Sunday, March 18, 2012

Market Week Wrap-up

Market Week Wrap-up

- Investors dumped funds into risk assets this week, pushing most US and European equity markets higher. Among risk-on catalysts were better US economic data, Tuesday's FOMC statement, the release of the annual CCAR bank stress tests and the removal of the Greek drama from headlines. 15 of 19 major institutions passed the latest Fed stress tests, and most of those firms took the opportunity to increase share buybacks and hike dividends, boosting financial sector stocks. In Tuesday's FOMC statement, the Fed acknowledged the slowly improving economic conditions while also cautioning that rising oil prices will feed higher inflation. There was no mention of anything resembling QE3, in either the statement or a subsequent speech by Chairman Bernanke. Fed Governor Lacker spoke later in the week, strongly suggesting that exceptionally low rates will not be required through 2014 while calling for tighter policy as early 2013. The treasury yield curve on the benchmark steepened around 25 basis points for the week following the FOMC statement, reflecting the move out of safe havens as overall yields hit their highest levels since last October. VIX volatility index also sank to its lowest levels in nearly five years. China revealed on Monday that its trade balance plunged $31.5B into the red in February, the largest deficit since 1989, as imports overwhelmed exports. Chinese Premier Wen offered further commentary on his nation's new 7.5% GDP target, which he claimed is needed to transform China's growth to higher quality and also defended property tightening measures. The S&P500 and Nasdaq racked up their fifth straight week of gains, rising 2.4% and 2.2%, respectively, and the S&P500 closed above 1400 for the first time since mid 2008. The DJIA rose 2.4% this week.

- US Treasury yields backed up aggressively this week after the Fed provided a marginally better economic assessment, and gave no hint of either QE3 or extension of expiring Operation Twist. Traders and pundits alike took note of the aggressive selling in bonds resulting in much of the talk turning towards asset allocation, and whether or not the long awaited migration into stocks has finally arrived. Multiyear highs for the US indices and close to one-year lows in the Japanese yen only added to this notion. The US 10-year yield touched levels not seen since late October rising above 2.35% which helped drag the German Bund yield back above 2%.

- Fifteen of 19 large financial institutions passed the Federal Reserve's CCAR stress tests. The losers were Suntrust, Citigroup, Ally Financial and MetLife, whose capital plans did not pass the stringent hypothetical scenario, which included a peak unemployment rate of 13%, a 50% drop in equity prices and a 21% decline in housing prices. JP Morgan co-opted the Fed, raising its dividend by 20% and authorizing a generous $15B share buyback two days before the results were to be officially released. Other big winners after the stress tests include Wells Fargo, which hiked its dividend by more than 80%, and the leading regional banks, many of which decided not to substantially hike their payouts to holders but still saw big share gains. Citigroup failed the CCAR stress tests by a very slim margin and publically objected to the Fed's refusal to authorize its capital plans. MetLife commented that it does not believe bank-centric methodologies used under CCAR are appropriate for insurance firms.

- Three major US steelmakers offered poor first-quarter forecasts this week. AK Steel, Nucor and Steel Dynamics warned that their profits will be highly constrained in Q1 due to lower shipments, lower margins and higher costs. AK Steel warned that it would be in the red in Q1, but also said that Q2 shipments and operating would improve in the second quarter, aided by lower raw material costs. Nucor's Q1 guidance was around half the expected figure for Q1, due to LIFO charges.

- The greenback continued to benefit from signs of gradual recovery in the US economy, including higher bond yields and favorable spreads against euro zone benchmark yields. Growing appetite for risk in markets around the world impacted some of the traditional funding currencies, as both the JPY and CHF fell across the board.

- The Greek phase of the Euro debt crisis is over for now, but EUR/USD remains in turbulent waters. High daily ECB borrowing suggested that the recovery in Europe remains fragile, and not even the better German ZEW survey could counter that impression. Market participants also continued to fret over Spain's budget issues. Two weeks ago, PM Rajoy revised its 2012 debt-to-GDP ratio higher to 5.8%, but this week he bowed to heavy EU pressure, agreeing to a slightly lower target of 5.3%. EUR/USD made a run for $1.3200 early in the week, before the post-FOMC dollar strength sent the pair below the $1.31 handle. Reports of sovereign demand coupled with the euro zone approval of Greece's second bailout stopped the slide at the $1.3000 level. In-line US CPI and a softer Michigan consumer sentiment offered traders the catalyst to long USD trades on Friday.

- Economic data out of China continued to disappoint as analysts' calls for further policy easing grew ever more audible. February trade balance saw its widest deficit in over 20 years at -$31.4B, well above the consensus of -$5.4B. Some of the weakness was certainly attributed to the imports component rising +39.6% v +31.8%e primarily due to record high volume of oil shipments, but exports were also markedly weaker at +18.4% v +31.1%e. February foreign direct investment also fell for the 4th consecutive month by -0.9%, surprising expectations of a 15% increase. CICC and Nomura economists noted the FDI figures would justify a more aggressive PBoC action such as a cut in key 1-year lending and deposit rates. In turn, JPMorgan Chase chief Asian strategist offered a dire assessment of China being in a state of "hard landing" despite the government efforts to manage the slowdown. With the altered months of Lunar New Year distorting economic data for January and February, attention turns to the early March report from HSBC on China manufacturing on tap for late next week. Markets will also be more attuned to the political developments in Beijing after a stern warning from departing Premier Wen to continue political reform or risk another "cultural revolution" - a veiled attack against the controversial populist leader of Chongqing, Bo Xilai, removed from power this week.

- Bank of Japan interest rate decision had a much smaller impact than last month's pivotal policy easing and inflation targeting objective, but did help to maintain soft tone in Japanese Yen. BOJ boosted the capacity of its Growth-Supporting Funding Facility by ¥2T to ¥5.5T, but also acknowledged "signs of picking up" in Japan's economy. Following Tuesday's rate decision, BoJ Governor Shirakawa reasserted commitment to a strong easing program, sending USD/JPY as high as ¥84.18 - a fresh 11-month high. Later in the week, Bank of Japan meeting minutes revealed that there were some calls for inflation target as high as 2% vs the 1% adopted during the February meeting.