Friday, June 14, 2013

Market Week Wrap-up  Weekly Market Update: Markets Remain Volatile as the June FOMC meeting looms

- Market volatility is not letting up and cross currents continue to make for dramatic moves in a broad range of asset classes. Japan and handicapping future Fed moves remain the major catalysts. The Nikkei225 saw another very steep decline mid week as traders reacted with disappointment to the BoJ not taking more efforts to pump up stimulus, while USD/JPY is back trading with a 94 handle, more or less where it was when Abenomics was launched earlier this Spring. In Europe, there was more tepid economic data, although it appears that the German Constitutional Court may hand down a ruling favorable to German participation in the critical OMT eurozone backstop in September. In the US, there was another handful of somewhat disappointing economic numbers and S&P raised the US sovereign outlook to stable from negative. The dollar continues to underperform against both the euro and the yen, even as the yield on the 10-year benchmark bond pushed out to 14-month highs around 2.27% early in the week. For the week, the DJIA fell 1.2%, the S&P500 declined 1% and Nasdaq lost 1.3%.

- Perception of a soft patch in the latest US economic data and whispers out of the Fed have decisively shifted market sentiment regarding the Fed's willingness to taper QE asset purchases. The weak three-month average in non-farm payrolls, the terrible May ISM manufacturing data, the retreat in the U of Michigan sentiment index and the weakening trend in retail sales suggest the Fed has much less evidence in favor of a taper now than they did a month ago. On Thursday, the WSJ's Hilsenrath forecasted a potentially dovish Fed statement next week in which they will likely emphasize interest rates are to stay low until well after they begin calibrating quantitative easing. Newly moderate FOMC voter Bullard said that weak inflation data could possibly argue for prolonging QE asset purchases.

- Japan's Nikkei225 put in another week of highly volatile trading. Unhappiness with the third leg of Japan PM Abe's reform program was fresh in many minds heading into the BOJ rate decision on Tuesday. Expectations were that the BoJ would extend its 0.1% fixed-rate lending facility to banks from one year to two, although the bank held back and did not act to restrain rising rates, prompting a move down on Tuesday. But the big slide came on Thursday as jittery Chinese investors came back from the Dragon Boat holiday and sold off equities hard; the Nikkei dropped 6.4%, putting the index back in bear market territory from the late May highs for the second week in a row.

- The China May economic data out last weekend was somewhat disappointing. The trade numbers were way below expectations, although analysts caution that the shortfall is mostly due to a correction of inflated exports to Hong Kong from the last several quarters. Weak inflation readings were unsettling as well, although they may give the PBOC some additional flexibility on rates. Chinese markets were closed for the Dragon Boat Festival for the better part of the week.

- On Monday morning S&P raised the US sovereign outlook to stable from negative. The firm commented that the improved outlook was due to its analysis that there was less than 1-in-3 chance for a ratings downgrade in the near term, thanks to the better economic outlook and more signs that the Democrats and Republicans will be able to reach compromises on the most important fiscal issues.

- India's Apollo Tyres reached a deal to acquire Cooper Tire for about $2.5 billion, at $35/share in cash. The deal would make the combined entity the world's seventh-largest tire maker. Sprint said it had ended its talks with Dish and gave the company until June 18th to put up or shut up. In the meantime, the company said it would proceed with the deal with Softbank, which was upped to $21.6B from $20.1B. Note that press reports suggest that Google might try to help Dish sweeten its bid.

- The euro continued its month-long ascent this week, until the EUR/USD encountered resistance around the 1.3380-1.3390 zone on Thursday. The German Constitutional Court heard arguments about the constitutionality of German participation in the ECB's OMT program early in the week. Comments out of the two-day session led many to believe that the court would not block participation, especially after Justice Vosskuhle said the OMT's strict conditionality could draw a clear line between fiscal and monetary policy. Note that the Bundesbank's Weidmann reiterated his strong critiques of the OMT program at the hearings, while Asmussen offered a defense of the program.

- The unwind of the USD/JPY long trade continued apace. Like the euro, the yen closed out a fourth consecutive week of strength against the dollar, briefly testing below the 93 handle on Friday, the USD/JPY weakest level in two months - recall that the late May high in USD/JPY was around 103.54. Unhappiness with the third leg of Japan PM Abe's reform program was compounded by disappointment that the BOJ did not extend its 0.1% fixed-rate lending facility to banks from one year to two, pushing even more money out of the Nikkei and into JPY. Dollar softness was also likely due to traders betting on a more dovish Fed ahead of next week's FOMC meeting.

- The India and Turkey central banks have dived back into the FX intervention game. The Turkish Central Bank has begun direct market intervention to fight "excessive FX volatility" after the TRY sank to its weakest level against a euro/dollar basket since October 2011. The bank held five FX auctions this morning and managed to stabilize USD/ TRY for the moment around 1.8900. India's policies are more opaque: there were rumors of RBI intervention as USD/INR looked to test the key 60 level and then dropped back to the 58 handle. An Indian government official stated that "steps will be taken" to curb rupee volatility if needed, but said the recent decline was due to "debt outflows."