Markets rebound on hopes that Europe bailouts and Fiscal Cliff can find
resolution
After several straight weeks of political concerns exerting downward pressure
on equity markets, they snapped back smartly this week. European bourses had
their best week of the year, shaking off a Moody's downgrade of France's AAA
rating and the EU's failure to agree on a long term budget. Risk on sentiment
was attributable to the hopes that leaders in Europe and the US could finally
get their houses in order before the New Year. Negotiations on finalizing the
revised Greek bailout package continued to grind ahead, with final details
expected to be negotiated this weekend ahead of another Eurogroup conclave this
coming Monday. This timetable would still allow Greece to receive the
anticipated aid tranches in early December. Politicians in Washington were on a
holiday break, so optimism from last week's bipartisan Congressional press
conference still lingered, though tough negotiations are still ahead. Economic
data helped sentiment too, starting with China HSBC Flash Manufacturing PMI on
Wednesday posting its first growth reading in 13 months, possibly signaling the
slowdown in Chinese growth has bottomed out. The German IFO Business Climate
index showed its first rise in seven months, and US saw some more signs of
strength in the housing market, with the NAHB Housing Market Index hitting a
6-year high and monthly Housing Starts coming in well above expectations.
Trading in crude futures calmed this week as Israel and Hamas agreed to terms
of a ceasefire on Wednesday, and so far the truce has held. Gold gained some
ground as it tested its 50-day moving average on Friday, to end the week up 2%.
Early indications from retailers are that Thanksgiving Day and Black Friday
sales have gotten the US holiday shopping season off to a good start. Equity
markets erased most of the losses seen in the last two weeks and had their best
week since June: the S&P500 rose 3.6%, the Nasdaq added 4%, and the DJIA
gained 3.3%, to close above 13,000 for the first time since November 6.
Moody's became the second credit-rating agency to strip France of its AAA
rating on Monday evening. Moody's warned that a sustained loss of
competitiveness and the failure to tackle structural problems prompted the
decision to downgrade France. French Finance Minister Moscovici found a silver
lining to the downgrade, claiming it would force leaders to agree to pursue
reforms, however the development will have repercussions even though yields on
French debt barely wavered in the aftermath of the move. To begin with, Moody's
said the downgrade would impact the rating of the ESM/EFSF bailout facilities,
and the EFSF was forced to delay the auction of three-year notes on Tuesday.
Hewlett-Packard shares collapsed to near 10-year lows after reporting
accounting irregularities at its recently acquired Autonomy unit. On an
adjusted basis, HP more or less met expectations in its Q4 results, however
revenue fell nearly 7% y/y and after charges the firm racked up a huge
quarterly loss, and Q1 EPS guidance was well below expectations. The firm took
an $8.8B 'kitchen sink' charge in the quarter, blaming $5B of that on
"serious accounting improprieties and outright misrepresentations" at
Autonomy Corporation, which it acquired last fall. CEO Whitman said the board's
due diligence had relied on financials audited by Deloitte, and said management
had brought the accounting issue to the attention of US and UK regulators. A
spokesman for the former Autonomy CEO shot back, saying the allegations were
totally false and the due diligence was intensive.
Best Buy also had a terrible quarter, missing earnings targets by a very wide
margin in its Q3 report. Overall sales were down on y/y basis and comps were
equally bad. Executives continue to blame the poor overall economic
environment, competition from online sites and customers holding back on
purchases ahead of new product launches. Investors were clearly disappointed
with Deer & Co Q4 results as well. Shares slid 4% after coming up short of
consensus estimates on the bottom line and offering conservative guidance for
2013.
Saleforce.com was a noticeable bright spot among the week's earnings reports.
Shares rose 8% after reporting Q3 earnings and sales exceeded expectations and
the CEO said that the strong response to next generation cloud technologies
will enable the company to surpass a $4B annual revenue run rate next year.
Energy markets went for a bit of a ride as traders watched headlines out of the
Mideast closely. On Monday, the violence escalated as Israel bombed strategic
targets in Gaza city and Hamas continued to lob rockets toward major population
centers. As Israel called up tens of thousands of reservists in what was seen
as a prelude to a ground incursion into Gaza, the rhetoric on both sides did
little to quell the speculation of a larger conflict and oil prices rose
sharply. By mid-week reports began to surface that the new Egyptian President
had brokered a cease fire and as a result energy prices backed off, despite US
stockpile data from both the API and EIA that indicated large draw downs across
all three categories. For the week WTI and Brent each finished up more than
1.5%, but well off the Monday highs.
US Treasury markets spent much of the week on the defensive. Some speculated
traders were unwinding positions ahead of thinner holiday shortened trade, as
well as potentially reacting to some of the more positive comments made by Fed
Chairman Bernanke. On Tuesday the Chairman suggested the financial crisis
lowered the potential of US GDP growth below 2.5% and reiterated that the Fed
has no means of offsetting the fiscal cliff, so Washington needs to find a
solution. He also noted that a resolution to the fiscal cliff would have a
positive impact on growth and the housing market has seen clear signs of
improvement.
In Forex markets, the week began with a rise in risk appetite as sentiment that
negotiations on a deal to avoid the fiscal cliff were productive which weighed
upon the USD and JPY currencies. The EUR/USD started the week with a move over
1.2780 level. The currency was able to shake-off the French sovereign downgrade
with growing optimism that Eurogroup would soon reach an acceptable agreement
on Greece debt sustainability in order to release the next tranche payment
before the country goes bankrupt in mid-December. The FX market was betting on
a Greek solution with the Greek 10-year yield falling below the 16% level for
its best post debt restructuring reading and the EUR/USD found the momentum to
sustain a move above its 200-day moving average at 1.2804. The pair hit a
3-week high at 1.2915 after Friday's German IFO Survey registered its first
month over month improvement in seven months.
The USD/JPY pair hit fresh 7-month highs while EUR/JPY cross tested above the
106 handle for 6-month highs. A number of factors were cited for the weaker JPY
currency including a wider than expected Japan merchandise deficit, Japanese
LDP opposition election platform and dealer chatter of M&A flows with rumor
that Softbank had started buying USD for acquisition of Sprint with cited. The
JPY was off its worst levels by Friday after LDP opposition leader Abe changed
his FX intervention rhetoric that he was not thinking of currency intervention
to weaken the JPY currency and wanted the BOJ to address strong yen through
monetary policy.
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