Friday, September 19, 2014

Market Week Wrap-up  Weekly Market UpdateScotland Stays, Alibaba Goes

The DJIA and the S&P500 saw fresh all-time highs on Thursday and most global markets (with the glaring exceptions of Shanghai and the Hang Seng) closed on Friday just off their highs of the week. As equities gained ground the 10-year UST yield saw ten-week highs around 2.66% on Thursday. With risk assets on fire, many commentators speculated whether this week's monster Alibaba IPO could be a symbolic top in markets, while others looked at the ominously weak inaugural TLTRO auction as a sign of very deep dysfunction in Europe. Meanwhile, China's seemingly benign downturn has taken a turn for the worse, prompting a more direct response on the part of the PBoC, which unveiled a CNY500 billion standing liquidity facility (SLF) provision for the nation's top five banks. Scotland gave London a scare as polls showed the independence referendum was too close to call, but ultimately voted to remain in the UK. For the week, the DJIA rose 1.7%, the S&P500 gained 1.3% and the Nasdaq added 0.3%.

Heading into Wednesday's Fed decision, there were expectations that the FOMC might drop the "extended period" language in order to prepare the way for its exit strategy. Instead, Fed Chair Yellen again highlighted in her press conference that the Fed's language has always been conditional and data-dependent, and said the Fed's views about the outlook had not changed much, which meant that there was little need to adjust the wording. While the Fed statement and Yellen's press conference could hardly be called hawkish, changes to the dot chart clearly suggested a greater willingness to tighten policy in 2015 and 2016. Another surprise was the release of a general outline of principles for the process of normalizing policy, which included the statement that interest on excess reserves (IOER) would be the primary tool for moving the fed funds rate and overnight repos would be a secondary tool for moving rates.

On Thursday the ECB disclosed lenders borrowed a mere €82.6 billion in four-year loans from its new TLTRO facility, falling well short of expectations for take-up of €133 billion. Bond yields dropped and the euro slipped on speculation that the very weak showing in the centerpiece of the ECB's big June effort at policy action increased the likelihood of the central bank launching more measure next year to stave off deflation, possibly including full-fledged QE (aka sovereign bond buying). German bunds fell to fresh all-time lows around 1.04% on Friday.

Scottish voters rejected independence (45% for Yes vs 55% for No) on Thursday, choosing to remain part of the United Kingdom. Alex Salmond, one of the driving figures behind the anti-UK forces, resigned as Scotland's First Minister following the defeat. UK Chancellor Osborne had said that if Scotland voted "No," the UK government would devolve more powers to Scotland, powers which could amount to effective home rule. UK PM Cameron is expected to make an announcement soon regarding an overhaul of local governance in Britain, while the Labor Party is calling for a constitutional convention.

The Ukraine Parliament passed a new law granting rebel-controlled regions of eastern Ukraine self-rule and offering amnesty to anti-government fighters. The measures are in line with the ceasefire agreement signed by President Poroshenko in early September. Meanwhile, fighting continued all week in hotspots in the east, most notably as rebels tried to force government forces away from the Donetsk airport. There were also reports of shelling and troop movements around Mariupol. Poroshenko was in Washington this week, asking for financial and military aid for his country. "We cannot fight a war with blankets," he said in his address to a joint session of Congress.

The Alibaba IPO frenzy dominated headlines later in the week. It priced at $68 on Thursday and opened at $92.70 on Friday morning. Shares quickly jumped to $99.70 before settling back to about $92 in afternoon trading. In the IPO the company raised $21.8 billion, for the largest IPO in the history of the US stock market, and that figure could rise to $25 billion with overallotments. Alibaba's total market cap is around $228 billion, making it bigger than Amazon, Intel, or IBM. Yahoo stands to make more than $10 billion on the IPO, as it plans to sell around 5% of its 22.4% stake. Japanese wireless carrier Softbank owns more than a third of the shares, a stake worth over $70 billion.

Sales of the new Apple iPhone began on Friday, although some of the shine was taken off possible volumes by a report that the new model may not be sold in China this year. The story said Apple failed to reach an agreement with the country's Ministry of Industry and Information Technology this month, which might push the launch of the iPhone 6 in China to 2015. In addition, there were reports that Apple would unveil two new iPad models and release of OS X Yosemite on October 21st.

Steel names gained on strong guidance ahead of earnings season out of US Steel, Nucor and Steel Dynamics. US Steel said it would not proceed with a planned expansion at its iron ore pellet operations in Minnesota. As a result, US Steel said to expect Q3 results significantly higher than current consensus EPS estimates. Nucor offered very strong Q3 results and also cited good market conditions. Steel Dynamics said strength in automotive, manufacturing, energy, and construction markets continue to improve.

Oracle CEO Larry Ellison stepped out of the CEO role, naming his two top executives, President Mark Hurd and CFO Safra Catz, to co-CEO roles. The announcement called some volatility in the stock, but on the conference call Ellison indicated the promotion was essentially in name only as he will remain at the company as chairman and CTO and said the three of them "will keep doing what we have been doing." Oracle's Q1 EPS and revenue missed expectations once again, and guidance for the second quarter wasn't great.

Shares of Rite Aid tanked 17% this week after the firm cut its FY15 forecast. Ironically, Rite Aid reported a second quarter profit nearly four times higher than a year ago on decent comps. However, the company warned it would see a decline in the pharmacy margin in the second half of the fiscal year.

On the M&A front, Dutch brewer Heineken was approached by SABMiller about a potential takeover, however Heineken's controlling family, which owns just over 50%, said it wanted to keep the company independent. There were separate reports that AB InBev was discussing financing options for a bid for SABMiller, although later reports said the financing was not for an SABMiller buy. Microsoft confirmed that it will pay $2.5 billion to acquire gaming developer Mojang, the firm behind the wildly popular game Minecraft. Rackspace shares cratered after it announced it had ended a months-long strategic review process and concluded it would remain independent.

In FX, the euro was stable though the first half of the week, with EUR/USD range bound around 1.2900. The very unsatisfactory TLTRO auction slammed the single currency down to 1.2835. Heading into the last days ahead of the Scotland vote, polls tilted toward the no vote, helping to strengthen the pound. Lows of the week in GBP/USD were around 1.6160, but by close of voting on Thursday the pair had moved up to 1.6520.

China's August economic data was worrying: industrial output growth slumped to its lowest rate in nearly six years, as electricity generation fell for the first time since 2009. Retail sales also slowed to a four-month low, while fixed asset investment contracted by 14% y/y to its lowest level in 2.5 years. Later in the week, August property prices registered a fourth consecutive m/m decline in 68 out of 70 cities. The PBoC's CNY500 billion SLF liquidity was a direct response to the data, and was estimated as the equivalent of a 50bps cut in the Reserve Requirement Ratio. The following day, PBoC also lowered the offered 14-day repo yield by 20bps to 3.50% - the lowest level since early 2011 - in a bid to further boost liquidity. Analysts have differed on the implications of these actions, as some suggested these reflect a more pronounced easing bias while others saw a diminished likelihood of an across-the-board reserve requirement cut. For the week, the Shanghai Composite closed down 0.1%.

- On Friday, the Japan cabinet office cut its September monthly economic assessment for the first time in 5 months. Officials pointed to soft private consumption, which remains weighed down by the April sales tax increase with an added headwind of rough weather over the past several weeks. On Friday, Japan PM Abe promised to continue with structural reforms, while also hinting at another corporate tax rate cut in 2015. Broad-based post-FOMC US dollar strength throughout the week pushed the USD/JPY exchange rate by another 2 big figures above the ¥109 level, helping Nikkei225 to a 2.4% weekly gain.