Friday, January 24, 2014

Market Week Wrap-up  Weekly Market UpdateWinter Is Coming (for Emerging Markets) 

- Global markets went for a rollercoaster ride this week following about a month of tepid, sideways trading. A broad cohort of analysts has been calling for an inevitable correction from record highs and we may be seeing the beginning of the leg downwards. Troubling developments in Chinese financial markets and a huge devaluation in the Argentine Peso late in the week drove back-to-back, triple-digit losses on the DJIA. Over the course of Thursday and Friday, the DJIA and the S&P500 lost about 3% a piece. The first contraction in the flash China HSBC-Markit Manufacturing PMI data in six months also added weight. There was some better data in Europe, although there was almost no positive impact on equities as traders were focused on the global macro picture. The EUR and USD have both appreciated notably as investors seek safe havens, and the yield on the 10-year US Treasury has fallen to 2.72%, its lowest level since last November. For the week, the DJIA dropped 3.5%, the S&P500 lost 2.6% and the Nasdaq declined 1.7%.

- Fresh concerns about China's opaque and over-leveraged banking sector pummeled risk appetite on Thursday. Reports circulated the Industrial & Commercial Bank of China rejected requests from investors to bail out a unit's trust vehicle, China Credit Trust Co.'s high-yield "Credit Equals Gold" fund, which is headed for default on Jan 31st. There have been some reports that suggest Chinese authorities are pushing to let the vehicle default without rescue to "teach investors a lesson." Other reports suggest local provincial officials will scrape together the funds to make investors whole.

- The situation in Argentina worsened all week, and had a pronounced impact on global markets on Friday. On Wednesday, the Argentina Peso weakened by 0.25 to 7.14 to the dollar, and then on Thursday it fell to 8 pesos to the dollar, suffering its biggest daily decline since the crisis of 2002. The central bank intervened and pulled the peso back to 7.79 to the dollar, amounting to a devaluation of more than 15% in just 48 hours. There has been little official explanation for the huge devaluation, although the move comes after the central bank disclosed that foreign reserves had fallen to $29.4B (In 2013 alone, reserves plunged more than $12 billion to $31 billion, down from around $50 billion two years ago) and said it would abandon interventionist monetary policy.

- Natural gas prices spiked up into the $5.00 handle this week for the first time since 2010, as unseasonably cold weather drove up demand. Oil prices also ticked higher, rising off the $92-93 area to test above $96.80. Analysts suggest the opening of new pipelines is finally unclogging the Cushing, Oklahoma bottleneck, draining off stockpiles and boosting demand at Gulf Coast refineries.

- Iran and the west have taken the first steps toward implementing the P5+1 accord reached last November. The UN Nuclear Agency reported Iran has begun suspending uranium enrichment under the deal, leading the EU to formally suspend some sanctions for six months. The White House said it would provide modest sanctions relief per the agreement. At the same time, there were reports that the Iranian government was ready to talk with western oil majors, with even Chevron and ConocoPhillips said to have been approached. Up to 1.2M bpd worth of Iranian production could soon find its way back into markets.

- In its biannual WEO report, the IMF said the global economic recovery is strengthening as countries move away from austerity budgets and financial systems heal. The IMF increased its estimate for world growth this year slightly to 3.7% from 3.6% prior, compared to the 3.0% rate seen in 2013, although it also warned that the global growth rebound remains "weak and uneven." It boosted both China and US GDP forecasts slightly.

- Earnings season rolled along this week, although declines in major names weighed on indices and contributed to the overall slide. Johnson & Johnson, Travelers and Verizon all lost ground on Tuesday despite some decent quarterly results. Travelers more than tripled its Q4 profits versus a year ago on a big decline in catastrophe costs. J&J's saw very strong profit gains, although its initial FY14 outlook was a bit shy of estimates. Verizon's earnings and revenue were way up y/y, although net subscriber additions were less than half the year-ago figure. On Wednesday, IBM reported revenue that were down 5% y/y, thanks largely to ongoing difficulties in the Chinese market. McDonald's Q4 results were not great and comps were terrible, but executives made positive noises about a revamped value menu improving guest traffic in January.

- A few big names reported strong results and fought the prevailing currents. . Microsoft saw modest gains after earnings and revenue totals for its second quarter comfortably beat expectations and offered a rare bit of guidance for the forward quarter that was pretty strong. Consumer names Procter & Gamble and Starbucks were safe havens despite mediocre quarterly numbers. P&G gained although EPS and revenue totals only just met expectations and the firm merely reaffirmed full-year guidance. SBUX slightly topped the consensus view and tweaked its full-year a bit higher.

- At its weekly deposit auction, the ECB failed to fully sterilize bond purchases under its SMP program for the first time ever in a non-holiday market, raising some concerns as to why European banks were seeking so much extra liquidity. The came only a day after eonia spiked up to 0.35% from only 0.14% a week ago. Analysts suggested that rising short-term rates might increase pressure on the ECB to cut its repo rate in February. In any case, eonia eased off later in the week. The better Germany and France PMIs helped drive the euro higher against the dollar, with EUR/USD rising to 1.3690 from 1.3550 in the immediate wake of the data. At Davos on Friday, ECB President Draghi said that even though the recovery is still fragile and risks are to the downside, situation in the Eurozone has improved dramatically over the last year.

- With China jitters building, analysts noted that the environment was strengthening the yen while weakening the Australian Dollar. USD/JPY tested below the 102 level as of Friday, its lowest level since early December, while EUR/JPY approached 140.00. AUD/USD hit three-and-a-half year lows below $0.8760. However China was hardly the Aussie's only problem: RBA Governor Ridout kicked the AUD lower, saying the currency had not fallen enough and AUD/USD around $0.80 would be a fair level for the economy.

- Data is indicating a slow-but-steady economic recovery in the United Kingdom. The pound surged as the ILO Unemployment Rate edged closed to the BOE threshold of 7.0%. GBP/USD gained steadily through Friday morning, rising to just shy of 1.6670, its highest levels since the spring of 2011. The BOE minutes appeared to be a touch dovish and the MPC did not bring up forward guidance. There had been some speculation that BOE Governor Carney could amend forward guidance by changing the unemployment benchmark at which an interest rate hike would be considered to 6.5% from 7% after he said there is no pressing need for a rate increase.

- The Turkish Central bank resisted heavy market pressure to defend a tumbling lira and fight inflation for fear of dampening economic growth ahead of elections this year. The Lira hit fresh record lows against both USD and EUR following the central banking holding rates steady on Tuesday. With the chaos overtaking FX markets later in the week, the central bank was said to have intervened for the first time in two years, by selling dollars.