Friday, January 10, 2014

Market Week Wrap-up  Weekly Market UpdateMarkets Frozen in Neutral

- Tepid markets were the rule this week, as the DJIA racked up its second consecutive week of losses while the S&P500 eked out a small gain. European markets slid sideways and Asia equities saw some pretty steep losses. There were no surprises in the BoE or the ECB rate decisions and the FOMC minutes were pretty much as expected. Friday's US payrolls report was perplexing, as the headline NFPs fell wide of expectations and well below recent performance at +74K even as the unemployment rate fell to 6.7%. In Europe, peripheral nations held very successful debt auctions even as unemployment rates in core states hovered near all-time highs. For the week, the DJIA slipped 0.2%, the S&P500 gained 0.6% and the Nasdaq rose 1%.

- There was plenty of controversy over the December jobs report. The economy added 74K jobs in December, the lowest increase in a year and a half and well short of the 197K expectation. On the other hand, the unemployment rate dropped to 6.7%, for the lowest rate since October 2008. The NFP miss was hard to explain away, while the material decline in the unemployment rate spurred plenty of debate. Factors behind the discrepancy have been chalked up to weather effects, a plummeting participation rate, and the impact of the run-off in unemployment insurance benefits, among other things. Various commentators opined that the jobs report alone was unlikely to alter Fed's course on tapering QE.

- The minutes from the FOMC's landmark December decision to taper QE asset purchases were released on Wednesday. The minutes showed the FOMC is looking to take a cautious approach to the taper and focus on preventing asset bubbles. Some committee members expressed concern about the potential for an unintended tightening of financial conditions if a reduction in asset purchases was misinterpreted as a signal the Fed would tighten rates sooner. There was little interest in changing thresholds for raising interest rates, as a change could undermine the credibility of the FOMC's forward guidance.

- Chinese equity markets fell for a second consecutive week. Analysts say the declines have been exacerbated by the resumption of IPOs in China after a year-long suspension. Importantly, the pricing of IPOs is no longer capped, allowing investors to dump in funds in expectation of a healthy pop on the first trading day, leading to billions of yuan periodically locked up in this part of the market, worsening the liquidity crunch. The first two IPOs, selling a combined CNY932 million, launched on Wednesday and were both over 100x oversubscribed, resulting in a massive CNY128.2 billion in funds being frozen. Fifty companies are set to come to market in China this month alone, including a record 18 next week.

- In other China news, the NDRC said it would allow local governments to restructure debt by selling bonds. Recall that at the very end of December, a government audit showed a big increase in local government debt, with local and central government debt rising to 37.1% of GDP in June 2013 from 34.1% in 2010.

- Liberty Media has revised its relationship with subsidiary Sirius XM by announcing its goal to acquire the shares in the satellite radio provider it doesn't already own. The non-binding offer is to pay a tiny premium to the closing price of Sirius when the offer was made of about $3.68 per share. Press sources suggest the Liberty offer for Sirius may be a prelude to a formal offer for Time Warner Cable via Charter Communications. Back in mid-December, Charter was said to be preparing a "bear hug" offer for Time Warner valued under $135/share, well below the $150/share it reportedly desires.

- Alcoa unofficially kicked off earnings season on Thursday. The firm's adjusted earnings were a bit subpar but revenue looked good, although traders do not seem impressed that the firm's FY14 global aluminum demand forecast remains unchanged at +7% from the FY13 forecast. Shares of AA fell more than 5.6% in trading on Friday.

- US retail names disclosed December and holiday season same-store sales reports this week, in addition to a few poor quarterly reports. On the whole, the picture was ugly, with slumping comps rationalized by appeals to intense competition for sales, unenthusiastic consumers and tough comparisons to a year ago. Tiffany and Macy's were the exceptions to the terrible holiday results from retail, with holiday SSS +6% and 4.3%, respectively. Target disclosed that more data was stolen in the December security breach than originally thought, including names, mailing addresses, phone numbers or email addresses for up to 70 million individuals, separate from payment card data.

- Shares of trucker YRC Worldwide fell more than 30% this week as the Teamsters voted down a new contract with drivers that would have cut salaries by 15% in order to help the company restructure its debts and stay out of bankruptcy. While the implosion of the contract will not necessarily mean bankruptcy, the company - which cancelled talks with lenders - will likely have to sell assets, consider strategic options, and go back to the Teamsters with a new offer.

- Both the BOE and the ECB left interest rates unchanged in their respective policy decisions on Thursday. In his post-rate decision press conference, ECB President Draghi shared even more dovish rhetoric in his continuing quest to force down money market rates and prevent more deterioration in the inflation outlook. EUR/USD moved lower as the press conference wore on but downside momentum was limited with no material changes in policy on tap. All in all, dealers seemed a bit perplexed that the euro did not sell off more. The BOE did not issue a statement after its decision, although earlier there had been some speculation that Governor Carney would amend forward guidance by changing the unemployment benchmark to 6.5% from 7.0%

- Now that they have exited their bailouts, Spain and Ireland held successful bond auctions this week. Spain sold €5.29 billion of new 2019 bonds and existing paper maturing in 2028. The yield on the five-year paper averaged 2.38%, a record low level. Orders for Ireland's 10-year bonds hit €14 billion, almost four times the €3.75 billion actually sold. Portugal is ready to exit its bailout in May, and the nation's debt agency received approximately €11 billion in orders for five-year notes at auction on Thursday, eventually selling €3.25B at 4.66%. Peripheral spreads fell notably following the auctions, with the 10-year Irish/German spread falling to 135 bps, its narrowest level since April 2010. The 10-year Spanish/German spread was around 180bp, the tightest since April 2011. Meanwhile, Italian and Greek December unemployment levels hit fresh record highs at 12.7% and 27.8%, respectively, while Eurozone unemployment hit 12.1%, just a hair below record highs.