Market Week Wrap-Up

- The last week of August saw another round of sluggish, low-energy trading in the US and Europe. Not even the Jackson Hole conclave did much to puncture the listless feeling on Wall Street, although predictions for a volatile September were widely heard. With a few exceptions, market action was mostly a lead-up to Fed Chairman Bernanke's speech at Jackson Hole, although by mid week most analysts had already concluded that new policy initiatives were not on tap in Wyoming. In the speech, Bernanke held back on specifically promising more QE while leaving the possibility of a later announcement wide open, stating that he would not rule out more asset purchases. The chairman asserted that non-traditional easing has aided the economy in the past and the negative risks of easing are manageable, although there were notes of caution about further QE. Data out this week did not bode well for the global economy, with weak data out of Europe, China, Japan and the US further stoking concerns about the economic outlook. Coming into the week, there was a bit of excitement about another Chinese stimulus plan after weekend remarks by Chinese Premiere Wen, although other officials later tamped down expectations. In Europe, all sorts of breathless reports about the imminent announcement of the ECB's new bond buying program made the rounds; the firmest of these suggested that Draghi will have something to share at the ECB decision on September 6th. Draghi went so far as to cancel his trip to Jackson Hole, saying that he was "too busy" to attend. The Bundesbank is still unhappy about Draghi's plans, and there were rumors out midweek (and later furiously denied) that Bundesbank President Weidmann had threatened to resign over the bond buying program, much like his earlier predecessors Weber and Stark. Hurricane Issac blew into and then out of the Gulf without causing much damage at all, and front-month crude continued to decline from highs above $98 seen last week. Ironically, the one thing Bernanke's speech did help were certain commodities: after his remarks WTI crude spiked back up to $96, while spot gold returned to highs above $1,685 last seen in March. Base metals didn't get much of a lift, however. For the week the DJIA fell 0.5%, the Nasdaq slipped 0.1%, and the S&P500 lost 0.3%.

- The rapid decline in iron ore prices in July and August continued this week, with cost per dwt crashing to around $90, their lowest levels since 2009 and down more than 30% since early May. The sharp declines just this week dragged down the shares of miners, including Rio Tinto and BHP Billiton. On Thursday a widely-read financial press article noted that large shiploads of iron ore continue flowing into China despite very few orders from steelmakers. According to the report, iron ore inventory at Chinese ports is about 100M tons, up from about 70M tons in early 2010. Falling steel demand has undercut the market, and this week metals recycler Schnitzer disclosed that its Q4 earnings would be breakeven, well below expectations. Schnitzer warned that ferrous average net selling prices are expected to decline 10-15% from the third quarter of fiscal 2012. Ferrous sales volumes are also expected to decline 10-15% due to reduced flows of raw materials. Mining equipment name Joy Global's Q3 results were not very strong: the firm missed bottom-line expectations and its backlog declined sequentially for a second consecutive quarter. In addition, the firm cut its FY12 outlook for a second quarter in a row, warning that the deceleration of China demand has deteriorated international markets more quickly and severely than previously expected.

- On the deal front, Hertz finally bagged Dollar Thirfty, two years after it made its first bid for the company. Hertz will buy Dollar Thrifty for $87.50/share in cash, for a total deal value of $2.3B or almost double a $1.2B offer Hertz made in April 2010. Avis entered the bidding early but ultimately gave up after acquiring Avis Europe in mid 2011. In other news, Hudson City Bancorp agreed to merge with M&T Bank in a cash-and-stock deal valued at $3.7B. IBM signed a deal to buy HR software developer Kenexa Corp for about $1.3B, or $46/share, a 43% premium. Recall that SAP bought Kenexa's competitor SuccessFactors for $3.4B cash last December.

- August same-store sales results came in much stronger than expected, with nearly all major retailers beating expectations. Executives commented that sales accelerated in the last two weeks of the month, driven by strong back-to-school shopping. Sales were robust across channels, at both mid-range department names Kohls and Stein Mart, to discount name TJX, to luxury retailer Nordstroms, whose impressive 21% comp gain destroyed consensus expectations driven by the later start to its anniversary sale. Most other retailers handily beat expectations, with apparel names Gap and Limited well above the consensus. The only major miss came from Wet Seal, which is currently restructuring its sales approach.

- EUR/USD remained well above the pivotal 1.2440 level this week, supported by talk of decent bids by sovereign names. Some analysts noted that coordination between Germany and France following last week's meetings would help provide the euro with continued support. On Friday, EUR/USD managed to test above its 100-day moving average of 1.2581 just prior to the Bernanke speech, although it was back around 1.2565 through the bulk of Friday's session. Some analysts noted that the pair had already priced in Bernanke's policy hints at Jackson Hole. The USD did rebound slightly after the release of the speech as Bernanke continued to build the case for more QE, as expected.

- Equity indices in Japan and China slumped further this week thanks to more dismal economic news. Over the weekend China Premier Wen stated that China needs to adopt policies to support exports in order to meet annual economic targets of +7.5% GDP growth in 2012, raising hopes that Beijing was mulling fresh stimulus. However these hopes were diminished when NDRC commented that the government's prior moves to support the economy were gaining traction. Analysts commented that there was little chance of any big moves before this year's political leadership transition is complete, a process that will play out over the course of October and November. In Japan, the monthly Cabinet Office economic report cut its assessment of Japanese economy for the first time since Oct 2011.

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