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."
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