Markets opened in the US for trade on Tuesday forced even lower by pessimism over the US auto industry bailout, Eastern European currency chaos and President Obama's signing of a contentious stimulus bill into law (market were close on Monday for the President's Day holiday). Obama's "three legs of the stool"-stimulus, housing and banking rescue plans-were all addressed this week in one way or another. Obama signed the $787B stimulus package on Tuesday, announced a detailed plan on stemming home foreclosures on Wednesday, and on Friday chatter circulated that details of the bank plan may be forthcoming sooner rather than later. On Thursday the weekly continuing jobless claims came in just shy of 5 million, for yet another all-time record high, while on Wednesday the FOMC minutes failed to shed more light on possible plans to buy Treasuries and gave further downward revisions on 2009 GDP forecasts. Investors fleeing for cover in gold kept the yellow metal just shy of the $1,000/oz level all week, making 11-month highs on Friday. The DJIA flirted with November lows on Tuesday and Wednesday, finally breaking the 7,449 level on Thursday afternoon, a level last seen back on Nov 21st at the height of the credit crunch. Things only got worse on Friday as bank nationalization rumors beat the stuffing out of the major US indices, with the DJIA hitting its lowest mark since October 2002 before doubling witching volatility and the rumor mill helped rally stocks, with CNBC reporting that Treasury sources told them some details of the banking rescue plan would be announced next week. For the week, the DJIA lost 6.2%, the Nasdaq Composite dropped 6.1%, and the S&P500 fell 6.9%.
The specter of bank nationalization has stalked markets for quite some time, but fears of heavy-handed government intervention jumped into overdrive in the wake of Treasury Secretary Geithner's vague bailout plans last week. This week investor blowback slammed into the financials, with Citigroup and Bank of America the primary victims. Shares of the two banks, which have been called technically insolvent by more than one commentator, stabbed downwards precipitously all week long, with things getting really dicey on Friday. Press reports overnight on Thursday prompted Friday's panic selling-newspapers wrote that some US banks have been holding talks with regulators to provide them with more capital but stop short of outright nationalization, naming Citi and BoA in particular. Citi came out with a half hearted denial by mid morning on Friday, asserting that the bank has "a very strong capital base." BoA's CEO was more forceful, asserting his bank does not need any more assistance and reportedly telling his senior executives that US government officials have assured him that nationalization is not an option. Nevertheless, various government takeover rumors made the rounds, with some commentators reading the tea leaves from Fed Chairman Bernanke's comments on Wednesday, highlighting his statement that the administration is strongly committed to keeping banks private or "quickly returning them to private hands." By Friday afternoon, Citi found a floor at $1.60 and BoA hit the brakes at $2.60 after the White House reiterated its "strong belief" that a privately held banking system is "the right way to go," with shares in banks bouncing back somewhat ahead of the close.
On Wednesday, as the January housing starts and building permits data registered fresh record lows, the Obama administration announced its $75B housing relief plan. The plan represents an attempt to put a floor under home prices and arrest the damaging spiral of declining prices by helping 4 to 5 million "responsible homeowners" refinance mortgages and protecting another 3 to 4 million homeowners by lowering the risk of imminent default. In addition, the plan seeks to boost the loan portfolios of Freddie Mac and Fannie Mae by $50B a piece, injecting fresh funds into the two GSEs via preferred stock purchases. The FDIC's Bair called the plan the "missing link" in rescue effort, noting that it should begin having an effect on markets by March. Not everyone has been so enthusiastic, as Rick Santelli's epic rant on CNBC demonstrates.
General Motors and Chrysler handed their viability plans to the administration on Tuesday, as required by the terms of their emergency loan packages from back in December. Both companies increased their total loan requests: GM said it would need $9.1B-$16.6B in additional loans to complete its restructuring (in addition to the $13.4B it got in December), while Chrysler asked for another $2B for a total request of $9B. In addition, GM said it would run out of funds in March without government assistance, warning that a bankruptcy could cost as much as $100B. Chrysler said it would need $20-25B in the event of bankruptcy. The administration said that the "auto industry task force," led by Treasury Secretary Geithner and advisor Larry Summers, would meet on Friday to consider the plans (note that the idea of naming a "car czar" seems to have been abandoned). The New York Times quoted an administration official as saying that President Obama was reserving for himself any decision on the viability of GM and Chrysler and that the administration had not ruled out government-backed bankruptcy plans. Senate Banking Committee Chairman Dodd said on Friday that he does not want to see pre-packaged bankruptcy for the auto industry, but stated it could be a solution.
Earnings reports in the week provided a look at which corporations might conceivably soldier through the recession without too much damage, if not outright growth. Retailing giants Wal-Mart and CVS reported solid fourth-quarter earnings, although Wal-Mart's forecast for the coming quarter and full year were tilted a bit below par. CVS's CEO bluntly stated that his company was "immune" to the recession. Cable operator Comcast had a good quarter and even raised its dividend, evidently expecting even more people to be staying home to watch cable TV. And speaking of recession-proof, spam manufacturer Hormel beat earnings estimates and reiterated its 2009 forecast. Dow component Hewlett-Packard's revenues lagged estimates by nearly 10% and its earnings guidance was strikingly weak. HP's CFO warned that the company expects to see more inventory reductions to deal with ever slowing demand. Deere and Goodyear offered very weak earnings and Goodyear said it would cut 7% of its workforce. The CEO of Deere said he expects double-digit y/y declines in commercial and construction sales.
Government bond markets continue to wrestle with two competing forces. First there are concerns surrounding the big increases in supply needed to fund government relief programs, concerns which have kept upward pressure on yields. These concerns are frequently offset by waves of flight to safety trades that emerge when equity and currency markets come under increased pressure stemming from the crisis. It was these risk aversion trades that sent the US benchmark yield down some 25 basis points over the week's first two sessions. By mid-week traders were looking past the turmoil in equity and currency markets, selling government bonds after the US Treasury announced $94B in fresh 2-, 5-, and 7-year note supply would come to market next week. Bond prices were rallying once again later in the week as major equity indices tested or approached the November lows. For the week Treasury prices improved pushing the bench mark back yield back below 2.75% and the long bond towards 3.5%.
In currencies, Eastern Europe and widening EU spreads were in tight focus throughout the week, making traders wonder whether Germany and France could be forced to bailout entire nations rather than just individual banks. Concerns died down somewhat after Eastern European currencies recovered a bit later in week, providing some covering in related risk-aversion trades (gold, fixed income and equities). Poland sold a helping of EU grants due to the "attractive" EUR/PLN exchange rate, which held around the 4.80 area, below the Polish prime minister's "line-in-the-sand" level of 5.0. The focus on the CEE4 currencies of Eastern Europe is prompted in part by the $1.7T the countries have borrowed abroad, of which at least $400B is due to be refinanced in 2009. Some market participants have noted that as much as 60% of Polish mortgages are denominated in CHF. And according to one report, Russia "has held 36% of its foreign reserves since August defending the ruble" in what amounts to the largest run on a currency in history.
All in all, the Eastern European fracas has hurt the euro, and traders are speculating about the possible impact on the Western European banking sector. Moody's warned this week that weakness in East European banks could spill over into their Western financial parents. EUR/USD started the week breaking below its recent 1.27-1.31 consolidation range in the aftermath of the G7 summit. Dealer chatter circulated about big April 1.2000 and June 1.1000 euro put options were being place as the 1.2730 level was unable to be retaken on a weekly close basis. Germany said it would host the leaders of Britain, France, Italy, Spain, Netherlands, Czech Republic and Luxembourg over the weekend to prepare a common European stance ahead of the G20 summit, although there is little hope that the meeting will develop concrete measures designed to address market concerns.
In Britain the BoE's minutes from the Feb 5th MPC meeting included the phrase many have been waiting for: quantitative easing. The BoE's King confirmed that he has asked Chancellor Darling for permission to undertake various quantitative easing schemes, which could include buying commercial paper, corporate bonds and a range of other assets. The GBP was under some pressure following a report in the UK Telegraph that Britain's AAA credit rating is under threat from the sheer scale of the nation's bank bail-out. GBP/USD tested below 1.41 before rebounding toward 1.44 as the week ended, aided by the BoE's insistence that quantitative easing operations could begin earlier than expected.
The yen was softer for the week as dismal domestic data weighed on sentiment. The Q4 Japanese annualized GDP number came in at -12.7%, the largest contraction since the 1974 oil embargo, while BoJ Chief Shirakawa said economic conditions would remain severe this quarter. Shirakawa also warned that lowering overnight rates does not always translate into lower long-term rates. The BoJ's monthly report heaped on more of the same, noting that the Japanese economy was deteriorating significantly. Japan's Topix Index fell to its lowest level since 1984.
The Swiss Franc remained subdued throughout the week, hampered by concerns that Swiss banking secrecy laws have been compromised by UBS's settlement with the IRS, which may force it to reveal names of clients who the agency sees as tax evaders. Concerns also surfaced about CHF-denominated Eastern European debt, adding pressure to the currency. USD/CHF tested above the 1.1880 level while EUR/CHF cross held the 1.47 level.
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