TradeTheNews.com Weekly Market Update: Markets Set Aside Latest Uncertainties, S&P500 Hits New Highs
- The eventful first quarter of 2013 came to a close this week, marked by key US equity indices hitting all-time highs. The rally that began in mid-November is on track, supported by investor enthusiasm for the accelerating pace of the US economic recovery and ongoing support of central bank stimulus. On Thursday (US equity trading was closed for Good Friday) the S&P500 topped its all-time closing high of 1,565 from October 2007, after rising 10% since January 2nd. The DJIA was up approximately 11.2% over the same period, while the Nasdaq was up a more modest 5.3%, weighed down by Apple's 13% decline. Economic recovery drove WTI crude prices up 5.9% in Q1 and natural gas prices rose 20%. Headlines this week were dominated by the crisis in Cyprus, where the eight-day enforced banking holiday came to an end on Thursday. Cyprus and EU officials managed to hammer out a bailout compromise and prevent run on the banks, but few expect that to be the end of the story. Italy still lacks a government after talks on forming a coalition between the right and the left failed. French and German equity markets closed out the quarter flat, while the FTSE100 gained 6%. In Asia the Nikkei was up a whopping 17% as the Japanese government continued its highly liquid campaign against deflation, while the Shanghai Composite was flat as fears about the real estate bubble cancelled out the better overall economic outlook. For the week, the DJIA rose 0.4%, the S&P 500 gained 0.8% and the Nasdaq rose 0.6%.
- Fourth quarter US GDP was revised higher in the third and final reading, to +0.4%. Note that this is the second revision higher, after an advance reading of -0.1% and a preliminary figure of +0.1%. The upward revision was primarily due to nonresidential investment, which increased 13.2% in the third estimate versus 9.7% in the second estimate. Some parts of durable goods data for February were pretty decent, including the headline +5.7% figure, which was a big improvement from January's -3.8% decline. Transportation was a big contributor, as ex-transport the Feb numbers were negative, versus a 2.9% gain in January.
- The Eurogroup and Cyprus worked out a bailout compromise last weekend. The new deal dropped bail-ins contributions from bank accounts with less than €100K and included significant banking system restructuring. Laiki Bank will be wound down, deposits of less than €100K will be protected and accounts over €100K will be frozen and taxed. It still remains how big the haircut will be, although an 80% figure was bandied about late in the week. The deal secured continued ELA funding for Cyprus banks from the ECB. Restrictive capital controls came into effect when the banks reopened on Thursday: depositors were only allowed to withdraw a maximum of €300 per day, no checks could be cashed and individuals could take no more than €3,000 out of the country. The feared bank runs did not materialize on Thursday thanks to the controls.
- The Italian political crisis deepened this week as the center-left group led by Bersani failed to form a government after negotiations with Berlusconi's rightist coalition broke down. Meanwhile, Beppe Grillo's Five Star movement promised to oppose any Bersani government, no matter what the makeup, in a confidence vote. On Thursday, President Napolitano retracted Bersani's mandate. Analysts believe some form of technocratic government will be put in place and new elections could be called as soon as June. Bond investors are starting to get nervous about the situation: the bid-to-cover in the Italian five-year auction on Wednesday was the lowest in over a decade.
- Warren Buffett swapped his financial crisis-era warrants in Goldman Sachs for stock, making Berkshire Hathaway one of Goldman's top ten holders. Instead of exercising the warrants, which would cost Berkshire money and dilute the bank, Goldman will give Berkshire shares reflecting the difference between the warrants' original exercise price of $115 and the average closing price of Goldman's stock for the 10 trading days up to October 1, or just shy of 10M common shares.
- The Dell board received two alternative acquisition proposals on Monday, following the expiration of the go-shop period for the company's going-private deal. Blackstone is offering shareholders $14.25/share in cash while Carl Icahn is offering the equivalent of $15/share in cash. The Michael Dell/Silverlake buyout was $13.65/share in cash and equity, in a total deal worth $24.4B. Michael Dell is reported to be willing to explore the possibility of working with third parties regarding alternative offers, while Icahn has said he would be open to joining forces with Blackstone.
- Blackberry (formerly Research-In-Motion) surprised investors with a solid profit in its Q4 versus expectations for yet another loss. Margins were very strong thanks to higher selling prices and cost cutting. The firm was very positive about initial results for its new Z10 handset, disclosing that one million units were shipped in the quarter, of which as much as 75% have already been sold.
- EUR/USD moved back above its 200-day moving average around 1.2870 last Friday as Cyprus and its European partners moved closer and closer to a bailout deal. The pair was firmly back above 1.3000 by Sunday evening and through early Monday morning. However, midway through the US session on Monday morning, Eurogroup Chief Dijsselbloem made a gaffe that bowled over the euro and will likely come back to haunt the eurozone at some period in the future. Dijsselbloem stated that the Cyprus bank restructuring program - including its extraordinarily controversial depositor bail-ins - could be used as a "template" for the rest of the EMU. EUR/USD gave up two big figures within a few hours, dropping right below its 200-day MA, where it remained all week. The apparent end of negotiations between the center-left and center-right groups on forming a government in Italy on Wednesday further undercut the euro, with EUR/USD making four-month lows around 1.2760.
- The trouble in Europe and risk-off trades ran counter to continuing Japanese efforts to weaken the yen. USD/JPY hit three-week lows below 93.60 on Monday. New BoJ head Kuroda took the reins last Thursday and his first BoJ policy meeting comes next week. In his initial parliamentary testimony, Kuroda reiterated that the BoJ would do whatever it takes to defeat deflation, in particular targeting longer dated JGBs to push down the yields across the curve. The new central bank governor also affirmed his commitment to reach the 2% inflation target within the 2-year time frame. USD/JPY is headed for its third consecutive week of losses as analysts concede the markets may be disappointed by anything shy of pushing forward the central bank's start of open-ended asset buying program currently not expected to start before January 2014.
- Shanghai Composite hit 3-month lows below 2,340 late in the week as the new China government has moved swiftly to reduce shawdow banking activity which, according to the S&P, reached CNY22.9T or 34% of total loans in the banking industry. China banking regulator CBRC unveiled a series of controls on the sale of wealth management products to bring about more financial transparency and also slow the growth of the overall financing flows. Fitch research estimates the wealth managment component of China's shadow banking system at a hefty CNY13T in 2012. China manufacturing PMI figures for March are set to be released on Sunday evening, as markets await confirmation that the weakness in the February data was an aberration due to the timing of the Lunar New Year.
