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.
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