Friday, December 28, 2012

Market Week Wrap-Up

 Market Hangs on Cliff Talks

- The level of uncertainty surrounding the US Fiscal Cliff rose sharply this week after talks in Washington were broken off during the Christmas break. Hopes for a last minute "mini-deal" were stirred when the GOP leadership announced late in the week that the House would resume its session on Sunday evening and the White House scheduled an eleventh hour meeting with Congressional leaders at 3pmET on Friday. Data this week showed that the impending fiscal cliff may have had a bigger impact on consumer behavior than previously believed as the US Consumer Confidence reading came in below expectations and some early reports suggested that holiday retail business started to dry up in the week ahead of Christmas. At least one worry for the New Year was resolved as US federal mediators announced a tentative deal to avert a strike at 14 major ports along the east coast and Gulf of Mexico that had threatened to grind shipping to a halt on the eastern seaboard. Bond markets were unmoved by fiscal cliff concerns or the countervailing rumors of a mini fiscal deal in the works; Interest rate futures had one of their least active weeks of the year. Gold futures also moved sideways, unable to capitalize on concerns about going over the cliff and ending the week essentially flat at $1,657. Currency markets were fixated on the new Japanese government, which successfully weakened the Yen with verbal intervention ahead of more concrete actions to reflate the economy. As the VIX volatility index, used as a fear indicator, rose back above 20 for the first time since July, equity markets gave up last week's gains: the DJIA fell 1.9%, the Nasdaq lost 2%, and the S&P500 dropped 1.9%.

- The US consumer was a particularly hot topic heading towards the New Year. East coast snow storms and concerns surrounding the impending fiscal cliff weighed on many shoppers' minds. US Consumer Confidence took a hit in December, coming in almost 5 points below consensus, at a four month low of 65.1. The US Conference Board also noted that there was a subsequent risk that the December data could be downwardly revised due to smaller sample sets related to the holiday data collection period. Early holiday spending data from MasterCard Advisors SpendingPulse indicated that retail sales leading up to Christmas saw the smallest increase since 2008.

- Barnes and Noble shares traded higher on Friday after disclosing an $89M investment by publisher Pearson in BKS' NOOK unit, putting a $1.8B value on NOOK's operations. The announcement was undercut somewhat by the company noting that holiday sales trends were below prior projections, including in the NOOK segment.

- After being pummeled by a short seller report last week, shares of Herbalife managed to rebound nearly 10% this week. The firm put on an aggressive defense, hiring a law firm to help formulate a response to the comments from Pershing Square's Bill Ackman, who sent HLF shares down 40% last week after calling the company's multi-level-marketing business a "pyramid scheme."

- The greenback was softer against the European pairs as concerns about budget negotiations in Washington lingered. Those concerns proved to be a double edged sword as the FX market started to focus on the potential for a US sovereign rating downgrade in early 2013, providing a headwind for risk appetite and helping the USD come off its worst levels. Indeed Moody's sounded the alarm for politicians this week, stating that it expects an eventual resolution of the budget and debt limit issues, but "if there is no clear path on the fiscal outlook and debt trajectory in 2013, the US sovereign rating will be downgraded." Dealers noted that general book squaring in thin end of year liquidity played a role in dollar price action as well. There were also some murmurs of concern in Europe after the ECB failed to fully sterilize accrued SMP bond purchases for the first time since November 29th, 2011, the day before global central banks took coordinated action to boost liquidity in the global financial system.

- The Japanese yen was trading on the softer side after incoming PM Abe vowed legislation to revise Bank of Japan mandates if it did not adjust its inflation target to 2%. The new Japanese government maintained its rhetoric late in the week on seeking a weaker yen, though it acknowledged that there is a risk that the recent weakening in the currency could reverse. The Japan Chamber of Commerce head expressed his desire to see USD/JPY stabilize between the ¥85-90 level, but cautioned that importers would want any rise limited to the ¥110-120 range. USD/JPY hit fresh 28-month highs above ¥86.60 and the EUR/JPY cross hit 16-month highs of ¥114.70 in Tokyo on Friday following Japan inflation data that showed little change in expectations despite the cabinet change. The leading Tokyo core component for December was a tick worse than expected at -0.6% - the biggest y/y drop in 5 months - while the nationwide core print for November was back in the red after a flat reading in October. Some vague chatter circulated that Japan might impose a 90 floor in the pair, though analysts saw that as highly doubtful since the BOJ has been preaching to China about the virtues of a floating, market-driven rate. Late on Friday, Japan Economics Minister Amari said the cabinet will look to formalize a policy accord with the BOJ as soon as next month to solidify the prospects for a formal 2% inflation target and called the next central bank meeting on Jan 21-22 a "milestone."

- In China, the Shanghai Composite closed the week at a 6-month high above 2,230 on further signs of recovery in the manufacturing sector. The China National Bureau of Statistics reported November industrial profits for large firms rising 22.8% y/y - well above the 20.5% growth seen in October and the 7.5% increase in September. Later in the week, the Chinese Finance Ministry cautioned that it saw higher risks due to rising bank loans going into 2013, and some chatter also emerging that the State Council could introduce limits on lending to local government finance vehicles (LGFVs).

- The GBP/USD was firmer and tested the 1.62 handle this week. Weekend press reports noted that the BOE could defy expectations and raise interest rate in 2013 on the back of a solid economic recovery and rising inflation. Meanwhile, the Brazilian Real currency was firmer as the central bank continued action to offset recent weakness, using both an auction of credit lines and swap contracts to guide the USD/BRL back below 2.05 after starting the week at around 2.08.