Friday, November 7, 2014

Market Week Wrap-up Weekly Market Update: Calm Returns After a Month of Volatility
Fri, 07 Nov 2014 16:08 PM EST

Global equity markets moderated their charge higher this week, flattening out a bit even as the DJIA and S&P500 marked fresh all-time highs. US equities have more than filled the gap left after October's slide, while Europe is just over halfway back. The Shanghai index marked 20-month highs despite some concerning Chinese data. The Chinese manufacturing and services PMIs for October suggested the economic pullback is not over in the middle kingdom, with the services index at a nine-month low and the manufacturing series at a five-month low, although both remain in expansion territory. In the US, elections and the October jobs report were the big themes, while crude prices may have found a short-term floor. In Europe, conflict at the ECB provided entertaining headlines, but Draghi's post-policy meeting press conference offered nothing new. For the week, the DJIA gained 1.1%, the S&P500 rose 0.7% and the Nasdaq added less than 0.1%.

The October US non-farm payrolls total of +214K was slightly less than expected, but the unemployment rate still fell to 5.8% from 5.9% its lowest level since early 2008. Analysts highlight that this is the ninth straight month of +200K payrolls growth, the longest stretch since 1995. The prior September payrolls were revised slightly higher. Note that weekly earnings and hours worked were pretty much unchanged even as unemployment gets closer to full employment around 5.0-5.2%, boosting pressure for Fed rate hikes. Goldman Sachs Chief Economist Hatzius commented that the defects in the report were a signal of how much slack remains in the labor market.

Various Fed officials commented on the road ahead for US monetary policy now that QE had ended and the rate hike guessing game has begun. On the dovish end of the spectrum, new dissenter Kocherlakota reiterated that raising rates in 2015 would be a mistake. Fisher, a hawk, said the FOMC has neutered the "considerable time" concept, and the key indicator for policy remains unemployment. Mester, Plosser's hawkish replacement in Cleveland, said she would have liked the "considerable time" language removed and said the Fed funds rate would be 3.75% eventually. Moderate Bullard said the FOMC has agreed to keep the balance sheet at its current size for now. According to Bullard, the rate lift off will come first and only then will the Fed consider selling off assets in a passive and gradual process.

The Republican Party had a very good night at the polls on Tuesday, easily winning the six seats they needed to take control of the Senate and greatly expanding their majority in the House. This marks the first time the GOP has controlled both houses since 2006. GOP candidates avoided setbacks in all of the key battleground states. President Obama made conciliatory comments about finding areas to cooperate with the GOP, but few expect great things. Various asset classes have reacted to the elections, but none so much as the coal complex. Coal stocks moved up on the news on hopes of favorable treatment from presumed Senate Majority Leader McConnell: Alpha Natural Resources gained 30% through week's end, while CNX was up 5%.

The Russian ruble broke above 45 to the dollar for the first time ever amid plunging oil prices and the Bank of Russia announcing it might use some of its foreign currency reserves or even its gold bullion reserves to pay for imports if Western sanctions over Ukraine continue. The central bank tried to jawbone panicky markets by promising to limit interventions to $350M a day (they have been around $1-2B per day in late Oct/early Nov), and also shifted the free-float corridor. The moves did little to staunch the bleeding and USD/RUB peaked around 48.75. Friday morning saw some firming in the ruble as the central bank declared that it could implement currency interventions at any time without warning.

Crude prices may have found a short-term bottom this week, after WTI futures dipped briefly below the key psychological level of $75 on Monday. There was some commotion after Saudi Arabia adjusted its prices (cut US prices, raised Europe and Asia prices), with January WTI delivery futures moving above December futures, putting the market briefly in contango, although the Kingdom said it was just a regular seasonal adjustment. Later in the week, OPEC reduced its price and demand expectations in the long-term World Oil Outlook. OPEC Chief El-Badri said oil prices had fallen too far in the absence of major changes in fundamentals, claiming that speculation has driven the decline in prices.

October US auto sales came in at the expected pace. Ford's sales were negative for a second month in a row, led lower by declines in truck sales. GM's October US sales were more or less flat, after a big y/y gain in September. Chrysler continues to see booming sales, with the October y/y gain up at a strong, double-digit rate. Toyota, Honda and especially Nissan saw very good US sales growth in the month.

On the M&A front, US digital marketing firm Sapient has agreed to be acquired by Publicis Groupe for $3.7 billion in cash. With the acquisition of Sapient, Publicis says "digital revenues will account for more than 50%," some three years ahead of its 2018 plan. The pharma consolidation dance continues: LabCorp agreed on Monday to buy Covance for about $6.1 billion in cash and stock, taking control of one of the biggest providers of contract medical research.

The dollar strengthened firmly against most major pairs in the week following the end of Fed QE as FX traders talked about yield divergence between the US and the rest of the developed world. The most dramatic moves were against the ruble, although this is admittedly a special case. Some drama at the ECB helped EUR/USD move out to 27-month lows under 1.2400 midweek. Ahead of the ECB rate meeting, a press report citing sources claimed that committee members were planning to challenge President Draghi and critique his leadership style at the governors' dinner on Wednesday. Thursday's press conference was uneventful and Draghi merely reiterated his dovish stance. Draghi indirectly addressed the discord story by highlighting that the council remains unanimous in its commitment to using more unconventional measures (though not necessarily agreeing on which unconventional measure might be used).

The EUR/CHF cross edged closer to the SNB's 1.2000 line in the sand. The weakening euro could very well prompt the SNB to officially intervene for the first time since 2012 to defend its floor. SNB Governor Jordan commented that the upcoming Swiss referendum on gold could make defending the floor defense more difficult. On November 30th, the Swiss will vote in a referendum on a measure to require the bank to build its bullion position up to at least 20% of total assets from 8% today. Given the bank's current $544 billion of assets, it would have to buy at least 1,500 tons of gold to get to the required threshold by 2019.

Trading in USD/JPY pair remained volatile in the wake of surprise BOJ stimulus announcement last week, reaching a fresh 7-year high above 115.50 before coming in toward the low 114 range going into the weekend. South Korea, whose export economy is particularly impacted by the competitive yen weakness, stepped up its jawboning aimed at the Japanese stimulus with intention to "manage KRW moves in line with JPY". Volatility also returned to trading in the Aussie currency, as AUD/USD hit fresh 4-year lows below $0.8650. The Reserve Bank of Australia Quarterly Policy Statement maintained its outlook on growth through 2016, but renewed its attack on the exchange rate and also lowered its forecast for headline inflation for 2014-end and 1H15 by 0.25pts.

The Shanghai Composite traded sideways for much of the week, bumping along 20-month highs around 2,420. The balance of China October PMI data was mixed - HSBC Final manufacturing PMI of 50.4 confirmed a 3-month high, while the official non-manufacturing survey struck a 9-month low. HSBC noted that the "manufacturing sector continued to stabilize in October, however the sequential momentum likely weakened", with property downturn-related uncertainty and slow pace of global recovery justifying further easing measures. The PBoC's Q3 Monetary Policy Implementation Report confirmed a new liquidity tool that siphoned another CNY770B in funds to China's top lenders over the past two months with a 3.5% interest rate. Over the weekend, China Customs Office will post its October trade figures, estimated to show a $42B surplus.