Friday, October 11, 2013

Market Week Wrap-up  Weekly Market UpdateUS Fiscal Crisis Moves Toward Endgame 

- After reacting calmly to the fiscal train wreck underway in Washington, DC last week, financial markets began to display a certain degree of discomfort through the first half of this week. On Monday, the US Treasury's $35B four-week bill sale went very poorly, with the rate hitting its highest level since March 2008, triple the rate of the last four-week auction, as traders continue to shy away from holding short-term US paper. Both Japan and China (the first- and second-largest foreign holders of USTs) demanded that Congress ensure the stability of their very substantial investments, while ratings agencies warned they would reconsider US sovereign ratings if there were no debt limit solution. By Friday, the House Republican leadership looked ready to resolve the crisis and undertake serious negotiations with the White House. Because of the government shutdown there was a dearth of US economic data, and the data that was reported disappointed expectations. The weekly jobless claims hit six month highs on more claims processing issues in California and as government furloughs started to impact the data, and preliminary October University of Michigan confidence fell to its lowest level since January. Minutes of the last FOMC meeting confirmed that the "close" decision not to taper in September was largely based on concerns the debt ceiling debate could hurt the economy, and several Fed Governors and Presidents this week said the government shutdown showed they made the right call. With little fanfare, President Obama nominated Janet Yellen for the Fed Chairman post, making the safe and expected choice for continuity of the Bernanke legacy. Earnings season began with Alcoa, which did very well, and JPMorgan, which saw its first quarterly loss under the leadership of CEO Jamie Dimon. For the week, the DJIA gained 1.1%, the S&P500 rose 0.7% and the Nasdaq tacked on 0.4%.

- The House spent the first half of the week passing piecemeal funding bills while continuing to demand negotiations begin before raising the debt ceiling or funding the government - while the White House demanded both to be resolved before negotiations could begin. Under pressure from polls, the business community, ratings agencies, overseas creditors and party elders, the House GOP leaders began giving up ground on Thursday, at first proposing a 'clean' six-week debt ceiling hike and then on Friday a combined debt ceiling increase and an end to the shutdown in exchange for a package of spending cuts. The new Republican offer would set up negotiations on two tracks: the first to reopen the government and the second to craft a broader budget deal that would fund the government through 2014 and raise the debt ceiling. Reports suggested that if the president accepts the framework, the House could vote Friday on a six-week short-term debt ceiling hike.

- The September FOMC minutes were keenly dissected for any insight into the Fed's taper strategy, although there was little new to be found. The decision not to scale back QE was a close call for some members but many of those members have already said as much in their public statements. Another big focus was the importance of maintaining the distinction between QE taper and low interest rate guidance. There was some discussion of possibly linking a taper decision with expanded forward guidance, with the latter potentially including an inflation floor (no rate hikes until inflation is above 1.5%) or additional information about the Fed's rate hike plans after unemployment reached 6.5%.

- The IMF reduced forecasts for global growth in its World Economic Outlook, warning that emerging economies have cooled off, Europe remains in the doldrums, the US is facing fiscal uncertainty and global ramifications of QE tapering are becoming clear. The IMF cut its 2013 global GDP outlook to +3.1% from +3.3% prior and its 2014 outlook to +3.8% from +4.0% prior. G20 finance ministers also noted the slowdown in emerging markets and told Washington to take urgent action to resolve short term fiscal uncertainties.

- JP Morgan reported its first loss under CEO Jamie Dimon: after adjusting for a titanic $9.2B item for the legal defense fund, the firm lost $308M in its third quarter. The company continues to strive for an umbrella settlement of its outstanding legal issues with the government, but also warned that legal expenses would remain elevated for the next year or two. Wells Fargo's headline earnings and revenue met expectations, but shares declined as investors focused on lower net interest margins, lower loan originations and the end of earnings bumps from loan loss reserves.

- September same store sales showed some improvement, though many apparel and mall chains experienced y/y comp declines or very low gains. The Gap missed expectations by a wide margin, knocking shares down 6% on Friday. JC Penny disclosed September comps only declined 4%, which is a huge improvement over the double-digit declines seen earlier in the year. The firm also made other reassuring comments about a return to more normal business conditions.

- BlackBerry gained 6% this week on various reports detailing how the firm might be divided up and sold. Reports suggest that Google, Cisco, SAP, Intel and others are considering bids for parts of the company, and it appears that Fairfax's tentative offer of $9/share for the whole company won't work. The firms are said to be most interested in Blackberry's secure server network and its patent portfolio. Note that co-founder Lazaridis hiked his stake to 8% from 5.7% prior as rumors swirled he might submit a bid.

- In M&A news, Joseph A Bank offered to buy Men's Wearhouse for approximately $2.3B in cash, or $48/share, a 42% premium to the closing price the day before the offer was made on Sept 17th. Men's Warehouse rejected the deal, claiming it did not fully value the company and did not remedy potential anti-trust concerns. Cooper Tire won a victory in Delaware Chancery Court in a bid to compel India's Apollo Tyres to stop stalling and close on its deal to acquire Cooper. Recall that back in September, an arbitrator blocked the deal unless Apollo could reach an agreement with UAW workers at certain US plants.

- The EUR/USD pair was contained within its 1.3400-1.3700 consolidation range all week. Some dealers believe the pair will run out of steam and head lower, although a retest of the 1.3645 and 1.3710 peaks cannot be ruled out in the near term. The yen lost altitude all week and dropped to eight-week lows against the dollar by early on Friday, around 96.60, and briefly traded below its 200-day moving average for the first time since mid-November 2012. With the glimmers of hope seen in the US fiscal battle, USD/JPY moved higher and closed out the week around 98.50.

- GBP/USD had been driven by the recent stream of positive economic data surprises, though positive data is starting to see diminishing returns as market expectations have risen ahead of the data. The pair saw some volatility and hit session lows after confusion over a Bank of England repo announcement. Initial headlines suggested the operation would be an LTRO, indicating the BOE would follow the lead of the ECB, but was then corrected to say the BOE would hold a Long Term Variable Rate Repo on Wednesday, a standard operation. At its monthly policy meeting, the BOE left both Interest Rates and Asset Purchase Target unchanged at 0.50% and £375B respectively (as expected).

- In other forex news, the Brazil Central Bank raised its SELIC target rate by 50bps, as expected, in a unanimous decision. The Bank of Korea left rates on hold at 2.50% and maintained its 2013 GDP forecast at 2.8% while lowering its 2014 forecast by two-tenths to 3.8%.