Friday, February 15, 2013

Market Week Wrap-up

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 base.

- 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.