Friday, January 11, 2013

Market Week Wrap-up

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 forecast.

- 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 sandwich."

- 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.