Friday, April 5, 2013

Market Week Wrap-up  Weekly Market Update: Heading for a Spring Swoon

- Global markets took a turn for the worse this week. In the US, the March employment report was disappointing, the March ISM Manufacturing index hit its lowest level since December and the weekly initial jobless claims pushed out to a four-month high. Last Thursday the S&P500 took out its all-time closing high but this week the index was unable to take out its intraday high of 1,576.09 from back in October 2007. The brace of soft economic data inspired talk of a "Spring swoon" in Q2 following the relatively decent first quarter, similar to scenarios seen in 2011 and 2012. Overseas central bank decisions and geopolitical storms dominated. Japan was about the only bright spot after the BoJ rolled out an aggressive new monetary policy strategy aimed at driving a stake through deflation and ending the two-decade long slump. Note that the Nikkei closed out the week not far off recent five-year highs. The ECB, BoE and the Australia's RBA left rates on hold and took no special action in their respective decisions. North Korea got plenty of attention for "authorizing" nuclear strikes on the US and making other provocative moves. In China, a new strain of bird flu (H7N9) emerged in Hong Kong and Shanghai, proving fatal for about half of the dozen people who were infected. For the week, the DJIA slipped 0.1%, the S&P 500 fell 1.0% and the Nasdaq dropped 1.9%.

- Markets were satisfied with the BoJ's aggressive new qualitative and quantitative monetary policy plans. The total new monthly size of asset purchases was increased to ¥7T from ¥3.8T. The board adopted "monetary base control" by unanimous vote - intending to conduct money market operations so the monetary base will rise at annual pace of ¥60-70. The BoJ also underscored its commitment to a time horizon of two years to achieve its new 2% CPI target. As speculated, the BoJ also terminated the Asset Purchase Program, with the purchase of JGBs for money market operations to be absorbed into new program. Lastly, BOJ voted to temporarily suspend bank note rule, potentially sparking scrutiny into its intent of monetizing government debt.

- The March US jobs report saw non-farm payrolls of only +88K versus expectations of +190K, and private payrolls were +95K versus expectations of +200K. The non-farm payrolls number was the lowest since July 2012. The unemployment rate fell to lows last seen in December 2008, although most of the decline was due to labor force shrinkage. The labor force participation rate fell to 63.3%, the lowest level since 1979. After the data, Goldman Sachs Chief Economist Jan Hatzius said markets should not expect to hear much about QE tapering for a while.

- Natural gas futures pushed out to one-year highs on Friday, closing out the week around $4.13. Thursday's EIA weekly stockpiles data showed inventory below the five-year average level for the first time in 19 months, a major shift for a market that has been burdened with oversupply for years. Goldman Sachs said demand is growing at the same time that US production is holding steady and forecasted prices of around $4.50 in the second half of 2013.

- Leading US refining names fell 10-15% early this week after the EPA proposed new rules to reduce sulfur emissions from cars and trucks. The EPA's so-called Tier 3 standards would demand lower pollutant emissions and higher automobile fuel efficiencies. Analysts have piled on with negative comments, noting that compliance will require new capital costs for the refiners, although its worth pointing out that the proposed regulations will not take effect until 2017.

- The Centers for Medicare and Medicaid Services (CMS) changed course and stated that there will not be benefit cuts or premium hikes next year and that the fee for service percentage would climb more than 3%. Back in mid-February, CMS published preliminary 2014 reimbursement rates suggesting that the amount it pays per person for the popular coverage could fall more than 2% in 2014. Share of leading healthcare firms gained on Tuesday morning after the announcement.

- EUR/USD remained stuck below its 200-day moving average of 1.2880 until Thursday morning. The pair tested 4-month lows during the ECB press conference as Draghi struck a dovish tone and once again pledged to maintain accommodative policy for as long as needed. As the conference drew to a close around 09:30ET, traders sent EUR/USD up two big figures from weekly lows around 1.2750 to test as high as 1.2948.

- USD/JPY hit one-month lows around 92.50 ahead of the big BoJ policy meeting on fears that Kuroda would under deliver. The yen softened up nicely following the announcements early on Thursday morning. USD/JPY bounced higher after the decision, from just below 93 to top out above 97. There was a dip on Friday, but after the US jobs report USD/JPY was right back around 97.15. AUD/JPY is hovering right above 100, up from the 97 handle before the announcement.

- USD/CNY tested below the 6.20 level for fresh 19-year highs this week. The move followed the PBoC's guidance for its daily central parity rate. Dealers said that the PBOC's recent moves implied that China's new leadership might favor a faster pace of yuan appreciation to boost flexibility under the capital account.