TradetheNews
06-11-2011, 08:48 AM
- Fallout from the soft economic data seen over the last month continued to push global equity indices lower and drive flight to safety trades this week. US equities saw their sixth consecutive weekly loss, the longest losing streak since 2002, and on Friday the DJIA closed below the 12,000 level for the first time since mid-March. With QE2 expiring at the end of the month, analysts and market commentators debated the likelihood of some form of continued easing from the Fed, although the current consensus is that things would have to get much worse for the Fed to launch QE3. Fed Chairman Bernanke hardly touched on the subject in his big policy speech on Wednesday, merely affirming that the extended period will remain in place. Other Fed governors dismissed further easing: Dudley said the soft patch in US economic activity is unlikely to last and Lockhart stated that a third round of QE would not be needed. Other commentators were less restrained: economist Robert Shiller warned that a double-dip recession is a real risk and said a further decline in housing prices of up to 25% over the next five years would not be surprising (recall that last week the S&P Case-Shiller housing price index hit its lowest level since the summer of 2006 in Q1). PIMCO's El-Erian said he was shocked by recent declines in consensus growth estimates, although he also said there is too much liquidity in the system for another recession to happen. In Europe, officials continued to pretend that the Greek situation was days or weeks away from resolution, even as the ECB and Germany squabbled over arrangements for some sort of debt restructuring. There was a brief equity bounce on Thursday after US exports rose to a new all-time high in April of $175.5B, although the big sequential decline in China's May trade volume and contraction in Britain's April manufacturing data helped eliminate those gains Friday morning. The Nasdaq and S&P500 had their biggest weekly declines since August 2010, falling 3.3% and 2.2% respectively, and on Friday the Nasdaq fell into the red year to date for 2011. The DJIA lost 1.6% this week.
- OPEC had a very contentious meeting on Wednesday, as oil ministers from member nations publically clashed over whether or not to increase production quotas. The Saudis and their Gulf allies Kuwait and the UAE proposed an production hike of up to 1.5M bpd while other delegates wanted to keep production flat. The faction seeking no increase prevailed, and OPEC maintained the current quota of 24.82M bpd with a loose agreement to revisit the issue at a special meeting in three months. Oil futures surged back above $100/bbl as OPEC confounded expectations. The Saudi oil minister called it "the worst meeting ever" and pledged his nation would meet any rise in market demand regardless of the cartel's quotas. [Note that few member states have stuck to their quotas since the early 1990s, and OPEC's April production (ex Iraq) was 26.3M bpd. Various estimates see the organization's actual production, with Iraq, closer to 30M bpd]. Later in the week there were press reports that Saudi Arabia would increase production to 10M bpd in July, up from May production of 8.9M bpd in order to meet growing demand. Saudi officials responded to the reports by saying it was too early to say whether they would increase output in June or not, but the report still helped push oil back below triple digits on Friday.
- Shares of the largest US banks see-sawed through the week. Analyst calls weighed on the sector as Dick Bove cut Wells Fargo to a sell and lowered FY11 estimates for Morgan Stanley. The New York Post reported that Barclays, Goldman, Bank of America, JP Morgan and Morgan Stanley were planning to announce thousands of job cuts at trading investment banking units in the coming weeks. The debate over debit card interchange fees also continued to weigh on issuers, as the Senate defeated a measure that sought to delay implementation of the Durbin rules that would cap debit card transaction fees set to go into effect next month. Both the Fed and the FDIC discussed proposals for extra capital charges for systemically important financial firms (the so-called SIFIs), with the Fed pushing for a 3% maximum surcharge on top of the new Basel III requirements. FDIC Chairwoman Bair said the surcharge could be 2-3% on top of Basel III, noting that the big banks would make a "nice return" on capital even with a 10% total capital requirement. Bank names rallied late on Friday's session after press reports indicated an unpublicized meeting of global banking regulators was backing off the US proposal for a 3% extra charge for SIFIs, and instead would likely cap it at 2-2.5%.
- US Treasury prices began the week consolidating near multi-month highs as the economic soft patch and continued consternation in Europe buoyed demand. Yields hit fresh lows mid-week after Bernanke indicated 2011 growth was coming in somewhat slower than expected. Buying was strongest at the short end with the 2-year yield dipping below 0.4% for the first time since last November. The benchmark 10-year yield drifted below 2.95% despite coupon auctions Tuesday, Wednesday, and Thursday. Fed fund futures are now not fully pricing in a Fed rate cut until Q4 2012.
- The week in FX began with the greenback consolidating after last Friday's anemic US jobs data, which only reinforced expectations for ultra-easy Fed policy to remain in place for the foreseeable future. Dollar softness was aided by comments from Fed Chairman Bernanke, who confirmed that accommodative monetary policy would still be needed for an extended period, while in Europe dealers were expecting ECB Chief Trichet to signal that a rate increase could happen at the July meeting. Comments out of China deflected the focus away from the Greek debt crisis, as the China State Administration of Foreign Exchange's (SAFE) Guan Ho, head of the international payment department, warned that he saw risks in excessive holdings of dollar assets and said that the dollar would continue to weaken against other major currencies. EUR/USD moved higher on the remarks, testing 1.4070 for fresh one-month highs. Euro strength did not survive the ECB press conference, however, and after Trichet uttered the magic words "strong vigilance," laying the groundwork for another rate hike in July, EUR/USD tumbled lower and flushed out crowded euro long positions. The cross broke below critical hourly support of 1.4550 Thursday morning and finished out the week well below 1.4400. Note also that USD/CHF continued to probe fresh post-WWII lows around the 0.8325 area
- The tone of the Greek drama shifted from last week's positive developments to a standoff between Germany and the ECB over private participation in a potential debt restructuring. The ECB demanded assurances that a debt rollover would be absolutely voluntary after German government officials warned that Germany's participation would be predicated on private investors sharing in the burdens. During the ECB press conference Trichet said that forcing private creditors to participate in a Greek debt rollover would be akin to default, while German Finance Minister Schaeuble countered that private sector investors cannot escape contributing to the Greece package. The ratings agencies continued to press the situation, as Fitch warned that it would lower the sovereign rating of Greece to 'C' in the event of any distressed debt exchange, equivalent to a seven-notch move from the current B+ level. There were unconfirmed press reports that the second Greece bailout package could cost up to €120B, compared to the €90B figure thrown around previously. The Greek government tried to signal progress by announcing its cabinet had unanimously approved a new four-year austerity plan that would meet the demands of the troika (ECB,IMF, EU), and PM Papandreou asked for political unity in the parliament which will vote on the plan on June 28.
- Ahead of Thursday's BoE rate decision the IMF commented on the UK economy, warning that now was not the time for the UK to adjust its macroeconomic stance. The IMF stated that it believes the BoE should only tighten policy after economic growth resumes. GBP/USD hit 1.6375 right after the MPC kept rates on hold, and sterling was broadly lower after Moody's reiterated that weak economic growth and fiscal slippage could see the UK lose its AAA sovereign rating.
- USD/JPY maintained a foothold below the 80 handle during the early part of the week. The stronger JPY was aided by comments from the IMF after acting chief Lipsky stated he does not view current level of the yen as a problem for future Japanese growth. Dealers are focused on the 79.50 level where a clump of option barriers exist. The level also corresponds to the initial entry back in March of the coordinated currency intervention by the G7.
- Central banks in Australia, New Zealand and South Korea offered varying degrees of hawkishness in their respective monetary policy updates this week. The RBA was expected to be the most hawkish but disappointed with a cautious tone, reiterating that its restrictive policy stance remains appropriate. The RBA also downgraded its assessment of labor, warning that employment growth would be slower in the near term. Later in the week, the Australia May employment change data indeed came in well below expectations and the labor participation rate also retreated. AUD/USD move to two-week lows below $1.0530 on Friday. The New Zealand central bank kept rates on hold but signaled that OCR will have to rise in order to offset the increasing inflation pressure. NZD hit a post-flotation record high of $0.83 against the dollar before risk aversion and verbal jawboning against excessive Kiwi strength by RBNZ governor Bollard pulled the pair back to $0.8210 on Friday. The Bank of Korea was the biggest surprise in the trifecta, unexpectedly raising rates by 25bps to 3.25% following two consecutive holds. The BoK attributed its tighter stance to persistent inflation pressures, with the most recent core metrics hitting multi-year high despite falling headline figures, showcasing the pass-through from food and energy into other parts of the economy.
- The China trade data was cited among the key factors in Friday's pronounced sell-off, as the May surplus of $13B missed the $19B consensus. A closer look reveals a less gloomy output however, as imports rose sharply amid sequential gains in iron ore and energy. Recall that the disappointing imports last month foreshadowed multi-month lows in China industrial production, leading to speculation next week's monthly metrics may contain an upward surprise. Shanghai Composite losses were contained below 1% for the week as the index bounced above the key 2,700 level late on Friday.
- OPEC had a very contentious meeting on Wednesday, as oil ministers from member nations publically clashed over whether or not to increase production quotas. The Saudis and their Gulf allies Kuwait and the UAE proposed an production hike of up to 1.5M bpd while other delegates wanted to keep production flat. The faction seeking no increase prevailed, and OPEC maintained the current quota of 24.82M bpd with a loose agreement to revisit the issue at a special meeting in three months. Oil futures surged back above $100/bbl as OPEC confounded expectations. The Saudi oil minister called it "the worst meeting ever" and pledged his nation would meet any rise in market demand regardless of the cartel's quotas. [Note that few member states have stuck to their quotas since the early 1990s, and OPEC's April production (ex Iraq) was 26.3M bpd. Various estimates see the organization's actual production, with Iraq, closer to 30M bpd]. Later in the week there were press reports that Saudi Arabia would increase production to 10M bpd in July, up from May production of 8.9M bpd in order to meet growing demand. Saudi officials responded to the reports by saying it was too early to say whether they would increase output in June or not, but the report still helped push oil back below triple digits on Friday.
- Shares of the largest US banks see-sawed through the week. Analyst calls weighed on the sector as Dick Bove cut Wells Fargo to a sell and lowered FY11 estimates for Morgan Stanley. The New York Post reported that Barclays, Goldman, Bank of America, JP Morgan and Morgan Stanley were planning to announce thousands of job cuts at trading investment banking units in the coming weeks. The debate over debit card interchange fees also continued to weigh on issuers, as the Senate defeated a measure that sought to delay implementation of the Durbin rules that would cap debit card transaction fees set to go into effect next month. Both the Fed and the FDIC discussed proposals for extra capital charges for systemically important financial firms (the so-called SIFIs), with the Fed pushing for a 3% maximum surcharge on top of the new Basel III requirements. FDIC Chairwoman Bair said the surcharge could be 2-3% on top of Basel III, noting that the big banks would make a "nice return" on capital even with a 10% total capital requirement. Bank names rallied late on Friday's session after press reports indicated an unpublicized meeting of global banking regulators was backing off the US proposal for a 3% extra charge for SIFIs, and instead would likely cap it at 2-2.5%.
- US Treasury prices began the week consolidating near multi-month highs as the economic soft patch and continued consternation in Europe buoyed demand. Yields hit fresh lows mid-week after Bernanke indicated 2011 growth was coming in somewhat slower than expected. Buying was strongest at the short end with the 2-year yield dipping below 0.4% for the first time since last November. The benchmark 10-year yield drifted below 2.95% despite coupon auctions Tuesday, Wednesday, and Thursday. Fed fund futures are now not fully pricing in a Fed rate cut until Q4 2012.
- The week in FX began with the greenback consolidating after last Friday's anemic US jobs data, which only reinforced expectations for ultra-easy Fed policy to remain in place for the foreseeable future. Dollar softness was aided by comments from Fed Chairman Bernanke, who confirmed that accommodative monetary policy would still be needed for an extended period, while in Europe dealers were expecting ECB Chief Trichet to signal that a rate increase could happen at the July meeting. Comments out of China deflected the focus away from the Greek debt crisis, as the China State Administration of Foreign Exchange's (SAFE) Guan Ho, head of the international payment department, warned that he saw risks in excessive holdings of dollar assets and said that the dollar would continue to weaken against other major currencies. EUR/USD moved higher on the remarks, testing 1.4070 for fresh one-month highs. Euro strength did not survive the ECB press conference, however, and after Trichet uttered the magic words "strong vigilance," laying the groundwork for another rate hike in July, EUR/USD tumbled lower and flushed out crowded euro long positions. The cross broke below critical hourly support of 1.4550 Thursday morning and finished out the week well below 1.4400. Note also that USD/CHF continued to probe fresh post-WWII lows around the 0.8325 area
- The tone of the Greek drama shifted from last week's positive developments to a standoff between Germany and the ECB over private participation in a potential debt restructuring. The ECB demanded assurances that a debt rollover would be absolutely voluntary after German government officials warned that Germany's participation would be predicated on private investors sharing in the burdens. During the ECB press conference Trichet said that forcing private creditors to participate in a Greek debt rollover would be akin to default, while German Finance Minister Schaeuble countered that private sector investors cannot escape contributing to the Greece package. The ratings agencies continued to press the situation, as Fitch warned that it would lower the sovereign rating of Greece to 'C' in the event of any distressed debt exchange, equivalent to a seven-notch move from the current B+ level. There were unconfirmed press reports that the second Greece bailout package could cost up to €120B, compared to the €90B figure thrown around previously. The Greek government tried to signal progress by announcing its cabinet had unanimously approved a new four-year austerity plan that would meet the demands of the troika (ECB,IMF, EU), and PM Papandreou asked for political unity in the parliament which will vote on the plan on June 28.
- Ahead of Thursday's BoE rate decision the IMF commented on the UK economy, warning that now was not the time for the UK to adjust its macroeconomic stance. The IMF stated that it believes the BoE should only tighten policy after economic growth resumes. GBP/USD hit 1.6375 right after the MPC kept rates on hold, and sterling was broadly lower after Moody's reiterated that weak economic growth and fiscal slippage could see the UK lose its AAA sovereign rating.
- USD/JPY maintained a foothold below the 80 handle during the early part of the week. The stronger JPY was aided by comments from the IMF after acting chief Lipsky stated he does not view current level of the yen as a problem for future Japanese growth. Dealers are focused on the 79.50 level where a clump of option barriers exist. The level also corresponds to the initial entry back in March of the coordinated currency intervention by the G7.
- Central banks in Australia, New Zealand and South Korea offered varying degrees of hawkishness in their respective monetary policy updates this week. The RBA was expected to be the most hawkish but disappointed with a cautious tone, reiterating that its restrictive policy stance remains appropriate. The RBA also downgraded its assessment of labor, warning that employment growth would be slower in the near term. Later in the week, the Australia May employment change data indeed came in well below expectations and the labor participation rate also retreated. AUD/USD move to two-week lows below $1.0530 on Friday. The New Zealand central bank kept rates on hold but signaled that OCR will have to rise in order to offset the increasing inflation pressure. NZD hit a post-flotation record high of $0.83 against the dollar before risk aversion and verbal jawboning against excessive Kiwi strength by RBNZ governor Bollard pulled the pair back to $0.8210 on Friday. The Bank of Korea was the biggest surprise in the trifecta, unexpectedly raising rates by 25bps to 3.25% following two consecutive holds. The BoK attributed its tighter stance to persistent inflation pressures, with the most recent core metrics hitting multi-year high despite falling headline figures, showcasing the pass-through from food and energy into other parts of the economy.
- The China trade data was cited among the key factors in Friday's pronounced sell-off, as the May surplus of $13B missed the $19B consensus. A closer look reveals a less gloomy output however, as imports rose sharply amid sequential gains in iron ore and energy. Recall that the disappointing imports last month foreshadowed multi-month lows in China industrial production, leading to speculation next week's monthly metrics may contain an upward surprise. Shanghai Composite losses were contained below 1% for the week as the index bounced above the key 2,700 level late on Friday.