Friday, September 27, 2013

Market Week Wrap-up  Weekly Market Update: Looming US Budget and Debt Ceiling Battles Drive Risk-Off Tone in Markets

- The DJIA and S&P500 have moved steadily lower since the Fed decided not to reduce QE asset purchase at the FOMC meeting last Wednesday. As market participants reoriented themselves toward the possibility of an October or December taper this week, members of Congress managed not to remove the possibility of a government shutdown when the fiscal year ends on September 30th or resolve the upcoming debt ceiling issue. Risk has come off and bond yields have reversed course thanks to the political uncertainty, with the yield on the 10-year UST closing out the week around 2.62%, versus 2.73% last Friday and 2.88% two weeks ago. Meanwhile in Europe, Germany is working to form a new government after elections, while Italy is struggling to prevent a government crisis of its own. US economic data was mixed: the September Markit PMI index retreated to 52.8 this month from 53.1 in August, with a slowdown seen in the key new orders and employment components; the August durables orders were essentially unchanged and August new home sales rebounded from a dip lower in July. Russia, the US and the western powers made steady progress towards implementing the Syria chemical weapons accord through a UN resolution, while newly elected Iranian President Rohani made more conciliatory but symbolic gestures, raising hopes of further detente with the US. WTI crude declined to around $102, its lowest level since early August. For the week, the DJIA lost 1.3% and the S&P500 fell 1.1%, while the Nasdaq added 0.2%.

- Washington, DC was entertained by Senator Cruz's quixotic "filibuster" this week, however the reality that the Democratic-controlled Senate would pass a short-term funding bill without defunding Obamacare was not lost on anybody. On the other side of Capitol Hill, the House Republican leadership appeared powerless to control the conservative wing of the House, who are gunning for a battle over the debt ceiling, although as of writing it remains unclear whether or not the House will risk a government shutdown or wait for the debt ceiling battle in its quest for fiscal responsibility. Note that earlier this week, Treasury Sec Lew said the extraordinary measures designed to keep government finances afloat would be exhausted by October 17th, and condemned calls for "prioritizing" payments as just "default by another name." As the Congressional Republicans continued to gamble with US creditworthiness, CDS for United States debt rose to highs not seen since the August 2011 debt ceiling crisis.

- The CDU/CSU won the German elections, giving Angela Merkel a third term as chancellor, as expected, however they fell five seats short of an outright majority. Merkel and her party need to team up with a new party to form a ruling coalition, given that former junior partner FDP did not achieve the 5% threshold needed to retain representation in the Bundestag. Talks with the SPD and possibly the Greens to build a new coalition are set to get underway shortly. The consensus view is that there will be very little change in German policy stemming from the election, although it is notable that the SPD is said to be asking for the finance ministry portfolio as the price of supporting Merkel. The revamped Bundestag is due to have its first sitting on October 22nd.

- The Italian political crisis surrounding attempts to oust former-PM Berlusconi from the Senate deepened this week. An Italian Senate panel voted on September 18th to strip Berlusconi's senate status and a cross-party Senate committee hearing on the matter has been tentatively scheduled for Oct 4th. Various members of the right-wing PDL party are threatening to resign and pull their party's support for the coalition government if the chamber takes the next step to banish Berlusconi. The parliament is trying to remedy the 2013 budget and pass a 2014 budget that keeps the deficit under the 3% euro zone threshold. These developments threaten to reignite the euro zone debt crisis.

- A press report out on Wednesday asserted that Walmart was reducing orders from suppliers because of mounting unsold inventory in the US. The company was said to be looking at reducing supplier orders for Q3 and Q4. Within a short time, Walmart issued a statement that the report was "misleading" and said it is constantly "managing" inventory levels. Key Walmart supplier Li & Fung issued a statement that they had not received any order cancellations from Walmart.

- Shares of Apple remain below $500 and lower than they were before the iPhone 5S/5C announcement. The company disclosed that first weekend sales of the two devices topped 9 million units, ahead of industry expectations of 5.5-6M. Jefferies offered skeptical commentary on Apple's numbers, noting that while the 5S is sold out, the 5C is not, estimating that of the 9 million sales, 4 million were 5S models and 5 million were 5C models, with half of the latter going into inventory, making the true first weekend sales 6.5M units.

- JP Morgan was the subject of conflicting reports on settlement talks over its various pending federal civil and criminal charges. Early this week, the DOJ reportedly rejected a $3 billion settlement offer from the bank, and by Wednesday there was talk the settlement price tag could be as much as $11B, including $7B in fines and $4B in consumer relief payments. Elsewhere in banking, there were reports that Citigroup saw a sharper-than-expected summer slowdown in fixed income sales, echoing earlier reports regarding Deutsche Bank and Leucadia unit Jefferies.

- Chinese internet firm Alibaba abandoned plans to list in Hong Kong this week and said it would seek an IPO on the NYSE. The move comes after the Hong Kong exchange refused to bend its rules against dual-class shareholding that would allow insiders to keep ironclad control over the company. Alibaba, which is run by a 28-member partner committee, insisted that it be allowed to continue to nominate a majority of its board of directors.

- Shares of JC Penny fell approximately 25% this week thanks to big new dilutive capital raise and fears for the firm's solvency. The company abruptly launched an 84M share offering on Friday after initially denying earlier in the week that conditions warranted raising liquidity. Penney also tried to deflect rumors that its supply chain may be in trouble, saying that it was starting to see greater predictability in its performance across many areas and that the company continues to pay vendors on time.

- The deepening political dysfunction in Washington, DC is keeping the greenback weak after the moves seen in the wake of the FOMC meeting last week. EUR/USD remains in a very tight range between 1.3460 and 1.3560. USD/JPY closed out the week back in the 98 handle after testing 99 earlier.

- In China, the PBoC raised red flags after making two aggressive funds injection this week, bring the total injections for the week to the highest level in two months. Analysts suggested that PBoC was simply meeting quarter-end and pre-holiday demand for funds (next week is the Golden Week holiday). On Monday the stronger than expected China September flash PMI reading marked the second month of expansion in the series and a six-month high.