Friday, November 29, 2013

Market Week Wrap-up  Weekly Market UpdateMarkets Maintain Positive Tone as Holiday Shopping Season Starts Strong

- For the most part, equity markets in the US and Europe continued to glide higher as the US celebrated the Thanksgiving holiday which also kicks off the peak shopping season. Early indications are that Thursday and Black Friday retail sales got off to a good start -online sales on Thanksgiving Day were up 20% overall, and Walmart announced it had processed over 10M transactions at its stores on Thursday night. Despite some concerns being raised about equity markets starting to get "bubbly," stocks continued to march higher, with the Nadaq breaking above 4,000 this week for the first time since the internet bubble popped. For the week, the DJIA gained 0.1%, the S&P500 rose 0.1%, and the Nasdaq added 1.7%. November saw the S&P rise 2.8% and the Nasdaq up 3.6%.

- Housing industry data out this week indicated the US housing recovery remains firmly on track. Permits for home construction rose to their highest in over five years in October and the S&P/CaseShiller Index showed prices for single-family homes continued to rise in September. Noted housing skeptic Robert Shiller said the data makes it look like we are "off and running" again, although he said there were still reasons to be cautious. Pending home sales declined for the fifth straight month in October as the US government shutdown delayed sales, mostly from buyers waiting for IRS income verification for mortgage approval.

- The headline October durable goods orders fell 2.0% as expected, however the various subcomponents were much weaker than expected. Including defense and aircraft, orders fell 1.9% versus expectations for a 0.9% gain, for the third decline in the last four months. Note that this report contrasts sharply with the October ISM manufacturing and the October factory orders data out earlier in the month.

- The P5+1 negotiations with Iran yielded an interim deal last weekend. The broader oil embargo will remain in place, but the US will give Iran $6-7B in sanctions relief, much of it in the form of oil revenue frozen in banks, in exchange for Iran halting uranium enrichment above a 5% threshold and dismantling its system to enrich uranium above that threshold. Iranian oil production has fallen to about 2.7M barrels a day from around 4M five years ago. Iran exports averaged 1.1M in the first nine months of this year, and the current deal holds exports to the current short list of buyers. Market reaction was limited, with prices only dropping slightly from the $94-95 corridor where they had been for most of November.

- Political developments in Germany and Italy were closely watched. In Germany, the center-right CDU/CSU group reached a deal with the left-wing SPD party to form a governing coalition. The 474K members of the SPD will now vote on the coalition agreement, with the result due on December 14th. A poll out last week indicated SPD voters barely favored the coalition, with 49% supporting and 44% opposed to one. Chancellor Merkel is scheduled to begin her third term as chancellor on December 17th. In Italy, Silvio Berlusconi was expelled from the senate, but the Italian government remains firmly in control. On November 16th, Berlusconi and his loyalists launched themselves as Forza Italia while former partner Angelino Alfano and his loyalists departed PDL to form the New Centre Right (NCD), which will continue to support the Letta government.

- Fiat has put off the IPO of Chrysler until next year, at the earliest. The company had been moving forward with plans to price the offering as soon as this month, however the process had stalled due to disagreements between Fiat and the UAW on buying back the UAW pension trust's 41.5% stake in Chrysler. The trust's administrators thought Fiat's offer, reportedly about $3 billion, was too low. According to financial data in a prospectus published this week, Chrysler posted Q3 net profit $476M v $422M y/y and Rev $17.6B v $15.5B y/y. In other IPO news, Hilton announced plans to launch a $1.25B IPO on the NYSE. Hilton was taken private in 2007 by Blackstone Group.

- Shares of Hewlett-Packard saw strong gains midweek after the firm reported solid results in its fourth quarter. HP met EPS expectations and beat revenue targets, but with the exception of the enterprise group, HP's revenues continue to contract. CEO Whitman talked up the progress made in restructuring and promised new products in 2014 in the tablet and 3D printing areas.

- Men's Wearhouse turned the tables on rival Jos. A. Bank, offering to buy JOSB for $55/share in cash in a deal that would value the company around $1.2B. Recall that back in early October, Jos. A Bank offered to buy Men's Warehouse for $48/share, or around $2.3B in cash. MW ignored the offer, and JOSB later withdrew it.

- The Bank of Japan posted the minutes accompanying its October 31 policy meeting and the release of its semi-annual report with updated inflation and GDP projections for the next two years. Despite slightly raising its core inflation outlook for the current fiscal year to 0.7%, the minutes revealed three board members increasingly unsure the two-year timeframe for return to a 2% core inflation can be achieved - one went as far as to suggest that the rate of change in the CPI may have already peaked with the recent waning in yen depreciation. Later in the week, Japan released its latest inflation data showing a slight uptick in core CPI to a 5-year high of 0.9%, in line with analysts' consensus. BOJ Governor Kuroda also spoke in Parliament, suggesting he would consider adding to stimulus if risks to economy threaten the 2% inflation target. USD/JPY pair traded up to a 6-month-high ¥102.50 level, while EUR/JPY approached ¥140 - its 5-year high.

- Saber-rattling in the East China Sea escalated last weekend with the announcement of an "air defense identification zone" by the Chinese Defense ministry in the area of the disputed Senkaku islands. Since the statement, US State and Defense departments denounced the China attempt to test the US resolve in protecting its regional security interests in partnership with Japan. US Air Force has also flown two B-52 bombers through the area and Japan continued to operate commercial flights to Taiwan without a hitch. By Friday, China responded by sending two military aircraft to "investigate" the incursion, but made no other threats of further action. Separately, China will release is official November manufacturing PMI data late on Saturday, expected to show a slight decline from last month's 18-month high of 51.4.

- In the FX market, the yen was broadly weaker with USD/JPY at 6-month highs just above the 102 handle and GBP/JPY and EUR/JPY crosses at 5-year highs. The USD/JPY movement coincided with a minor correction in the Nikkei225 Index from 6-month highs. The EUR/USD hovered around the 1.36 handle for the bulk of the week despite ECB members reiterating forward guidance was a headwind for the Euro. Dealers noted that German State CPI reading this week likely put off any ECB rate action at next week's policy meeting. It was the October German inflation readings that likely vaulted the ECB into action earlier this month in the surprise cut in the 7-day Main Refi rate to 0.25%. The preliminary November CPI data in Germany out on Thursday showed positive month over month readings. The Euro held its ground late in the week despite an unexpected drop in German retail sales and sovereign downgrade for the Netherlands on Friday. The ECB's Coeure noted that outright asset purchases were a tool the ECB could use to implement monetary policy but not warranted to resort to large scale as seen by the BOJ or Fed.

- The second reading of UK Q3 GDP saw no revisions. The data confirmed that the UK has entered an expansionary phase, a positive factor for the pound. The GBP/USD tested above 1.6350 for fresh 2013 highs after the BOE announced changes to its Funding-for-lending scheme (FLS), ending support for new mortgages starting January 1st and focusing the FLS solely on supporting small businesses (SMEs). Dealers noted that a break above 1.6380 would ignite upside pressure.