Calm Before The Debt Ceiling Storm
- Global equity markets largely moved sideways this week as trading remained
rather subdued after last week's monster rally. There was little consequential
data to trade off of, besides China's excellent December trade report. Export
and import data were both much better than expected in China, prompting many
commentators to say the nation's 2013 GDP growth could be stronger than the
official 7.5% target. Both a former World Bank economist and an Alcoa executive
stated they would not be surprised if China GDP growth topped 8% in 2013. In
Japan, newly installed PM Shinzo Abe unveiled a ¥20T stimulus package, although
his government seemed to back away from forcing the Bank of Japan to formally
commit to a higher inflation target. In the US, President Obama nominated
current White House Chief of Staff Jack Lew to replace Tim Geithner as Treasury
Secretary, much to the chagrin of some Congressional Republicans who have found
Lew to be a tough negotiator. Little was heard from Capitol Hill, although
House Speaker Boehner suggested a later the usual date of February 12th for the
president's 2013 State of the Union address. The debt limit is looming ahead,
with some analysts saying the limit could be reached as early as February 15th.
For the week, the DJIA and S&P 500 each gained 0.4%, while the Nasdaq
tacked on 0.8%.
- China's much stronger than expected December trade data kept global markets
aloft in the latter half of the week. The trade surplus was well above
consensus, although it was the import/export components that inspired traders,
with the latter rising by nearly twice the expected rate at +6% and the former
by nearly three times expectations at +14%. Exports to the EU rose marginally,
marking their first y/y increase since May. Exports to the US showed a much
more robust growth of +10%.
- Alcoa's decent earnings report lifted markets on Tuesday, unofficially
opening the Q4 earnings reporting season. While the firm's revenue was weak and
earnings only just met expectations, investors were heartened by the firm's +7%
forecast for 2013 global demand growth, which compares to their +6% 2012
- Boeing's new 787 Dreamliner jet program is facing serious issues after a
string of technical failures this week. A battery system in a Japan Airlines
787 caught fire and an ANA Dreamliner reported cracks appearing in a window
during flight. In response, the FAA said it will thoroughly review the 787's
critical systems and assembly but will not ask airlines to ground the aircraft.
Airlines have started conducting their own reviews of their 787 fleets and so
far United Continental has found one of its 787s had faulty battery wires.
- Bank of America announced $11.6 billion in settlements with Fannie Mae and a
$1.8 billion sale of rights on home loans. The deals go a long way toward
moving BoA past its disastrous 2008 purchase of Countrywide. BoA said it would
still make money in Q4, however the settlements wipe out most of the bank's
profits for the quarter.
- Multi-level marketing firm Herbalife was much in focus on Thursday, when the
firm held an analyst event to rebut the accusations made recently by Pershing
Square's Bill Ackman. Herbalife's presentation was dismissed by some analysts
as transparent and dishonest. Other investors smell an opportunity: legendary
activist investor Carl Icahn was said to building a stake in the firm, while
Dan Loeb's hedge fund Third Point disclosed an 8.2% passive stake in the firm.
One fund manager commented that the play would end up as "an Ackman
- On Sunday, Switzerland's Basel Committee gave banks four more years and extra
flexibility to reach Basel III targets, allowing lenders to put some of their
reserves to work. Recall that back in November, the Fed abandoned its prior Jan
1st, 2013 deadline for making the Basel III rules effective for US institutions
and said it would continue to study the rules.
- EUR/USD was well contained within a 1.3000 to 1.3150 range through Thursday
morning's ECB rate decision. More signs of normality were seen in Europe's
crisis nations: Ireland, Italy and Spain sold longer-term debt in public
markets, drawing very good demand at lower yields. By Friday, the yield on
10-year Spanish debt dropped below 5% and the yield on Italian 10-year debt
were getting very close to 4%.
- There were no surprises in either the BOE or ECB rate decisions as both banks
left key rates unchanged. At the ECB press conference, Mario Draghi revealed
that the decision to hold rates steady was unanimous, unlike the December
meeting when there was "wide discussion" about whether to ease
further, including the concept of negative interest rates. By Friday, EUR/USD
advanced above 1.3300 after testing the key level repeatedly over the last
several weeks, as it became clear that Japan would follow through on promised
stimulus and US Fed members made it clear that last week's FOMC minutes were
misconstrued as a hawkish shift.
- On Thursday EUR/CHF moved sharply above 1.21 level on rumors that Zurich
Cantonal Bank (ZKB) would join other competitors and start charging for certain
deposit accounts. The bank later denied the reports, strengthening CHF. The
cross hit a four-month high on Friday at 1.2170 after the negative reading in
the Dec Swiss CPI data stoked fears of deflation.
- The steady weakening trend in the yen was on pause early on in the week as
the new government continued its struggle over monetary policy with the BoJ. The
yen strengthened after the government backed away from attempts to tie the BoJ
to a new high inflation target via a formal accord. Traders saw the compromise
as a less potent outcome than an explicit commitment to take unlimited easing
measures until inflation hit 2%. Later in the week, PM Abe unveiled a ¥20T
economic stimulus package, with a goal of boosting GDP by 2% and creating 600K
jobs. By Friday's close, USD/JPY was back around 18-month highs at 89.20.