TradetheNews
02-12-2011, 08:16 AM
- It has been a relatively quite week in markets, with little consequential data on tap, earnings season slowly winding down and the eyes of the world glued to the dramatic scenes in Egypt. US and European equity indices have made further steady gains, driven higher by positive quarterly earnings and a handful of major merger announcements. The fall of Egyptian President Mubarak on Friday also helped goose markets a bit higher. On the other hand, emerging market bourses continued to move lower on fears about policy tightening to cope with troubling levels of inflation-Brazil's Bovespa, for example, hit its lowest levels since August. Indeed inflation has emerged more acutely as a real problem in the first months of 2011, with warnings on the issue heard again from numerous central bankers and corporate executives this week. In the UK, the January PPI Input index racked up its biggest y/y increase in more than two years. On Tuesday the PBoC raised key rates by 25 basis points, continuing its gradual policy tightening campaign to clamp down on an overheating economy, although markets took the move in stride. US Treasury yields rose markedly on more concerns about rising prices, and some hawkish Fed speak sustained the upward pressure. Fed Chairman Bernanke testified before the Senate, once again defending the QE2 bond buying program. Bernanke warned that the Fed will need to start withdrawing accommodative monetary policy before reaching more normalized levels of unemployment (defined as 5-6%), and also highlighted that financial markets are not indicating expectations for higher inflation. For the week, the DJIA rose 1.5%, the Nasdaq gained 1.4% and the S&P500 was up 1.4%.
- In perhaps the most controversial earnings report of the last several weeks, Cisco's second quarter results upset the market and saw its shares fall more than 14%, to their lowest level in a year and a half. Markets were disappointed by eroding margins and remain concerned that competition and dwindling public sector spending are capping the company's profits. Multiple analysts cut the name, although a few suggested the declines were a buying opportunity. The losses continue at Sprint, although the firm's metrics indicate it is creeping slowly towards a turnaround in its troubled business. Levels of churn dropped to near all-time lows, while net customer additions continue to grow, hitting all-time highs in the pre paid segment. Akamai fell sharply after meeting expectations in its quarterly results but offering weak profit guidance. Video game maker Take Two crushed expectations in its Q3 and raised guidance, while competitor Activision Blizzard met expectations in its Q4 and guided lower as it announced it would discontinue its Guitar Hero game, once a blockbuster franchise.
- Insurance giants MetLife, Prudential and Allstate reported fourth-quarter results yesterday evening. MetLife's performance was thoroughly in line, with no real surprises. Prudential's profits were well ahead of expectations. Allstate missed earnings estimates by a wide margin, and blamed the weather and other catastrophe losses for its poor showing.
- Various firms discussed the troubling impact that higher input costs may have during 2011. PepsiCo reported solidly in line results, but executives warned that 2011 commodity cost inflation would be +8-9.5% y/y. Kraft Foods also met expectations, although it cut its FY11 earnings outlook slightly. In comments accompanying the report, Kraft said it expects to face significant input cost inflation. Pilgrim's Pride's quarterly profits were way ahead of expectations. Executives from the poultry power warned that they were concerned about much higher grain prices, even though 100% of needs were covered until early August. Among other consumer facing stocks, Disney's Q1 results came in comfortably ahead of expectations, with strong y/y revenue growth seen at most of its key units. McDonalds reported very strong month of same-store sales gains for January.
- On Friday the Obama administration outlined proposals to wind down Fannie and Freddie and significantly reduce the government's role in the mortgage market. The plan would bring the GSEs' market share down to 40% over the course of five to seven years and make the private sector is the dominant provider of mortgage credit. In an interview aired on CNBC, Treasury Secretary Geithner said he expects the cost of mortgages will rise modestly over the long run if the plan is implemented, something he would like to see happen within two years. Analysts caution that whatever plan emerges will likely be molded and implemented by Congress, which presents substantial uncertainties. Private mortgage insurers, which stand to benefit substantially from the plan, gained significantly on the announcement.
- In M&A news, Ensco said it would acquire rival Pride International for about $7.3B, in a transaction that would create the world's second-largest offshore oil and gas driller. The deal sets the purchase price at $41.60/share, a premium of 21% to Friday's close. The media was abuzz with news that AOL bought the Huffington Post for $315M, valuing it at five times annual revenue, in an effort to build the content side of the business. Danaher closed a deal to acquire medical diagnostics name Beckman Coulter for $83.50/share in cash, for a deal valued at $6.8B. The Toronto Stock Exchange announced that it was holding advanced merger talks with the London Stock Exchange. A merger of the two companies would create the world's 7th largest exchange, with a market cap of £5.5B. This news was quickly overshadowed by reports that the NYSE/Euronext and Deutsche Boerse were back in talks for a tie-up.
- Uncle Sam began unloading $72 in coupon supply with a mediocre 3-year auction on Tuesday. By the next day the 10-year yield hit its highest level in roughly 10 months at 3.77%. A subsequent stellar 10-year auction helped put in a floor for prices that lasted through the remainder of the week. Similar to last week, short term rates continued to inch higher as well. The 2-year/30-year and the 2-year/10-year spreads were narrower on the week, sitting at around 390 and 280 basis points respectively. US mortgage rates have moved back above 5% for the first time since May.
- Much of the commentary this week focused on the debate emerging around the recent aggressive move up in rates. Bond vigilantes argued that this is just the beginning of dramatic cyclical move higher as investors price in growing long-term inflation expectations and deficit projections. Others counter that rates have come up too fast and may be reaching a point where Treasury yields will begin to look more attractive relative to other assets classes. Regardless of which side you are inclined to believe, it is clear investors' flourishing risk appetite continues to pull money away from the relative safety and modest returns in government bond markets. Major US equity indices were up eight straight sessions before minimal declines broke the streak on Thursday. It's even more telling that the average junk bond yield fell below 7% for the first time in more than five years and currently stands near an all-time low.
- The euro strengthened steadily through late Wednesday this week, aided by higher risk appetite and sovereign demand. Rebalancing FX levels in Asia continue to support the single currency on the dips in EUR/USD. More support came from the much lower than expected take up of ECB's 7-day liquidity operation, which was especially welcome given the looming stress tests for the EU banks. Debate raged over the sentiment driving higher yields on US Treasuries. FX dealers wondered about the impact on trading, asking themselves if the euro wasn't losing ground as US yields rose, what would happen if US yields fell in the wake of the upcoming round of auctions.
- EUR/USD sentiment turned around as rising yields on Portuguese government debt fueled concerns that the nation would need to request a Eurozone bailout sometime soon. The outright yield on the Portuguese 10 year rose above the 7.5% area and the 5-year note was nearing 7.0%, reaching post-euro launch highs, and levels at which both Ireland and Greece were both forced to request aid. Portugal faces a huge round of debt redemptions in April. There are concerns that at this point Portugal could fall prey to speculators, prompting the ECB to step in and buy Portuguese debt. Portuguese officials expressed confidence that they would be able to continue to finance the nation in open debt markets. The fate of German Bundesbank hawk Axel Weber was another topic of great interest this week, as rumors made the rounds suggesting that he did not want to succeed ECB President Trichet after the latter's term expires in October. The week ended with Weber being summoned to Chancellor Merkel's office after which he promptly resigned, effective April 30, leaving the ECB President without a clear successor.
- Sterling approached 1.62 early on in the week after the Sunday Times reported that the shadow MPC expressed opposition to an interest rate increase amid rising inflationary pressures ahead of this week's MPC decision. Attention turned to news that the UK government raising its levy on bank profits to £2.5bln this year. On Thursday the Bank of England held its key interest rates steady at 0.50% and maintained its asset purchase target at current levels of £200B.
- USD/JPY was re-approaching last week highs of 82.50 as US rates headed higher. FX dealers noted a higher US 2-year interest rate usually corresponds with higher USD/JPY. One European dealer said that the last time the 2-year rate was around 0.78%, USD/JPY was above 90, while analysts talked about the growing impact the Chinese currency is having on other regional pairs.
- China came out of the Lunar New Year swinging. The PBoC announced a 25 basis point rate increase to key lending rates, the third such hike of the one-year benchmark rate since China embarked on a tightening cycle in October 2010. Expectations are for PBoC tightening to be front-loaded in early 2011, and central bank operations saw short-term yields rise beyond the 25 basis point policy action as it sold CNY1B in 3-month bills at 2.6242% v 2.2588% prior. An Economist at the Chinese Academy of Social Sciences (CASS) commented that the PBoC may be forced to act further if Jan-Feb CPI returns rise above 5%. There were also reports circulating that the PBoC was adjusting reserve ratio requirement (RRR) for smaller banks individually as a "punitive" measure, portending excessive lending in January new Yuan loans data to be released next week.
- Cautious official commentary in Australia and New Zealand battered their currencies to February lows against USD by Friday. New Zealand Finance Minister English warned that he could not rule out a recession in the latter half of 2011 in the absence of normal growth drivers of the economy, and his Australian counterpart, Wayne Swan noted that Q1 GDP may contract as a result of the extensive flood damage in the country. AUD was also weakened by a mixed employment report that showed the 11th straight month of job creation, offset by the first decline in the full-time employment component in three months. RBA Gov Stevens did more damage to the currency when he pushed back any expectation for renewed interest rate tightening into the 2nd half. This ran counter to a more bullish outlook from the RBA quarterly policy meeting late last week, when the central bank raised its 2011 GDP and CPI forecasts to 4.5% and 3.0% respectively.
- In perhaps the most controversial earnings report of the last several weeks, Cisco's second quarter results upset the market and saw its shares fall more than 14%, to their lowest level in a year and a half. Markets were disappointed by eroding margins and remain concerned that competition and dwindling public sector spending are capping the company's profits. Multiple analysts cut the name, although a few suggested the declines were a buying opportunity. The losses continue at Sprint, although the firm's metrics indicate it is creeping slowly towards a turnaround in its troubled business. Levels of churn dropped to near all-time lows, while net customer additions continue to grow, hitting all-time highs in the pre paid segment. Akamai fell sharply after meeting expectations in its quarterly results but offering weak profit guidance. Video game maker Take Two crushed expectations in its Q3 and raised guidance, while competitor Activision Blizzard met expectations in its Q4 and guided lower as it announced it would discontinue its Guitar Hero game, once a blockbuster franchise.
- Insurance giants MetLife, Prudential and Allstate reported fourth-quarter results yesterday evening. MetLife's performance was thoroughly in line, with no real surprises. Prudential's profits were well ahead of expectations. Allstate missed earnings estimates by a wide margin, and blamed the weather and other catastrophe losses for its poor showing.
- Various firms discussed the troubling impact that higher input costs may have during 2011. PepsiCo reported solidly in line results, but executives warned that 2011 commodity cost inflation would be +8-9.5% y/y. Kraft Foods also met expectations, although it cut its FY11 earnings outlook slightly. In comments accompanying the report, Kraft said it expects to face significant input cost inflation. Pilgrim's Pride's quarterly profits were way ahead of expectations. Executives from the poultry power warned that they were concerned about much higher grain prices, even though 100% of needs were covered until early August. Among other consumer facing stocks, Disney's Q1 results came in comfortably ahead of expectations, with strong y/y revenue growth seen at most of its key units. McDonalds reported very strong month of same-store sales gains for January.
- On Friday the Obama administration outlined proposals to wind down Fannie and Freddie and significantly reduce the government's role in the mortgage market. The plan would bring the GSEs' market share down to 40% over the course of five to seven years and make the private sector is the dominant provider of mortgage credit. In an interview aired on CNBC, Treasury Secretary Geithner said he expects the cost of mortgages will rise modestly over the long run if the plan is implemented, something he would like to see happen within two years. Analysts caution that whatever plan emerges will likely be molded and implemented by Congress, which presents substantial uncertainties. Private mortgage insurers, which stand to benefit substantially from the plan, gained significantly on the announcement.
- In M&A news, Ensco said it would acquire rival Pride International for about $7.3B, in a transaction that would create the world's second-largest offshore oil and gas driller. The deal sets the purchase price at $41.60/share, a premium of 21% to Friday's close. The media was abuzz with news that AOL bought the Huffington Post for $315M, valuing it at five times annual revenue, in an effort to build the content side of the business. Danaher closed a deal to acquire medical diagnostics name Beckman Coulter for $83.50/share in cash, for a deal valued at $6.8B. The Toronto Stock Exchange announced that it was holding advanced merger talks with the London Stock Exchange. A merger of the two companies would create the world's 7th largest exchange, with a market cap of £5.5B. This news was quickly overshadowed by reports that the NYSE/Euronext and Deutsche Boerse were back in talks for a tie-up.
- Uncle Sam began unloading $72 in coupon supply with a mediocre 3-year auction on Tuesday. By the next day the 10-year yield hit its highest level in roughly 10 months at 3.77%. A subsequent stellar 10-year auction helped put in a floor for prices that lasted through the remainder of the week. Similar to last week, short term rates continued to inch higher as well. The 2-year/30-year and the 2-year/10-year spreads were narrower on the week, sitting at around 390 and 280 basis points respectively. US mortgage rates have moved back above 5% for the first time since May.
- Much of the commentary this week focused on the debate emerging around the recent aggressive move up in rates. Bond vigilantes argued that this is just the beginning of dramatic cyclical move higher as investors price in growing long-term inflation expectations and deficit projections. Others counter that rates have come up too fast and may be reaching a point where Treasury yields will begin to look more attractive relative to other assets classes. Regardless of which side you are inclined to believe, it is clear investors' flourishing risk appetite continues to pull money away from the relative safety and modest returns in government bond markets. Major US equity indices were up eight straight sessions before minimal declines broke the streak on Thursday. It's even more telling that the average junk bond yield fell below 7% for the first time in more than five years and currently stands near an all-time low.
- The euro strengthened steadily through late Wednesday this week, aided by higher risk appetite and sovereign demand. Rebalancing FX levels in Asia continue to support the single currency on the dips in EUR/USD. More support came from the much lower than expected take up of ECB's 7-day liquidity operation, which was especially welcome given the looming stress tests for the EU banks. Debate raged over the sentiment driving higher yields on US Treasuries. FX dealers wondered about the impact on trading, asking themselves if the euro wasn't losing ground as US yields rose, what would happen if US yields fell in the wake of the upcoming round of auctions.
- EUR/USD sentiment turned around as rising yields on Portuguese government debt fueled concerns that the nation would need to request a Eurozone bailout sometime soon. The outright yield on the Portuguese 10 year rose above the 7.5% area and the 5-year note was nearing 7.0%, reaching post-euro launch highs, and levels at which both Ireland and Greece were both forced to request aid. Portugal faces a huge round of debt redemptions in April. There are concerns that at this point Portugal could fall prey to speculators, prompting the ECB to step in and buy Portuguese debt. Portuguese officials expressed confidence that they would be able to continue to finance the nation in open debt markets. The fate of German Bundesbank hawk Axel Weber was another topic of great interest this week, as rumors made the rounds suggesting that he did not want to succeed ECB President Trichet after the latter's term expires in October. The week ended with Weber being summoned to Chancellor Merkel's office after which he promptly resigned, effective April 30, leaving the ECB President without a clear successor.
- Sterling approached 1.62 early on in the week after the Sunday Times reported that the shadow MPC expressed opposition to an interest rate increase amid rising inflationary pressures ahead of this week's MPC decision. Attention turned to news that the UK government raising its levy on bank profits to £2.5bln this year. On Thursday the Bank of England held its key interest rates steady at 0.50% and maintained its asset purchase target at current levels of £200B.
- USD/JPY was re-approaching last week highs of 82.50 as US rates headed higher. FX dealers noted a higher US 2-year interest rate usually corresponds with higher USD/JPY. One European dealer said that the last time the 2-year rate was around 0.78%, USD/JPY was above 90, while analysts talked about the growing impact the Chinese currency is having on other regional pairs.
- China came out of the Lunar New Year swinging. The PBoC announced a 25 basis point rate increase to key lending rates, the third such hike of the one-year benchmark rate since China embarked on a tightening cycle in October 2010. Expectations are for PBoC tightening to be front-loaded in early 2011, and central bank operations saw short-term yields rise beyond the 25 basis point policy action as it sold CNY1B in 3-month bills at 2.6242% v 2.2588% prior. An Economist at the Chinese Academy of Social Sciences (CASS) commented that the PBoC may be forced to act further if Jan-Feb CPI returns rise above 5%. There were also reports circulating that the PBoC was adjusting reserve ratio requirement (RRR) for smaller banks individually as a "punitive" measure, portending excessive lending in January new Yuan loans data to be released next week.
- Cautious official commentary in Australia and New Zealand battered their currencies to February lows against USD by Friday. New Zealand Finance Minister English warned that he could not rule out a recession in the latter half of 2011 in the absence of normal growth drivers of the economy, and his Australian counterpart, Wayne Swan noted that Q1 GDP may contract as a result of the extensive flood damage in the country. AUD was also weakened by a mixed employment report that showed the 11th straight month of job creation, offset by the first decline in the full-time employment component in three months. RBA Gov Stevens did more damage to the currency when he pushed back any expectation for renewed interest rate tightening into the 2nd half. This ran counter to a more bullish outlook from the RBA quarterly policy meeting late last week, when the central bank raised its 2011 GDP and CPI forecasts to 4.5% and 3.0% respectively.