Friday, November 8, 2013

Market Week Wrap-up  Weekly Market UpdateMarkets Volatile in Week Full of Surprises

- Global markets weathered a series of surprising decisions and data points this week. In the US, the initial Q3 GDP reading was surprisingly strong and the October non-farm payrolls wee much better than expected. In Europe, final October manufacturing and services PMI data remained solidly in expansion territory and at multi-month highs, confirming that European economies may finally be returning to health. Yet, reacting to deflationary concerns, the ECB governing council cut its main refi rate by 25 bps to 0.25%, acting sooner than many analysts had expected. The better than expected data in the US caused some reassessment of when the Fed may start tapering, even as the central bank confirmed it has contemplated lowering the unemployment threshold on its forward rate guidance (to perhaps 5.5% from 6.5% currently). For the week, the DJIA gained 0.9%, the S&P500 added 0.5% and the Nasdaq slipped 0.1%.

- The advanced US Q3 GDP surprised all observers with a +2.8% reading, the highest rate of expansion since the third quarter of 2012. The extra strength was seen mainly in inventory restocking, whereas both US imports and exports saw big steps down from the Q2 final data. Consumer spending grew at +1.5%, matching its slowest pace of growth in more than 3.5 years.

- The October jobs report was challenging to parse given the impact of the government shutdown: according to BLS reporting standards, the payroll numbers would not have captured furloughs related to the shutdown but the unemployment rate would have been impacted by the furloughs. Accordingly, the +240K non-farm payrolls number was very strong and crushed the 120K consensus. The unemployment rate ticked up to 7.3% as expected, from 7.2% in September, which the BLS said partially reflected the decline in federal government employment. A dramatic four-tenths drop in the labor force participation rate to its lowest level since 1978 was another surprise, which the BLS could not fully explain.

- The ECB surprised markets with an interest rate cut and an extension of liquidity operations by one year, to mid-2015. The moves will help prime banks with funds and prevent the weak recovery from stalling as inflation falls further. The decision comes after the October euro zone CPI data fell to a four-year low of 0.7%, way off the target rate of 2.0%. While appreciation in EUR/USD had become an issue for euro zone economies, Draghi insisted that euro strength was not a factor in the decision and reiterated that the ECB has no FX policy target. Regarding the inflation issue, Draghi insisted that there is no risk of deflation in the zone, although he also indicated that Europe was in the midst of a prolonged period of low inflation.

- Coming into the week, EUR/USD tested and then held a four-month uptrend line around 1.3440 (where was a six-week low) before rebounding back over the 1.35 handle. The pair remained around 1.3500 though the ECB decision; analysts pointed out that the 1.3410-30 provided solid resistance in mid-June and late August. Going into the ECB policy decision, there was a feeling that the recent two-year highs in EUR/USD had become a political issue. After the surprise rate cut, EUR/USD plunged to two-month lows below 1.3300.

- Twitter's IPO frenzy seized markets this week. The social media firm's 70M share offering opened for trade on Thursday at approximately 10:50ET at $45.10, well above the $26/share IPO price. Shares of TWTR surged to $50 on the first day of trading and then declined back to around $42 on Friday on extreme heavy volume. As money poured into Twitter, other social media names lost ground, with FB down 4% and LNKD down 2% on the week.

- Shares of Tesla dropped almost 25% this week, thanks to problems with the firm's quarterly earnings and reports of the third fiery Model S accident this year. With shares priced for perfection, Tesla's EPS merely met expectations and only modestly raised its production outlook for Q4 to 6,000 units. CEO Musk said Tesla would see some relief from production constraints in 2014.

- BlackBerry disclosed that its tentative deal with Fairfax Financial to go private has fallen through and CEO Thorsten Heins resigned after less than two years in the post. Instead, the company will take on $1 billion in convertible debt, which converts if the stock hits $10 a share. Fairfax will kick in $250M of convertible debt. New chairman and interim CEO, John Chen, insisted that he would still pursue a sale of the company, but also couldn't rule out shuttering businesses as a strategic option.

- Retailers reported better-than-expected sales in October as discounts and promotions helped get shoppers into stores. Heading into retail reports expectations were very low, given the confidence issues and the chaos in Washington, DC during the month. Abercrombie &Fitch's weak preliminary Q3 report on Wednesday, with its 14% decline in comps also didn't help. However nearly all major retailers disclosed pretty strong monthly comps, and American Eagle Outfitters shook off Abercrombie bad mojo by preannouncing its own Q3 to the upside.

- In other FX news, trading in USD/JPY was choppy. Analysts said that a sustained break above 99.00 could provide next upward leg in the pair and further help the government with Abeonmics. The USD/JPY has been consolidating since hitting highs of 103.62 back on May 23rd and a low of 93.77 on June 14th. Conversely a move below 97.00 would likely target 93. On Thursday and Friday, USD/JPY saw big volatility ahead of and after the ECB decision, the US Q3 GDP and the jobs report. After fluctuating between 99.40 and 97.60, the pair exited the week just a hair above 99. GBP/USD surged above 1.6060 after the Oct PMI Services beat expectations with its highest reading since May 1997. EUR/GBP dipped to five-week lows around 0.8465.

- China's October trade surplus rose to a 10-month high, bolstered by a much stronger than expected increase in exports just a month after a surprise contraction. Exports to the US accelerated to 6.9% from 4.2%, while exports to Europe slowed to 0.5% from 1.1%. Imports of iron ore, a gauge of China's industrial health, gained 20% y/y but fell over 10% m/m. The PBoC made only one modest CNY8B liquidity injection this week.

- On November 9th, the Chinese leadership convenes a key decision-making event, the third plenum of the 18th central committee. President Xi has been telling foreign leaders that the session will be the most important for China since 1978, dropping hints of momentous change and China watchers predict that the biggest reforms rolled out at the event will be to the relationship between the government and state enterprises, to the financial system and to the legal regime governing the control and use of rural land.