US Equities Hovering at Five-Year Highs in Week of Mega Mergers; Currency Warriors Meet In Moscow
- US equity markets tested fresh five-year highs this week as global finance
leaders gathered at the G7 and G20 meetings in Moscow. Earnings season has
entered the home stretch, while a raft of mega deals highlighted the return to
life in the M&A market. On the US data front, the January industrial
production report was weaker than expected, following two months of solid
gains. However the very strong February Empire Manufacturing blew away
expectations and returned to positive territory for the first time since last
July. Note that the yield on the 10-year US treasury closed out the week right
above 2% in another sign of risk appetite continuing. In Europe, Q4 GDP data
showed the continent headed for another recession as austerity measures bit
into growth. Most Asian markets were closed for the New Year holidays, although
Japan traded most of the week. For the week, the DJIA slipped 0.1%, the S&P
500 gained 0.1% and the Nasdaq lost 0.1%.
- Fourth quarter GDP data for European nations and the eurozone as a whole
published on Thursday gave further notice that the continent headed for
recession. German GDP slid 0.6%, France's economy contracted 0.3%, Italian GDP
shrank 0.9%, and the eurozone economy overall fell 0.6%, the worst reading
since Q1 of 2009, in the aftermath of the 2008 meltdown. Recall that last week,
ECB Cheif Draghi asserted that confidence had stabilized and the ECB was seeing
a gradual recovery later in 2013.
- Analysts were watching the January retail sales report for signs of the
impact of the recent payroll tax cut repeal. The thesis was that the data would
be a barometer for the impact of the higher payroll taxes: a decline in retail
sales could indicate problems for the recovery as consumers tightened their
belts. As it turned out, the advance reading for January retail sales was
+0.1%, right in line with estimates, suggesting that spending was not held back
by the tax hike yet, though many analysts warned that consumers may adjust
their spending over a the course of a few months. The data may have masked the
impact on lower income workers, however, as a report on Friday suggested that
an internal memo indicated that Walmart sales in February were off to a very
shaky start. This may indicate that that the payroll tax hike is already
crimping the spending of the lower income consumers who form Walmart's customer
- At one point on Friday, gold futures were down over two percent, briefly
dipping below $1,600 for the first time since last August. Quarterly hedge fund
disclosures showed big withdrawals from various gold ETFs by George Soros and
Louis Bacon, among other, although the filings indicate John Paulson maintained
his position in gold.
- Warren Buffett's Berkshire Hathaway and 3G Capital announced a deal to
acquire processed food giant H.J. Heinz Co for $23.2B in cash. Including debt,
the transaction was valued at $28 billion. All in all, Berkshire and 3G will
pay $72.50 per share, a 19% premium to the stock's all-time high. Buffett told
CNBC he is putting $12-13B into the deal and still has "ample"
amounts of cash left over for another big acquisition.
- AMR and US Airways finally announced their long-anticipated merger. The $11
billion all-stock deal gives US Air's team operational control over the
bankrupt airline, while AMR's creditors will wind up owning 72% of the combined
carrier, which will retain the American Airlines name. The combined entity
becomes the largest US airline in terms of miles flown and annual revenue.
- A new wrinkle emerged in the Herbalife hedge fund battle on Thursday, when
Carl Icahn disclosed a 14M share stake (12.98%) in the MLM firm, saying that
his analysis shows the company has a "legitimate business model."
Three weeks ago during his televised confrontation with Bill Ackman, Icahn said
Herbalife could be the "mother of all short squeezes" someday. Other
hedge fund managers noted they were taking advantage of the battle of the
billionaires - Chapman Capital said it sold its entire stake in Herbalife right
after Icahn's stake announcement, and was looking to buy in again at a lower
price as the battle will cause a "roller coaster" in the stock.
- The week in FX was dominated by currency war skirmishes at the G7 and G20
conferences. At the G7, finance ministers and central bankers agreed to avoid
targeting lower exchange rates, and reaffirmed their commitment to "market
determined exchange rates" and avoiding excessive FX volatility. In
addition, members said they would work toward "domestic objectives"
using only "domestic instruments." There was some confusion after
anonymous officials suggested first that the members were concerned about
Japan's unilateral efforts to weaken the yen, followed by rebuttals by other
unidentified officials who said the statement was not aimed at any one nation.
- The G20 draft communique had some material differences with the G7 draft,
though officials played down the discrepancies. The G20 repeated the commitment
to market determined FX rates, but interestingly omitted the part about fiscal
and monetary policy only being used for domestic economic aims. Observers
suggested the US and Japan, with their massive QE programs, bumped the latter
statement from the broader G20 communique. The G20 also lacked a commitment to
avoid targeting FX rates. One senior G20 source said references to targeting
exchange rates would not be acceptable to China, with its yuan peg and giant
stash of USTs.
- In Europe, officials from France continued to face off against most of the
rest of their eurozone partners. The French kept stating that the euro remains
overvalued, while Northern European officials reiterated that the market needs
to set rates. EUR/USD traded in a range between 1.33 and 1.35, well within
January levels. The yen made fresh lows at the beginning of the week, as
USD/JPY hit its lowest level in 33 months just below 94.25. The back-and-forth
over the G7 and G20 statements capped the yen's decline for the week, and
USD/JPY traded back into the 92 handle. Cable hit six-month lows after the BoE
signaled it would not tighten policy in response to higher inflation.