Friday, December 5, 2014

Market Week Wrap-up

TradeTheNews.comContrast Grows Sharper Between US and the Rest
Fri, 05 Dec 2014 16:15 PM EST

Markets got off to a weak start on Monday, with fluky US Thanksgiving sales numbers and weak PMI data in Europe and China weighing on global stocks. The ECB intervened verbally again on Thursday indicating that it is very close to launching a full-fledged QE program, although the final details of the campaign appear to still be under discussion. The Yen kept sliding amid the Japanese Prime Minister's rush for a new mandate for Abenomics with elections scheduled for Dec 14th, and Moody's cut Japan's sovereign rating thanks to heightened uncertainty over the government's political objectives. US equity indices were once again testing all-time highs on Friday after a stunning November US jobs report helped close out a seventh straight week of gains. In China, the Shanghai Composite continued to mark 42-month highs. The blowout US jobs report cut both ways, with the Fed now facing another data point that suggests rates need to rise sooner rather than later, though markets showed little sign of panicking yet over the prospects of a Fed 'rate lift off.' Despite the blockbuster jobs data, the spread between the10-year TIPS and the 10-year Treasury remained at a three year low, indicating that markets are still more concerned about the disinflationary effects of falling oil prices and the global economic malaise. For the week, the DJIA rose 0.7% nearing the 18,000 milestone, while the S&P500 gained 0.4%, and the Nasdaq slipped 0.2%.

The November non-farm payrolls report delivered its highest reading in more than three years, while the October non-farm total was revised up by more than 10%. Along with big payrolls gains came a surprising m/m bump up in hourly earnings, which was twice the expected rate. Between the ECB statement and the US jobs report, the dollar saw another week of strong gains. EUR/USD briefly testing below 1.2280 and USD/JPY hit a fresh 7.5-year high near 121.70 on Friday.

At the post-decision press conference, ECB President Draghi outlined his thinking about the shape of a potential QE program and said the committee would not tolerate a prolonged period of low inflation. He indicated the ECB was mulling purchases of any class of asset except gold and foreign assets and a subsequent press report suggested the ECB would most likely buy bonds but not equities. As for the launch date, he suggested the program would start in early 2015, but not necessarily at the January meeting. Obliquely addressing German resistance to sovereign QE, Draghi reminded listeners that the ECB does not need unanimity to proceed on QE and has made decisions that were not unanimous in the past.

The five-month slide in oil prices moderated somewhat this week, although both Brent and WTI futures ended below $70. An unexpected drawdown in crude stocks seen in the weekly DoE inventories report briefly arrested the price drop mid-week, although shares of shale producers continued their steep declines. According some reports Saudi Arabia is eyeing $60/barrel Brent crude as a floor where oil prices could stabilize, while separate reports indiscated crude sold at the wellhead in the Bakken shale region in North Dakota was being discounted to under $50 a barrel in some cases.

Black Friday sales numbers revealed a stark and growing divide between brick-and-mortar sales and online sales. According to ShoppperTrak, Black Friday shopping at physical stores was down about 7%, while IBM data showed online Black Friday sales were up 9.5% y/y. A National Retail Federation survey covering Thanksgiving Day through Sunday showed total spending was down 11% y/y. One bright spot: auto sales. There were reports that Black Friday auto sales grew 10% y/y, helping to boost November SAAR to 17.2M, the strongest pace since 2003.

Thanks to that boost in holiday weekend sales, most of the major automakers beat expectations for November US car sales. Chrysler again led the pack with a 20% y/y increase, while GM saw a more modest 6% gain. Nissan's sales were down on a y/y basis but still better than expected, while Toyota eked out a slight gain. Ford was the laggard, with sales down 2%, right in line with consensus estimates, while truck sales flagged, mostly due to the changeover to the highly anticipated 2015 models.

Apple suffered a minor flash crash on Monday morning just after the open of cash trade. Shares of AAPL plummeted 6.4% in one minute as trading algorithms sold the name hard for no apparent reason. Post-hoc rationalizations of the sudden move included Morgan Stanley's downgrade of the tech sector from overweight to market weight, including a recommendation to trim positions in Apple, although the news had been out for hours by the time of the mini-crash.

A nearly 10% gain for the week in Shanghai Composite - it's best week in 5 years - has given the mainland index an almost 40% rise for the year, even though the manufacturing and services PMI figures out this week were not stellar. Official manufacturing and final HSBC prints hit 8-month and 6-month lows respectively, while Services PMIs edged slightly higher. Nevertheless, the early Santa Claus rally in the Far East is in full swing, as the tailwinds of the recent PBoC interest rate cuts and analyst expectations for even more easing are lifting the relatively undervalued A-shares. The Shanghai index could continue its roll on next week's data, beginning with the release of the November trade balance on Sunday night ET.

On Monday, Moody's registered a vote of no confidence in Abenomics, cutting Japan's sovereign rating one notch, citing heightened uncertainty over the achievability of fiscal deficit reduction targets after a sales tax hike was delayed. A brief market reaction to the Moody's action was quickly absorbed and then the yen and Nikkei Index resumed their relentless rise. The Nikkei225 ended the week up 2.6% above 17,900, and will likely test the 14-year high around 18,300 early next week given continued sharp gains in the USD/JPY pair after the US jobs data. Japan's focus now turns to Sunday's release of the final Q3 GDP data which is likely to get a lift from much stronger than expected CapEx figures out this week, as well as the final stretch of political campaigning ahead of the December 14th parliamentary elections.