Weekly market update (April 10, 2010)
- It has been another relatively quiet week of trading, with little economic data or corporate news to provide fuel for the next big move in markets. Volumes moved back into line with three-month moving averages as traders returned from the holiday weekend basking in the afterglow of data showing jobs growth released by the US government as markets were closed last Friday. A spate of risk aversion weighed down markets mid week, as yet another round of uncertainty over Greece’s finances drove investors to take shelter in Treasuries, the dollar and gold. Despite the trouble in Europe, there was no shortage of positive news to buoy sentiment: the March ISM non-manufacturing index hit its highest level since May 2006 on Monday, while the new orders sub-index hit its highest level since August 2005. Strong March same-stores sales figures and excellent y/y comps for February Nevada casino revenue shed a positive light on consumer sentiment. The upward momentum in crude has been checked, with the contract bumping up against the $86 handle after a two-month rally up from around $71. Gold made fresh YTD highs briefly thanks to the Greece situation and ended the week at around $1,161. Hawks and doves on the FOMC continued to illustrate the state of the exit strategy at the Fed. On Wednesday , chief dissenter Hoenig said rates at 1% could still be considered «highly accommodative,» while later in the week Tarullo and Lacker took a more dovish stance, with Lacker insisting that rate increases are still «over the horizon.» In Washington, Former Fed Chairman Alan Greenspan made a spectacle of himself before Congress, deflecting all blame for the economic crisis and claiming that he was right «70% of the time» during his stewardship of the US economy. For the week stocks posted modest gains: the Nasdaq rose 2.2%, the S&P500 climbed 1.4%, and : the DJIA added 0.7%, briefly hitting 11,000 for the first time since Sept 2008 just before the close on Friday.
- Three years ago, in the age before the financial crisis, Monsanto said it would double its annual profit by 2012. On Wednesday the ‘Big Ag’ leader reported less than stellar earnings and said it wouldn’t likely hit its 2012 goal, citing losses in its dwindling Roundup business and weak performance in its next-generation biotech seeds. Many firms have raised guidance ahead of the March quarter earnings season (and a few offered profit warnings). Chevron said it expects its Q1 profit to be higher sequentially, driven by higher earnings from its production and exploration operations. Heavy vehicle maker Navistar raised its 2010 earnings view significantly while aerospace and defense manufacturer Alliant Techsystems said its earnings would be at the upper end of its prior range. Selected casino names gained on Thursday after Nevada disclosed robust sequential and y/y growth in casino spending, including 33% y/y growth on the Vegas strip. Coal miner Massey Energy has dominated national news this week following an underground explosion at its Upper Big Branch coal mine in West Virginia, with 25 confirmed fatalities.
- Apple scored coverage with the first full week of iPad sales and by holding an event on Thursday to preview iPhone OS 4.0l. At the event, CEO Steve Jobs said the company has sold 450K iPads so far. The iPhone OS 4.0 met most expectations, with the signature feature support for multitasking, a key advantage the Google Android OS has had until now. Apple also challenged Google on the ad front, announcing that it would develop a mobile advertising platform called iAd that would let developers put advertising in their apps, with the ads hosted and sold by Apple. In other tech news, selected solar names have been making substantial gains in the second half of the week. JA Solar made a big leg up thanks to very strong Q1 shipment guidance, citing robust demand in the quarter, while Credit Suisse upgraded the Taiwan solar sector.
- March same-store sales data came in even stronger than the positive figures seen in the past three months, although analysts pointed out that comparisons with last year are difficult due to the earlier Easter holiday plus last Spring’s dismal economic conditions. The preponderance of comps were in the positive double-digit range, and only two major reports came in below estimates. Among the standouts were value apparel name Cato, with same store sales up 24%, and department store Kohl’s, with 22.5% comps. Abercrombie and Fitch remains the laggard among major retailers, as the apparel name’s comps were flat with last month’s performance, missing expectations. Note that industry analysts at ICSC predict overall April same-store sales to be down 3% to flat, and multiple retailers have noted that the early Easter will negatively impact April comps.
- The US benchmark rate began the week testing 4% for only the second time since the 2008 financial crisis. Treasury markets were keying off of last Friday’s improved March jobs report and Monday’s ISM manufacturing reading. Traders were also leery of $74B in coupon supply that was set to come onto the market throughout the middle of the week. Wednesday’s $21B 10-year note reopening put any supply concerns to bed after garnering a 3.72 bid-to-cover ratio and drawing 3.9%, which was roughly 7 basis points below where the when issued yield had been trading just that morning. Although Thursday’s long bond reopening acceptance fell short of the 10-year’s, markets have taken notice of the strong influx in demand surrounding the key 4% level in the benchmark rate. The 10-yr/2-yr spread remains above 280 basis points, still right near all time highs, but for the week prices look to finish higher than where they entered.
- In currency trading the greenback began the week on a firmer note in thin holiday trading as dealers focused on a Fed Discount Rate meeting on Monday while rumors made the rounds that the Fed might again raise the discount rate at the confab. In Europe, reports that Greek officials could be looking to renegotiate the standby financing aid package offered by the EU and IMF sparked fresh risk aversion. Various official comments sought to downplay the reports; a senior Greek official clarified that Greece was not trying to push the IMF out of the picture (as had been rumored) but did concede that Greece was seeking more «clarity» on the IMF package. Tension in Europe was exemplified by the spread between Greek and German 10-year bonds widened out to test 450bps by Thursday, the widest spread since the euro was launched in 1999. Dealers commented that buyers of Greece’s looming USD-denominated 10-year bond issue might demand a yield of as much as 7.25%. Greece Fin Min Papaconstantinou commented that it would take time for Greek spreads to narrow and stated that the 2009 Greek deficit to GDP might be revised higher by Eurostat from 12.9%. All the turmoil was fuel for a softer euro, although a sense of calm enveloped the market by Friday morning, after the Greece finance ministry stated that its Q1 budget deficit was down 40% y/y at Â4.3B and the country was on track to meet its 2010 deficit target of 8.7%. Fitch downgraded Greece’s sovereign ratings by two notches later on Friday, although the move did not upset the euro’s slight strengthening and lower spreads on Greek debt. Tentative details of the aid package leaked on Friday as a report emerged that EU ministers could make a formal statement on Greek aid next Friday and may charge Greece in excess of 6% for emergency loans.
- The BoE and ECB maintained rates at existing levels as expected on Thursday. The ECB press conference centered on the peripheral debt situation. Trichet commented that a Greek default was «not an issue» under the current information. EUR/USD maintained a foothold above the 1.33 area. In the UK, Prime Minister Brown formally asked Queen Elizabeth to dissolve the Parliament and set an election date for May 6th.
- US Treasury Secretary Geithner apparently chose diplomacy over political pressure to coax China into changing its FX policies. In order to avert a potential diplomatic gaffe, Geithner delayed publication of the semi-annual currency report to Congress due on April 15 until after a mid-month state visit by Chinese President Hu Jintao. Later in the week, Geithner made a surprise visit to Beijing for closed-door meetings with Vice Premier Wang to present the US case for revaluation of the renminbi.
- In China, rhetoric regarding yuan revaluation remained divided. China’s Foreign Minister reiterated that yuan appreciation would not be a viable solution to rebalancing US-China trade and denied charges that China manipulates its currency for advantage in trading. A Chinese government economist stated that the country could return to a modest yuan appreciation policy and that a widening of the yuan trading band was possible. On the monetary front, one of the newly appointed central bank advisors, Li Daokui, warned the PBoC could consider raising interest rates as early as the current quarter if the rate of inflation exceeds 3%. Li also noted the PBoC would move unilaterally and without rate change by the US. As the currency issue heated up, there was also press speculation that China was close to announcing a revision of its currency policy with possible action similar to China’s currency shift in policy back in 2005.
- Central banks across the Asia Pacific rim rendered rate decisions this week. The Reserve Bank of Australia raised its cash target rate for the fifth time in six meetings, shrugging off the recent deterioration in monthly trade, retail sales and dwelling approvals data. The accompanying statement was on balance more hawkish, containing a specific mention of economic recovery «contributing to pressure on prices for raw materials.» Going forward, RBA said the buildup in investment the resources would lead to even higher pace of growth, even considering the diminishing effects of fiscal stimulus. Moreover, the RBA downgraded its assessment on sovereign risk, suggesting sovereign concerns «have been contained» (revised from «remain elevated»). The Australian dollar extended its gains following the RBA statement, approaching 0.93 handle for the first time in nearly three months.
- This week’s Bank of Korea rate decision – the first under the leadership of new Governor Kim – also took a more hawkish turn, weighing on Korean equity and bond markets in the Friday trading session. The BoK left rates unchanged at 2.00%, as widely expected, and reiterated the need to maintain easy policy for the time being but also pointed out risks of higher inflation in months to come. Governor Kim said considerable upward pressure exists for the second half of the year and noted faster than previously expected growth in domestic economy.
- With little political pressure for further easing from the Bank of Japan following last month’s expansion of the 3-month lending program, the BOJ maintained its economic assessment and kept rates ultralow at 0.1% with monthly JGB buying at Â¥1.8T. The accompanying statement reiterated that economic activity is picking up but growth is expected to be gradual, reaffirming commitment to easy monetary conditions because of persisting downside risks to the economy.
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