Friday, February 8, 2013

Market Week Wrap-up

European Issues Return to Center Stage, but Risk-on Blizzard Continues

- Giddy global equity markets continued to push out to fresh post-crisis highs this week. There were some hiccups of risk aversion thanks to an unfolding political scandal in Spain and Berlusconi's gains in the polls ahead of the Italian elections on February 24th. In addition, perceptions that ECB's Draghi was excessively dovish in his post-ECB rate decision press conference provided some turbulence in EUR/USD that spilled over into equity markets on Thursday. However the issues provided no more than passing blocks to ever stronger rotation into risk assets. On Friday, markets pushed higher thanks to better Chinese and US trade data. China January trade data showed a much greater than expected pickup in exports, while the December trade deficit narrowed much more than expected, plunging by over $10B to a three-year low of $38.5B. Friday also saw a breakthrough in EU budget talks, with leaders agreeing to a tentative 7-year spending plan coming in under €1T but still promoting some growth initiatives. Ominous rumblings of geopolitical trouble were in the background: Japan accused China of more serious provocations over disputed island territories, North Korea was observed preparing for nuclear tests and Iran called off fresh negotiations over its nuclear program only a day after agreeing to them. For the week, the DJIA rose 0.1% and the S&P 500 gained 0.3%, while the Nasdaq added 0.5%, coming within points of a fresh 12-year high.

- State and federal regulators announced their intention to prosecute ratings agency Standard & Poors for its part in the excesses in the housing bubble that lead to the 2008 financial crisis. On Tuesday, the DoJ said it would file civil charges in cooperation with 16 states against S&P after ongoing settlement negotiations with the company fell apart. In a separate effort, reports suggested the New York State has subpoenaed S&P and formally requested information from Moody's and Fitch to examine ratings they issued in the run-up to the crisis. Unlike the existing federal/state probes, the NY AG can sue under the state's Martin Act, which does not require prosecutors to prove a firm intended to defraud investors to win a case.

- Notable European earnings this week included BP and UBS. BP's Q4 profit fell nearly 80%, dragged down by payouts related to the Macondo oil spill. The company booked a $3.8B loss for its settlement of criminal charges. UBS posted a $2.1B loss for Q4 in the wake of lawsuits, the LIBOR scandal and a wave of restructuring.

- New and old media names offered contrasting quarterly reports. Disney's earnings fell 6% y/y as ESPN absorbed higher programming costs and the performance of its movie studio sagged. AOL beat top and bottom line targets on solid growth. Analysts cite the 13% gain in advertising revenue as a major positive result, although the bulk of the firm's profits are still coming from membership revenue.

- Fast food stocks were burned by developments in Asia. Yum Brands' Q4 numbers were solid, but the firm warned its outlook has turned very sour on adverse publicity from contaminated poultry supplies in its China business. In the current Q1, Yum expects China KFC sales comps -25% y/y. McDonald's January sales comps were negative, as the company had warned with earnings two weeks ago. The company's terrible -9.5% comp in Asia was due in part to the timing of Chinese New Year and the impact of the tainted fast food chicken scandal there.

- On the M&A front, Michael Dell and Silver Lake Partners formally outlined their $24B going-private deal for Dell Computer, worth $13.65/share. Some large shareholders immediately objected to the slim premium on the deal. Oracle clinched a deal to acquire Acme Packet for $29.25/share in cash, in a deal valued at $1.7B. Oracle emphasized that the firm's network management solutions would help the company transition to all-IP data delivery.

- After peaking above 1.3700 late last week, EUR/USD turned around and gapped lower this week. Over the weekend, damning details from the unfolding Spanish political scandal circulated in the press, implicating PM Rajoy and other leading government officials in a slush fund scheme. Meanwhile Italian polls showed former PM Berlusconi's gaining on the various left-wing parties ahead of elections coming up in two weeks. Berlusconi made waves after promising to roll back and rebate certain taxes implemented by Monti's government. Peripheral bond yields widened out, with the Spain 10-year yield moving above 5.4% and Italian 10-year yields topped 4.5%, both back at highs last seen in early December. EUR/USD closed out the week just above 1.3350.

- The biggest leg down in EUR/USD arrived over the course of the ECB post rate decision press conference. Rates were on hold, as expected, and President Draghi began his remarks by reiterating his usual comments, including that the bank still sees downside risks for the economy. He also said the ECB would maintain a full allotment of MROs. Draghi acknowledge the stronger euro, but said it was still unclear whether the appreciation would be sustained. The dovish tone was taken as a reason to sell.

- The weak yen trend continued apace through midweek, with USD/JPY testing the 94 handle for fresh 33-month lows. USD/JPY has weakened over 7.5% in 2013 so far, and EUR/JPY found its way above 127 this week. Finance Minister Aso commented that ending the yen's long uptrend remained a top priority for the government, suggesting the currency's recent weakening had not satisfied the nation's leadership. BoJ Governor Shirakawa said he would step down three weeks earlier than expected to coincide with departure of two deputy members, a move which would most likely move forward an anticipated shift to more aggressive monetary easing by Abe's yet to be named choice to helm the BOJ. The yen strengthened slightly after Aso was cited as saying the currency had weakened too quickly, however the ministry later clarified that Aso's remarks had been mistranslated.

- UK markets were volatile as BoE Governor-Designate Carney addressed Parliament for the first time. Carney's tone was more hawkish compared to his remarks at Davos two weeks ago. GBP/USD surged 100 pips after Carney said the BoE must exit its unconventional policy. Gilt yields moved higher and tested 2.14%. The BoE issued a rare statement following its rate decision noting that inflation would exceed 2% for the next two years and the MPC stood ready to provide further stimulus if warranted.