Friday, September 7, 2012

Market Wrap-Up

Draghi Unveils Bond Buying Plan As Disappointing US Payrolls Tip Scales Toward QE3

- Markets received two big jolts of adrenaline and one big downer this week. On the positive side the ECB outlined the details of its new bond buying program and the Chinese government quietly returned to stimulating its economy by launching several large infrastructure spending plans. ECB President Draghi sketched the broad outlines of the new bond buying program - the Outright Monetary Transactions (OMT) - all of which were in line with prior press speculation over recent weeks. The US August payrolls report was extremely disappointing: the payroll figures were brutal, with the headline nonfarm, private and manufacturing numbers all widely missing expectations. The overall unemployment rate fell to 8.1% but the decline was for all the wrong reasons, mainly attributable to unemployed individuals dropping out of the workforce, even as weekly hours ticked lower. Analysts believe that the jobs data virtually guarantee another round of easing from the Fed at its Sept 12-13th meeting, either with an outright QE3 launch, or an extension of the low rate pledge to 2015 with a strong hint of QE3 before the end of the year. The renewed talk of central bank intervention sent gold soaring to six months highs above $1,700, and global stock markets saw big gains. For the week, the DJIA gained 1.6%, the Nasdaq rose 2.3%, and the S&P500 added 2.2%, reaching multi-year highs.

- The ECB's new bond buying program held few surprises for markets, but markets were pleased the governing council was able to agree on a full framework for the plan with only one dissenter (Bundesbank chief Weidmann). Analysts cheered three critical components to the plan: there will be no quantitative limits to OMT transactions, purchases will be fully sterilized, and on seniority issues, the ECB accepts the same treatment as private creditors (pari passu). The ECB's insistance that the program adopts "strict conditionality" was more contentious: although the ECB warned it would consider selling bonds if the program's conditions were not met, there was no discussion of what the "conditions" in question actually are, and whether or not they would frighten off the peripheral nations from making use of the program. As expected, the plan will target maturities of up to three years, and after the announcement yields on shorter-dated Italian and Spanish government bonds declined to multi-month lows. The plan provoked outrage in the German press, with Bild calling the plan a "blank check," however Chancellor Merkel praised the plan for its insistence on conditionality.

- China's NDRC unveiled a major new infrastructure spending program this week, including plans for 13 roadway projects and 25 urban transit projects approved yesterday. The total investment outlined over the last two days amounts to CNY1.0T ($157B), or roughly one quarter the size of the 2008/09 stimulus plan. Note that this comes just days before the big August data dump out of Beijing, heightening fears about what the numbers may say about the state of the Chinese economy. Recall that since April, the government has also approved a number of other infrastructure projects, including several airport and energy developments. Today's news sent the Shanghai Composite up approximately 4%, taking it off recent three and a half-year lows. Various industrial commodities surged on Friday on the China news, with copper futures gaining 3.6%, their biggest one-day jump in two months.

- BP's hopes to settle its outstanding legal issues from the Macondo oil spill in 2010 took a hit this week as DOJ prosecutors laid out a legal case for gross negligence against BP. Earlier in the summer there had been talk about a deal, with BP was hoping to pay $15 billion to put the case behind it, while the DoJ was holding out for $25 billion, although the talks do not appear to have been put to bed.

- Two major firms - Fedex and Intel - cut their forecasts for the current quarter due to the current spate of global macroeconomic weakness. Fedex cut its Q1 earnings outlook, warning that profits in the quarter suffered from constrained revenue growth. Intel slashed its Q3 revenue guidance and withdrew its FY12 forecast. The company warned that revenue was weak with customers reducing inventory in the supply chain at a time when they usually increase inventory. Intel also said emerging market demand, an area of strength cited by numerous other IT firms, is slowing.

- Amazon unveiled a new stable of tablet computer and e-reader products, just days ahead of the Apple event, where a new, smaller iPad and the iPhone 5 are expected. Amazon rolled out its improved e-reader, the Kindle Paperwhite, upgraded its existing 7" Kindle Fire tablet with more memory and a better processor, and unveiled a bigger 8.9" Kindle Fire with a high-res screen. Shares of Facebook traded higher midweek after CEO Zuckerberg pledged to not sell any stock for the next 12 months and moved up the share lockup date for employee to Oct 29 from Nov 14. There were also unconfirmed reports that Blackrock's CEO Fink (Blackrock is FB's 6th largest holder) met with a senior Facebook executive to discuss the company's image problems since the IPO fiasco.

- EUR/USD spent most of the week wrestling with the pivotal 1.2635 area, which marked the high in the pair after Chairman Bernanke's Jackson Hole speech and also corresponded to the January 2012 low in the pair. Draghi's discussion of the technical features of the ECB's new and improved bond buying program did not help the euro, and dealers pushed the EUR/USD to session lows throughout the ECB press conference after concluding that there were still too many details missing and too much skepticism about why bond buying should work any better this time around than the previous two SMP programs. The disappointing US payrolls data finally gave the euro some upward momentum, and sent the greenback lower against its major pairs as speculation over possible QE3 chatter resurfaced.

- The USD/JPY pair shot up to its 6-month downtrend line around the 79.30 area on Thursday and Friday as dealers speculated that Japanese export orders are likely to surge ahead of Japan's fiscal-half-year end on Sept 30th. The disappointing US payroll data sent the USD/JPY back to where it was coming into the week, keeping the downtrend line intact.

- On the week marking the one-year anniversary of the SNB imposing a 1.2000 floor in the euro cross, EUR/CHF hit a one-month high above 1.2035 which prompted rumors that perhaps the SNB was buying Euros to defend the floor. As usual, the SNB declined to comment.