Friday, February 14, 2014

Market Week Wrap-up  Weekly Market UpdateYellen and Boehner Send US Equities Back toward All-Time Highs

- Global equity markets saw a solid run of risk-on trading this week. In the US, newly-installed Fed Chair Janet Yellen said all the right things in her first public report to Congress, pledging continuity with the policies pursued by Ben Bernenke. House Speaker Boehner surprised markets and his own party by proposing and then forcing through a clean debt ceiling increase, with no conditions. In the eurozone, a raft of slightly better-than-expected preliminary Q4 GDP reports helped support the emerging slow European recovery thesis. With snowstorms disrupting life up and down the US east coast, trading volumes were on the low side for most of the week, supporting a stronger, quicker move higher in equities. The S&P500 closed out the week within striking distance of the recent all-time high of 1,850. For the week, the DJIA rose 2.3%, the S&P500 gained 2.3% and the Nasdaq added 2.9%.

- In testimony before Congress, Yellen pledged her support for current FOMC policy and emphasized that there would be a great deal of continuity in monetary policy from Bernanke's tenure. Yellen repeated Bernanke's constant refrain that rates would remain near zero until well past the 6.5% threshold comes and goes. On QE, Yellen reflected the committee view that it would take a notable change in the outlook to alter the trajectory of tapering, though left leeway by reiterating that the taper is not on a pre-set course. Regarding the recent payrolls weakness, she said she was surprised the Dec and Jan reports came in below expectations but also said one cannot jump to conclusions based on two reports impacted by terrible winter weather.

- The "clean" debt ceiling hike may very well go down as the moment when the budget wars of the last several years ended in truce. The Speaker's move prevented another protracted and damaging battle and authorized the national credit card through March 2015.

- Spot gold prices have gained approximately 3.5% over the last week, and the metal crossed above its 200-day moving average on Friday for first time in a year. Gold has seen a steady recovery since early January, and the catalysts behind the leg up this week are somewhat opaque, with continued emerging market weakness, a softer dollar and even the cyber-attacks on bitcoin exchanges being cited. However, some analysts suggest it will take more than short-term technical moves to propel the yellow metal very far beyond the $1,300 level. Copper hit three-week highs this week, rising to $3.265. Silver gained a whopping 5% on Friday alone. Crude spent almost the entire week in the $100 handle, but the big gains in the front-month contract all arrived last Friday, post payrolls.

- January US retail sales slipped lower m/m even as the December result was revised lower, into negative territory. The disappointing data dampened the risk-on tone in markets on Thursday, however the reason for the slip is pretty obvious at this point: icy weather. The same excuse for weak results was behind the January jobs report and has been repeated by nearly every CEO in a consumer-exposed business for all of the current earnings season. The biggest negative component in the retail report was weak January auto sales, a factor which had already been disclosed in US January sales numbers out of the major auto manufacturers last week.

- Time Warner Cable agreed to Comcast's all-stock merger offer, valuing the cable giant around $45.2 billion, and spurning Charter Communications $132.50/share offer. The deal combines the two largest US cable TV companies in an entity with 30 million subscribers, and is practically guaranteed to draw lots of anti-trust attention. To assuage these concerns, Comcast has pledged to divest 3 million subscribers after the deal closes, but notably the deal did not include any breakup fee, and Time Warner shares are trading at more than a 5% discount to the deal price.

- Discomfort with the future of Cisco has only deepened after its latest quarterly revenue decline. Cisco's revenue slid 8% y/y in its second quarter, and it said it would slide another 6-8% in its third quarter. CEO Chambers pounded the table, citing a book-to-bill greater than 1.0 and the best booking backlog the company has seen in years. Cisco shares lost 4.5% after reporting on Wednesday but recovered nearly all of the losses in the back half of the week. Meanwhile, two other tech hardware names, Applied Materials and Nvidia, surged to new 52 week highs after issuing strong quarterly reports.

- Deere topped consensus expectations in its first quarter report, on very modest y/y gains in income and revenue. The firm reiterated it glum forecasts for FY14, with total sales seen down 3% y/y, on flagging global demand. One bright spot was the outlook for construction and forestry, as the rebounding economy in the US and Canada spurs more housing starts.

- Italian Prime Minister Enrico Letta has been thrown out of office by the leader of his own party, Matteo Renzi. The young, ambitious leader of the center-left Democratic Party, Renzi claimed that electoral and employment reforms were getting mired in political paralysis and felt compelled to push Letta out. The move gives Italy its third government in the last 12 months, though Renzi got assurances from the erstwhile opposition that they would continue to support the ruling coalition. Yields on 10-year Italian government bonds fell to their lowest levels since early 2006, around 3.68%, reflecting the lack of concern over the developments in financial markets.

- EUR/USD rose to its highest levels in two weeks and very nearly matched YTD highs from early January, around 1.3715. The ECB monthly report trimmed its outlook for Eurozone inflation in 2014 and 2015, however the initial 2016 forecast was for harmonized CPI at 1.7% in 2016, backing Draghi's repeated assertions that there will not be deflation in the Eurozone. Recall that in last week's post-ECB decision press conference, Draghi specifically cited the need to have these initial 2016 forecasts in hand before making any more decisions about cutting rates further. Decent preliminary Q4 GDP reports from core members France, Germany, and the Netherlands as well as peripheral nations Italy and Portugal also helped support the euro.

- The Bank of England's quarterly inflation report was seen as a bit more hawkish than expected in maintaining the 7.0% unemployment threshold (with the latest unemployment reading at 7.1%). The report also suggested the BoE's new forward guidance would monitor a broader range of economic indicators, without being too specific about which indicators were being watched. Sterling firmed as analysts decided the BoE will tighten policy sooner than it would loosen it. GBP/USD hit highest level since May 2011, above 1.6700.