Friday, September 6, 2013

Market Week Wrap-up  Weekly Market Update: Tinker, Taper, Soldier, Spy

- Syria, August non-farm payrolls and more Fed taper talk made for fast-moving markets in the first week of September. Despite the plethora of dire-sounding headlines, equity markets maintained a steady risk-on tone even as expectations for a Fed taper remained more or less intact. Bond yields continued their march higher, as the German 10-year bund nearly topped 2.0% (last tested back in March 2012) and the 10-year UST yield touched 3% for first time since July 2011. The subpar US August jobs report restrained things a bit on Friday. On the bright side, the UK accomplished an economic data trifecta with its August PMI readings: manufacturing, services and construction PMIs all exceeded market expectations and pushed out to multi-year highs. China final August manufacturing PMIs - both the official and HSBC figures - are now in expansion territory (but just barely, at 51 and 50.1, respectively) and every component of the official measure rose from July levels. World leaders gathered in St. Petersburg for the G20 conference, however their talks were overshadowed by the battle of wills between Vladimir Putin and Barak Obama over the Syria situation. Obama used the summit as a platform to make his case for a military strike on the Assad regime, getting tentative support from about half of the G20, but also had to dedicate time to assuring other leaders about the NSA-spying scandal. For the week, the DJIA snapped a month-long losing streak to gain 0.8%, the S&P500 added 1.4% and the Nasdaq rose 2%.

- The August jobs report was not terribly positive, but does not appear to be bad enough to derail expectations for the Fed to begin tapering bond purchases at the September FOMC meeting. The non-farm measure missed expectations (+169K v +180Ke) and the back-month revision to the July data was severe (to +104K from +162K). Despite the revisions, the US has averaged 183K jobs added per month over the past year, and this report does not change the trajectory of slow, steady job growth. The unemployment rate fell to 7.3% from 7.4%, a four and a half year low, but for all the wrong reasons. Unemployment unexpectedly fell again because the labor force participation rate dropped another two-tenths of a percent to 63.2%, its lowest level since August 1978.

- Taken with other recent data that was more positive, the jobs numbers left most analysts saying tapering is still on track, but has led many to speculate that the Fed could tinker with forward guidance to offset the impact of tapering. After the data Goldman Sachs Chief Economist Hatzius said growth is good enough to keep the taper on track for this month at perhaps $20B, though the jobs numbers could lead the Fed to attempt a "dovish taper" by reinforcing forward guidance or lowering the initial size of the QE cutbacks. PIMCO's Bill Gross maintained the Fed will still taper despite the payrolls miss, perhaps on the order of $10B initially. Friday afternoon, the Fed's chief dissenter Ester George said she would like to see a gradual taper, starting with a $15B reduction to a monthly rate of $70B.

- Syria news buffeted energy and commodity markets. With the UN Security Council authorization blocked and the UK parliament voting down British participation in any attack, President Obama delayed military action against Syria to seek Congressional approval. Energy and commodity prices initially traded lower on the news, with WTI crude briefly dropping below $105 after lunging above $112 in the prior week. Obama and Putin traded barbs all week, culminating in the Russian President promising to continue support for Syria even in the event of a western attack. WTI crude closed out the week around $110.

- Apple confirmed it will hold its big iPhone 5S/5C rollout next Tuesday and markets continue to digest various rumors and speculation about what exactly Apple has up its sleeve. On the device side, it is clear that there will be an updated iPhone 5S and a new range of lower-cost devices oriented toward emerging markets ('5C'). Rumors suggested that there may be a fingerprint sensor integrated into the new models as a new security feature. On the business side, traders were intrigued by reports of a special event for journalist in Beijing on Sept 11th. Speculation was that the event would launch the iPhone on the massive China Mobile network, although later reports suggested it would simply be a rebroadcast of the US launch. China Mobile later confirmed it was in talks with Apple to carry the next iPhone but that no official agreement had been reached. Apple rival Samsung had its own product launch this week, rolling out a new iteration of its lead smartphone as well as a "smart watch" called Galaxy Gear. Almost simultaneously Qualcomm threw its hat into the device market with a preview of its own smart watch dubbed Toq.

- Shares of DRAM manufactures, most notably Micron and SanDisk, moved higher on Wednesday on reports of a fire at a major plant owned by competitor Hynix Semiconductor. Hynix later said that the fire did not damage any clean rooms at the fab while analysts suggested it might take up to a month to get the plant back on line. DRAMeXchange said the price of DRAM jumped 19% in the wake of the fire, the biggest increase in three years.

- Car makers reported their best sales data in years. August auto sales rose by double digits, with both Ford and GM topping year-ago levels. Toyota's sales gain of +23% y/y led the pack, followed closely by Nissan's 22% y/y gain. The overall industry annual sales pace (SAAR) for August beat expectations handily and topped 16M for the first time since 2007. Ford lost some ground on Friday after reports that CEO Mulally could step down early, perhaps to take a highly visible post at another Fortune 500 firm, though he quickly responded that he intends to stay at least through next year.

- The biggest merger deal in recent memory hit the tape this week: after extended negotiations, Verizon reached a deal to acquire Vodafone's 45% interest in Verizon Wireless for $130B in cash and stock. Consolidation in the telecom industry did not stop there and hours later Microsoft announced it would pay more than $7B to purchase Nokia's smartphone business. As part of the transaction, Nokia is assigning to Microsoft its long-term patent licensing agreement with Qualcomm.

- The possibility of tapering this month continues to send shockwaves through global FX markets. Emerging market currencies remain in a bad way, but at least a few were off their worst levels this week. Both the Indian Rupee and Brazilian Real were a bit firmer than the lows seen over recent weeks, although the Turkish Lira continues to plumb all-time lows against the greenback. After dropping to the lower end of its August trading range late last week, EUR/USD dropped to within striking distance of 1.3100 after Draghi said the ECB discussed rate cuts at its policy meeting on Thursday. Analysts called the comment surprising given the recent streak of (slightly) better-than-expected European data out since the July meeting.

- The BoJ's Kuroda pushed the government to not postpone its planned tax hike for fear of a possible tumble in government bonds, using the rate decision press conference to warn the government it risks losing market confidence. Both the government and the BoJ would be in a tight spot if bond prices plunged and interest rates surged. Additionally, the BoJ raised its economic assessment for September for the first time in two months. USD/JPY hit six-week highs above the 110 level.