Friday, March 15, 2013

Market Week Wrap-up  Weekly Market UpdateStocks Continue Melt Up On Mixed Data

- Steadily improving US economic data and the budget battle in Washington dominated headlines this week. The stock market melt up continued, though the DJIA ended a two-week winning streak on Friday, after closing higher for ten sessions in a row, its longest winning streak since November 1996. On Thursday, the S&P500 closed within two points of its all-time closing high of 1,565.15, whetting the appetite of traders eyeing another milestone. For the week, the DJIA gained 0.8%, the S&P 500 added 0.6% and the Nasdaq rose 0.2%. US indices were off a bit on Friday after the preliminary March University of Michigan Confidence sagged to a 15-month low on lower future expectations. But earlier in the week the February US retail sales data came in at twice the expected gain, proving that US consumers kept spending despite the higher payroll taxes. The weekly jobless claims numbers fell for a third straight week, sending the four-week moving average for new claims to five-year lows. In Europe, Italian political forces again failed to form a government and European leaders gathered for a summit in Brussels amid challenges to Germany's push for recommitments to austerity measures. Peripheral yields on 10-year notes from Spain and Italy decoupled this week, with Spanish yields contracting and Italian yields rising; the unusual pattern comes after Fitch's downgrade of Italy's sovereign rating and a somewhat weak three-year Italian auction.

- Last weekend China released January and February data that suggested the new leadership team in Beijing will have its hands full coping with a complicated economic situation. High food prices sent February CPI to a 10-month high +3.2% y/y and 13-month high in the m/m growth figure. Industrial production and retail sales grew at the lowest rate in several month, while February lending undershot estimates.

- In Washington, the Senate Democrats and the House GOP worked on budget proposals while President Obama continued his 'charm offensive' in hopes of massaging a deal between the two parties. Rep. Paul Ryan presented the GOP budget proposal, which would seek to balance the budget by 2023 with $4.6T in spending cuts. Spending would increase by 3.4% per annum versus 5% presently under Ryan's plan. The Democratic budget plan presented by Senator Patty Murray, calls for $1.85T in additional deficit reduction over 10 years, half from spending cuts and half from tax increases. The plan would increase taxes on the wealthy and large corporations by closing loopholes and tax breaks.

- The Fed released the second part of its annual bank stress tests this week. Fourteen of the 18 SIFI banks had their 2013 CCAR capital plans approved. JPMorgan and Goldman won conditional approval, requiring they rework and resubmit plans by October, while plans from Ally Financial and BB&T were rejected outright. BB&T shares slid 3% on Friday, and JP Morgan lost more than 2% with the addition of bad press from a Senate panel hearing grilling current and former executives about the "London Whale" trading loss from last year.

- Shares of Boeing rose 5% this week as the FAA authorized the company's plans to test and recertify the 787 Dreamliner battery system. Boeing said the testing should be complete before the end of the month, although there were reports later in the week that Boeing still does not entirely understand what went wrong with the system.

- EUR/USD tested its 2013 lows on Wednesday and Thursday around 1.2930 as the dollar strengthened on better US economic data and US equity gains, both of which contrast starkly with dismal European data and Italian political gridlock. On Friday the pair bounced back to the highs seen before the US Feb payrolls data after Portugal passed its seventh troika review and European leaders appeared to make progress toward resolving the Cyprus situation.

- Cable came into the week around two-and-a-half year lows and traded even lower through the terrible January production data. GBP/USD bottomed out below 1.4850 following disappointing production data mid-week but retook the 1.51 handle by Friday. Short-covering ahead of next week's much awaited spring budget plus comments from BoE's King, who said the BoE was not looking to deliberately weaken the pound, helped cable recover.

- The yen maintained a soft tone as Kuroda was formally confirmed as the new BOJ governor along with Iwata and Nakaso as deputy governors. Markets will wait to see whether the BOJ will hold an emergency policy meeting to launch new easing measures as soon as late next week.