The
"Great Rotation" Continues
- Risk assets headed higher again this week as optimistic markets accentuated
the positive and ignored the negative. Money flowed into risk assets in record
amounts. Indices surpassed key psychological levels: the S&P500 established
itself squarely above the 1500 mark and on Friday the DJIA closed above 14,000
for the first time since late 2007. US economic reports out this week were contrarian
and hard-to-read, but on the balance positive. The December headline durable
goods reading of +4.6% y/y was very strong, however ex aircraft it was much
more tepid at +0.2%. The 2.6% surge in the December personal income data (the
largest gain since 2004) was chalked up to the bubble of special dividends paid
out before the end of 2012 ahead of the fiscal cliff. The first reading of Q4
GDP was -0.1%, way below consensus expectations, although the data was skewed
by an unusual slump in defense spending. The January payrolls were uninspiring,
while the December payrolls were revised much higher. In China, the Shanghai
Composite rose 5.5% on the week thanks to solid manufacturing data. For the
week, the DJIA rose 0.8%, the S&P 500 gained 0.7% and the Nasdaq jumped
0.9%. As equities forged higher, the yield on the US 10-year bond held above
2.0%.
- The first negative reading in quarterly US GDP since 2009 was being blamed on
a sharp decline in defense spending, which was a big part of the decline in
government fixed expenditure. Data showed that government spending on defense
fell by the greatest amount since the early 1970s as the Pentagon anticipated
potential 'sequester' budget cuts. Investors concentrated much more on the
solid increases seen in business and consumer spending: disposable personal
income was +6.8%," nonresidential fixed investment was +8.4% and
residential investment gained +15.3%.
- The headline non-farm payrolls numbers were not inspiring, with the +157K
figure right in line with the original December number. However, the revisions
to the December data to +196K from +155K were a big positive, thanks to the
nine-month benchmark revisions. Moreover, analysts blame the weaker job growth,
like much of the rest of the data softness this month, to shenanigans in
Washington.
- The Fed met this week with little fanfare. After expanding its QE3 program at
the December meeting, the FOMC made no policy changes this week, and gave a
slight upward tweak to its assessment of the economic environment. As the FOMC
rotated its voting membership for 2013, Kansas City Fed President Ester George
became the new dissenter on the committee, raising concerns that the continued
high level of monetary accommodation will increase the risks of future economic
and financial imbalances and cause long term inflation.
- A trio of tech earnings proved irresistible for the talking heads this week.
Facebook's headline numbers and user metrics were all pretty solid, and mobile
revenue grew to 23% of the ad revenue, however margins were down big on a y/y
basis. Amazon missed top- and bottom-line expectations, but investors were
heartened by an improvement in margins. Yahoo's FY revenue outlook was strong
and CEO Mayer promised continuing improvements as her overhaul process continued.
Despite strengths or weaknesses in the reports, shares of all three names were
down 4-6% this week.
- Research in Motion unveiled its new Blackberry 10 (BB10) operating system and
launched two new phones. The new models are the Q10, with a physical keyboard,
and the Q10, which is touchscreen only. The firm also said it would change its
name to Blackberry and its ticker to BBRY. After months of hype ahead of the
BB10 launch, shares of RIMM sold off sharply after the official roll out.
- Quarterly reports from Ford, Caterpillar and Boeing provided a snapshot of US
manufacturing. Caterpillar set a cautious tone for the year in FY13 guidance,
offering a very broad range and warning that the outlook is very opaque. Ford's
North American business remains very strong, while European revenue fell 25%
y/y. Boeing's profits crushed expectations in its Q4 and its initial profit
forecast for FY13 was well ahead of estimates. In regards to the 787
Dreamliner, the company said that progress is being made on narrowing the
causes of the battery problem and production continues on plan.
- Oil majors Chevron and Exxon both beat consensus earnings expectations on
solid y/y profit growth. Analysts highlighted that profits at the two firms and
the industry in general are benefitting from high margins on the fall cost of
domestic crude thanks to shale production.
- The greenback weakened against European pairs this week as money continued to
flow into risk assets. Not even the patchy GDP or payrolls data put much of a
break on the upward trend of EUR/USD. Multiple official commentators hammered
away at the "euro-zone crisis is over" theme, Europe's new form of
mild verbal intervention.
- Data out from the ECB and European banks showed that institutions were not
rolling over three-year LTRO funds into shorter dated paper. Analysts said that
this suggests the European banking sector was healthier than expected. Reports
showed that Spanish banks repaid almost a third of their three-year LTRO
borrowings.
- There was a big exception to the trend in European currencies: Sterling.
Cable hit five-month lows of 1.5716 and continued to trade under pressure from
the potential triple-dip recession risk after last week's Q4 growth reading.
Dovish comments from incoming BOE Governor Carney over the weekend were also a
factor.
- Japanese officials deflected criticism from the Davos summit against Japan's
campaign to weaken the yen even as USD/JPY tested above the 92 handle late in
the week. Dealer cited the pickup in US Treasury yields as a factor in price
action after the US 10-year yields move firmly over 2%.
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