Friday, January 3, 2014

Market Week Wrap-up  Weekly Market UpdateWelcome to 2014

- The year 2014 began halfway through the week, closing out a year during which by most measures, economic recovery established itself throughout the global economy. US, European and Japanese equity markets closed on Tuesday at or not far from their highs of the year, while the performance of other Asian equity markets was less impressive. On Thursday, European and US indices stumbled lower. US equities saw their first down day for the opening trading session of the year since 2008. Fixed income investors saw yields move higher, with the yield on the 10-year UST topping out on Thursday around 3.04%, its highest level since 2011. Bund and gilt futures started the year with sharp losses of their own, as investors bet on more European stabilization in 2014. For the week, the DJIA less than 0.1%, the S&P500 lost 0.5% and the Nasdaq fell 0.6%.

- By many measures, 2013 was a banner year. Equities closed out the year with outsized gains: the S&P 500 rallied 30%, its best year since 1995, to close at an all-time high of 1,848 on Dec. 31st, while the Nikkei 225 gained 57%, its best year since 1972. Natural gas finally moved out of the doldrums, gaining 26% in 2013, its best gain since 2005. Renaissance Capital reported that the US IPO market was busier than in any year since 2000, with 222 companies raising a total of $55B. Deal volume in the US was up 11% y/y to around $1 trillion, while global deal volume remained more or less flat. Meanwhile after 13 positive years, the US fixed income market had its worst year since 1994, with the Barclays US aggregate bond index declining 1.9% y/y. Gold was the other notable looser, with the yellow metal loosing 28% in 2013, ending its 12-year bull run. EUR/USD and USD/JPY closed out 2013 just off one-year highs (at 1.38 and 105, respectively). USD/CNY ended 2013 at 6.0539, up 2.9% y/y compared to the 1.2% rise seen in 2012 and the 4.7% rise in 2011.

- December manufacturing PMI data from around the globe have been under the microscope this week. The official China data came in at 51.0, barely above contraction and at a four-month low. In Europe, Germany and Italy saw readings that indicated a solid level of expansion, with both sustaining six months of growth, while France's manufacturing PMI fell to a seven-month low, with sharp declines in both output and new orders. The US Markit PMI reading hit its highest level in a year, with the output index at its best level in nearly two years.

- The October S&P/Case-Shiller Index indicated home prices continued robust gains through the fall, with the y/y gain at 13.6%, the strongest showing since February 2006. Analysts highlighted that Q3 data from CoreLogic data showed 4.1 million homeowners have escaped negative equity in 2013, helping to significantly improve household balance sheets and confidence (6.4 million remain in negative equity). The December consumer confidence survey certainly reinforced this point, with the index rising to 78.1 from 72 in November. The Conference Board said that sentiment was close to a 5-year high, with consumers attributing the improvement to more favorable economic and labor market conditions.

- Detroit's Big Three turned in their best showing since 2007, reporting 2013 industry sales up 7.6% y/y, at 15.6M units. December sales results, however, fell short of consensus expectations. Ford's US sales grew 1.7% in the month, while the company's 2013 US sales increased 10.8%. Chrysler December sales grew 6% y/y, with 9% growth in 2013 sales, its biggest improvement in six years. General Motors saw its sales during the last month of the year slipping 6.3%, saying bad weather cut into December sales, and discounts in late November pulled sales ahead from December.

- Activist investor Carl Icahn has identified a new target for his loving attention: Hertz. On Monday, the company disclosed that it had adopted a one-year shareholder rights plan after having "dialogue" with a number of shareholders. Early reports said that Corvex and Third Point were building stakes and may have talked with management. Then on Friday, CNBC reported that Icahn had accumulated 30-40 million common shares, to the surprise of nobody. Share of Hertz are up more than 12% on the week.

- Cooper Tire's $2.2 billion merger deal with India's Apollo Tyre has now officially gone flat, after months of suits and counter suits between the firms. Cooper said financing is no longer available and continues to claim, as it has for months, that Apollo breached the terms of the agreement. Fiat reached a $3.65 billion deal with the UAW that will allow it to acquire the remaining outstanding 41.5% stake in Chrysler. Network security firm FireEye has a $1.05B stock-and-cash deal in hand to acquire Mandiant, which has become known for its forensic investigations of IT security breaches. Mandiant is best known for publishing a detailed report in early 2013 about a Chinese military hacking group in Shanghai responsible for hacking hundreds of companies and organizations in the US.

- Netflix said it was testing new price plans for streaming video as it tries to lure more viewers. Among the plans being tested are a $6.99/month plan that allows only one video stream to be watched and a $9.99/month plan that allows three streams at one time. This compares to the company's standard $7.99/month offering for video on up to 2 screens at once and an $11.99/month family plan for streaming up to four shows at once.

- FX markets were roiled by low-volume trading in the year-end holiday period. EUR/USD backed off two-year highs just below 1.3900 seen last Friday. Skeleton crews manning trading desks did not react to weekend comments from ECB's Draghi that there was no urgent need for ECB action amid encouraging signs that the euro zone crisis has subsided. Dealers were watching rates in the first days of the New Year for signs the liquidity squeeze that supported the euro in mid-December was continuing to fade. During the week, ECB excess liquidity rose to around €275B (the highest level since July), compared to around €200B on Dec 27th. USD/JPY maintained the strength seen in the last days of December through the first few weeks of January, around five-year lows. Japanese markets reopen on Monday after being closed most of the week surrounding the New Year's holiday.