Friday, February 22, 2013

Market Week Wrap-up

Market Week Wrap-up Weekly Market Update: Rally Stalls As FOMC Minutes Expose Fed Anxiety About Easy Policy

- US equity markets were more or less flat for a second consecutive week as market participants kept their fingers on the pause button after a three month rally. In Europe, jitters about the Italian political situation threatened to move the eurozone crisis back to center stage. Weak February Eurozone and French manufacturing PMI data were offset by German PMI data returning to growth for the first time in a year and the February IFO survey indicating continued improvement. In the US, traders fixated on the minutes of the January FOMC meeting, which detailed the sharpening debate over when to begin withdrawing the punchbowl. The implosion in metals did not let up, with Comex gold ending the week at a seven-month low around $1,573, and copper futures diving nearly 6% to test two-month lows. China dragged down Asian markets as Beijing discussed stronger measures to curb speculation in property markets; the Shanghai Composite fell close to 5% on the week. US markets were closed on Monday for President's Day. For the week, the DJIA gained 0.1%, the S&P 500 lost 0.3% and the Nasdaq dipped 0.9%.

- The FOMC minutes certainly did not signal any material change in Fed policy, however the hawks are definitely stirring as anxiety grows on the committee about monthly bond purchases. The mintes read that "an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred." Analysts say the skeptical tone in the minutes suggest that the debate has shifted to the question of when to scale back purchases rather than when to end them.

- Managed care names moved on Tuesday after The Centers for Medicare and Medicaid Services (CMS) offered new Medicare Advantage rate guidance. Last Friday after the close, CMS published preliminary 2014 reimbursement rates for public comment. Humana commented that the preliminary rates would drive a mid-single-digit decline in the company's Medicare Advantage payment rates, while a Citigroup analyst warned the proposals would reduce payments to plans by 7-8%. Most of the managed care names fell around 4% after the announcement, while Humana dropped 8%.

- Walmart offered a mixed Q4 report. Earnings grew solidly and beat expectations but revenue was lower than expected. The company confirmed that February comps were weak (in line with a leaked internal memo out last week), blaming a delay in income tax refunds, but it also said that comps had normalized by mid-month. In other retail earnings, both Nordstroms and Abercrombie headed lower after solid headline numbers but very weak FY13 forecasts.

- The January retail sales data out last week showed little indication that the withdrawal of the payroll tax cut was holding back consumer spending. Retail firms offered commentary on the issue this week. Walmart made lemons into lemonade saying lower paychecks, plus higher gasoline prices, only made their pricing strategy more attractive for consumers. Darden said it is facing "difficult headwinds" from increased payroll taxes and rising gasoline prices. Clorox said it would see a modest impact from the payroll tax change. Grocer Safeway is expecting no sales decline from the change.

- While there were no more megadeals announced this week, the heightened pace of M&A continues. Office Depot reached a deal to combine with rival OfficeMax in a $1.2B all-stock merger of equals. OfficeMax shareholders will get 2.69 ODP shares for each share they own, valuing the company at $13.50/share. Prepaid gift card firm NetSpend agreed to be acquired by TeleCommunications Systems for $16/share, in a total deal valued at $1.4B. KKR reportedly submitted a final $75/share bid to acquire Gardner Denver, whose board will meet next week in order to consider whether to accept the offer. Shares of mining equipment firm Joy Global jumped on intensified rumors that a deal to acquire the firm was in the works, although Joy's management dismissed the speculation.

- The euro weakened due to headwinds from another round of terrible European economic data and the uncertainty around the impending elections in Italy. Italians go to the polls on February 24th and 25th to elect a new government. Four mutually antagonistic groups are in the running: Bersani's Democratic Party, Silvio Berlusconi's allies, Beppe Grillo's Five-Star Movement and forces allied with current technocratic PM Monti. Two weeks ago, yields on Italian 10-year government debt surged on news that Berlusconi was gaining in the polls on campaign promises of rolling back many austerity measures, although the gains were reversed last week. Italian benchmark yields rose again this week, although that likely had more to do with risk-off trading in global markets. The press also shined the light on Grillo's left-leaning populists this week -- Grillo has said he supports renegotiating Italy's debt obligations with creditors.

- The greenback saw a mid-week surge after the release of the FOMC minutes, sending the US Dollar Index to its highest level since last September. EUR/USD pushed to six-week lows in the wake of the terrible economic data out of Europe, the uncertain Italian situation and news that France may be facing an EU "excess deficit procedure." On Friday, European banks repaid €61.1B which was below expectations of €130B, further weakening the euro.

- The pound extended its downtrend this week, with GBP/USD marking a two-and-a-half year low. BoE Governor Weale said a weaker pound might be needed to narrow the UK current account deficit and there were rumors of an imminent UK sovereign downgrade (though this would be especially unlikely ahead of the UK spring budget, which is due on March 20th). However, the BoE minutes countered this dovish tone with news that the most recent vote to increase QE narrowed to 6-3 versus the 8-1 votes seen over the past three months. The MPC also considered cutting the repo rate nearer to zero, buying other assets, and changing the interest paid on reserves. The vote put Governor King in the minority for only the fourth time in his 10 years as the BoE chief. GBP/USD tested 1.5310 following the release of the minutes. Cable elected stops in thin trade which fueled a push under 1.5135.

- The yen saw its lowest levels of the week against the USD on Monday after the official G20 communique did not specifically mention Japan's policies. However, USD/JPY is having trouble getting above the 95 handle. PM Abe and Finance Minister Aso seemed at odds: Abe said that if the BoJ was unable to achieve the 2% inflation target the government would work to rewrite the central banking law, while Aso later said the government would not considering changing the law. There were also reports that the two men disagreed over candidates to replace Shirakawa as BoJ governor, with the announcement due out next week. Difficulties in USD/JPY breaching the 95 handle helped trigger some squaring of JPY shorts.