Friday, May 17, 2013

Market Week Wrap-up  Weekly Market Update: Teflon Market Slides Higher as Taper Talk and Japan Policy Spur Global Gains

- Equity markets in the US, Europe and Asia floated ever higher this week despite several rounds of less-than-impressive economic data. Bond yields rose as demand shifted toward risky assets - the US benchmark 10-year yield got very close to 2.0% for the first time since early March while other developed world benchmark yields rose as well. Analysts spent the week discussing the impact of Japanese monetary policy, and the prospects of the Fed taper and the great rotation in search of explanations. In Japan, the Abe government launched the third component of its radical economic policy, with a focus on structural reform. Talk about Fed tapering QE resurfaced early in the week, but was shoved back down by poor economic data. First quarter GDP data out of Europe showed that the continent is not finding its way out of economic malaise. In the US, April inflation reports raised some concerns about disinflation, while April Industrial production experienced its biggest decline since last October, and the Empire and Philly Fed manufacturing indices dropped into negative territory, missing expectations widely. Washington was consumed by drama emanating from the Obama Administration's IRS and Benghazi scandals. Despite such headwinds, the S&P500 and DJIA continued to forge record highs this week: the DJIA gained 1.6%, the S&P500 added 2% and the Nasdaq rose 1.8%.

- On Thursday, four weak US data reports touching jobs, housing, inflation and manufacturing favoring the skeptics about US economic recovery. The weekly jobless claims topped expectations and saw their largest w/w rise since last fall. The April housing starts widely missed expectations, with the annualized rate dropping sharply to 853K from the 1.04M rate seen in March (which was the highest rate since 2008). The negative headline April CPI was the lowest reading since December 2008, thanks to low oil prices, putting the annual figure at 1.1%, well below the Fed's 2.0% target rate. Ex food and energy the core annualized rate is still only 1.7%. Finally the May Philly Fed manufacturing survey was way off the mark to the downside, echoing the Empire survey yesterday.

- Fed taper talk reached new heights this week, with speeches by Fed governors and missives from the WSJ's "Fed Whisperer" Jon Hilsenrath prompting much discussion. Over the weekend, Hilsenrath wrote that the Fed has mapped out its exit strategy with emphasis on managing market expectations, although the timing of the exit remains uncertain. The Fed's Williams, a non-voter with dovish tendencies, said that the Fed may be able to taper bond buying as early as this summer, although the job market has not improved enough as of yet. Rosengren, who is seen as a moderate at the Fed, warned that low inflation boosts the risk of a negative shock that could undermine stable inflation expectations and reiterated support for easy policy, commenting that there is a case to be made for even more aggressive monetary policies. Hawks Lacker and Plosser both reiterated their cases for tapering as well. Hilsenrath emerged again in the latter half of the week with a piece suggesting that the Fed is not particularly concerned that inflation will fall further away from its target. Fed hawk Fisher said as much, commenting that the recent decline in inflation is benign and that he is not expecting deflation.

- Abenomics is beginning to deliver more than just a weaker yen. Preliminary GDP data out this week showed that Japan's economy expanded at the fastest rate since Q1 of 2012, +0.9% q/q versus the prior quarter's figure of +0.3%. The much improved reading was primarily driven by strong exports and private consumption, although this has yet to translate into the corporate spending (capex shrunk 0.7% q/q). There was much talk about the big reversal in JGB yields this week. The yield on the benchmark 10-year bond had spiked over recent days to eight-month highs, and midweek Japan's five-year borrowing costs rose above Germany's for the first time in more than 20 years. The BoJ stepped in and said it would inject ¥2.8T in market operation on Friday - three times the ordinary amount - in an attempt to cool things off.

- Japanese PM Abe unveiled the third part of Abenomics this week, although his widely heralded "third arrow" was pretty thin on substance. First there was unprecedented monetary stimulus and then a big boost to government spending. Now Abe's government will also pursue structural reforms that aim to triple infrastructure exports and double farm exports by 2020, as well as push private investment back to the 70 trillion yen annual level before the 2008 crisis, up about 10% from the current figure. How this will occur remains to be seen.

- FX analysts debated the sources of dollar strength this week. The Fed taper talk was certainly a huge factor and then there's the yen, however some analysts cited the ongoing fundamental changes in Chinese policy as key to understanding the greenback's gains. Chinese FX regulator SAFE is rolling out policies to reduce speculative hot money flows into the yuan that are having various knock-on effects. The rules tighten limits on long yuan positions that banks can hold and discourage firms from using dollar loans to speculate on yuan gains. USD/CNY hit all-time lows last week around 6.13 but has gained slightly this week. Note that SAFE also took steps this week to simplify rules on FDI and remittances.

- The euro softened further in the wake of yet another round of weak economic data and as participants positioned themselves for more ECB monetary easing. EUR/USD tumbled all week and briefly tested the 1.2800 level on Friday as it approached YTD lows. On Wednesday, German advance annualized Q1 GDP was -1.4% y/y and eurozone preliminary Q1 GDP came in at -1.0% y/y. Peripheral Europe saw two strong long-term bond offerings in Spain and Italy. Both countries drew excellent demand: orders for the Spain 10-bond syndicate surged to over €21B (sold €7B) while Italy's new Sept 2044 BTP bond drew almost €14B (sold €6B).

- Share of Elon Musk's Tesla gained another 20% this week in the wake of its excellent Q1 results last Thursday. After the massive gains, the company said it would sell 2.7M shares of common stock (about 2% of the float) and $450M in convertible notes - the sale was later expanded to 3.9M shares and $600M in notes on robust demand. Telsa shares extended their gains after CEO Musk lent support to the offering, announcing he would buy an aggregate of $100M in common stock. Approximately $450M of the proceeds would go to pay back a loan from the Department of Energy taken out at the height of the crisis.

- Wal-Mart's Q1 EPS and revenue missed expectations and sales declined slightly on a y/y basis. The firm's Q2 guidance was also soft. Comps were negative. Among other issues, including higher payroll taxes, a delay in IRS refunds and cooler weather, executives cited less grocery inflation than expected as an issue.

- Shares of Cisco gained more than 13% after earnings on Wednesday night, putting them 2.5 year highs. Cisco's Q3 results were not exactly spectacular, as the firm merely met expectations and saw modest y/y earnings and revenue gains. The Q4 revenue guidance was likewise just in line, but firm offers an upbeat contrast to a lot of gloom out of other networking competitors.