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Fed
Launches QE4, No Hard Landing In China, Greece Will Get Paid
- Three notable developments defined trading this week against the backdrop of the ongoing fiscal cliff debate in Washington: Wednesday's FOMC decision, the Greek bailout payment and China's November economic data. At its December policy meeting, the Fed broke new ground by committing itself to a new structure of policy guidance based on achieving certain economic data thresholds. In addition, it launched a new round of quantitative easing to replace Operation Twist. In Europe, a long-delayed €34B loan payment was released to Athens after eurozone finance ministers approved the move on Thursday. EU and Greek officials roundly proclaimed that fears Greece would be forced to leave the eurozone were now dead. In China, November economic data surprised to the upside and left the distinct impression that an economic hard landing is really off the table for Beijing. Meanwhile, Japan entered recession only days ahead of parliamentary elections this weekend. For the week, the DJIA -0.2%, the S&P500 -0.3% and the Nasdaq -0.2%. US Treasury yields backed up led by the 10-year which briefly approached 1.75% for the first time since late October.
- The Fed also replaced its low rates to 2015 pledge with new thresholds based on real economic performance. Instead of tying low rates to a date, the Fed will leave easy monetary policy in place as long as unemployment stays above 6.5% and inflation expectations don't get too far ahead of its long term goal of 2%. Chairman Bernanke cautioned that the new thresholds do not indicate monetary policy is on autopilot, warning that crossing the 6.5% boundary would not automatically trigger policy changes. The Fed will be looking at a variety of employment indicators, including payrolls, hours worked and participation rates and more when determining policy going forward.
- The Fed transformed Operation Twist into a program of outright treasury purchases this week. Some are already calling the program QE4, as the Fed will create $45B in new money (unsterilized purchases) every month to buy USTs, unlike Op Twist which merely adjusted the debt holdings on the Fed's balance sheet. Note that the new effort runs parallel to QE3, under which the Fed will create $40B in new money each month to buy agency MBS to lower mortgage rates.
- The fiscal cliff stalemate continued this week, with no significant movement seen toward a solution from either side. House Speaker Boehner paid a surprise visit to the White House Thursday night, only a few hours after claiming that President Obama had failed to offer a serious compromise to prevent the fiscal cliff. Spokespeople for the two men issued nearly identical statements, calling the meeting "frank" and saying the "lines of communication remain open." There were reports late on Friday that Senate Minority Leader McConnell was offering to raise rates on the top 2% of earners if no other tax hikes were passed, although Boehner was still said to oppose the idea.
- European equity markets hardly rejoiced at the final release of funding to Greece, with the Euro Stoxx 50 gaining only a few tenths of a percent on the week. European officials also managed to agree on a unified bank regulatory authority for the EU. All the warm feelings were cut short by political maneuvering in the Italian parliament that forced technocrat PM Monti, who helped restore stability in Italy, to call early elections for next February. In a bid to return to power, former PM Berlusconi withdrew the support of his center-right PDL party from the Monti government and announced his candidacy for the top spot. But after markets and public opinion polls suggested that they didn't want to see the return of former prime minister, Berlusconi sheepishly suggested he might support Monti as a candidate to lead the centrist coalition.
- OPEC maintained its 30M bpd production ceiling without much debate in Vienna. However the competition to replace Secretary General el-Badri was more intense, with plenty of jockeying among candidates from Iraq, Iran and Saudi Arabia. Members compromised by extending el-Bardi's term by one year. Feb WTI crude future finished the week up 1%.
- The US Treasury sold off the 234M common shares that comprise the last of its stake in AIG, effectively ending the bailout that began back in the dark days of 2008. Note that the Treasury still retains warrants to buy 2.7M shares of AIG common stock. The Treasury is looking to make $7.6B from the sale, bringing its profit in the overall AIG bailout to around $23B.
- Emboldened its new alliance with Japanese carrier Softbank, Sprint disclosed two big moves this week. Sprint consolidated its ownership of Clearwire, disclosing that it had taken a 51.7% stake as of December 11th and had offered to buy the rest of the company for $2.90/shr. There were also reports that Sprint has been talking to Dish Network for months about using Dish's spare satellite spectrum for wireless mobile service. Dish has been looking to bundle wireless phone services with its other offerings. This week the FCC approved the plans.
- In deal news, YM BioSciences is being acquired by Gilead for $2.95/shr, for a total deal valued at $510M. Delta will acquire 49% of Virgin Atlantic for $360M as part of a strategic alliance deal. Both airlines are looking to boost their transatlantic businesses against strong competition.
- EUR/USD began the week around 1.2900 and retook the 1.30 level on Tuesday after the December Germany ZEW survey saw its first positive reading since May. The Greek deal and the EU banking union agreement further consolidated the euro uptrend. EUR/USD took another leg higher after the European close on Friday, testing above 1.3170 before meeting resistance. Traders point out that when you look at the bigger picture, EUR/USD remained firmly within the 1.28-1.32 consolidation range that has been in place since September. One conclusion drawn by analysts last week after the ECB meeting was that there was a distinct possibility that the new year could see the ECB consider negative rates. The ECB's Praet diluted some of this speculation, warning that the ECB had very little room to maneuver on policy.
- The Swiss Franc weakened a bit through the middle of the week after UBS followed moves by other Swiss Banks to introduce fees on credit balances in CHF cash clearing accounts held by financial institutions at UBS Zurich. EUR/CHF probed above the 1.2120 level repeatedly in the second half of the week. On Thursday, the SNB left the floor in the pair unchanged at its policy meeting.
- Japan entered a technical recession after reporting its second consecutive quarter of negative GDP growth; Japan final Q3 GDP came in at an annualized rate of -3.5% and the final Q2 reading was revised to -0.03% from +0.2% prior. The fourth quarter will likely be even worse: the BOJ's quarterly Tankan manufacturing survey was very negative, coming in at an 11-quarter low. Recent yen weakness continued and USD/JPY hit a fresh 8-month high just below the 83 handle. The LDP party solidified its lead ahead of parliamentary elections on Sunday. Note that 320 seats is the key threshold in the 480-seat lower house, as it would give the LDP a 2/3rd supermajority empowering them to vote down bills passed by the DPJ-controlled upper house.
- The November data published this week further suggests that the Chinese economy is bottoming out. New yuan loans rose for the first time in three months, both industrial production and retail sales pushed out to eight-month highs, and the HSBC flash manufacturing PMI was above 50 for the second month in a row. On Friday, the Shanghai Composite saw a monster 4.3% rally, pushing out to four-month highs above 2,150 in the wake of the data. This weekend the Politburo will convene its Central Economic Work Conference to set out 2013 economic policy objectives.
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