- Global equity markets made modest gains this
week, despite news flow that was not particularly positive. S&P finally
downgraded a number of euro zone member nations on Friday, although France's
sovereign rating was only cut one notch, from AAA to AA+. Markets reacted calmly,
given that the moves had been telegraphed for weeks and were largely priced in.
There were more signs that Europe could experience a 'technical recession' in
the first half of 2012, with dire forecasts for initial GDP data seen in many
parts of Europe, and even Germany expected to barely show growth this year.
Both the ECB and BoE kept policy on hold in rate decisions this week, as
expected. In the US, Alcoa opened earnings season on Tuesday with weak
quarterly results, while JPMorgan's report indicated that earnings from the
other big banks may be less than stellar. There was little in the way of
consequential US economic data. The preliminary January University of Michigan
Confidence index was better than expected and hit its highest level since May
2011. The Fed Beige Book report was mildly positive, noting that the economy is
growing at a moderate pace, with consumer demand and business loan demand
rising slightly in some markets. Spot gold continued to regain territory lost
in the final weeks of 2011, closing out the week near a one-month high, around
$1,638. After several weeks of Iranian saber rattling, the White House was said
to have informed Iran via channels that any move to close the Strait of Hormuz
would be met with force. Meanwhile Europe was reportedly planning to delay its
embargo on Iranian petroleum by several months to reduce any potential oil
shock. Crude closed the week below $99, well off the highs seen earlier this
month. For the week the DJIA gained 0.5%, the NASDAQ rose 1.4%, and the S&P
500 tacked on 0.9%.
- Investors got their first view of the state of the US financial industry in
the final quarter of 2011 with JPMorgan's Q4 results on Friday. The bank met
profit expectations, although reported profit was down about 23% on a y/y basis.
Revenue was a bit below par. Equity market and investment banking revenue fell
sharply, boding ill for the other large US banks. On the positive side, the
bank highlighted the strong growth in loan demand. Note that the company's DVA
(debit-valuation-adjustments) shaved around a dime off of earnings (recall that
last quarter it added nearly 30 cents to the bottom line). On the conference
call, CEO Dimon said that investment banking and trading revenue is volatile by
nature and should bounce back. He also said that even as the bank sees growth
in all credit categories, JPMorgan is getting "killed in mortgages."
- Alcoa's Q4 miss was right in line with expectations, and revenue was a bit
above par. According to the company, aluminum demand grew 10% in 2011 on top of
13% growth seen in 2010. Alcoa warned that growing demand for aluminum and
production cutbacks will result in a global aluminum industry deficit of 600K
metric tons in 2012, which is ironic given the firm said it would cut 12% of
its capacity just last week. Schnitzer Steel's Q1 results came in at the top
end of its guidance, beating expectations only slightly. The company warned
that heightened global macroeconomic concerns, stemming primarily from the
European debt crisis, resulted in a significant slowdown in customer buying
patterns, followed by a sharp decline in sale prices. Lennar's Q4 top-line
revenue was stronger than expected and its new home orders were up nicely over
year-ago levels. In addition, Lennar's backlog was up 35% y/y. Lennar executive
said they have seen the housing market start to stabilize, driven by a
combination of low home prices and low interest rates.
- Both Chevron and Marathon warned investors that crude price moves in the
quarter would negatively impact earnings. Chevron warned that its earnings in
Q4 would be significantly lower on a sequential basis, with downstream earnings
around breakeven. Marathon said it expects a small EPS loss in the quarter,
well below consensus expectations. The company said its results were being hurt
by the rapid increase in the price of WTI crude. WTI went from $79.20 on Sept.
30th to $98.83 on Dec. 30th, wiping out the firm's profits.
- FX traders returned to the market on Monday pondering whether the extremely
bearish euro sentiment that dominated trading in the prior week wasn't somewhat
overdone. CFTC data showed that euro short positions were at record highs, with
EUR/USD at 16-month lows and EUR/JPY at 12-year lows. Comments from Fitch about
the European sovereign situation also helped the euro -- Fitch Sovereign
Director Parker said that France is "not a crisis country" and that
he did not expect to downgrade the country in 2012. After the ECB rate
decision, central bank president Draghi did his bit to foster confidence,
noting that the ECB was seeing signs of economic stabilization at "lower
levels" and praised EMU member states for ambitious fiscal policies.
Draghi addressed critics of the ECB's new three-year LTRO head on, asserting
that the policy has been effective and insisting that funds from operation were
not just being salted away in ECB deposits but were circulating in the real
economy. By Friday, however, S&P's European downgrades shattered the
temporary sense of calm.
- Markets are beginning to realize that Europe's economy could very well sink
back into recession in 2012, thanks to the endless debt crisis, ever more
austerity and political chaos. On Monday, a survey of 14 bank economists stated
that Germany was already in recession, and a few days later the German Stats
Office disclosed that Q4 German GDP would be down 0.25%. The Spanish Economy
Minister commented mid week that Spanish GDP would contract in both Q1 and Q4
(in late December, the Bank of Spain confirmed that Spain's Q4 GDP contracted).
Three leading European institutes (the INSEE, IFO and the ISAE) published a
joint report that forecasted a "short recession" in the euro zone.
- The Swiss Franc was firmer against the major pairs following news of Swiss
National Bank President Hildebrand's resignation in the wake of an FX trading
scandal involving his wife. Following Hildebrand stepping down, EUR/CHF tested
its lowest level since the SNB floor was enacted back in early September 2010.
In farewell remarks, Hildebrand once again reiterated that the SNB would defend
the EUR/CHF floor at 1.2000 with utmost determination.
- Economic data out of China continued to paint a bleak picture, prompting more
speculation about the timing of the next PBoC policy move. December trade data
saw a surplus of $16.5B which was double the consensus, but the increase was
primarily the result of the slowing import component, which fell to a 27-month
low (+11.8% y/y). China's latest inflation data was similarly downbeat, as CPI
fell for the 5th consecutive month to a 15-month low of +4.1%. For the year,
CPI was reported at 5.4% -- well above 3.3% in 2010 and 4.0% official target.
Q4 FX reserves at $3.18T was perhaps the most telling data as it marked the
first decline since 1998, when the Asian region was mired in a deep financial crisis.
While the PBoC deferred its typical Friday policy move, central bank officials
acknowledged deterioration in economic data justifying some easing in the
future. PBoC advisor Li Daokui said the data give the government room to adjust
policy to more growth-oriented stance, and the director of PBoC research bureau
warned the financial crisis could last another 2-3 years.
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