Showing posts with label tradethenews. Show all posts
Showing posts with label tradethenews. Show all posts

Friday, September 23, 2011

Market Week Wrap-up

Trade The News Weekly market update: Market Week Wrap-up

- Global markets entered liquidation mode this week as the European debt crisis seemed to morph into a European banking crisis and the Fed launched 'Operation Twist,' to terrible reviews. Equities, metals (precious and base), energy and key currencies racked up steep losses heading into week's end as fears of the global economic slowdown plus the Europe situation drove risk into the woodshed. The IMF issued its World Economic Outlook, warning that Europe and the US could slip back into recession in 2012 unless they dealt with problems that were threatening to infect the rest of the world. A round of weak September European PMI data added to baseline risk aversion, including China reporting another sub-50 reading in flash PMI. In its policy decision on Wednesday, the FOMC altered its statement language to read "there are significant downside risks to the economic outlook." The committee also said it would extend the average maturity of securities held on the Fed balance sheet by buying $400B in longer-dated securities and selling shorter-dated notes. While the amount is greater than some observers had expected, the response among analysts was still generally negative, with some decrying the move as ineffectual, some saying it would destroy bank profitability and other calling the move a poorly thought-out QE3. Adding to the growing sense of uncertainty, a looming impasse over a six week stop gap funding measure in the US Congress is again threatening a government shutdown. Global equities saw a massive sell-off in Thursday's session as investors coped with the Fed move, heard the growing consensus that Greece will default while remaining inside the euro zone and threats and worried about the state of the European banking system. For the week the DJIA lost 6.4%, the S&P500 dropped 6.6%, and the Nasdaq fell 5.3%.

- Ongoing policy skirmishes in Washington were hard to ignore this week. On Monday, President Obama handed Congress a $3.5T deficit reduction bill, including $1.5T in funds from his so-called "Buffett Rule" to boost tax rates for those who earn more than $1M. The move provoked howls of protest from the right, which branded the effort "class warfare." The plan will be submitted to the Congressional debt reform super committee, which is mandated to come up with at least $1.2T in budget cuts by November 23rd. In Congress, a routine short-term government funding bill blew up into a battle that could result in a government shutdown in October. With FEMA's war chest running low after the disasters of recent months, the House GOP leadership tried and then failed to pass the government bill that included much less than the requested amount for FEMA and sought to pay for the funds by cutting billions from a program to help car factories retool for building more fuel-efficient vehicles. A total of 48 conservative Republicans defied the leadership on the bill, saying it did not include enough spending cuts. A slightly reconfigured bill passed the House thanks to some arm twisting, although the Democratic-controlled Senate voted down the measure, setting Congress up for more conflict next week.

- In equity news, US bank and insurance stocks were slammed in the wake of the new Fed policy, as investors forecasted that financial sector profits would be hurt by the flattening yield curve. In addition, Moody's downgraded ratings on Bank of America, Citigroup and Wells Fargo due to the decreased probability that the US government would support the banks in the event of a crisis. FedEx only just topped expectations in its Q1 report and trimmed its FY12 outlook slightly. FedEx's CEO said that recession is not part of the forecast at the moment, although he does expect sluggish growth. Homebuilders Lennar and KB Homes both reported Q3 results that were much better than expected, and additionally both demonstrated healthy y/y growth in their new order rates. Following Patriot Coal's move last week, two more major coal producers cut production guidance. Alpha Natural Resources and Walter Energy reduced their forecasts based on lower-than-expected output due to negative events at their mines. Hewlett-Packard's board abruptly dumped CEO Apotheker and named former eBay CEO Meg Whitman as the new chief.

- In deal news, Tyco International - which was the focus of various takeover rumors late last week - is moving to separate its businesses into three independent publicly traded companies. The company plans to spin off three units to shareholders, including the ADT North America residential security business, the flow control products and the services and the fire and security business. United Technologies said it would acquire Goodrich for $18.4B in cash, at $127.50/shr. The deal helps UTX gain heft in new aircraft technology and plane services. The company will issue about $4.6B in new shares to fund the deal and cut its spending on share buybacks as it digests its biggest acquisition in a decade.

- Government bond markets continued to make historic moves in Europe and the United States. Tensions surrounding Greece and contagion effects ratcheted up borrowing costs in Europe once again, leading to several reports that in some cases lenders were choosing to pull out of the market all together. Layered on top of deteriorating economic data and the Fed's decidedly disconcerting statement on US growth prospects, safe haven flows sent both yields to new historic lows. Operation Twist had the desired effect, flattening the curve substantially by forcing buyers to the longer end. The US 30-year yield decline by roughly 50 basis points on the week to finish at 2.85% while the 10-year touched a new all time low at 1.7%. In terms of spreads, the US 10-2 year narrowed towards 150 basis points while the 30-10 year declined to 106 from 126 basis points on the week.

- Fears about a Greek default were stoked by conference calls between Greece and IMF/ECB/EU troika officials on Monday and Tuesday. Both sides discussed more measures Greece would need to take to secure the next aid tranche. But the main focus in Europe this week moved on to the delicate state of the continent's financial sector, where fluctuating bank shares reflected investor worries that whatever happens in Athens, a European bank crisis may be inevitable. Tension built on reports that more entities were cutting exposure to European banks, especially after German industrial giant Siemens pulled funds from a French bank and Chinese state banks appeared to sever swap lines with several European counterparts (the Chinese claimed the lines were "full"). On Thursday, reports that the EU was speeding up recapitalization of the 16 mid-tier banks that came close to failing last summer's EU stress tests made the rounds, and on Friday there were reports that France was mulling a unilateral TARP-like program to aid its banks. Even US banks were not immune: one speculative research report making the rounds asserted that Morgan Stanley could have significant exposure to French banking contagion, though it was quickly denied.

- EUR/USD continued the slide seen last week as an endless stream of negative European news and contradictory official rhetoric hammered the single currency. By Friday the technical picture played a role in curbing euro declines as EUR/USD found Fibonacci support around 1.3410, which corresponded to a 50% retracement of the 1.1875 June 2010 low to 1.4939 May 2011 high. In addition, dealers said that there were hopes late in the week that the annual gatherings of the IMF and the World Bank could provide an opportunity to coordinate a fresh round of measures to stem the spread of the crisis. The ECB continued to buy peripheral bonds for the sixth straight week, although Spanish and Italian 10-year yields are higher than ever.

- Sterling slumped after the most recent policy minutes indicated the BoE was ready to provide more stimulus. The vote for QE was 8-1, and the contents of the minutes painted a more dovish view among MPC members. The yen continued to maintain a firm tone. USD/JPY lingered about 25 pips above fresh all-time lows, EUR/JPY hit fresh 10-year highs and GBP/JPY reached all-time highs. With the end of the Japanese fiscal half-year fast approaching, repatriation seems to be generating JPY demand. There were rumors circulating mid-week that the Swiss National Bank might raise the EUR/CHF floor from 1.20 to 1.25, sending EUR/CHF from 1.2060 to test above 1.22 before retreating. Swiss officials would not comment on the market rumors, although dealers said it would be in the SNB's interest to keep investors guessing about where they intend to maintain the floor.

- In Asia, the China flash manufacturing indicator from HSBC echoed the largely disappointing PMI data in Europe, falling to 49.4 from 49.9 prior. Recall that last month marked the first increase in four months, raising some speculation that the downturn in Chinese production has run its course. Instead, this most recent print makes it a third consecutive month that China HSBC PMI data is in sub-50 contraction territory.

- In New Zealand Q2 GDP was also a disappointment, with 0.1% q/q increase coming well shy of 0.5% consensus. The New Zealand dollar sold off sharply to a five-month low of $0.7750 against dollar and also hit a one-week low against its slumping relative AUD. The Reserve Bank of Australia September meeting minutes suggested the markets are overestimating the bank's willingness to cut rates in the face of global turmoil, hinting that it is too early to assess the extent of this crisis. Later in the week, S&P revised the outlook for South Australia region to negative from stable, but affirmed the AAA rating of the sovereign, pointing to strong mining exports and private investment in the resources sector.



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