TradetheNews
01-08-2011, 06:59 AM
- Equity indices see-sawed through the first trading week of 2011 as volumes recovered from holiday lows even as sentiment remained directionless. Data out this week indicated the economic recovery is continuing apace for business, while key US jobs reports indicated the water is murkier for workers. The US December ISM manufacturing index gained for the 17th month in a row, with both the headline reading and the prices paid components hitting their highest levels since May, complimenting the strong US December PMI data out last week. In Europe, December PMI data from France and Germany was also relatively strong, although in China the December manufacturing PMI index declined for the first time in five months. The US December ISM services (i.e. non-manufacturing) index hit its highest levels in more than three years. Jobs data confounded analysts' estimates. On Wednesday the headline ADP jobs report for December came in at +279K, nearly three times the expected number. The data were met with immediate skepticism, and one analyst pointed out that the end-of-year ADP is often the victim of "quirky seasonal factors. The report measures the number of people on payrolls rather than the number of people actually working, and firms often keep all employees that worked some part of the year on their payrolls until December for tax purposes. Friday's December nonfarm payrolls data quelled the buzz cause by the ADP, posting a disappointing net increase of 103K, although the November numbers were revised higher and the official annualized unemployment rate dropped to 9.4% from 9.7% prior. Fed Chairman Bernanke testified before the Senate on Friday, commenting that while he does not believe the recovery is strong enough to produce good job growth yet, the economy will be getting better this year. For the week, the DJIA rose 0.8%, the S&P500 gained 1.1%, and the Nasdaq added 1.9%.
- Legal cases moved banking names higher and then lower this week. On Monday financial names leapt out of the gate on news that Bank of America had settled all mortgage putback suits with Fannie Mae and Freddie Mac. The bank said it would report $3B in provisions to cover the payments in its Q4 results, and also said the charges would not be material to its results. Then on Friday, in a ruling that may affect foreclosures nationwide, a Massachusetts' court voided the seizure of two homes by Wells Fargo and US Bancorp after the banks failed to show they held the mortgages at the time they foreclosed. It remains to be seen whether the decision will have a broader impact on the industry as it works through massive backlogs of foreclosed homes.
- December sales data from automakers and retailers painted a mixed picture of the US consumer at the end of 2010. US auto sales rose by the highest rate in more than a year and major automakers forecast better momentum in 2011 as the industry distances itself from one of its deepest slumps ever. GM's US vehicle sales rose 15.5% y/y and Ford's sales were up 6.7% y/y (both on an adjusted basis), while Toyota's sales fell 5.5%. December retail same-store sales reports were mixed, disappointing investors after relatively strong October and November comps. Apparel names Gap, American Eagle and Aeropostale, and big box stores like Target and Macy's missed expectations, some by very wide margins. Big outperformers from the past several months, including Kohl's, Costco and JC Penny, barely met the Street's projections. Among the better performing comps were Abercrombie & Fitch, TJX, Saks and Nordstrom.
- Fixed income markets saw quite a bit of action in the first week of 2011. Government bond yields were whipsawed back and forth by the data, while corporate bond markets saw aggressive issuance. The US 10-year yield entered the week around 3.3% and climbed to 3.45% following Wednesday's blowout ADP jobs figures. By Friday though, that benchmark rate had taken a round trip to 3.31% after the Bureau of Labor Statistics report handily missed inflated expectations. The Dec fed fund future briefly priced in the odds of an FOMC rate hike by year's end at more than 70% before drifting back below 50%. Corporations, especially high grade banks, were aggressive in raising money though debt offerings just as they were in early 2010. European institutions in particular, rushed to get ahead of an upcoming wave of refinancing for government guaranteed bonds as well as leverage dollar denominated issuance to cut funding costs.
- The first trading week of the year in FX featured plenty of renewed risk appetite, with weaker CHF and JPY indicating investor confidence in the sustainability of the global economic recovery. The dollar strengthened all week long against the euro as lingering concerns about the European sovereign debt situation continued to hurt the single currency. Among the negative peripheral factors was Portugal's six-month bill auction, which was well bid but also saw sharply higher yields than the September auction for the same maturity. The same day, the Swiss National Bank said it would not accept any more Irish government bonds as repo collateral and PIMCO said it would not buy any more Irish debt (or any more peripheral European debt at all, for that matter). The day after that, the EU circulated proposals related to future bank failures that could force debt holders to participate in bailouts. The euro was barely able muster a limited bounce on press reports that China would purchase €6B in Spanish debt, with some dealers sarcastically pointing out that China made no mention of the other €394B in support that Spain would likely require. EUR/USD slid from highs above 1.3400 on Tuesday to four-month lows below 1.2910 on Friday. It's worth noting that history teaches us that the price action in EUR/USD in the month of January tends to mark either the high or the low for the pair in the remainder of the year.
- Dealers debated the fate of the USD/JPY, after the yen benefitted through late December from year-end repatriations flows and tested below 81.00. The New Year saw an ebbing of repatriation flows and the pair found the momentum to surge above key hourly resistance of 82.20. The yen ended the week off its worst levels as shorter tem US yields headed lower post payrolls while still maintaining a firm tone above the 83 handle. EUR/GBP saw decent model flows, helping Sterling's generally firmer tone.
- Down under, the worst flood in decades submerged some areas in Australia's mining-heavy state of Queensland under as much as 10 meters of water. Force majeure remained in place for Xstrata, Anglo American and Rio Tinto, among others. Other commodity names such as MacArthur Coal have begun cutting their near-term earnings outlook. Supply disruptions sent metals, materials and soft commodities higher early in the week, as March copper rose to record high $4.50/lb while wheat prices saw 5-month highs above $8.20. The high-flying Australian dollar was also visibly shaken, falling below parity with the USD, hitting a 2-week low as traders priced in lower export activity. Although the Australian central bank is not expected to meet before February 1st, RBA Board Member McGauchie suggested "substantial damage" to infrastructure from the floods will have a significant impact on shipping flows and the overall economy.
- Legal cases moved banking names higher and then lower this week. On Monday financial names leapt out of the gate on news that Bank of America had settled all mortgage putback suits with Fannie Mae and Freddie Mac. The bank said it would report $3B in provisions to cover the payments in its Q4 results, and also said the charges would not be material to its results. Then on Friday, in a ruling that may affect foreclosures nationwide, a Massachusetts' court voided the seizure of two homes by Wells Fargo and US Bancorp after the banks failed to show they held the mortgages at the time they foreclosed. It remains to be seen whether the decision will have a broader impact on the industry as it works through massive backlogs of foreclosed homes.
- December sales data from automakers and retailers painted a mixed picture of the US consumer at the end of 2010. US auto sales rose by the highest rate in more than a year and major automakers forecast better momentum in 2011 as the industry distances itself from one of its deepest slumps ever. GM's US vehicle sales rose 15.5% y/y and Ford's sales were up 6.7% y/y (both on an adjusted basis), while Toyota's sales fell 5.5%. December retail same-store sales reports were mixed, disappointing investors after relatively strong October and November comps. Apparel names Gap, American Eagle and Aeropostale, and big box stores like Target and Macy's missed expectations, some by very wide margins. Big outperformers from the past several months, including Kohl's, Costco and JC Penny, barely met the Street's projections. Among the better performing comps were Abercrombie & Fitch, TJX, Saks and Nordstrom.
- Fixed income markets saw quite a bit of action in the first week of 2011. Government bond yields were whipsawed back and forth by the data, while corporate bond markets saw aggressive issuance. The US 10-year yield entered the week around 3.3% and climbed to 3.45% following Wednesday's blowout ADP jobs figures. By Friday though, that benchmark rate had taken a round trip to 3.31% after the Bureau of Labor Statistics report handily missed inflated expectations. The Dec fed fund future briefly priced in the odds of an FOMC rate hike by year's end at more than 70% before drifting back below 50%. Corporations, especially high grade banks, were aggressive in raising money though debt offerings just as they were in early 2010. European institutions in particular, rushed to get ahead of an upcoming wave of refinancing for government guaranteed bonds as well as leverage dollar denominated issuance to cut funding costs.
- The first trading week of the year in FX featured plenty of renewed risk appetite, with weaker CHF and JPY indicating investor confidence in the sustainability of the global economic recovery. The dollar strengthened all week long against the euro as lingering concerns about the European sovereign debt situation continued to hurt the single currency. Among the negative peripheral factors was Portugal's six-month bill auction, which was well bid but also saw sharply higher yields than the September auction for the same maturity. The same day, the Swiss National Bank said it would not accept any more Irish government bonds as repo collateral and PIMCO said it would not buy any more Irish debt (or any more peripheral European debt at all, for that matter). The day after that, the EU circulated proposals related to future bank failures that could force debt holders to participate in bailouts. The euro was barely able muster a limited bounce on press reports that China would purchase €6B in Spanish debt, with some dealers sarcastically pointing out that China made no mention of the other €394B in support that Spain would likely require. EUR/USD slid from highs above 1.3400 on Tuesday to four-month lows below 1.2910 on Friday. It's worth noting that history teaches us that the price action in EUR/USD in the month of January tends to mark either the high or the low for the pair in the remainder of the year.
- Dealers debated the fate of the USD/JPY, after the yen benefitted through late December from year-end repatriations flows and tested below 81.00. The New Year saw an ebbing of repatriation flows and the pair found the momentum to surge above key hourly resistance of 82.20. The yen ended the week off its worst levels as shorter tem US yields headed lower post payrolls while still maintaining a firm tone above the 83 handle. EUR/GBP saw decent model flows, helping Sterling's generally firmer tone.
- Down under, the worst flood in decades submerged some areas in Australia's mining-heavy state of Queensland under as much as 10 meters of water. Force majeure remained in place for Xstrata, Anglo American and Rio Tinto, among others. Other commodity names such as MacArthur Coal have begun cutting their near-term earnings outlook. Supply disruptions sent metals, materials and soft commodities higher early in the week, as March copper rose to record high $4.50/lb while wheat prices saw 5-month highs above $8.20. The high-flying Australian dollar was also visibly shaken, falling below parity with the USD, hitting a 2-week low as traders priced in lower export activity. Although the Australian central bank is not expected to meet before February 1st, RBA Board Member McGauchie suggested "substantial damage" to infrastructure from the floods will have a significant impact on shipping flows and the overall economy.