TradeTheNews.com Weekly Market Update: DJIA
Marks All-Time High on Better US Data
- Global equity markets racked up very strong gains this week as the Dow Jones
Industrial Average marked a new all-time high, and most other US and European
indices are near 5-year highs. On Tuesday the DJIA closed at 14,253.77,
surpassing the prior all-time high of 14,164.53 seen in October 2007. The index
made subsequent record highs for the next three sessions, closing the week up
2.2% at 14,397. The S&P500 gained 2.2% and the Nasdaq added 2.4% on the
week. There was little to no negative news to get in the way of the risk-on
tone, and the Italian electoral crisis quickly faded from headlines despite the
lack of progress in forming a government in Rome and a downgrade of Italy's sovereign
rating by Fitch on Friday. There were virtually no changes in rate decisions by
the ECB, BoE, BoC and the BoJ. Analysts were struck by ECB Governor Draghi's
slightly less dovish tone during the post rate-decision press conference. US
economic data was very good, most notably the excellent February jobs report.
The US February ISM non-manufacturing composite rose to its highest level since
last February. The Shanghai Composite was about the only major market not to
see appreciable gains on the week. China's new government announced a slate of
regulations to help cool down real estate prices, including a new 20% tax on
home sale profits, higher down payments for second homes and higher interest
rates on mortgages. In addition, the NDRC set its 2013 GDP target at 7.5%,
which was unchanged from 2012.
- The February US jobs report was unambiguously positive: both non-farm and
private payrolls widely beat expectations at +236K and +246K, respectively, and
the unemployment rate fell to 7.7% from 7.9%. The non-farm payrolls number is
very close to the 250K level that economists believe is needed for sustained
reductions in joblessness. Clearly the February jobs report is unlikely to move
the pendulum in terms of Fed policy. However the report indicates the jobs
market is moving closer to the "substantial improvement" the Fed has
set as the criterion for reducing its asset purchases. Commentary from Fed
governors and board members suggest that the earliest this might take place is
later in 2013, after the danger of another mid-year economic soft patch is
past. After the data the dovish Chicago Fed President Charles Evans noted that
the jobs market still has some way to go and he would like to see 200K+ payroll
gains for six straight months. Goldman Economist Jan Hatzius commented that a
long period of job reports similar to the February data would force the Fed to
rethink the current course.
- The US 10-year Treasury yield moved out the highest level in nearly a year
following the strong employment report on Friday. Prices quickly came off their
lowest levels, but at 2.05% the benchmark rate backed up 20 basis points on the
week. Fed fund futures prices ticked lower but still don't fully price in a
rate hike until 2015.
- The Federal Reserve released the results from its stress tests of 18
systemically important financial institutions. Only one firm, Ally Financial,
did not pass the tests, which simulated a very severe recession. There were
surprisingly weak showings from Goldman Sachs, Morgan Stanley and JP Morgan,
while Bank of New York, State Street and American Express were the best
performers. The big winner was Citigroup, which failed the stress test last
year. Citi passed with a good result this year and the bank's shares rose
nearly 9% on the week.
- Berkshire Hathaway has released its annual shareholder's letter, warning
holders that it may end its long streak of outperforming the S&P500 this
year. More specifically, Berkshire's book value per share may underperform the
growth in the S&P 500 when measured over a five-year period. Warren Buffett
said he is looking for more big deals similar to the H.J. Heinz buy, but not in
the consumer products sector.
- Shares of JC Penney lost even more ground this week after the company said it
would sell 10M shares held by shareholder Vornado, which holds 23.4M shares of
JC Penny stock. Reports later in the week asserted that the company had cut
another 1,500 jobs to save costs. Shares of JCP fell about 15% this week.
- Dell's going-private deal got a lot more complicated. Carl Icahn took a 6%
stake in the company and joined the ranks of Dell holders that are expressing
dissatisfaction with the current $13.65/share LBO plan advocated by founder
Michael Dell and Silver Lake. Icahn called on the board to pursue a leveraged
recapitalization and pay out around $15 billion in special dividends. The board
responded by asserting that they are pursuing a thorough search for alternative
offers in the go-shop period.
- It was a quiet week for M&A news, with few notable deals. Private equity
firm KKR reached a deal to acquire Gardner Denver for $76/share in cash, in a
total deal valued at $3.74B. Teen retailer Hot Topic agreed to be acquired by
Sycamore Partners for $14.00/share in cash, in a deal valued at $600M.
- The euro continued to face headwinds. EUR/USD was more or less contained
within the 1.30 handle for the week through the ECB rate decision on Thursday
morning. Dealers noted that someone active in the market seemed to be trying to
keep Euro above 1.30 level. There had been some expectation that the ECB would
lay the groundwork for more rate cuts at the press conference, however Draghi's
less-dovish comments seemed to take the possibility of near-term cuts off the
table. The ECB Staff projections adjusted the growth forecast modestly lower.
EUR/USD climbed to around 1.3100-1.3130, and reversed all gains following the
US payrolls report, closing out the week more or less where it began, around
1.2980.
- The yen returned to its gradual weakening trend, aided by the stronger
dollar. USD/JPY closed out the week at its highest level since August 2009 and
briefly tested above 96. The BoJ policy meeting was uneventful: rates were left
unchanged and the asset purchase program was not altered, while the bank
upgraded its economic assessment for the third consecutive meeting. Outgoing
BOJ Governor Shirakawa ended his term and his successor, Mr. Kuroda, is
expected to be approved next week.
- The trend for the pound remained weak despite a brief move higher on Tuesday.
The BoE rate decision saw no changes in policy. The consensus was for no QE
increase, however there the price action suggested there were some bets the
other way as GBP/USD rose ahead of 1.5150 early on. By Friday, GBP/USD hit its
lowest level since July 2010 as the US economic picture brightened.
- The Canadian Dollar was softer following the BoC rate decision and
accompanying dovish statement. USD/CAD moved above 1.0330 after the BoC said
that "considerable" amounts of stimulus would remain appropriate for
"a period of time."
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