TradetheNews
05-21-2011, 08:42 AM
- Global equity markets traded sideways this week in the absence of any particularly good news. The peripheral European debt drama dominated headlines (the tabloids stuck to salacious coverage of the D.S.K. story), starting with the approval of Portugal's €78B bailout package and continuing with European official's semantic shift to discussions of Greek debt "rescheduling" or "reprofiling." No matter what the words were used to describe it, some form of restructuring is looking more and more likely. The euro fared well for most of the week, until a confluence of a cautious economic growth forecast in Germany, jitters ahead of local elections in Spain, and Norway suspending some minor aid to Greece forced EUR/USD to give up about half its gains on the week. On Friday, Greece was also hit with another downgrade from Fitch, which warned Europe that any extension of the maturity of existing bonds would be considered to be a "default event." Treasury yields consolidated at multi-month lows, and corporate America used the opportunity to rush to market with billions in new debt offerings. Continuing caution about the global economic recovery kept WTI crude below $100 all week, while spot gold only regained the $1,500 handle on Friday. All three leading US equity indices were lost some ground this week, with the DJIA down 0.7%, the S&P500 off 0.3% and the Nasdaq falling 0.9%.
- Manufacturing has led the emerging economic recovery for the last six months or so and economic data out this week suggested the US manufacturing sector has weakened recently, although market participants continue to debate whether this reflects momentary softness or a fundamental slowing of the recovery. The Commerce Department's April report on Industrial Production showed growth was flat y/y, the worst reading in six months. Two regional Fed industrial surveys for the month of May were also quite poor: the Philly Fed index hit its lowest level since last October, while the New York Fed's Empire Manufacturing survey dropped sharply from April levels, including a notably lower new orders sub-index, even as the prices paid and employment components stayed strong.
- Monday saw the Nasdaq/ICE consortium withdraw its takeover proposal for NYSE Euronext. The move comes following discussions with the US DoJ, which had told Nasdaq that the DoJ would have filed suit to block Nasdaq's bid for NYSE due to competition concerns. In other M&A news, Teva acquired a 57% majority stake in Japanese generic drug maker Taiyo Pharmaceuticals for $1.3B, expanding its global generic empire. Recall that earlier this month Teva agreed to buy Cephalon for $6.8B, and just last August it acquired Germany's Ratiopharm for $5B. Liberty Media offered to acquire Barnes & Noble for $17/share in cash, but Barnes & Noble has yet to acknowledged or comment on the offer. Shares of BKS jumped more than 30% on the news. Finally Thermo Fisher Scientific signed a deal to acquire allergy and autoimmunity diagnostics firm Phadia for €2.5B in cash.
- Quarterly earnings reports from Hewlett-Packard and Dell stood in stark contrast to each other this week. H-P announced its results a day ahead of schedule after the leak of an internal memo in which CEO Apotheker warned of a tough July quarter and ordered executives to maintain an iron grip on costs. The quarterly results were poor and the firm cut guidance on softness in services revenues. Dell, on the other hand, beat profit expectations thanks to a gross margin rate around two-decade highs and offered unusually strong revenue guidance. Both H-P and Dell offered cautious comments about the consumer PC markets, while also saying that commercial sales remain strong. Note that last Friday, Gartner's Q1 preliminary global PC shipments data was -1.1% y/y to 84.3M units, the first decline in the series in six quarters.
- The major US retailers offered March quarter results this week. Wal-Mart and Target just met expectations on disappointing comps, and executives from both firms had little in the way of positive commentary on the US consumer during their conference calls. Discounter BJs did quite well, and including gasoline sales racked up an impressive +6.3% quarterly comp figure, although executives warned that purchasing behavior in the quarter was impacted by inflation. Among the big misses were Sears and Gap, after the former racked up another sizable loss and the latter slashed its full-year outlook. Note also that teen apparel name Aeropostale declined to reiterate its full-year outlook due to the lack of visibility on consumer trends.
- US Treasury prices were little changed on the week which allowed yields to consolidate at multi-month lows. The benchmark 10-year yield briefly dipped below 3.10% for the first time since December. Inflation gauges also continued to drift lower with the 5-year TIPS breakeven falling below 2.5%. European peripheral spreads remain stressed as safe have flows picked up in the wake of the renewed uncertainty surrounding Greece. The German Bund yield is drifting back towards 3% while Spanish 10-year debt is only a hair below 5.5%.
- Corporate debt offerings surged as companies looked to take advantage of the recent dip in Treasury yields. In the company's first ever bond sale, Google sold $3B in notes at only a very modest discount to Treasuries. Google said they would be using the proceeds to repay outstanding commercial paper and for general corporate purposes. Norfolk Southern registered to sell 100-year notes also raising funds for general corporate purposes. Johnson & Johnson disclosed its intention to price a multi part benchmark offering to repay commercial paper.
- As anticipated, euro zone finance ministers meeting in Brussels granted Portugal a €78B bailout on Monday, Finland included. No solution was announced for Greece and officials reiterated that the EU will wait until the next progress report on the nation arrives next month before making any concrete moves. Meanwhile, EU officials have introduced new euphemisms for Greek debt restructuring - reprofiling or soft restructuring. The new names (for the same old idea) were met with strong opposition by the ECB, which holds more sovereign subprime bonds on its balance sheet than anybody else. Late in the week, the ECB threatened to remove liquidity measures if the EU decided to undertake any sort of debt restructuring for Greece. Despite the uncertainties surrounding the peripheral euro zone nations, the weaker than expected German ZEW and the Dominique Strauss-Kahn brouhaha, EUR/USD maintained a firm tone throughout most of the week in the 1.4200-1.4300 range thanks to hotter inflation data in the UK, a strong Spanish debt auction and bidding support. During the Friday's session, however, the pair erased its short-term gains as worries shifted back to the uncertainty of the Greek dilemma.
- GBP/USD tested the 1.63 level after UK inflation came in hotter than expected on Tuesday, prompting speculation that the Bank of England would have to embark on a tightening cycle. The central bank policy meeting minutes showed no change in the BoE's stance, with members again declaring a split decision on rate policy and the Asset Purchase Target. UK unemployment claims rose in April at the fastest pace since January 2010, helping sterling maintain a soft tone as traders faced the fragility of the UK economic recovery.
- The Swiss Franc rallied sharply during Friday's session as officials offered no resistance to the trend and in fact stated that the stalwart Swiss economy would be able to handle the currency's strength. Apart from risk aversion ahead of the Spanish regional elections this weekend, a Hungarian plan to assist defaulting mortgage borrowers also encouraged Swiss flows. The Hungarian government disclosed that it has entered into agreement with banks to correct the repayment rate on CHF-denominated mortgages at a CHF/HUF exchange rate of 180.
- In Japan, TEPCO reported the largest annual loss for a non-financial Japanese entity on record at ¥1.25T - well beyond the loss of ¥114B forecasted by analysts. President Shimizu took the brunt of the blame for the mishandled aftermath of the Fukushima nuclear disaster, as Japan's core utility announced leadership transition while also hinting it may not survive as a "going concern." With responsibility shifting toward the public sector, other Tokyo utilities bristled at the prospects of a TEPCO bailout, calling on Japan's government to clarify why TEPCO liabilities must be shouldered by its competitors. Separately, Bank of Japan left its economic assessment unchanged amid the post-earthquake slump in industrial production but reiterated its expectation for recovery in the second half of the year. Japan officially entered a double-dip recession this week with a second consecutive quarterly contraction in Q1. Cabinet officials also warning Q2 GDP may continue to slow on sequential basis.
- Down under, the Reserve Bank of Australia meeting minutes saw policymakers continue to straddle both sides of the fence on inflation expectations. RBA justified reiterating its "mildly restrictive" policy stance by suggesting it would look through the short term price spikes following Australia's natural disasters, but also cited evidence of a tightening labor market and improved household sentiment. Fixed income markets looked beyond the hawkish sentiment, heeding the central bank's warning of a potential contraction in Q1 GDP while downgrading the prospects for a 25 basis point tightening at the next policy meeting from near 20% down to about 10%. In New Zealand, the Treasury Department's annual budget prognosis soothed some of the fiscal concerns expressed by the ratings agencies, pushing forward its return to surplus by a year to FY14/15. NZD/USD spiked up to a 1-week high above $0.79 on the budget release and subsequent favorable comments from S&P, extending those gains to $0.80 late on Friday.
- Manufacturing has led the emerging economic recovery for the last six months or so and economic data out this week suggested the US manufacturing sector has weakened recently, although market participants continue to debate whether this reflects momentary softness or a fundamental slowing of the recovery. The Commerce Department's April report on Industrial Production showed growth was flat y/y, the worst reading in six months. Two regional Fed industrial surveys for the month of May were also quite poor: the Philly Fed index hit its lowest level since last October, while the New York Fed's Empire Manufacturing survey dropped sharply from April levels, including a notably lower new orders sub-index, even as the prices paid and employment components stayed strong.
- Monday saw the Nasdaq/ICE consortium withdraw its takeover proposal for NYSE Euronext. The move comes following discussions with the US DoJ, which had told Nasdaq that the DoJ would have filed suit to block Nasdaq's bid for NYSE due to competition concerns. In other M&A news, Teva acquired a 57% majority stake in Japanese generic drug maker Taiyo Pharmaceuticals for $1.3B, expanding its global generic empire. Recall that earlier this month Teva agreed to buy Cephalon for $6.8B, and just last August it acquired Germany's Ratiopharm for $5B. Liberty Media offered to acquire Barnes & Noble for $17/share in cash, but Barnes & Noble has yet to acknowledged or comment on the offer. Shares of BKS jumped more than 30% on the news. Finally Thermo Fisher Scientific signed a deal to acquire allergy and autoimmunity diagnostics firm Phadia for €2.5B in cash.
- Quarterly earnings reports from Hewlett-Packard and Dell stood in stark contrast to each other this week. H-P announced its results a day ahead of schedule after the leak of an internal memo in which CEO Apotheker warned of a tough July quarter and ordered executives to maintain an iron grip on costs. The quarterly results were poor and the firm cut guidance on softness in services revenues. Dell, on the other hand, beat profit expectations thanks to a gross margin rate around two-decade highs and offered unusually strong revenue guidance. Both H-P and Dell offered cautious comments about the consumer PC markets, while also saying that commercial sales remain strong. Note that last Friday, Gartner's Q1 preliminary global PC shipments data was -1.1% y/y to 84.3M units, the first decline in the series in six quarters.
- The major US retailers offered March quarter results this week. Wal-Mart and Target just met expectations on disappointing comps, and executives from both firms had little in the way of positive commentary on the US consumer during their conference calls. Discounter BJs did quite well, and including gasoline sales racked up an impressive +6.3% quarterly comp figure, although executives warned that purchasing behavior in the quarter was impacted by inflation. Among the big misses were Sears and Gap, after the former racked up another sizable loss and the latter slashed its full-year outlook. Note also that teen apparel name Aeropostale declined to reiterate its full-year outlook due to the lack of visibility on consumer trends.
- US Treasury prices were little changed on the week which allowed yields to consolidate at multi-month lows. The benchmark 10-year yield briefly dipped below 3.10% for the first time since December. Inflation gauges also continued to drift lower with the 5-year TIPS breakeven falling below 2.5%. European peripheral spreads remain stressed as safe have flows picked up in the wake of the renewed uncertainty surrounding Greece. The German Bund yield is drifting back towards 3% while Spanish 10-year debt is only a hair below 5.5%.
- Corporate debt offerings surged as companies looked to take advantage of the recent dip in Treasury yields. In the company's first ever bond sale, Google sold $3B in notes at only a very modest discount to Treasuries. Google said they would be using the proceeds to repay outstanding commercial paper and for general corporate purposes. Norfolk Southern registered to sell 100-year notes also raising funds for general corporate purposes. Johnson & Johnson disclosed its intention to price a multi part benchmark offering to repay commercial paper.
- As anticipated, euro zone finance ministers meeting in Brussels granted Portugal a €78B bailout on Monday, Finland included. No solution was announced for Greece and officials reiterated that the EU will wait until the next progress report on the nation arrives next month before making any concrete moves. Meanwhile, EU officials have introduced new euphemisms for Greek debt restructuring - reprofiling or soft restructuring. The new names (for the same old idea) were met with strong opposition by the ECB, which holds more sovereign subprime bonds on its balance sheet than anybody else. Late in the week, the ECB threatened to remove liquidity measures if the EU decided to undertake any sort of debt restructuring for Greece. Despite the uncertainties surrounding the peripheral euro zone nations, the weaker than expected German ZEW and the Dominique Strauss-Kahn brouhaha, EUR/USD maintained a firm tone throughout most of the week in the 1.4200-1.4300 range thanks to hotter inflation data in the UK, a strong Spanish debt auction and bidding support. During the Friday's session, however, the pair erased its short-term gains as worries shifted back to the uncertainty of the Greek dilemma.
- GBP/USD tested the 1.63 level after UK inflation came in hotter than expected on Tuesday, prompting speculation that the Bank of England would have to embark on a tightening cycle. The central bank policy meeting minutes showed no change in the BoE's stance, with members again declaring a split decision on rate policy and the Asset Purchase Target. UK unemployment claims rose in April at the fastest pace since January 2010, helping sterling maintain a soft tone as traders faced the fragility of the UK economic recovery.
- The Swiss Franc rallied sharply during Friday's session as officials offered no resistance to the trend and in fact stated that the stalwart Swiss economy would be able to handle the currency's strength. Apart from risk aversion ahead of the Spanish regional elections this weekend, a Hungarian plan to assist defaulting mortgage borrowers also encouraged Swiss flows. The Hungarian government disclosed that it has entered into agreement with banks to correct the repayment rate on CHF-denominated mortgages at a CHF/HUF exchange rate of 180.
- In Japan, TEPCO reported the largest annual loss for a non-financial Japanese entity on record at ¥1.25T - well beyond the loss of ¥114B forecasted by analysts. President Shimizu took the brunt of the blame for the mishandled aftermath of the Fukushima nuclear disaster, as Japan's core utility announced leadership transition while also hinting it may not survive as a "going concern." With responsibility shifting toward the public sector, other Tokyo utilities bristled at the prospects of a TEPCO bailout, calling on Japan's government to clarify why TEPCO liabilities must be shouldered by its competitors. Separately, Bank of Japan left its economic assessment unchanged amid the post-earthquake slump in industrial production but reiterated its expectation for recovery in the second half of the year. Japan officially entered a double-dip recession this week with a second consecutive quarterly contraction in Q1. Cabinet officials also warning Q2 GDP may continue to slow on sequential basis.
- Down under, the Reserve Bank of Australia meeting minutes saw policymakers continue to straddle both sides of the fence on inflation expectations. RBA justified reiterating its "mildly restrictive" policy stance by suggesting it would look through the short term price spikes following Australia's natural disasters, but also cited evidence of a tightening labor market and improved household sentiment. Fixed income markets looked beyond the hawkish sentiment, heeding the central bank's warning of a potential contraction in Q1 GDP while downgrading the prospects for a 25 basis point tightening at the next policy meeting from near 20% down to about 10%. In New Zealand, the Treasury Department's annual budget prognosis soothed some of the fiscal concerns expressed by the ratings agencies, pushing forward its return to surplus by a year to FY14/15. NZD/USD spiked up to a 1-week high above $0.79 on the budget release and subsequent favorable comments from S&P, extending those gains to $0.80 late on Friday.