Friday, March 9, 2012

Market Week Wrap-up

Market Week Wrap-up

- Greece defaulted on its debt this week, bringing to an end a long dramatic chapter in Europe's continuing sovereign debt crisis. But even as confirmation of the final participation rate in the PSI debt exchange arrived late in the week and the ISDA declared that the exchange constituted a "credit event," thereby triggering CDS, few have any illusions that this story is over. In somewhat ironic coincidence, the Greek default arrived three years to the day from the post-Lehman lows in US equity indices. In any case, the reaction in US and European markets was muted, after a few scares earlier on in the week. There had been some concerns, not borne out, that an insufficient number of creditors would participate in the exchange. In other news, Chinese Premier Wen lowered China's 2012 GDP targets at the National People's Congress on Monday, as expected, and a slew of data out of Beijing came in softer than expected. This theme helped most Asian equity markets underperform for the week, with the notable exception of Japan, where the Nikkei continues to benefit from the weakening yen. ECB, BoE and Bank of Canada rate decisions were tepid events, with policy left on hold, as expected. ECB Chief Draghi recognized the reality that euro zone inflation would overshoot the 2% target in the short term, thanks to high oil prices, but did his best to reassure markets that medium-term inflation expectations are firmly anchored. In the US, the Fed was said to be considering a sterilization option for future bond purchases, adding a new wrinkle to the markets' fantasies about a potential QE3 program. The week was rounded out by another better than expected US jobs report, with payrolls rising by more than 200K for the third straight month. The S&P500 and Nasdaq registered their fourth straight week of gains, rising 0.1% and 0.4% respectively, while the DJIA lost 0.4% this week.

- A handful of significant names reported quarterly earnings this week, as the long December quarter earnings season drew to a close. American Eagle broadly met expectations in its Q4 report and Q1 guidance, even as its gross margins are under strong pressure from discounting. Note that AEO's quarterly comps were up 10% y/y. Homebuilder Hovnanian's loss was much smaller than expected, even as revenue was a bit soft. Hovnanian's contract backlog is up by a comfortable margin, with net contract signed in the quarter also up sharply over year-ago levels. Navistar's loss widened markedly in the company's first quarter, as results were dragged down by higher costs. Note that Navistar cut its earnings outlook for FY12, but sustained its revenue guidance. Troubled cruise ship line Carnival slashed its guidance due to the Costa Concordia incident, and did its best to highlight that booking trends have been strong in the North America market.

- McDonald's shares slid after posting February same-store sales data that fell short of analyst expectations, and management said first quarter income could be pinched by Europe's economic woes in addition to costs for commodities and labor. Semiconductor names Texas Instruments and Altera offered mid-quarter updates yesterday after the close. Both firms revised their first quarter guidance slightly lower, citing some restrained demand for wireless products.

- FX markets were variable this week, with most trading following developments in the European debt crisis. EUR/USD fell to three-week lows around 1.3100 early in the week in the face of multiple risk events, including Greece, the ECB rate decision and the US payrolls report. The IIF commented that a disorderly Greek default could cause more than a €1.0T in damage to the euro zone, leaving Italy and Spain dependent on outside help to stop contagion spreading. The lead up to the Greek debt exchange and the ECB decision saw the pair pop up to 1.3275, however EUR/USD was right back at its lows of the week as ECB Chief Draghi aided the EUR after he noted in his post rate decision press conference that inflation would remain above the bank's 2.0% target longer than previously expected and the ISDA declared the execution of CACs a credit event. In Asia, there was another spate of rumors asserting that China would cut the RRR rate again, although the PBoC took no such action. Instead, the Central bank of India surprised markets by reducing its Cash Reserve Ratio (CRR) rate (equivalent to China's RRR) by 75bps to 4.75% on Friday, in an unexpected intra-meeting move.

- The yen continued to gradually weaken, after some early week strength from the risk aversion flows. On Wednesday, as market nervousness peaked, USD/JPY initially dropped back down to the 80.30 area (the former Aug 2011 BoJ solo intervention highs), but then resumed its course higher, closing out the week around 82.50. The unwinding of speculative position continued to influence JPY-currency pairs. Various Asian central banks apparently conducted FX interventions throughout the week, with dealers claiming that Indonesia, Taiwan and India all acted to curb local currency weakness. Meanwhile, Brazil was vocal about the strong BRL and the Brazil Central Bank aggressively cut its key Selic Target Rate by 75bps to 9.75% in an effort to curb BRL currency strength.

- The address by Premier Wen at China's National People's Congress on Monday set a bearish tone for emerging markets early in the week. Wen downgraded Beijing's official 2012 GDP target to 7.5% from the 8% target that had been held for the past eight years. Mainland monthly economic data has done little to dispel the notion of a managed landing, as Jan/Feb inflation metrics all hit multi-month lows. Most notable among the datapoints, China CPI at 3.2% was below 3.4% consensus and a 20-month low, while industrial production was shy of 12.5% estimate at 11.4% - the lowest print since mid-2009. Bank lending also remained muted, falling for the first time in 3 months and also failing to register a seasonal spike in holiday-related lending evident in China's recent boom years. China trade data for February on tap for release this weekend is expected to show the first deficit in a year.

- Down under, Reserve Banks of Australia and New Zealand both kept rates on hold, albeit with a far more downbeat view. RBA's inflation assessment added that policymakers now expect inflation to fall further over the next quarter or two. Australia January trade and February employment data were similarly dovish, with the former falling into deficit for the first time since Feb 2011 and latter showing its 3rd month of net job loss in four months. In New Zealand, RBNZ also reflected on declining inflation expectations, adding it is increasingly uncomfortable with the high levels of the New Zealand dollar. Both AUD and NZD fell following their respective central bank decisions