The case for a bottoming in the US economy and a broad-based, lasting rally in equities may have gained some traction this week. The economic data undoubtedly remains dismal, but in most cases markets just shrugged it off as "lagging" or even chose to focus on points that indicated a moderation in the rates of decline that in some cases exceeded the pummeled down expectations. Indices took a step down on Monday after the White House rejected the automakers' stability plans, but the DJIA recovered quickly and even managed to top 8000 on Thursday for the first time since early February. Midweek the March ISM manufacturing reading suggested that activity contracted by less than anticipated with an uptick in new orders and a decline in inventories, while consumer confidence edged up from the Feb lows. Employment data from around the world has not been pretty, with the US unemployment rate hitting 8.5%, Euro Zone unemployment climbing to its highest level since May 2006 and Canadian PM Harper saying Canada has a "massive and growing" employment problem. Traders and investors alike seem to be betting that jobs are a lagging indicator and these readings may ultimately represent the trough in the current cycle. Along that line money has found its way to some of the most economically sensitive commodities, Friday May copper trading at levels not seen since last fall testing $2. Grain futures are hovering near multi-month highs and front-month crude continues to consolidate above $50. For the week the Dow and S&P rallied a littlle more than 3% while the NASDAQ added 5%.
The Obama Administration gave failing marks to the restructuring plans from General Motors and Chrysler on Sunday, ensuring that US equity indices opened considerably lower on Monday morning. The White House has pledged to provide GM with aid for 60 days while it tries to come up with a better plan, while giving financial aid to Chrysler for 30 days so it can wrap up a partnership deal with Fiat. GM CEO Rick Wagoner has resigned as a condition for receiving further aid, replaced on an interim basis by COO Frederick Henderson, who said that the company could file for bankruptcy within 60 days if agreements with bondholders and labor can't be reached. An S&P analyst commented that the risk of bankruptcy for GM, Ford and Chrysler remains as high as ever. March vehicle sales provided a bit of optimism for the auto industry, as nearly all producers beat their dismal sales expectations by healthy margins (GM's sales were -45% v -52%e; Ford's were -40.9% v -49%e). The industry saw sales increase around 20% over last month's levels.
The G20 Summit on Wednesday dominated the media all week, with images of protesters in the streets of London and rioters smashing windows at an RBS branch contrasting with the relatively smooth relations between global heads of state. Few expected any great initiatives to emerge from the meeting, although talks did lead to an agreement to increase funding for the IMF and the World Bank. The official communiqué included an additional $850B in support for the institutions, as well as pledges from central banks to engage in expansionary monetary policies for as long as needed. The G20 also promised to take action to restore the flow of credit and to refrain from competitive currency devaluations. There had been plenty of hand wringing regarding the USD's status as a reserve currency ahead of the summit, although the issue remained largely off the agenda. The World Bank's Zoellick said that the dollar would remain principal global reserve currency while also saying that the issue would be "discussed over time." Russian President Medvedev reiterated at the summit his belief that an alternative to the USD should be considered. He noted a basket of regional currencies or a Gold linked currency could be used instead of USD basket reflecting similar sentiment seen from various Chinese officials.
The big event in the financials came on Thursday, when the FASB provided the sector with a big dose of regulatory relief by voting to relax mark-to-market and fair value accounting rules. Banks had gained modestly in the lead up to the decision, and remained steady through the close on Friday. Morgan Stanley has been a laggard in the group, with shares on Friday about where they were one week earlier. On a conference call Monday night, CEO John Mack told brokers that 2009 would be difficult and that profitability is not in line with the bank's long-term plans. Mack said that even though business has been good so far, "it's nowhere near what we need on a long-term basis." There was also a whiff of executive compensation drama in the air: House approved bill allowing the Treasury to set limits on executive compensation for firms that receive public funds, and in an interview with CBS, Treasury Secretary Geithner said he had not ruled out forcing out CEOs of banks who received government funds.
Trading in government bond markets has stepped out of the spotlight, settling back into its customary inverse relationship with riskier assets. For the better part of the week bond prices moved lower, sending yields higher on both sides of the Atlantic as equity markets rallied. With no supply of Treasuries coming to market and the NY Fed purchasing treasuries outright in three different auctions, many expected bond prices to remain firmer heading into the week. But the renewed appetite for riskier assets overshadowed that notion, sending the US benchmark yield to its highest level post the FOMC quantitative easing announcement. The 10-year yield has climbed back towards 2.9% widening the benchmark spread back above 190 basis points. Accelerated selling late in Friday's session was attributed to a likely revival of supply concerns early next week when the Treasury is set to announce another $50+B in 3 and 10-year auctions.
UK debt markets absorbed £5.75B in 6- and 30-year supply, and although auction results passed without any major hiccups traders noted yield tails were well above historical averages. To offset the supply the BoE purchased £3.5B in 2014-2019 Gilts on Wednesday but this did little to keep yields in check. The yield on the 10-year Gilt has climbed about 14bps over the week to 3.42%, ending the week at the highest level since the spike high following the failed 40-year GILT auction.
In currency trading, April began with a shower of critical political, monetary and economic data, with the G20 summit the central focus. Risk aversion was the theme early on, especially after an Obama Administration official said bankruptcy might be the best option for GM and Chrysler. But risk appetite started reappearing ahead of the US payroll data later in the week, with soaring equity markets keeping the USD and JPY broadly softer. Japanese pension and mutual funds remained aggressive buyers of the European crosses as the Japanese fiscal year ended on March 31, while the quarterly Tankan report was simply dismal, indicating that Japanese economic conditions remain severe. EUR/USD began the week testing 1.3130, where the pair was dealing prior to the Fed's quantitative easing move back on March 18. The euro found itself on the defensive after Spain bailed out one of its leading banks, Caja de Ahorros Castilla La Mancha. Dealer chatter noted that the bank was among the 45 Spanish financial institutions that own €500B in outstanding MBS. But the ECB rate decision on Thursday and anticipation of US payrolls data on Friday helped EUR/USD probe the 1.35 area.
The ECB surprised traders with a 25 bps interest rate cut on Thursday; consensus expectations were for a 50 bps cut. At the press conference, ECB President Trichet reiterated his standard position that inflation would remain below the 2% target in 2009/2010 and that risks to the economic outlook remain broadly to the downside, with disinflation, not deflation, stalking Europe. During the Q&A portion, Trichet noted that the rate decision was made by consensus, with no discussion on holding rates steady. The ECB confessed that rates were not at their lowest level, but still low by historical standards. Looking ahead to the next policy meeting in May, the ECB said it would decide at that time on whether or not to pursue "non-standard measures," but declined to provide further insight on alternative policies.
Eastern Europe continues to be a concern, with more trouble on tap as the region absorbs the shockwaves from the US auto industry situation. S&P cut Hungary's sovereign long-term rating one notch from BBB to BBB- (the lowest level of investment grade) with a negative outlook, citing the ongoing deterioration in economic and fiscal indicators in the country. Increased financial support for the IMF should bode well for the region.
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