US equity indices continued to take out big psychological levels this week, with the DJIA opening on Monday below 7,000 for the first time since October 1997. By Friday afternoon the DJIA breached the 6,500, prompting CNBC's Jim Cramer to call 5,320 his “worst-case scenario.” More stress among the UK's banks, including a big quarterly loss and a sizable capital raise at HSBC, and Europe's failure to aid Eastern Europe started things off on the wrong foot Monday morning. Markets recovered mid week as traders vainly placed their hopes on rumors of a new Chinese stimulus package. Chinese Premier Wen announced no additional spending, prompting traders to wax pessimistic about Friday's employment data, sending markets down once again. On Friday the unemployment rate came in at 8.1%, higher than any time since December 1983. In the meantime, GM continued to be harried by bankruptcy worries and shares of US financials got even worse. Front-month crude has strengthened on a report that the Chinese may plan to shift some of its reserves from US Treasuries into oil. Despite a modest rally Friday afternoon, equity markets had their worst week of the year to date, with the DJIA down 6.1%, the Nasdaq Composite off 6%, and the S&P500 lower by 7%.
On Tuesday the Fed and Treasury fleshed out details of the long awaited TALF program. According to their joint statement, TALF lending will begin on March 25th and run through December 2009. The New York Fed will lend up to $200B secured by certain AAA-rated securities back by newly and recently originated auto loans, credit card loans, student loans and SBA-guaranteed small business loans. In addition to the TALF, which commentators expect to become the biggest government rescue fund yet, there were reports that the Obama administration is mulling the creation of multiple investment funds to buy toxic assets, including separate funds capitalized by both government and private funds and run by private investment managers. Other reports speculated that the TALF may be expanded to buy up toxic loans.
Fallen insurance giant AIG kicked off the week with a bang, reporting a fourth-quarter loss of $61.7B and confirming the government would restructure its rescue package yet again, handing the company another $30B in taxpayer funds to be used on an "as needed" basis and converting an existing $40B stake in preferred shares to common shares, raising the taxpayers' total exposure to the company to $163B. Pressure is building on the firm to name the counterparties to its giant network of derivatives, prompting members of Congress to demand that the Fed name names. Senator Dodd went as far as to warn Congress might compel the Fed to reveal the information.
Shares of the leading US banks just kept falling all week. Moody's put the ratings of Bank of America and Wells Fargo on review for possible downgrade due to pressure on the banks' capital. WFC responded by cutting its dividend. Bank of America noted that it prodigal partner Merrill Lynch has uncovered "hundreds of millions of dollars" in irregularities in its 2008 currency and derivative trading. In Congressional testimony, Ben Bernanke said that while Citigroup is under stress, it still qualifies as well capitalized - but his statements hardly helped the bank's share price, which plunged below $1.00 on Thursday. Speculation has intensified that Citi could be removed from the DJIA any time.
The steady decline in GE's shares put major downside pressure on markets this week as speculation intensified that the ratings agencies would cut GE's coveted AAA rating. PIMCO's Bill Gross went as far as to say that the big declines in GE shares show the market has already priced in a downgrade. Rumors circulated that GE needs additional funds to shore up GE Capital, while the media discussed GE Capital's expensive exposure to commercial real estate and exposure to Eastern Europe. Thursday morning GE's CFO gave a long, candid interview on CNBC, insisting that the speculation about GE Capital is overdone and affirming rather adamantly that the unit needs no additional capital. But on Friday, there were reports GE Capital might participate in the upcoming TALF program.
February same-store sales were as dismal as they've been for the last several months. Wal-Mart extended its solid performance, with sales up 5% in the month, BJ's just managed to keep same-store sales positive, while Costco and Target reported declines. Department store names disclosed yet another month of steep y/y monthly declines, with high-end names Saks and Nordstrom falling 15% and 26%, respectively. Apparel sales were dismal as well, although youth-oriented names Aeropostale and Hot Topic showed better than expected y/y sales increases than in January. By far the biggest slump was at Abercrombie, whose same-store sales declined 30%.
The ongoing struggle between flight to quality (which has bid up short-dated Treasuries) and supply concerns (which have prompted relative weakness in the rest of the curve) was overshadowed by developments in the UK this week. The Bank of England's move to enact quantitative easing and Gilt purchases was widely anticipated, but the sheer size of the £75B operation and the maturity of Gilts in play came as a surprise. As a result a huge bid moved into the belly of the UK yield curve on Thursday and the resulting curve flattening spilled over into Treasuries. The 10-year note has moved firmly back below the psychological 3.00% level, whilst the benchmark 2-yr/10-yr yield spread is well below 200bps. Supply is back in focus next week with $63B in re-openings of 3- and 10-year notes and 30-year bonds. Some signals of stress have returned to credit markets thanks to lingering concerns over major financial institutions. Three-month USD Libor inched up by 3 basis points over the week to 1.2925%, its highest fix since early January. The iTraxx Crossover CDS Index of high-yield European corporate names also blew out to a fresh record high at 1,170bps.
In currencies, the risk aversion theme quickly came back into vogue and helped to keep the greenback firmer from closing levels seen last Friday. Concerns about Eastern Europe lingered after the EU's disappointing weekend summit, which failed to provide any concerted support for the region. Dealers wondered on Monday whether the pre-Asian market lows in EUR/USD were the sort of "rock solid support" that could last through the remainder of the week, into US payroll data. By Friday the largest monthly decline in US nonfarm payroll data since October 1949 helped the EUR/USD move back above the 1.2700 level, leaving it little changed for the week. The overall theme for the euro was the lack of any impetus to significantly test lower after a break of alleged option-related support at 1.2500.
The European service PMI data midweek kept the pressure on the ECB for a rate cut. There were a few moments when risk appetite reappeared and eroded the USD's appeal, such as chatter that China might announce a second stimulus package and use FX reserves to buy commodities (at the expense of US Treasuries). But the inability of EUR/USD to sustain any break below the 1.2500 level weighed heavily on position squaring, particularly as the US employment picture was beginning to come into focus. Also note that the Indian Central Bank unexpectedly cut its key interest rates ahead of the planned April 21st policy meeting, representing the bank's fifth interest rate cut since October 2008.
The ECB cut rates by 50bps to 1.50% as expected. ECB President Trichet indicated that the decision was not unanimous, but reached by consensus. Currency dealers speculated there may have been dissent on both sides of the 50bps move. The ECB hinted it still has to room lower its key interest rates, depending on future ECB staff projections for 2009 & 2010 GDP and inflation. Following the rate cut, Daily Telegraph commentator Ambrose Evans-Pritchard wrote that European banks face a USD funding gap as a result of aggressive expansion around the world and may have difficulties rolling over their debts.
The Bank of England continued its easing cycle, cutting its key rate to another historic low at 0.50%. With approval of the Treasury to begin quantitative easing, the BoE also took the unprecedented step of printing money to purchase £75B in assets, including Gilts. European fixed-income futures surged on the news, led by June Gilts, probing the 123 handle after opening around 118.85. The UK yield curve flattened significantly in the aftermath of the quantitative easing announcement. GBP/USD tested the 1.40 level over and over again but in the end managed to maintain a foothold above this pivot point.
On Thursday, the greenback was initially bid up following Chinese Premier Wen's opening address to a nine-day legislative conference. Wen failed to disclose any additional stimulus spending, although he reaffirmed that China can hit its ambitious 2009 GDP target at 8%.
USD/JPY hit fresh four-month highs above the 99 level before option-related resistance and Japanese exporters capped further gains. This was reinforced by the cross's 200-day moving average, which is currently pegged around the 100.20 level. Commodity currencies were softer for most of the week on concerns that the global recession was getting worse, prompting a realignment in CAD and AUD related pairs. However, the Australian Central Bank's decision to hold interest rates steady as a "buy carry trade" signal helped bring the pairs off their respective weekly lows, complemented by chatter that China could shift reserves out of USTs and into resources such as oil. The CAD weakened considerably toward the 1.30 area for fresh -month highs after the Bank of Canada cut their interest rates by 50bps (as expected).
After dropping in tandem with equities early in the week, crude rebounded sharply on Wednesday on the previously mentioned chatter about China considering an investment in oil. With the 9.4% gain on Wed, crude ended the week up over 2% at $45.65. Gold was essentially flat on the week, after its recent retest of $1000.
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