Friday, September 21, 2012

Market Week Wrap-Up

Risk-On Rally Pauses as Officials Discuss QE Fallout

 Markets largely moved sideways this week, consolidating last week's big risk-on rally. Analysts, Fed officials, politicians and market participants around the globe mulled the implications of massive central bank intervention, including when and if inflation would strike. Meanwhile, both the DJIA and the S&P500 are hovering around five-year highs after months of expansion. The Bank of Japan joined the party on Wednesday, expanding the size of its standing asset purchase program by ¥10 trillion (roughly $130B) and warned that Japan's economy has moved "deeper into deceleration." In Europe, a squabble between the Spanish government and the government of independent region Catalonia over tax and austerity issues threatened to postpone further a potential official request for an EU bailout. Spanish officials continue do deny that they were even mulling a request, while German Finance Minister Schaeuble said that Spain doesn't need a bailout anyway. In Greece, talks between Athens and the Troika dragged on, with both sides roughly €2.5B apart on the proper amount of austerity in the next round of cuts. Peripheral yields remained mostly lower, however, and both Span and Portugal took advantage of the new atmosphere to sell longer-term debt at lower yields. The euro came off its post-ECB bond-buying announcement sugar high this week, with EUR/USD dropping from highs around 1.3170 to bottom out right around 1.2920. The China September flash manufacturing PMI, which was more or less even with the August reading, was either a positive sign of bottoming or a concerning lack of improvement, depending on the analyst. Note that on Friday, a PBoC advisor warned that China's Q3 and Q4 GDP would come in a little below the official 7.5% target and that the slowdown might last into 2013. In a similar vein, Brazil and Italy both took down official GDP forecasts for 2012. There were several more positive US housing data points, with existing home sales and building permits exceeding estimates, and the NAHB's September market index bounced to its highest level since June 2006, capping five months of improvement. For the week, the DJIA and Nasdaq each slipped 0.1%, and the S&P500 fell 0.4%.

- An intense debate among Fed officials took place in the press this week. No fewer than ten Fed board members and governors spoke out in defense of or against QE3. In the hawk camp, Bullard, Lacker, Plosser and Fisher all aired their objections to the new program, emphasizing that the costs of the program greatly outweigh the potential benefits. Inflation threats were at the heart of their critique, with both Lacker (the lone FOMC dissenting voter) and Fisher emphasizing that the program will drive a steep increase in inflation expectations. Bullard warned it would be dangerous to link the program's lifespan only to the unemployment rate, which he points out has been very fickle. Among the moderates at the Fed, Kocherlakota, whose rhetoric has tended to the hawkish side, said he would have voted in favor of QE3. Lockhart said that Job growth of 150K or more could constitute Bernanke's 'signs of improvement.' The doves mainly echoed Bernanke's rationales for QE3, offering little new color. Evans warned that timid policy moves would only prolong economic problems and insisted that fears of Fed-fueled inflation have been consistently wrong, while Dudley highlighted that moving the rate pledge to 2015 was a signal of the Fed's commitment. Nothing in public was heard from Bernanke, who briefed members of the Senate Finance Committee in a closed door meeting on Wednesday afternoon. Coming out of the meeting Senators said the Chairman warned that Congress needs to start acting to fix the nations fiscal mess, and that there are limits to what the Fed can do alone.

- This week's breakdown in crude futures has confounded markets and seemed to run counter to both consensus thinking and moves in other risk assets, which have already greatly benefitted from QE3. Last Friday, WTI futures had spiked above $100 briefly in a QE3-fueled rally. Then on Monday, Brent and WTI futures fell by $4 in a matter of minutes, evoking memories of the 'Flash Crash' and sparking chatter of fat finger trades or a big move by an unnamed hedge fund. Crude fell another $4 on Wednesday, in part due to weekly DOE data showing an unusually large build in US crude stocks as production restarted in the Gulf of Mexico after the closures caused by Hurricane Isaac. Traders also pointed to a press report on Tuesday that said Saudi Arabia was looking to pump more oil to hold down prices, although the catalysts for the move still remain somewhat opaque.

- In earnings news, Oracle saw some softness in sales in Q1, with the total declining y/y and missing analysts' expectations. The firm's revenue outlook for Q2 was also a bit soft, given FX headwinds , and more notably warned that its hardware revenue could fall as much as 18% y/y as it continues its push into cloud computing.

- Two major transport firms this week indicated that the global malaise is having real consequences. After cutting Q1 guidance earlier this month, Fedex reported on Tuesday. The global shipping firm slashed its FY13 outlook only three months after first offering the forecast back in June, and guided Q2 well below analyst consensus. The CFO warned that weak global economic conditions were driving customers away from express services. Railroad operator Norfolk Southern tanked after the firm warned that earnings would be well below consensus estimates due to coal shipment volume declines and lower revenue from fuel surcharges.

- iPhone 5 mania went into full swing as the Apple faithful lined up at retailers on Friday to upgrade to the latest handset. Apple shares hit fresh all time highs above $700, as analysts raised their price targets in anticipation of 8M or more unit sales this weekend. Meanwhile, the architect of the Apple Store concept, Ron Johnson, may have been looking wistfully at those lines of customers. Now CEO of JC Penney, Johnson tried to deflect attention away from the major sales losses incurred in the company's turnaround as he took analysts on the first big tour of JCP's concept store redesign.