Sunday, February 1, 2009

Weekly Market Wrap Up

The US and world economy kept limping along this week with no end in sight for the economic crisis. If anything, conditions seemed to worsen somewhat. US corporations announced approximately 75,000 job cuts on Monday, with Caterpillar alone cutting 20,000 workers, while the advance Q4 GDP reading came in at -3.8%. On Wednesday the House passed the over $800B stimulus package, without a single Republican vote in favor. A modified and enlarged version of the bill will likely get Senate passage next week. January US consumer confidence hit all-time lows once again, while front-month gold managed to hold firm above the $900/oz level for most of the week, offering what seemed like the only safe harbor for many investors. Stock markets continued their losing ways-for the week, the DJIA fell 1%, the Nasdaq fell 0.1%, and the S&P500 slipped 0.7%, posting its worst January ever, down 8.6%.

The week saw the rise and fall of the “bad bank” strategy for rescuing the world financial system. Early on in the week government officials and analysts in the US and Europe bandied about the concept, which would have involved setting up an RTC-like structure for buying up and consolidating toxic assets from financial firms. On Tuesday Senator Dodd said the Obama Administration was mulling establishing a bad bank and CNBC reported that a "bad bank" plan might be announced soon. The IMF's Strauss-Kahn weighed in, noting that he is in favor of a "bad bank" plan. But major players pooh-poohed the idea: George Soros cautioned the model might not be the best approach for fixing the financial sector, while Oppenheimer's Meredith Whitney said the idea would not boost lending. By Friday, the concept was looking dead in the water. All the bad bank talk boosted financial names mid week, helped along by Wells Fargo's very positive fourth-quarter earnings report. Many of the leading US bank names rose 10-15% on Wednesday on the news, although most of those gains had evaporated by Friday.

Anticipation for the advance fourth quarter 2008 GDP data built up in the background through the second half of the week, with whisper numbers as low as -7% making the rounds. The data showed a 3.8% contraction, the worst showing since 1982. Although the initial result was better than consensus expectations for -5.5%, the data could be lowered in the two revisions due in the coming weeks. Market participants were more concerned by the rise in inventories seen in the GDP report-the first rise in inventories in over a year could crimp GDP for the rest of 2009.

The record low New Home Sales data on Thursday added to the gloomy mood. After some constructive housing data last week, the 14.7% y/y decline in December new home sales and another all-time low in the November Case Shiller Home Price Index foreshadowed no recovery in housing.

US corporations continued to offer dismal quarterly results as earnings season hit its stride. Dow components Boeing and Caterpillar missed earnings estimates, while Ford reported a $14.6B loss for 2008, its worst year in its 105-year history. Earnings from automobile component manufacturers Lear, American Axle and Autoliv were a complete disaster. Shares in the major airlines plunged after Delta missed earnings estimates in a big way; better-than-expected results from US Airways, Continental Airlines and JetBlue later in the week didn't seem to help. Some healthier earnings reports came from McDonalds, Amazon, US Steel and Nucor. In other corporate news, Pfizer announced it would acquire Wyeth for $68B and Dow Chemical told Rohm and Haas that it would be unable to close on its $15B takeover of the company. In addition, Dow's CEO warned that a dividend cut is on the table (note that Dow has maintained or increased its dividend every quarter since 1911).

Government bond yields continued to push higher this week. Benchmark spreads widened with the 10-year Treasury, Bund, and Gilt yields all testing their highest levels in nearly two months. The Treasury market absorbed $70B in fresh two- and five-year supply; attention now turns to the Treasury's quarterly refunding announcement next Tuesday. This week's FOMC announcement, that fell short of some expectations that it would include an initiative to buy long-dated Treasuries, had little effect on the downward pressure in prices, but traders will certainly continue to search for additional clues on what might trigger Fed action. Finally, by week's end signs emerged that credit markets are slowly continuing to thaw. Goldman Sachs successfully came to market with $2B in 10-year non-FDIC backed bonds, though they did have to pay 500 basis points above Treasuries. The Fed also released data for the latest week showing a noticeable decline in the commercial paper holdings in its CPFF. The reduction in holdings was greater than the amount already owned in the CPFF that was set to mature indicting issuers most likely returned to the open market.

In currencies, appetite for risk fluctuated throughout the week depending on the earnings report or data point of the moment. Willingness to take on risk reached its peak as speculation mounted that the US would establish a bad bank and the House passed the Obama administration's bailout package, while risk appetite waned ahead of the US GDP data on Friday. In any case, the greenback maintained a steady tone against the major pairs throughout the week. USD tested above 1.3330 mid-week and ended Friday near the 1.29 area, more or less where it began on Monday. Overall dealers attributed the USD's sturdiness to the opinion that the Fed and US officials were being more proactive in tackling the crisis than their Europe colleagues.

Deepening concerns about sovereign ratings inside the EMU hampered the euro. At the World Economic Forum in Davos, ECB Chief Jean-Claude Trichet said the crisis would not break up the Euro Zone but vague rumors circulated that Greece could pull out of the currency this weekend. In the meantime, Moody's cut Ireland's sovereign debt outlook to Negative from Stable. Moody's later warned it was "closely monitoring" the creditworthiness of all AAA-rated sovereigns and was planning to issues a special comment on AAA-rated sovereigns in the near future.

In other FX action, sterling managed to recover from recent all-time lows against the EUR, JPY and 23-year lows against the USD. EUR/GBP moved below 0.89 by Friday, while GBP/USD tested back above 1.43 versus 1.3505 last week. In yen price action speculation grew among analysts regarding if or when intervention could take place. A Credit Suisse analyst noted that the BoJ could intervene around the 87.00 level, while the Bank of Tokyo commented that USD/JPY was unlikely to sustain momentum above 90.00 area. The SNB's Roth prompted decent CHF buying mid-week after he noted that there was no need to curb CHF strength at this time. Swiss Finance Minister Merz noted the government would support the SNB in selling francs.

The ruble remained under a cloud despite the new upper limits established by the Russian Central Bank last week as trading showed the bank's line in the snow would be tested sooner rather than later. The Russian currency tested above 40 against its basket even as Central Bank Chief Ignatyev reiterated his intention to defend the 41 level via currency intervention or “other monetary tools” if necessary. Ruble action helped the USD, as the USD/RUB cross saw its biggest two-day move in a decade. Russian banks were reportedly in need of large capital injections while the Russian Central Bank Gold/FX reserves fell by $10B to $386.5B.

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