It has been an eventful week in markets, with a potential global pandemic, and a giant bankruptcy offset by "green shoots" prompting hope an economic recovery in the works. Swine Flu, recently re-branded as the 2009 H1N1 influenza virus, emerged as a global issue and weighed down equity trading on Monday, hitting the travel industry especially hard. Wednesday saw the US Q1 Advance GDP reading come in worse than expected (-6.1% versus -4.7%e) and the Fed keeping interest rates steady with only a minor revision to the FOMC policy statement. On Thursday Chrysler filed for bankruptcy and began its reorganization. But none of these events prompted significant declines; investors instead turned to data and statements showing improvements in the economy, or more aptly indicating that things are getting worse more slowly. The dreadful GDP report also included hopeful metrics showing 2.2% growth in consumer spending and a 3.4% decline in inventories. The February Case-Shiller housing data did not register another record-setting decline. Treasury Secretary Geithner told the Senate that no more bailout funds would be requested (in the near future, anyhow), and the White House said a second stimulus package was not being planned. The final April University of Michigan Confidence and ISM Manufacturing numbers were better than anticipated. Despite the swine flu sell off on Monday, the pigs came back to the trough leading to gains for the week in the three major US indices: the S&P 500 rose 1.3%, the DJIA climbed 1.7%, while the Nasdaq Composite managed a 1.5% gain. June S&P500 futures ended the week just above the key 875 level.
Chrysler, the smallest of the Big Three Detroit automakers, filed for Chapter 11 protection on Thursday, entering what the White House said would be a brief one- or two-month bankruptcy process. Negotiations with bondholders continued until the last possible moment on Wednesday evening, but the White House Auto Task Force and company executives failed to get lenders accept a final offer of around 30 cents on the dollar for their collective $6.9B in debt. Fiat has agreed to take a 20% stake in the company, with the right to another 15% stake over time if certain criteria are met, in exchange for small car technology. The US Treasury will hold 8%, Canada gets 2%, while the UAW's VEBA retirement association will hold 55%. But there is no question who is in the driver's seat, as the US Treasury will nominate six of the nine board seats, with the remaining three seats going to Fiat. According to President Obama, the arrangement will give Chrysler a "new lease on life."
Over at GM, negotiations with the UAW and bondholders continue. On Thursday, the bondholders countered GM's latest offer (involving a debt for equity swap and the UAW owning 39% of the company), calling for an allocation of new GM equity equally across the board to union VEBA and GM bondholders, pro rata to the level of financial obligation owed to each by GM, with no cash component and no government equity stake. Ford, meanwhile, seems to be getting by. According to press reports, Chrysler's bankruptcy filing will not lead Ford to ask for government loans, and Ford does not foresee and disruptions to its business from the situation. Still on Friday, the auto manufacturers reported a 34% decline in April sales compared to year ago.
This week the US Treasury pushed back the date of the public release for the bank stress test results, to May 7th. Earlier in the week some information about the results apparently leaked: on Tuesday, the WSJ reported that Citigroup and Bank of America have been told to raise billions of dollars in fresh capital based on the results. Along with the rescheduling, sources reported that publicly available information from the tests will include capital needs for each bank and estimated losses for certain loan categories.
Executives from Bank of America, Morgan Stanley and Wells Fargo wrangled with shareholders at annual general meetings throughout the week. The media reported that attendees would attempt to strip Morgan Stanley CEO John Mack and BoA CEO John Lewis of their titles, but both survived in place, although shareholders did manage to split the Chairman and CEO roles at BoA. Wells Fargo's shareholders rejected a proposal to require an independent chairman. The troubled Citigroup sold off its Japanese retail brokerage operation, Nikko Cordial Securities, to Sumitomo Mitsui for ¥774.5B ($7.9B). The deal, which includes an investment banking alliance, is expected to close at the beginning of October.
Dow components Exxon, Chevron, Procter & Gamble and Verizon all reported quarterly results this week. Exxon missed earnings estimates while Chevron came in ahead of expectations, but these results were overshadowed by both companies' big declines in quarterly profits on a y/y basis (CVX -64% y/y, XOM -58% y/y), which they blamed on recession and sharply lower commodity prices. Strong gains in wireless and FiOS subscriber additions helped Verizon do better than expected in the quarter. Note that there were widespread reports this week that Apple was talking with Verizon about launching iPhone service as soon as 2010; executives refused to confirm or deny the reports. PG offered solid, in-line performance, and offered a much improved revenue outlook for the year.
Most of the leading insurance names reported results. Earnings from MetLife, Cigna and Hartford Financial fell short of expectations, with the firms missing estimates as weaker markets cut into their businesses across the board. Hartford has been much harder hit than the rest, with the firm reporting its third consecutive quarterly loss and slashing its full-year forecast. Aetna, Humana and pharmacy benefits manager Medco Health reported solid quarterly results, although executives warned that rising job cuts among its employer customers are a concern, with layoffs and increased Cobra membership a threat. Travelers' offered mixed results.
In other earnings, pharmaceutical titans Bristol-Myers Squibb and Pfizer offered solid quarterly results and reaffirmed their 2009 forecasts. Note that Pfizer reported substantially lower revenues for several of its leading drugs, including the blockbusters Lipitor (-13% y/y) and Chantix (- 36% y/y). Time Warner's EPS was firmly ahead of the Street despite the overall weakness in the sector, noting that better results at its cable properties offset other losses. Consumer-facing names Burger King and Reynolds American offered results in line with expectations, although BKC noted that worldwide sales rapidly decelerated in the month of March.
Snowballing risk appetite and $101B in 2-, 5- and 7-year supply on offer this week combined to send treasury prices sharply lower, pushing the yield on the 10-year Note firmly above 3%. With the fed funds rate set to remain at the zero bound for the foreseeable future the 2-year remains anchored between 0.90% and 0.95%, helping the 2-/10-year yield spread sail though 200 bps to trade above 220 bps at the week's close. Some observers had expected the Fed to be more aggressive with its buybacks in response to the rising yields, but this proved unfounded as the FOMC merely affirmed its commitment to its prior $300B commitment.
Wednesday's Quarterly refunding announcement revealed $71B in re-openings for next week, in line with market expectations. However, the Treasury's plan to offer long bonds on a monthly basis did raise some eyebrows, and sent the yield on the long bond well above 4%, to levels not seen since November 2008.
Corporate credit conditions continued to ease. Three month USD-Libor improved by another 5bps over the week to fix just below 1.01% on Friday. Note that Harley Davidson sold $500M worth of loans as part of the TALF program and perhaps most significantly, Goldman Sachs sold $2B in 5-year notes, sans FDIC guarantee.
Currency trading saw its share of rotational themes this week. Over recent sessions a growing chorus of government and central bank officials have said the global economy is getting worse less quickly. Early in the week USD and JPY benefited from risk aversion stemming from the swine flu hysteria, but by mid week confidence seemed to be spreading faster than the virus as 'less bad' US & European data and firmer equities helped spur risk appetite and soften up USD and JPY, with European and commodity-related currencies strengthening.
EUR/USD saw a 400-pip range for the week. It tested below the 1.30 handle on initial flu jitters before heading back above the pivotal 1.3070 level to test near 1.34 by week's end. Next week brings a pivotal ECB monetary policy meeting. Dealers discussed rumors that there has been bickering within the ECB over which non-standard measures should be implemented to grapple with the crisis, and Trichet has reportedly imposed a vow of silence on Governing Council members ahead of the meeting.
GBP/USD fell short of the 1.50 handle, where considerable GBP selling emerged earlier this month. USD/CAD bounced off support around its 200-day moving average of 1.1847 (last violated back in early June 2008). Currently the pair is seen consolidating with resistance pegged at 1.1970/90 level. Weaker energy and metal price action did little to derail the recent positive momentum for the commodity-related currencies. USD/JPY retested its historical pivot point of 95 early in the week and then probed toward parity of 100 as the week progressed. Sterling also firmed against the major pairs during the week aided by the best CBI distributive data out of the UK since January 2008.
Spot gold pivoted around the $900/oz level all week, prompting bouts of long liquidation and managed to hold above its key support level of $860/oz level. Additional chatter circulated that an imminent new Central Bank gold pact that might lead to changes to increase the amount of gold that can be sold. The central banks are currently in the fifth and final year of their current Central Bank Gold Agreement (CBGA).
The week in Asia was highlighted by a rally in Taiwan, where the government opened the island's markets to Chinese investments for the first time in decades. Investors sent Taiex index up 6%, the biggest gain for that market since 1991. In New Zealand, RBNZ lowered interest rates by 50bps as expected, to 2.50%, however NZD was punished by central bank's forecast of rates remaining at or below that level through 2010 amid ongoing regional economic malaise. Notable damage inflicted against the Aussie, with AUD/NZD rising to its highest level since July of 2008. Japan took another step on the familiar path of deflation, with National CPI reported on Thursday declining in March for second consecutive time and by the widest margin since November of 2005. Also, the Bank of Japan cut its GDP forecast for the economy to -3.1% from the prior -2.0% target, but kept rates and monthly JGB buying levels unchanged. That "wait and see" approach to quantitative easing may be reconsidered, particularly if the green shoots of recovery in Japan's industrial production seen this week are undermined by poor external demand going forward.
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