Hopes that the Obama administration would launch the final solution to the toxic asset question were dashed this week as Treasury Secretary Geithner disappointed nearly everyone with a plan that has been dismissed as misguided, too vague and short on details. The DJIA fell more than 300 points on Tuesday after Geithner's speech left investors wondering why private capital would jump into bed with the government in buying up toxic securities and what the Treasury will do when stress tests show that leading US banks are technically insolvent. Gold finally broke through the critical $930 resistance level on fresh risk aversion after Geithner's speech; April gold briefly tested $950 before consolidating around $940. The G7 is meeting in Rome, but few surprises are expected. The final stimulus package emerged from conference committee and passed the House on Friday. The Senate is expected to pass the measure later tonight, and President Obama plans to sign it on Monday. The ham handed efforts of the Administration to outline the financial sector rescue package did nothing to inspire equity markets, and they retested recent lows this week. For the week, the DJIA lost 5.3%, the Nasdaq Composite dropped 3.6%, and the S&P500 fell 4.8%.
The worsening economic data seen worldwide this week is only deepening pessimism about the state of the global economy. The US December trade balance registered its fifth consecutive monthly decline in both exports and imports. China's January exports declined by the most on a percentage basis since March 1996, coupled with the highest decline in imports on record in percentage terms. Euro Zone Industrial Production hit multi-decade lows. Capping it all off, Q4 Euro-Zone GDP came in worse than expected, showing a 1.5% q/q contraction, with particular weakness in Italy and Germany. There were two bright spots among all the gloom: the Baltic Dry Index has sustained its continuing recovery, with gains in 17 straight sessions, while some of the sovereign spreads inside the Euro Zone have narrowed against the German Bund.
In equity news, GM added to its layoffs this week, reportedly trimming an additional 10K salaried positions around the world, or 4% of its workforce, and cut pay across the board by 7-10%, including executives. Big cola had a fairly solid fourth quarter with both Coca-cola and Pepsico reporting more or less in-line with the Street. Pepsico's CEO did warn that the first half of 2009 would be a big challenge, and the company also saw big y/y declines in its US and European units in a sign of consumer softness. Hotel giant Marriott was behind the ball in Q4 and cut its forecast for 2009.
Intel offered one piece of upbeat corporate news, announcing a two-year, $7B investment program for manufacturing facilities in the US designed to make its new 32nm chips. But the rest of the tech sector was battered by weak earnings reports and other bad news. Research in Motion was a big looser this week after the firm said its Q4 earnings would come in at the low end of its prior guidance range. Struggling to hold up its sales numbers, Dell said it would offer 0% financing to small businesses. Nvidia and Applied Materials both offered unexpectedly large quarterly losses. JA Solar cut its 2009 forecast, helping eliminate some of the gains it has made on optimism over government stimulus spending.
In fixed income, the recent trend of rising yields and declining prices in government bond markets came to an abrupt end this week as financial markets received the US Treasury's latest financial bailout plan with resounding disappointment. The lack of any real details in Geithner's announcement showed that last week's rally in Eurobonds and the narrowing of 2-year swap spreads was premature, inducing a fresh bout of risk aversion across most asset classes. The US benchmark yield approached 3.05% on Monday as this week's $67B in refunding supply overshadowed the market. By mid-week the 10-year yield had backed off nearly 30 basis points to trade below 2.75%, also aided by comments from a Chinese regulator who indicated his government had few real alternatives to US Treasuries. Treasury prices moved sharply lower on Friday after Thursday afternoon's vicious short covering stock market rally, which followed reports the Obama administration is working on a specific plan aimed at stemming housing foreclosures. The declines retraced move of the move seen in yields post Geithner. The 10-year yield seems to have found a floor just below 2.9% and the long bond yield is nearing 2.65%, which is just a few basis points below where it entered the week.
There were fresh signs of improvement in the corporate bond market, however. Monday's two part $4B Cisco offering priced roughly 200 basis points above respective Treasuries for both 10- and 30-year paper, indicating markets are functioning efficiently for high-quality companies. So far this year investment-grade companies have issued more than $78B in non-government guaranteed paper compared to just $21B in the final quarter of 2008. High-yield markets were also encouraged by successful offerings coming out of the oil patch, including issues from Chesapeake, Forest and Denbury Resources. Ratings agencies remained active, with both S&P and Moody's cutting Dow component Alcoa to the lowest level of investment grade, while Belgium's Fortis was cut to junk. British Airways and Textron were also downgraded over the course of the week. On a positive note, Amazon's debt ratings were raised to investment grade at S&P.
A mid-week report from Moody's made the rounds suggesting the creditworthiness of the US and the UK is deteriorating faster than many other AAA-rated countries and that eventually the ongoing economic crisis could put their ratings in jeopardy. Despite the continued cautiousness surrounding the US outlook, hope remains that the steps taken thus far by the Fed are starting to have an impact. Thursday's announcement revealed the Fed's asset holdings shrank for the sixth straight week, highlighted by $7B declines in both discount borrowing and the commercial paper funding facility. Holdings in these two particular programs are well off of levels from last quarter, indicating the private sector may be picking up the slack.
The energy complex spent much of the week moving lower though the trading was very product specific. The EIA, IAE and OPEC all put out their short-term monthly oil forecasts and all indicated they see greater declines in demand than their prior reports suggested. March crude began the week at roughly $40 and traded below $34 on Thursday. Large divergences in trade occurred between March WTI and Brent crude as well as reformulated gasoline and distillate products. Gasoline prices rallied pushing crack spreads out to levels not seen since 2007 before a sharp reversal on Friday. March crude rallied nearly 10% in the week's final session ahead of next week's expiration. The spread between March and April crude widened out to $9 on Thursday before contracting back $5, and the March-Dec approached $30 briefly before getting cut in half on Friday. The Spider Gold Trust ETF continues to see record demand as its physical holdings climbed to another all time high of more than 970 tons. March copper after looking primed to break out of multi-month trading range last week, fell back towards $1.55.
In currency trading, EUR/USD maintained a 1.27 to 1.31 range for the week, a corridor that allegedly corresponded to large option barriers. The euro exhibited some volatility on reports and then denials of a Russian corporate debt-restructuring plan; overall sentiment stemming from the Russian situation has placed a ceiling for the euro-related pairs. ECB members are becoming more and more vocal over the potential for cutting interest rates below 2.0% by March, although they have also insisted that rates will not hit zero. Europe's central bankers have surely been prompted by reports from leading economists, who have slashed Euro Zone GDP and inflation forecasts. An ECB survey of professional forecasters cut their 2009 GDP view to -1.7% and the 2010 estimate to 0.6%, while their 2009 inflation outlook was cut to 0.9% from 2.2%.
Sterling had a volatile week, prompted in part by the BoE's quarterly report, which stated that Britain was in a "deep recession” and implied that further easing of interest rates may be needed, despite their already record low levels. The BoE also informed markets that it could begin purchasing a range of assets under the APF scheme, including Gilts. The BoE's King observed that the sharp drop in the pound would act as a stimulus for demand. UK Chancellor Darling reiterated that the UK would not adopt the euro and that measures taken by the UK will help to shorten the recession. Adding to the pressure on the pound, Lloyds released a trading update on Friday indicating that they were expecting impairments at HBOS to be £1.6B higher than initially expected.
In other currency trading, the yen weakened mildly through Friday. The BoJ's chief economist Momma set off the decline on Monday, saying that he expected a large contraction in Japan's Q4 GDP and warning there was “no light at the end of the tunnel.” Momma also said that both Japanese and Asian economies are worsening faster than previously believed. The Bank of Canada's Carney commented that the Canadian economy was in recession. USD/CAD stayed in a 1.22 to 1.25 range as strength in metals managed to par CAD losses. The Russian Central Bank raised some lending rates in its continuing defense of the ruble, which managed to show some strength and pull back from the 41.00 basket floor.
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