Thursday, April 5, 2012

Market Week Wrap-up

Market Week Wrap-up

- The second quarter of 2012 got off to a sour start this week as market participants appeared genuinely surprised by comments from Fed and the ECB that strongly suggested there would be no more extraordinary stimulus, except in the event of another sharp economic slowdown. It's not like this message hasn't been telegraphed repeatedly by numerous central bank officials already, but the FOMC minutes from the March meeting and ECB President Draghi's comments on Wednesday seemed to drive home in many traders' minds that the two key central banks want to start considering options for their future exit strategies. Comments from Fed governors reinforced the message: hawk Lacker observed that growth is picking up and thus no more support is needed, Lockhart said that sustained employment gains diminish needs for easing, and Fisher said he did not believe that any sort of 'Bernanke put' exists. A wide selection of asset classes slumped, including corporate bonds, commodities and equities, as money flowed to the usual places: the dollar, the yen and USTs. Other factors helped worsen the sentiment as well, including a disappointing Spanish bond auction as well as terrible German industrial production and factory orders data. In the US, more incremental gains in economic data proved the point of the Fed hawks, as the March sales comps and automobile sales came in looking very strong, despite weeks of elevated gasoline prices, and the weekly jobless claims continued their gradual decline. As of writing the March employment report has not been released, although the consensus expectation is for a 200K+ non-farm payrolls number, somewhat less than February's 227K result, although the unemployment rate is expected to remain stuck at 8.3%. For the week the DJIA fell 1.1%, the S&P500 declined 0.7%, and the Nasdaq dropped 0.4%.

- US March auto sales were in sharp focus on Tuesday. Ford's reported unit sales were up 5% in the month, supported by pent-up demand, mild weather and demand for fuel-efficient vehicles. Chrysler's sales were up by a huge 34% y/y, the company's best monthly result since 2008. General Motors sales also improved y/y at +12% but were still below expectations causing shares to sell off. Toyota's March US sales were up 15.4%, Nissan's were up 12.5% y/y. Dealer AutoNation reported a 15% y/y gain in new vehicle sales, prompting the company to raise its sales forecast for the full year, though competitor CarMax cautioned that consumer demand has still not returned to levels seen previously.

- March same-store sales were very strong, with department and apparel names racking up very good comps that generally topped expectations by wide margins. By some measures, last month was the warmest March in the US in more than 50 years helping stores bounce back from a weak winter season. The Limited and Gap both crushed consensus expectations, while TJX's comps were twice the expected amounts, allowing the firm to slightly increase its Q1 guidance. Department stores Nordstroms, Kohls and Macys also beat expectations on pretty strong comps, although interestingly analysts seem to be catching up with Saks, as they accurately predicted the firm's comp after months of underestimations. Among the losers were Costco, due to the impact of the strong dollar from overseas sales, and Bon-Ton, which unexpectedly racked up negative comps.

- In M&A news, private perfume maker Coty Inc offered on Tuesday to buy Avon Products for $10B, or $23.25/share, but the bid was rejected by Avon. Coty initially indicated that it had no plans to make a hostile bid, and had been "unsuccessful" in getting Avon to talk about a deal, but later in the week there were reports that Coty was lining up financing for an attempt. Avon said the offer undervalues the firm, and that Coty is simply trying to get a free look at the firm's books. On Wednesday, Molson Coors said it had a deal to buy Czech brewer StarBev from CVC Capital Partners for €2.65 billion, in a push to boost its global presence. According to reports, Molson Coors outbid Asahi Group of Japan.

- Markets kept the dollar on the defensive early on this week, thanks to an initial round of risk-on trading and Bernanke's dovish comments from last week. However trading sentiment through the rest of the week only helped strengthen the greenback, as equity market softness and rumblings in Europe drove money into safe havens. The reduced expectations for more Fed stimulus that grew out of Tuesday's FOMC minutes provided tailwinds for both the USD and JPY against their European counterparts.

- EUR/USD suffered from renewed concerns about the euro zone's peripheral members. On Thursday, amounts sold in a three-tranche Spanish bond auction barely met the lower end of expectations, with lower bid-to-cover ratios and higher yields. The yield on the Spanish 10-year treasury jumped above 5.75%, to levels last seen before the ECB began its three-year LTRO operation last December. Wednesday's ECB rate decision left rates unchanged, as expected, and the monthly press conference offered little new color on the bank's thinking. The key takeaway was that any rate adjustments will only come after the ECB has fully assessed the impact of the LTRO operations on markets - and that there would not likely be another three-year LTRO auction. EUR/USD tested three-week lows under 1.3040 as the President Draghi's press conference unwound. Commentators focused in on one comment by Draghi, namely that the ECB would take an emerging market stance to aid EU economic growth. Many took that to mean that Draghi believes a weaker euro would help stimulate European exports.

- USD/JPY maintained a steady tone around the 82.00 throughout the week after an initial stop hunt forced a move towards 81.50. EUR/JPY tested below the 109.40 level with real money names leading the selling pressure lower. Cable pushed out to five-month highs near 1.6060 following the better UK PMI Manufacturing data. Dealers noted that the pair saw its first three consecutive monthly gains in Q1 since 1995. The pound slipped a bit as the week progressed. There were no surprises from the BoE decision which left both interest rates and asset purchase targets unchanged. EUR/CHF finally tested the floor at 1.2000 aided by better Swiss PMI data. The SNB lost no time in reaffirming its utmost determination to maintain the floor.

- Economic data and a high-profile central bank policy decision in Australia were in the spotlight for the Asia-Pacific region this week. Despite the big-figure gap higher following surprising 1-year high in the official China manufacturing PMI released over the weekend, Australian dollar accelerated its recent decline this week to a 3-month low vs USD and a 6-month low against its close relative NZD. Reserve Bank of Australia left interest rates unchanged at 4.25% as expected for the 3rd consecutive meeting, but offered a more sober assessment to its outlook on China growth as being "more measured" rather than "robust" view of the last 2 decisions. RBA also opened the door a crack to renewed easing, indicating it would wait for Australia's quarterly inflation data on April 24th. Lastly, policymakers were less hawkish on Aussie exports, adding the terms of trade for Australia have now peaked. That assessment was confirmed by the subsequent monthly trade figures released later in the week which showed a second consecutive month of deficit against expectation of return to an A$1.1B surplus. Early-week market focus shifts to China set to release its latest monthly inflation data at 21:30ET on Sunday evening.