Friday, May 24, 2013

Market Week Wrap-up  Weekly Market Update: : Bernanke Speaks, the Market Freaks

Markets were struck by a wave of volatility this week as a series of unsettling events and data uncovered strains in the 2013 rally. Equity, bond, and currency markets all saw increased volatility as participants pondered whether central bank policies might hit some bumps in the road. The fulcrum point of the week was Fed Chairman Bernanke's Q&A during testimony before Congress, during which many participants detected a more hawkish taper-friendly tone from the chairman. Equity markets traded off hard in the wake of his talk and US equity markets opened lower for the next two consecutive sessions. Hours after Bernanke spoke, the latest China HSBC flash manufacturing PMI report came in at 49.6, missing expectations and registering its first contraction in seven months. The Nikkei lost 7% on the day and the BOJ moved to contain volatility in the JGBs, announcing a ¥2T fund supplying operation after the 10-year yield moved to a multi-month high level above the 1%. Gold, oil and the dollar all traded off pretty hard, and while most of these asset classes made up losses through the end of the week, there was a widespread feeling that the long rally had been derailed. For the week, the DJIA fell 0.3%, while the S&P500 and Nasdaq each lost 1.1%, as the VIX volatility index popped 13%.

- On Wednesday, Chairman Bernanke presented congressional testimony that repeated, practically word for word, statements about policy he has been making since last September. He said the Fed would keep buying $85B of bonds monthly until it was confident of reducing unemployment, while the scale of these purchases might be increased or decreased if warranted by better or worse data. Many market participants interpreted as hawkish his comment that the Fed could start tapering purchases over the next few meetings. He emphasized, that at the moment, there is no case for a change in either direction. The minutes from the May 1st FOMC meeting came out later the same day and repeated many of the same themes, although they did underscored the minority that said they were open to tapering. One member called for an immediate decrease in the rate of QE3 asset purchase program.

- Amid the incessant hand wringing surrounding the Fed's taper dilemma, US treasury yields finished up only a few basis points on the week. A jolt of selling following Bernankie's Q&A session on Capitol Hill was cancelled out as cooler heads kept the benchmark 10-year yield at 2%, below the March highs.

- The wide swings in the Nikkei and the yen this week presented the first big test of market confidence in Abenomics. In the wake of the weak China May HSBC PMI reading and concerns about Fed tapering, the Nikkei fell 7.3% in Thursday's session, the biggest slide in the market since the 2011 tsunami disaster. On Friday, the Nikkei saw a tumultuous session, traversing a 7.1% range between positive and negative territory before ending up 1% or so. Meanwhile, the yield on the 10-year JGB climbed higher this week, rising to one-year highs around 1.0%, nearly three times the level where it settled after the announcement of Abenomics. The yen strengthened in choppy trading, with USD/JPY dropping more than three big figures to trade firmly in the 100 handle.

- Solar names were highly volatile this week on reports that the US, Europe and China were looking to set up negotiations for a grand bargain to cut tariffs on solar products and end product dumping conflicts. US sources shot down reports early in the week that the three sides were close to any sort of deal, although subsequent stories indicated some level of talks were under way. Solar ETF 'TAN' was up as much as 15% on the week early on Tuesday, before giving up all these gains by Thursday morning.

- Confirming widespread rumors, Yahoo said it would acquire trendy blogging site Tumblr for $1.1B in cash. Tumblr will maintain a degree of independence in managing its 108 million blogs with CEO and founder David Karp at the helm, per Yahoo's promise "not to screw it up." Not breaking stride, Yahoo reportedly joined the bidding frenzy for internet video purveyor Hulu, which has attracted a half dozen potential offers. In other deal news, Actavis said it would acquire Irish firm Warner Chilcott in all-stock deal valued at approx $8.5B. The acquisition makes Actavis the premiere women's health company. Valeant Pharmaceuticals, which was said to be eyeing Actavis, instead opted to acquire privately held Bausch & Lomb for about $9B, in a deal that is expected to be formally announced next week. Wall Street seems to approve of the deal, as Valeant shares gained over 10% on Friday.

- Europe was pretty quiet though most of the week, with EUR/USD trading dictated by the moves in the US and Asia. Late in the week a few more positive data points inspired speculation that the euro zone might not be seeing negative rates anytime soon. Advance May PMI data and May business confidence readings for Germany and France were all better than expected and ticked up off the April readings, suggesting that there may be some improvement in the continent's economy. EUR/USD was volatile in the wake of Bernanke's comments on Wednesday, initially trading as high as 1.3000 before dropping to 1.2825 later in the same day. The pair closed out the week around 1.2930.

- Softer-than-expected UK April inflation data - which would provide the BoE with more impetus to stimulate - sent GBP/USD as high as 1.5280 early in the week, before weak April retail sales data and then Bernanke let the air out of cable, which bottomed out around 1.5010. CNY strengthened to 6.1260 to 19-year highs on market speculation that Beijing would imminently widen the trading band.

- The Chinese property sector is showing resistance to the government's steps to curb housing inflation. April property prices across 70 cities rose 4.9% y/y - the biggest increase since Apr 2011 - while m/m growth was at 1.0%, down from 1.2% in March. Analysts are increasingly concerned that policymakers will be unable to control property market gains, just as the China Academy of Social Sciences (CASS) warned about the risks of a property/financial bubble brewing in Hong Kong.