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Market Week Wrap-up
- US and European equity indices bubbled higher this week in very thin
pre-holiday trading conditions. Traders were happy to forget about the
shortcomings of the European leaders' summit two weeks ago and focus rather on
the launch of the ECB's shiny new three-year Long-Term Refinancing Operation
(LTRO). Ahead of the LTRO on Wednesday, European data helped improve the tone
of markets, with a better German IFO Survey and a strong Spanish bill auction
buoying risk appetite. The three-year LTRO came off very well and seemed to
calm fears about the euro zone in the short term. Still lurking in the
background was S&P's much anticipated verdict on debt ratings of 15 euro
zone countries. However, according to unconfirmed press reports out late in the
week, European officials received "informal signals" from S&P
that the agency will wait until January to render its decision. In the US,
Congress squabbled all week long over a short-term extension of the payroll tax
cut, only passing the measure after epic intramural political battles in the
Republican party. Two sets of data out this week suggested that positive trends
may be building in the US housing market. The December NAHB Housing Market
survey beat expectations and hit its highest level since early 2009, marking
the third consecutive rising month for the survey. The November housing starts
and building permits both widely beat expectations and pushed out to their
highest levels since the beginning of 2010. Interestingly single-family starts
and permits both posted gains, whereas strength in past reports has been mostly
in multi-family units. In Asia, markets were flat to down, softer in part due
to the regional uncertainty that followed North Korea's announcement of the
death of Kim Jong-Il. The BoJ's second consecutive reduction in its growth
outlook and some bad housing data out of China last weekend also helped keep
things subdued. For the week the DJIA rose 3.6%, the NASDAQ gained 2.5% and the
S&P 500 increased 3.7%.
- On Wednesday the ECB's inaugural three-year LTRO allotted approx €490B in new
liquidity for the dysfunctional European credit markets, matching the high end
of most expectations. Note that there was some skeptical commentary about the
official amount sold in the auction: SocGen wrote that when you net out the
reduced amounts allotted in the ECB's main refi the day before, the three-month
LTRO on Wednesday and recent moves out of the 12-month LTRO, the net new
liquidity generated by the new LTRO was likely a mere €210B. There were also
questions about where all the new liquidity would go, and comments by the
Italian Bank Association (ABI) that it expected banks to reduce exposure to
government debt under new EBA rules suggest one of the new destinations may not
be European sovereign bonds. On Friday, the ECB indicated that European banks
had parked an additional €82B in the ECB's deposit facility, which brought the
cumulative total to a new 2011 record of €347B.
- On Monday shares of the largest US banks traded sharply lower on reports that
the Fed would support rules requiring leading banks to hold additional capital
as part of the proposals by Basel regulators. Under the rules, certain
systemically important financial institutions (SIFIs) may have to hold 2.5% of
extra capital in addition to the 7% base capital level (the additional
surcharge is not expected to come into effect until 2016). Shares of the banks
gained ground steadily through Friday after Monday's hiccup. In other sector
news, troubled brokerage house Jefferies reported Q4 results on Tuesday. The
firm's share price has suffered in recent months from fears about its sovereign
exposure and leverage ratio, the issues that caused the collapse of MF Global.
In its Q4 Jefferies' profit was well head of expectations, although the firm
saw large y/y declines in both fixed income and investment banking revenues. On
the conference call, executives said that the firm's trading business has
returned to pre-November levels after being impacted by
"misinformation." Shares of JEF traded up sharply after the report
and sustained its gains all week, suggesting the company may have avoided the
fate of MF Global.
- Tech names Oracle and Micron made big moves following quarterly earnings this
week. Oracle, whose earnings are typically quite predictable, missed both
profit and revenue expectations in its Q2 report. Executives blamed the
elongation of sales cycles just as the quarter ended, particularly in the
Americas and Europe, in addition to headwinds from the euro. Shares of ORCL
dropped more than 10% on the news and had not recovered as of Friday. Quarterly
losses at DRAM manufacturer Micron were considerably greater than expected.
However executives commented that while the DRAM market is under a lot of
pressure in general, Micron is faring better than competitors and has seen a
mild uptick in the last few weeks in OEM contract pricing. They also said they
expect an early spring recovery in the hard drive supply chain. On Thursday
shares of MU traded up 15% on the brightening outlook.
- The deal news of the week was the implosion of the AT&T/T-Mobile merger,
thanks to roadblocks thrown up by the FCC and the DoJ. In its investigation,
the FCC determined that approving the merger would drastically reduce
competition in most large markets. Following their poor Q3 showing last week,
Research in Motion was subject to various takeover chatter, including reports
of interest from Microsoft and Nokia, and Amazon. However some press reports
indicated that takeover interest is waning due to RIM's declining US market
share, and that Amazon may now be more inclined to expanding its commercial
ties with RIM instead of pursuing an acquisition.
- FX markets were relatively calm this week and the year-end period saw pretty
subdued trading. The euro garnered support from an oversubscribed Spanish bill
auction on Tuesday, with yields back at more normalized levels. The ECB repo
auction (LTRO) on Wednesday nudged the euro even higher, but the strength did
not last. Markets saw the high take-up at the ECB auction as a good thing,
assuming the funds were used to shore up banks' medium-term financing needs and
their balance sheets, and might even encourage them to buy sovereign debt.
However more than one analyst was unsettled by the sheer number of banks (over
500) participating in the auction. EUR/USD ticked up from lows on Monday around
1.3000 to test briefly as high as 1.3200, but the pair was back to around
1.3050 on Friday.
- EUR/CHF drifted around 1.22, still firmly above the SNB's 1.2000 floor. In
its quarterly report, the SNB reiterated that it would maintain the EUR/CHF
floor at 1.2000 and reiterated that it would be enforce the limit with
"utmost determination." The yen was a touch weaker given the
political uncertainty on the Korean Peninsula following the death of Kim Jong
Il, but stayed contained well within its two-month trading range. USD/JPY
drifted above the 78 handle by late Friday while EUR/JPY was straddling the 102
level.
- The Bank of Japan cut its economic assessment for the second straight meeting
following disappointing Tankan manufacturing data last week. The BoJ has
acknowledged a pause in economic activity in part due to the persisting
strength of the Yen, but expressed optimism that a moderate recovery would
return once overseas economies improve. Separately, the Japanese cabinet office
formally cut its current fiscal year GDP forecast to -0.1% from +0.5% and next
fiscal year to +2.2%. In Australia, RBA policy minutes revealed some
trepidation to cut cash rates by 25bps for the second consecutive meeting, as
members continue to see the mining boom sustaining domestic economic growth
levels.
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