TradetheNews
07-02-2011, 08:40 AM
- Global equity markets surged this week as the Greek government managed to pass a five-year austerity plan, and data from select US manufacturing reports suggested that the recent soft patch will not turn into another economic downturn. In Greece, domestic political squabbling provided some volatility ahead of parliamentary votes on Wednesday and Thursday, but in the end the Greek ruling party carried the day and forced through its medium-term plan, clinching the release of the next tranche of IMF financial aid and averting an immediate default. European governments made progress on encouraging domestic banks to agree to roll over Greek debt into longer maturities, although investors have few illusions about Greece's long-term viability as yields on Greek government debt remains disturbingly high. In the US, the June ISM Manufacturing and Chicago PMI reports beat expectations by healthy margins, suggesting that the recent slump in manufacturing may be a temporary phenomenon. QE2 expired on Thursday without causing any major ripples in the Treasury market, although there were notably weak auctions for 2-, 5- and 7-year notes, pushing yields higher. Fed Governor Bullard praised quantitative easing for preventing a Japan-style crisis in the US economy and explained that the effects of QE2 lag implementation by 6 to 12 months. Oil futures moved up from the six-month lows seen in the wake of the IEA's reserve release announcement last week, with front-month WTI crude closing out the week just shy of $95. Spot gold ended below $1,500 for the second consecutive week, hitting six-week lows around $1,485 as risk appetite picks up once again. Stock markets posted impressive weekly gains, their best since July 2009: the S&P rose 5.6%, the Dow gained 5.4% while the NASDQ surged 6.2%.
- Shares of the leading US banks and selected financial industry firms made strong gains this week on a handful of unrelated stories, in addition to the overall gains in equity markets. Bank of America reached a deal to settle legacy Countrywide RMBS mortgage claims in exchange for cash payments of $8.5B, in addition to setting aside several billion in fresh provisions to cover RMBS exposure. Analysts said that the settlement will provide a good framework for expediting the settlement of other outstanding RMBS claims and help the overall industry recover more quickly. Card issuers gained after the Fed revised its rules for implementing the Durban Amendment to the Dodd-Frank Act, raising the cap on fees for debit card transactions to $0.21 from the preliminary proposal of $0.12 and adopting a position on so-called 'network exclusivity' that was less onerous for card processors. Shares of Visa gained around 20% on the week, while other firms with substantial debt card businesses were up sharply as well on the week.
- Investors' increased willingness to add risk sparked an abrupt reversal in fixed income markets this week. The successful passage of Greece's two austerity votes and a couple of better than expected looks at US June industrial data spurred heavy selling in US Treasuries. European peripheral spreads narrowed as well, as traders moved away from the relatively safety of gilts and bunds. The US 10-year yield surged more than 30 basis points, backing up to 3.2%. The benchmark spread widened to more than 270 basis points. Despite the BUND yield climbing back above 3%, it is now more than 15 basis points below that of a comparable 10-year Treasury. Inflation expectations have also moved higher. The 5-year TIPS breakeven now tops 245 basis points after entering the week below 225. Fed fund futures prices have come in too, and now project a 25 basis point hike in the funds rate by Q4 2012.
- FX trading this week revolved around the critical parliamentary votes on the Greek government's five-year austerity plan. Ahead of the initial vote, fears about the government's slim 155 majority in a parliament of 300 members provided a certain amount of euro volatility as individual members declared for and against the measures. In the end, the ruling party held together and passed the austerity program despite massive street protests against it.
-The next potential debt crisis continued to brew as President Obama and Republican leaders dug in to their hardened positions in the debt and budget negotiations. In its annual review of the US economy, the IMF stated that it sees US growth under 3.0% for the next half decade and warned that the debt ceiling should be raised quickly to avoid severe shock to economy. Meanwhile the ratings agencies continued to threaten to take action if the debt ceiling is not raised before August. The Treasury Department affirmed that its borrowing authority would run out as of August 2, and a White House source noted that realistically a debt deal needs to be in place before the last week of July to allow Congress the necessary time to pass the bill through both houses. Note that there were rumors that Treasury Secretary Geithner is considering leaving his position after a budget deal has been reached, though he quickly denied it saying he will be staying "for foreseeable future." The greenback maintained a soft tone as uncertainty over the debt ceiling was the driving factor in light month-end trading.
- Forex technical levels were key ahead of the end of the month and the quarter. EUR/USD tested a key 2011 uptrend line around the 1.4110 area and then rebounded after Greece passed its austerity plan. Following passage EUR/USD tested three-week highs around 1.4550 while the EUR/CHF cross came off all-time lows around 1.1810. It should be noted that China's Premier Wen reiterated his support for Europe during his five-day visit to the region. Dealers saw decent Middle East bids help the euro higher. Ahead of next weeks' ECB policy decision, ECB Chief Trichet again said that the central bank remains in a state of "strong vigilance."
- The GBP/USD pair was weighed down by a slight downward revision to the UK final Q1 GDP reading. GBP/USD probed the lower end of the 1.59 handle as BoE members testified before the Treasury Select Committee, offering another batch of dovish commentary on the UK economy. Later on in the week GBP/USD managed to re-test the key neckline of its H&S top formation at 1.6115 before heading south to finish out the week around 1.6070.
- In China, the Shanghai Composite followed last week's impressive 4% run with a more modest 0.5% increase. Recent comments from Chinese premier Wen on inflation levels prompted the PBoC to break a pattern of one-year rate hikes every-other-month that stretched back to October. With the rally in mainland housing prices stalling, local press speculated the PBoC may now be willing to slow its monthly tightening of reserve requirement ratio (RRR), which recently moved to a record level of 21.5%. Justifying greater caution at the Chinese central bank, this week also saw more signs of slower Chinese manufacturing growth, as June PMI fell to 50.9 - six-tenths below consensus and its lowest level since early 2009.
- Shares of the leading US banks and selected financial industry firms made strong gains this week on a handful of unrelated stories, in addition to the overall gains in equity markets. Bank of America reached a deal to settle legacy Countrywide RMBS mortgage claims in exchange for cash payments of $8.5B, in addition to setting aside several billion in fresh provisions to cover RMBS exposure. Analysts said that the settlement will provide a good framework for expediting the settlement of other outstanding RMBS claims and help the overall industry recover more quickly. Card issuers gained after the Fed revised its rules for implementing the Durban Amendment to the Dodd-Frank Act, raising the cap on fees for debit card transactions to $0.21 from the preliminary proposal of $0.12 and adopting a position on so-called 'network exclusivity' that was less onerous for card processors. Shares of Visa gained around 20% on the week, while other firms with substantial debt card businesses were up sharply as well on the week.
- Investors' increased willingness to add risk sparked an abrupt reversal in fixed income markets this week. The successful passage of Greece's two austerity votes and a couple of better than expected looks at US June industrial data spurred heavy selling in US Treasuries. European peripheral spreads narrowed as well, as traders moved away from the relatively safety of gilts and bunds. The US 10-year yield surged more than 30 basis points, backing up to 3.2%. The benchmark spread widened to more than 270 basis points. Despite the BUND yield climbing back above 3%, it is now more than 15 basis points below that of a comparable 10-year Treasury. Inflation expectations have also moved higher. The 5-year TIPS breakeven now tops 245 basis points after entering the week below 225. Fed fund futures prices have come in too, and now project a 25 basis point hike in the funds rate by Q4 2012.
- FX trading this week revolved around the critical parliamentary votes on the Greek government's five-year austerity plan. Ahead of the initial vote, fears about the government's slim 155 majority in a parliament of 300 members provided a certain amount of euro volatility as individual members declared for and against the measures. In the end, the ruling party held together and passed the austerity program despite massive street protests against it.
-The next potential debt crisis continued to brew as President Obama and Republican leaders dug in to their hardened positions in the debt and budget negotiations. In its annual review of the US economy, the IMF stated that it sees US growth under 3.0% for the next half decade and warned that the debt ceiling should be raised quickly to avoid severe shock to economy. Meanwhile the ratings agencies continued to threaten to take action if the debt ceiling is not raised before August. The Treasury Department affirmed that its borrowing authority would run out as of August 2, and a White House source noted that realistically a debt deal needs to be in place before the last week of July to allow Congress the necessary time to pass the bill through both houses. Note that there were rumors that Treasury Secretary Geithner is considering leaving his position after a budget deal has been reached, though he quickly denied it saying he will be staying "for foreseeable future." The greenback maintained a soft tone as uncertainty over the debt ceiling was the driving factor in light month-end trading.
- Forex technical levels were key ahead of the end of the month and the quarter. EUR/USD tested a key 2011 uptrend line around the 1.4110 area and then rebounded after Greece passed its austerity plan. Following passage EUR/USD tested three-week highs around 1.4550 while the EUR/CHF cross came off all-time lows around 1.1810. It should be noted that China's Premier Wen reiterated his support for Europe during his five-day visit to the region. Dealers saw decent Middle East bids help the euro higher. Ahead of next weeks' ECB policy decision, ECB Chief Trichet again said that the central bank remains in a state of "strong vigilance."
- The GBP/USD pair was weighed down by a slight downward revision to the UK final Q1 GDP reading. GBP/USD probed the lower end of the 1.59 handle as BoE members testified before the Treasury Select Committee, offering another batch of dovish commentary on the UK economy. Later on in the week GBP/USD managed to re-test the key neckline of its H&S top formation at 1.6115 before heading south to finish out the week around 1.6070.
- In China, the Shanghai Composite followed last week's impressive 4% run with a more modest 0.5% increase. Recent comments from Chinese premier Wen on inflation levels prompted the PBoC to break a pattern of one-year rate hikes every-other-month that stretched back to October. With the rally in mainland housing prices stalling, local press speculated the PBoC may now be willing to slow its monthly tightening of reserve requirement ratio (RRR), which recently moved to a record level of 21.5%. Justifying greater caution at the Chinese central bank, this week also saw more signs of slower Chinese manufacturing growth, as June PMI fell to 50.9 - six-tenths below consensus and its lowest level since early 2009.