Friday, January 18, 2013

Market Week Wrap-up

Equities Push Higher On Better Data, Decent Earnings, Potential Debt Ceiling Truce

- US equities drifted higher this week as decent US earnings, some good economic data and a de-escalation of tension on the debt ceiling front inspired confidence. The S&P500 and the DJIA both pushed out to fresh five-year highs, while the Russell 2000 and the Dow transports index marked all-time highs. Conversely, the VIX index moved below 13 for the first time since 2007; one trader mentioned that participants are "scrambling for upside protection now." After gathering for a leadership conference this week, the House Republicans offered a consolatory proposal that would push back the debt ceiling for three months while the spending component of the fiscal cliff battle was settled. The December beige book report indicated that the economy expanded modestly in the final month of 2012. The initial jobless claims fell to levels last seen in January of 2008. December housing starts were much better than expected, with huge gains seen in multi-family construction. US retail sales continued their slow but steady gains in December, reflecting the strong individual SSS reports out at the beginning of the month. In Europe, bailout nations continued to see decent results from the sale of sovereign debt across the curve, further suggesting that the European debt crisis has been brought under control. US Treasury yields remain near recent multi month highs as investors continue to ask if this could be the beginning a long term migration into stocks. For the week, the DJIA rose 1.2%, the S&P 500 gained 0.9% and the Nasdaq tacked on 0.3%.

- The Congressional Republicans appear to have listened to more reasonable voices in the party and concluded that an immediate clash with the White House over the debt ceiling would be a losing proposition. Coming into the week there were reports that the party would be willing to risk a government shutdown to push its agenda in the debt ceiling negotiations. Then on Friday, House Speaker Boehner offered a new strategy for dealing with the issue: a budget must be passed before the debt limit is increased, and the House will offer a three-month extension of the debt limit with the condition that the bill will obligate the Democrat-controlled Senate to lower spending levels. During the debt ceiling negotiations last August, the Obama Administration repeatedly rejected any short-term extensions of the debt limit. However the White House seems interested in playing ball this time around. Later on Friday, White House Spokesman Carney said the administration is encouraged by the proposals, but emphasized that the House must pass a 'clean' debt ceiling increase that is free of conditions. The House may move to pass the increase as soon as next week.

- Goldman Sachs, JPMorgan and Morgan Stanley reported excellent results in Q4 reports this week. Both Morgan Stanley and Goldman widely beat expectations, with both earnings and revenue well ahead of estimates. Very strong investment banking business drove good results at both banks. JPMorgan also reported good results in the quarter, with profits up a bit more than 50% y/y. Bank of America and Citigroup had more problematic Q4 reports: Citi's EPS was well below expectations after taking into account huge legal costs and corporate restructuring charges while BoA was weighed down by the recently announced $5B in MBS repurchase charges.

- Among other notable earnings reports this week, General Electric largely met expectations and reiterated its FY13 forecast. The firm's backlog returned to record-high levels by the end of the quarter and CEO Immelt talked a lot about solid emerging market demand, especially from China. Share of Intel tanked as the firm reported that its gross margins continued to shrink. American Express's Q4 results were right in line with their preliminary Q4 numbers out a week ago, although the firm disclosed that US and international card services net income fell sharply on a y/y basis, even as revenue grew.

- Trouble with the Boeing 787 Dreamliner was in headlines all week. The FAA and the Japanese and European air safety regulators grounded the 787 fleet until further notice. Operators will have to prove that the new plane's battery systems are safe before the planes fly again. Reports suggest that the problem is in the backup battery system, where voltage exceeding the design limit was applied to the batteries designed by GS Yuasa Corp.

- EUR/USD maintained a steady tone this week despite some soft European economic data. The pair traded between 1.3255 and 1.3400 after another round of peripheral bond auctions delivered solid results. Analysts pointed out Spain's sale of long-term bonds with lower yields and good demand on Thursday as reinforcing confidence in Madrid's ability to finance itself for now. Portugal also appears ready to rejoin debt markets after the cabinet said they were allowing the IGCP to issue debt. There were press reports that European banks are beginning to repay their three-year LTRO loans from the ECB, a move which is being seen as a possible catalyst that would push up both Eonia and EUR. EUR/USD hiccupped midweek after outgoing Eurogroup head Juncker warned about tolerating an excessively high euro FX rate, although the move was retraced when ECB Governor Nowotny refuted Juncker's claim and said there is no long-term uptrend in the cards for the euro.

- The yen saw some retracement early in the week as dealers latched upon comments made by new Japanese Economy Minister Amari, who said the yen had come to a good level (USD/JPY was around 90 and EUR/JPY was around 120) and that further declines could harm the economy. After taking criticism for the remarks, Amari claimed his statements had been misinterpreted and pointed out he never said that ¥100 level was a turning point. Japan PM Abe's Economic Adviser Hamada helped the pair test above the 90 handle after saying USD/JPY at ¥95 or ¥100 was not a problem and would not cause an inflation scare.

- On Friday China released GDP data for Q4 and 2012, as well as December output and retail sales reports, all of which beat estimates by slim margins. China's +7.9% GDP growth rate in Q4 was an improvement from Q3's +7.4% rate (a 3.5 year low), although the 2012 full-year GDP figure of +7.8% marked China's lowest rate of growth since 1999. The China Stats Bureau put a positive spin on the figure, asserting that annual GDP growth of +7-8% would be a good balance to end the period of "super rapid growth."