TradetheNews
03-26-2011, 09:31 AM
- Healthy gains across global equity indices this week demonstrated how hard it is to keep this market down. Investors kept adding risk despite the still unresolved nuclear incident in Japan, plenty of footage of coalition jets bombing Libyan tanks, more protests in Yemen, Syria and even Jordan, a grim UK budget prognosis, the failure of the Canadian and the Portuguese governments over austerity measures (making another eurozone debt bailout next to inevitable). One analyst observed that the potential for either upside from economic recovery or lots more liquidity - if things worsen - from a potential QE3 program is setting up a "can't lose" environment. In any case, precious metals remain near all-time highs, with spot gold closing the week around $1,438 and spot silver around $37.40. The data highlight of the week may have been Friday's final reading of US Q4 GDP, which came in at +3.1%, three-tenths higher than the preliminary reading on February 25th. The February US housing data was as grim as ever: median prices for existing homes and new homes reached the lowest level since early 2002 and late 2003, respectively, while new home sales plunged to an all-time low, marking the third consecutive monthly decline. However, weakness in the housing sector seems to be less and less of a concern for markets. Philadelphia Fed President Charles Plosser went as far as to say that he does not believe weakness in real estate will prevent a broader economic recovery. This was only part of the deluge of Fed speak during the week, as doves and hawks on either side of the FOMC obliquely debated exit strategy for the Fed's extraordinary measures, with comments out of eight committee members including Chairman Bernanke. In addition, the Fed announced that it would hold press conferences after rate decisions four times a year, in order to better communicate its thinking about monetary policy and the US economy. For the week the Nasdaq led markets higher, gaining 3.8%, while the DJIA rose 3.1% and the S&P500 rose 2.7%.
- US bank names lagged the broader market, weighed down by a 5% decline in Bank of America after the Fed objected to BoA's proposed increase in capital distributions for the second half of 2011. The Fed's decision seems to put the kibosh on higher dividends for the time being, although BoA executives stated that they would still seek permission for a modest dividend increase for the second half of 2011. In other banking industry news, there were reports that the Office of the Comptroller of the Currency was preparing settle with lenders over foreclosure practices, but would be entirely separate from ongoing suits being pursued by state attorneys general. The final settlement is due in a few weeks, and shouldn't amount to more than $20B or so in total.
- One merger story outshone all others this week: on Monday AT&T announced an agreement to acquire T-Mobile USA from Deutsche Telekom in a deal valued at $39B, including $25B in cash and the balance in AT&T stock. The deal is widely expected to come in for serious scrutiny from anti-trust regulators, and both Democratic and Republican lawmakers in Congress have given cautious responses to the deal. AT&T's two main competitors, Verizon and Sprint, seemed caught off guard by the move, and Sprint's CEO admitted on CNBC that he had not even considered the possibility of an AT&T/T-Mobile merger. Verizon filed a big $14B mixed shelf later in the week, prompting plenty of speculation that the network is shopping around for a deal to counter its rival. Lots of other chatter about various takeover maneuvering are all over markets, some more believable than others. Notably, Leap Wireless leapt over 20% since the T-Mobile deal announcement.
- There were significant movers in the tech sector this week based on quarterly earnings reports. Oracle jumped after modestly beating consensus estimates in its Q3 and offering strong guidance for Q4. Research in Motion fell more than 10% on Friday after the firm offered a weak forecast for the current quarter. The company blamed the lower profit outlook on higher promotional and research spending associated with its much anticipated Playbook tablet computer, which is due to launch on April 19th. Adobe met expectation in its first quarter report, although the firm's second quarter guidance was very disappointing. Retailers Walgreen and Best Buy both lost ground despite largely in line results, while GameStop headed higher on slightly better than expected earnings and guidance.
- Government bond prices came under some pressure this week. Inflation expectations remained a key factor while investors' increased willingness to add to risk positions generally weighed on prices. The US Treasury's announcement it would start winding down a $142B MBS portfolio through modest monthly sales caught some by surprise, but market observers quickly pointed out that the decision would have no bearing on the Fed's balance sheet and the overall market impact would be minimal. Rates also ticked up in Europe, helped by a hot February UK CPI reading and continued expectations that the ECB is on the verge of raising rates. Even more negative twists in the European sovereign debt saga failed to bring in substantial safe heaven flows. Strong demand for Thursdays 10-year TIPS reopening highlighted inflation remains in the forefront of some traders' minds. The 10-year TIPS breakeven spread moved up some six basis points following the sale and briefly neared 2.5% on Friday. As the week drew to a close prices remained weaker as markets focused on some hawkish Fed speak from the FOMC's Fisher and Plosser. The US 10-year yield added roughly 15 basis points on the week and finished near two week highs at 3.45%.
- FX traders remained focused on post-disaster developments in Japan, the peripheral situation in Europe and political turmoil in the Middle East this week. In Japan, events started off on a more positive note on Monday, although more radiation leaks and fears about Tokyo's water supply made everyone realize that the recovery process will be a long slog. The Portuguese parliament's rejection of the government's austerity measures on Wednesday amped up renewed risk aversion, drove safe haven flows into CHF, modestly benefited the dollar and pushed precious metals higher. However, the dollar continues to face headwinds against certain European and commodity-related pairs.
- EUR/USD pushed out to four-month highs early on this week aided by hawkish comments from ECB members and M&A flows. However, the status of the Portuguese government and its proposed austerity measures took the euro off its highs. On Wednesday, opposition members of parliament managed to vote down the government's budget, prompting Prime Minister Socrates to resign. Multiple sovereign downgrades followed these developments, although the euro managed to limit losses and remain relatively firm. Overall dealers said the market was awaiting the outcome of the ongoing EU Summit and details on a permanent stability mechanism. The consensus sees an EU bailout of around €75B for Portugal, but there is little indication how much might come from the IMF and what sort of interest rate would be charged. Helping to support the euro was chatter of sovereign and Middle Eastern names buying the single currency. Outright government bond yields on peripheral debt (Irish 2- and 5-year yield spreads were over 10%) had dealers pondering whether another wave of credit defaults might be around the corner. By the close of trading on Friday, EUR/USD was around 1.406, at the lows of the week.
- Further threats of intervention helped maintain a steady tone for the yen, with USD/JPY in close proximity to 81.00 for most of the week. The pair could not find the momentum in needed to test above last Friday's coordinated G7 intervention highs of 81.99. Several times USD/JPY found support at 80.70, and there was dealer chatter that the Japanese Post Office (Kampo) was buying USD around this level. EUR/JPY was unable to move above the 115.55 level with alleged euro buy stops building up and a potential upside chart breakout above this level. EUR/JPY continued to probe the 115.55 area, which was the post-G7 intervention high. There appears to be good technical momentum in the pair should this level give way.
- As expected, CPI data out this week confirmed that UK inflationary pressures have intensified. GBP/USD climbed to test the 1.64 level by mid-week. Perpetual BoE hawk Sentence reiterated his call for a rate hike. However, the pound encountered some turbulence. The release of the BoE March minutes revealed no newly minted hawks, and the details appeared to be exactly the same as the February minutes. The 2012 UK budget forecasted that the economy would grow more slowly than forecasted in 2011 coupled with higher borrowing needs than previously believed for the next five years. Late in the week the pound was broadly weaker after disappointing Feb retail sales data. A cautious report from Moody's warned that the UK's AAA sovereign debt rating could be at risk if slower economic growth makes it harder for the government to rein in its budget deficit. The pair was 300 pips off its week's high by Friday.
- The situation in Japan was markedly improved albeit far from stable. With power for water cooling restored and helicopter water dumping renewed at the Fukushima nuclear power plant, attention turned to containment of radiation outside the epicenter. By Friday, local authorities revealed that higher than allowed radiation levels were found in tap water in Ibaraki Prefecture. Earlier in the week, officials had also detected traces of radioactive cesium in vegetables, prompting a call by PM Kan not to consume some of products from the farming-heavy earthquake-impacted regions of northern Japan. Government debate also turned to the fiscal aftermath of the crisis, with the costs associated with damages estimated as high as ¥25T and likely requiring issuance of deficit-covering bonds. On the corporate front, Japan's top automakers continue to suffer from supply disruptions. Some of Toyota's assembly plants will remain closed through this weekend, while parts shipments were also reported to impact US plants. Honda extended suspended production at several plants until April 3rd, and Mazda was reported to have halted shipments to US dealers. Despite the glaring impact in manufacturing, large volumes of funds poured into Japan equity markets, helping Nikkei225 close 3.6% higher on the week.
- Outside of Japan, New Zealand reported better than expected and positive Q4 GDP data following a Q3 contraction, avoiding a double-dip recession with a 0.2% q/q print. Kiwi Dollar hit a 1-month high above $0.7550 as Fin Min English lauded the post-earthquake economy as more fiscally stable. In China, PBoC resumed its pace of strengthening the Yuan, as USD/CNY mid-point hit a new post-revaluation low of 6.5580 on Friday. As they continue to gradually strengthen the Yuan, PBoC officials vowed to increase the use of interest rate adjustment as the central bank's primary policy tool.
- US bank names lagged the broader market, weighed down by a 5% decline in Bank of America after the Fed objected to BoA's proposed increase in capital distributions for the second half of 2011. The Fed's decision seems to put the kibosh on higher dividends for the time being, although BoA executives stated that they would still seek permission for a modest dividend increase for the second half of 2011. In other banking industry news, there were reports that the Office of the Comptroller of the Currency was preparing settle with lenders over foreclosure practices, but would be entirely separate from ongoing suits being pursued by state attorneys general. The final settlement is due in a few weeks, and shouldn't amount to more than $20B or so in total.
- One merger story outshone all others this week: on Monday AT&T announced an agreement to acquire T-Mobile USA from Deutsche Telekom in a deal valued at $39B, including $25B in cash and the balance in AT&T stock. The deal is widely expected to come in for serious scrutiny from anti-trust regulators, and both Democratic and Republican lawmakers in Congress have given cautious responses to the deal. AT&T's two main competitors, Verizon and Sprint, seemed caught off guard by the move, and Sprint's CEO admitted on CNBC that he had not even considered the possibility of an AT&T/T-Mobile merger. Verizon filed a big $14B mixed shelf later in the week, prompting plenty of speculation that the network is shopping around for a deal to counter its rival. Lots of other chatter about various takeover maneuvering are all over markets, some more believable than others. Notably, Leap Wireless leapt over 20% since the T-Mobile deal announcement.
- There were significant movers in the tech sector this week based on quarterly earnings reports. Oracle jumped after modestly beating consensus estimates in its Q3 and offering strong guidance for Q4. Research in Motion fell more than 10% on Friday after the firm offered a weak forecast for the current quarter. The company blamed the lower profit outlook on higher promotional and research spending associated with its much anticipated Playbook tablet computer, which is due to launch on April 19th. Adobe met expectation in its first quarter report, although the firm's second quarter guidance was very disappointing. Retailers Walgreen and Best Buy both lost ground despite largely in line results, while GameStop headed higher on slightly better than expected earnings and guidance.
- Government bond prices came under some pressure this week. Inflation expectations remained a key factor while investors' increased willingness to add to risk positions generally weighed on prices. The US Treasury's announcement it would start winding down a $142B MBS portfolio through modest monthly sales caught some by surprise, but market observers quickly pointed out that the decision would have no bearing on the Fed's balance sheet and the overall market impact would be minimal. Rates also ticked up in Europe, helped by a hot February UK CPI reading and continued expectations that the ECB is on the verge of raising rates. Even more negative twists in the European sovereign debt saga failed to bring in substantial safe heaven flows. Strong demand for Thursdays 10-year TIPS reopening highlighted inflation remains in the forefront of some traders' minds. The 10-year TIPS breakeven spread moved up some six basis points following the sale and briefly neared 2.5% on Friday. As the week drew to a close prices remained weaker as markets focused on some hawkish Fed speak from the FOMC's Fisher and Plosser. The US 10-year yield added roughly 15 basis points on the week and finished near two week highs at 3.45%.
- FX traders remained focused on post-disaster developments in Japan, the peripheral situation in Europe and political turmoil in the Middle East this week. In Japan, events started off on a more positive note on Monday, although more radiation leaks and fears about Tokyo's water supply made everyone realize that the recovery process will be a long slog. The Portuguese parliament's rejection of the government's austerity measures on Wednesday amped up renewed risk aversion, drove safe haven flows into CHF, modestly benefited the dollar and pushed precious metals higher. However, the dollar continues to face headwinds against certain European and commodity-related pairs.
- EUR/USD pushed out to four-month highs early on this week aided by hawkish comments from ECB members and M&A flows. However, the status of the Portuguese government and its proposed austerity measures took the euro off its highs. On Wednesday, opposition members of parliament managed to vote down the government's budget, prompting Prime Minister Socrates to resign. Multiple sovereign downgrades followed these developments, although the euro managed to limit losses and remain relatively firm. Overall dealers said the market was awaiting the outcome of the ongoing EU Summit and details on a permanent stability mechanism. The consensus sees an EU bailout of around €75B for Portugal, but there is little indication how much might come from the IMF and what sort of interest rate would be charged. Helping to support the euro was chatter of sovereign and Middle Eastern names buying the single currency. Outright government bond yields on peripheral debt (Irish 2- and 5-year yield spreads were over 10%) had dealers pondering whether another wave of credit defaults might be around the corner. By the close of trading on Friday, EUR/USD was around 1.406, at the lows of the week.
- Further threats of intervention helped maintain a steady tone for the yen, with USD/JPY in close proximity to 81.00 for most of the week. The pair could not find the momentum in needed to test above last Friday's coordinated G7 intervention highs of 81.99. Several times USD/JPY found support at 80.70, and there was dealer chatter that the Japanese Post Office (Kampo) was buying USD around this level. EUR/JPY was unable to move above the 115.55 level with alleged euro buy stops building up and a potential upside chart breakout above this level. EUR/JPY continued to probe the 115.55 area, which was the post-G7 intervention high. There appears to be good technical momentum in the pair should this level give way.
- As expected, CPI data out this week confirmed that UK inflationary pressures have intensified. GBP/USD climbed to test the 1.64 level by mid-week. Perpetual BoE hawk Sentence reiterated his call for a rate hike. However, the pound encountered some turbulence. The release of the BoE March minutes revealed no newly minted hawks, and the details appeared to be exactly the same as the February minutes. The 2012 UK budget forecasted that the economy would grow more slowly than forecasted in 2011 coupled with higher borrowing needs than previously believed for the next five years. Late in the week the pound was broadly weaker after disappointing Feb retail sales data. A cautious report from Moody's warned that the UK's AAA sovereign debt rating could be at risk if slower economic growth makes it harder for the government to rein in its budget deficit. The pair was 300 pips off its week's high by Friday.
- The situation in Japan was markedly improved albeit far from stable. With power for water cooling restored and helicopter water dumping renewed at the Fukushima nuclear power plant, attention turned to containment of radiation outside the epicenter. By Friday, local authorities revealed that higher than allowed radiation levels were found in tap water in Ibaraki Prefecture. Earlier in the week, officials had also detected traces of radioactive cesium in vegetables, prompting a call by PM Kan not to consume some of products from the farming-heavy earthquake-impacted regions of northern Japan. Government debate also turned to the fiscal aftermath of the crisis, with the costs associated with damages estimated as high as ¥25T and likely requiring issuance of deficit-covering bonds. On the corporate front, Japan's top automakers continue to suffer from supply disruptions. Some of Toyota's assembly plants will remain closed through this weekend, while parts shipments were also reported to impact US plants. Honda extended suspended production at several plants until April 3rd, and Mazda was reported to have halted shipments to US dealers. Despite the glaring impact in manufacturing, large volumes of funds poured into Japan equity markets, helping Nikkei225 close 3.6% higher on the week.
- Outside of Japan, New Zealand reported better than expected and positive Q4 GDP data following a Q3 contraction, avoiding a double-dip recession with a 0.2% q/q print. Kiwi Dollar hit a 1-month high above $0.7550 as Fin Min English lauded the post-earthquake economy as more fiscally stable. In China, PBoC resumed its pace of strengthening the Yuan, as USD/CNY mid-point hit a new post-revaluation low of 6.5580 on Friday. As they continue to gradually strengthen the Yuan, PBoC officials vowed to increase the use of interest rate adjustment as the central bank's primary policy tool.