Friday, December 13, 2013

Market Week Wrap-up  Weekly Market UpdateThe Long Melt Up Freezes in Place

- Global equity markets retreated further from the highs seen at the beginning of December as participants cleared the decks ahead of the Fed meeting on December 17-18th. In Congress, a modest fiscal truce has been declared, raising hopes that the budget wars of the last three years are over. Data out this week was not quite as impactful as the reports out last week, but there was nothing that would dilute the impression that things are moving in the right direction. November retail sales rose 0.7%, topping the 0.6% gain in October. US import prices fell for a second straight month in November, thanks to lower oil and food prices. In Asia, there was speculation about additional BOJ easing as early as Q1 of 2014, helping to make the Nikkei the only major average to keep in the green this week. Growth in Chinese investment and industrial output eased slightly in November while retail sales grew at their strongest rate this year. Industrial output grew 10% y/y, a four-month low while retail sales rose 13.7% y/y. For the week, the DJIA lost 1.7%, the S&P500 dropped 1.7% and the Nasdaq fell 1.5%.

- On Wednesday Senator Murray and Representative Paul Ryan reached a two-year budget deal to fix federal spending at $1.012T in 2014 and $1.014T in 2015, reduce sequester cuts by $63B over the two years and also cut the deficit by a symbolic $20-23B. Speaker Boehner and the GOP Congressional leadership embraced the deal over howls of protest from Tea Party conservatives, and the House passed the measure in a 332-94 bipartisan vote, raising hopes that the budget wars are over for now. The Senate is expected to vote on the budget compromise next Tuesday.

- This week China held its annual week-long Central Economic Work Conference, at which the leadership sets the national agenda, including targets for 2014 GDP, CPI and M2. Rumors suggested that the conference would roll back Beijing's fiscal policy stance from "proactive" to "prudent," however, in the end the leadership maintained a "proactive" fiscal policy. The conference memo released after the event did not specify the GDP and inflation targets for 2014, although many have speculated the GDP target would be reduced to around 7.0% from 7.5% in 2013.

- The five Federal regulatory agencies that oversee the US financial system (the Fed, OCC, FDIC, CFTC and the SEC) approved the long awaited Volcker Rule this week. The rule constricts proprietary trading by banks and will come into effect most ironically on April 1st, 2014. By June large banks must begin reporting some data; full compliance with the rule is not required until July 21st, 2015. The FDIC's Hoenig said the rule does not fully deal with the risks in the financial system and could be used as the first step to a full segregation of investment and commercial banks.

- General Motors named Mary Barra as its first female CEO. She replaces Dan Akerson, who guided GM through most of the period since it emerged from bankruptcy in 2009. Barra joined GM 33 years ago and has held a series of manufacturing, engineering and senior staff positions. Additionally, the US Treasury announced that it had sold off the last of its stake in GM, noting that it had recouped a total of $39B of the $50B loaned to the company during the financial crisis.

- Microsoft's hunt for a new CEO continues to make headlines. Steve Mollenkopf, COO of wireless chipmaker Qualcomm, was anointed as QCOM's next CEO a day after he was mentioned in a news report as a possible successor to Microsoft's outgoing CEO Ballmer. Microsoft has considered several outside candidates, including Ford CEO Alan Mulally and VMware CEO Pat Gelsinger, as well as various Internal candidates. Ford reiterated this week that Mulally has no plans to leave the company.

- A little more than two weeks after the P5+1 group reached a deal to halt Iran's nuclear program, Iran walked away from continuing negotiations with world powers, accusing Washington of going against the spirit of the agreement reached last month by expanding its sanctions blacklist. Iranian officials said they were evaluating the situation and would make an "appropriate" response, while US Secretary of State Kerry said he fully expects talks to continue after participants "take a moment" to consult.

- Ireland became the first bailed-out Eurozone country to officially exit its financial rescue program. Over the last three years, the Irish Republic has received €85B in funding from its European partners. The move is largely symbolic, as the economy remains very fragile and debt levels remain very high, at 124% of GDP, while unemployment has only just declined to under 13%.

- EUR/USD extended last week's upswing to make one-month gains above 1.3800 on Wednesday, just shy of 2013 highs of 1.3830. Euro zone bond spreads narrowed markedly as officials sought an agreement on the banking union, including the single resolution mechanism. The EU wants to cement the historic agreement on banking union at a meeting on December 18th.

- USD/JPY and EUR/JPY hit multiyear lows late in the week as speculation builds about more BOJ easing. BOJ Governor Kuroda said the bank would continue to target 2% inflation and would stick with easy policy to keep inflation at 2% even after target was achieved. The yield on the benchmark 10-year JGB hit its highest level in two and a half months as the Nikkei index rebounded.