Friday, May 10, 2013

Market Week Wrap-up  Weekly Market Update: Weekly Market Update: Yen Weakness Dominates Markets

- The S&P500 saw its third straight week of gains and both the DJIA and S&P500 touched fresh all-time highs mid-week. There was little US data to run on, although another excellent showing in the weekly jobless claims data - now at their lowest level since January 2008 - neatly dovetailed with last week's strong April payrolls. With the brightening US employment picture, the outlook on FOMC quantitative easing has swung from speculation about more easing back to speculation about tapering asset purchases. With that has come renewed dollar strength and a little bit of a bond selloff. On Friday, PIMCO's Bill Gross grandly proclaimed (on Twitter) that the 30-year bull market in bonds ended in late April, although he also said the bear market has not begun. Under pressure from the Fed and BOJ easing programs and following the path blazed by the ECB, other central banks issued surprise rate cuts throughout the week, including 25 basis point cuts from Australia's RBA, India's RBI, the Bank of Korea and the Polish Central Bank. In Europe, better German March Industrial Production and Factory Orders data suggested that the last remaining engine of the European economy is not choking, yet. For the week, the DJIA gained 1%, the S&P500 added 1.2% and the Nasdaq rose 1.7%.

- The yen's move above 100 to the dollar for the first time since April 2009 dominated markets at the end of the week. Four weeks ago, the BoJ rolled out its new program of easing measures to defeat deflation and USD/JPY had been slowly working its way toward the key 100 level. Thursday afternoon the pair took out 100 and by late on Friday the pair briefly tested 102. Analysts expect the yen to fall further: some have called for the dollar to rise to 105 this summer and 110 by the end of the year. In the wake of the move, and ahead of a G7 finance ministers meeting this weekend, Japanese Economy Minister Amari reiterated that Japan is not manipulating its currency and asserted that the weaker yen reflects strength in US recovery. Note that data out this week showed that Japanese investors became net buyers of foreign bonds in the last two weeks.

- EUR/USD had been pretty steady in the 1.3100 handle, but following the USD/JPY the pair softened up and dropped to 1.2950, its lowest level since early April. On Tuesday the RBA cut its Cash Target Rate by 25bps in a surprise move helping AUD currency test two-month lows. AUD/USD has been gradually moving toward parity over recent weeks and hit 1.000 on Friday in the wake of the yen move.

- With the big spike in dollar strength on Thursday and Friday, commodities got hit hard. Spot gold tumbled approximately 3.5% from Thursday afternoon through Friday morning, dropping from $1,470 or so to test $1,420. Silver fell about 2.5% in a similar period. Front-month WTI crude dipped three bucks before recovering on Friday.

- The Fed's hawks took turns bashing QE3 this week, further highlighting the active debate on when the FOMC may begin tapering its asset purchases. Fed Governor Fisher went first, commenting that program has done its work and "we are at risk of overkill." Fisher said his preference would be to taper MBS purchases as a first step. Plosser said he would favor reducing the Fed's $85B monthly pace of bond purchases next month. FOMC dissenter Ester George reiterated her opposition to the QE program, saying the longer it goes the trickier the exit strategy will be. There had been high hopes that Chairman Bernanke would provide some color on his feelings on the tapering issue in a speech on Friday, but he stuck rigidly to the theme of banking industry regulation.

- MBIA settled all its outstanding mortgage repurchase issues with Bank of America on Tuesday, for a total payment of $1.6B in cash. BoA gets the right to buy a 4.9% stake in the bond insurer in exchange, and it will also remit $137M worth of MBIA senior debt and provide MBIA with a $500M credit line.

- With the housing recovery seemingly in full swing, Fannie Mae and Freddie Mac both reported sizable Q1 profits and paid big dividends to the US Treasury. Freddie reported its second-largest quarterly profit ever, $4.6B versus $577M a year ago. Fannie earned $8.1B and released a $50.6B deferred tax asset that will enable it to pay the Treasury $58.7B in dividends. Treasury Secretary Lew said the payment would push back the date on which the government would hit the debt ceiling until Labor Day.

- The March quarter earnings season is winding down, with major retailers about the only sector left to report. Warren Buffett's Berkshire Hathaway saw Q1 profits rise approximately 50% y/y, aided by better insurance performance. Buffett didn't make any big headlines at this year's investor meeting, noting that Berkshire is always on the lookout for ways to deploy its cash but has no interest in US airlines. Anadarko managed to widely beat expectations in its Q1 on record production numbers, however profits were lower on a y/y basis. Healthcare giant McKesson saw less than impressive Q4 revenue and profits, with the company's net income down half on a y/y basis. Tesla crushed consensus expectations in its Q1 report and hiked its forecast for deliveries of its hot new Model S sedan. The firm was profitable in the quarter for the first time ever and sales rose 83% on a y/y basis.

- After a surprising trade deficit in March that made analysts question the strength of overseas demand and the validity of Chinese domestic recovery, the China April trade balance returned to three-month high surplus. Both import and export growth accelerated, surging 14.7% and 16.8% respectively, resulting in an overall trade surplus of $18.2B - higher than the expected $16.2B. A number of analysts remained skeptical over the accuracy of the data given the lukewarm conditions in Europe and suggesting exporters may be overstating their activities in efforts to bring more funds onshore.