Sunday, May 17, 2009

Weekly Market Wrap Up

Equity indices took a step down this week, closing out Friday at weekly lows as investors hunkered down and took profits. The economic data offered little in the way of green shoots. There was no good housing news: the National Association of Realtors said prices for existing homes declined in most cities in Q1, while RealtyTrac reported that April foreclosures were +32% y/y and +1% m/m. Continuing unemployment claims hit their highest level on record once again and initial claims were higher than expected. April retail sales declined a bit more (versus expectations for flat sales) and the March figure was revised downward slightly. Friday's preliminary University of Michigan Confidence reading for May offered a bit of optimism, coming in slightly higher than expected. Some commentators indicated that a second week full to the brim with debt and equity offerings could indicate a short-term top, although others pointed out that despite all the dilution, the offerings show a strong return to liquidity and normality in capital markets. For the week, the S&P 500 fell 5%, the DJIA dropped 3.5% and the Nasdaq Composite slipped 3.4%.

Energy futures retreated for most of the week, following equity markets lower. Crude briefly peaked above $60/bbl, but ended the week around $57. Natural gas also sold off in the wake of a 25% gain over the prior two weeks. Copper futures were led lower by equities as well, dropping about 6%. Precious metals fared better, with spot gold gaining 1.6% on the week as risk aversion crept back in, closing out trade on Friday at a six-week high around $930.

A flood of post-stress test secondary offerings from the banks has washed over markets this week. The ability of banks to successful raise capital outside the government's purview is certainly a sign that capital markets are returning to health. Fed Chairman Bernanke complimented the banks on Monday, saying that he was impressed by their ability to raise funds so quickly, while later in the week FDIC Chairwoman Bair reiterated that the liquidity crisis is "over for good." However, in the short term all the supply has certainly weighed down trading. Wells Fargo priced its 341M share offer at $22/shr, Morgan Stanley priced 146M shares at $24/shr and BB&T priced 75M shares at $20; shares of all three banks have managed to stay above their secondary pricing level all week. Shares of Capital One and US Bancorp have fallen below secondary pricings of $27.75 and $18, respectively. Bank of America, is yet to price its $17B common equity sale. Citigroup is taking a slightly different path, expanding its program to convert preferred stock to common equity by an additional 1.6B shares. Citi now plans to exchange $33B in preferred shares, up from $27.5B prior.

The banks are not the only ones taking advantage of all the froth, with multiple secondary offerings coming from outside the financials as well. Ford priced 300M shares at $4.75/share as it tries to follow the road to solvency. Anadarko Petroleum launched a 30M offering at $45.50. Shares of Dow and Ford closed out the week above their secondary pricing levels, while shares of Anadarko have headed steadily below $45.50.

On Thursday the Treasury extended TARP funding to insurance companies. The industry had been denied access to the Treasury's Capital Purchase Program (CPP) program last fall, but various reports late on Thursday and on Friday indicated that several large insurers have been granted preliminary approval to apply for funding. Alllstate, Hartford, Prudential, Lincoln National, Ameriprise and Principal Financial were among the lucky firms reported to have been approved. So far Hartford, Lincoln and Allstate have confirmed the news, although all three have also noted that they plan to further evaluate whether or not participation makes sense for them or not before accepting any government cash. Ameriprise notably declined to take any CPP funding, stating that it remains confident in its capital position and access to adequate funding.

The government began to make good this week on its repeated pledges to revamp financial industry regulation. There were reports throughout the week that regulators are looking at ways to alter compensation across the financial industry, with options under consideration including legislation, SEC regulation or moral persuasion. Then on Wednesday the Treasury and CFTC outlined their plan to regulate over-the-counter derivative trading. The plan would set capital, reporting and margin requirements, as well as position limits on certain instruments, with the Treasury handing most oversight to the CFTC. Under the plan, the CFTC would establish an "audit trail" for the derivatives and have "clear unimpeded authority to police fraud, market manipulation and other market abuses" involving derivatives.

GM looks to be close to a key deal with the UAW to slash labor costs. On Friday the Wall Street Journal reported a potential deal with the union would cut hourly labor costs by more than $1B/year and reduce its $20B pledge to the UAW to cover health-care obligations in exchange for a 39% equity stake in the reorganized company. Reportedly the plan is still in flux, but the two parties could finalize terms as early as next week. In addition, the Treasury hopes to short-circuit protests from creditors by lining up deals before GM enters bankruptcy proceedings; the company is expected to begin negotiating with secured lenders soon to restructure about $6B in debt. Chrysler and GM both finalized their plans for trimming dealership networks, with Chrysler cutting its 3,200 dealers by 25% and GM cutting its network from over 5,900 to around 3,600 by 2010.

Leading retailers Wal-Mart, Macy's and Kohl's offered decent quarterly results this week. Wal-Mart came in a bit under revenue estimates, noting that the stronger USD reduced reported revenue by a considerable amount. Kohl's raised its full-year forecast a touch and Macy's said it could beat its fairly weak 2009 forecast if the economy picks up in the second half. Supermarket chains Winn Dixie and Whole Foods outperformed expectations, and Doctor Pepper Snapple beat the Street and raised its full-year forecast. Apparel retailers were mixed, with JC Penny and Nordstrom offering solid results and Liz Claiborne and Abercrombie & Fitch reporting substantial losses as sales among all its major brands continue to decline at a double-digit pace.

In tech, semiconductor manufacturing firm Applied Materials met analysts' earnings expectations, although its gross margin retreated to 15% versus 44% y/y and its forecast for next quarter's earnings was well below expectations. Intel confirmed that it is being fined $1.5B by the EU Commission. Representatives of the company took strong exception to the move, noting that the ruling ignores the reality of a highly competitive industry. Clearwire formed an alliance with Cisco to develop 4G mobile internet services. And Verizon reached a deal to sell wireline phone service areas outside its main Northeastern and Californian territories to Frontier Communications for $5.3B in Frontier stock and $3.3B in other payouts.

In fixed income, the yield on the benchmark US 10-year note entered the week near the highest levels of 2009 approaching 3.4%. But quickly prices rallied as equity weakness enabled traders to unwind a portion of the recent risk appetite induced rotation from bonds to stocks. With no Treasury auctions on the calendar and three Fed coupon purchases scheduled, yields moved decidedly lower through midweek. By Friday some sellers returned, pushing the benchmark yield back towards 3.15%, but still some 25 basis points below where it began the week. The calendar remains fairly light heading into next week with only the 2-, 5-, and 7-year note announcement scheduled for Thursday afternoon, so consolidation around these levels is likely with considerable focus remaining on equity markets.

The action in the corporate bond market was anything but quiet. Companies continue to come to market at a near record pace looking to take advantage of improving credit conditions. Both high and lower quality debt is finding solid demand. On Monday, Microsoft's first ever bond offering sold $3.75B in notes while Calpine sold some $1B in high yield paper. Drawing the most attention though were a group of offerings from some of largest US financial institutions who raised money through non FDIC backed bonds. Banks are eager to show the government they are not dependant on FDIC backing and hope to demonstrate the ability to repay TARP funds as soon as possible. Between last Friday and the middle of this week Citigroup, Banc of America, JP Morgan, US Bancorp, GE Capital and American Express sold some $12.5B in non guaranteed debt. Solidifying their position in the front row in the race to pay back TARP, JP Morgan for good measure sold $1B non-TALF eligible bonds backed by credit card receivables. Late on Friday reports emerged that JP Morgan and Goldman Sachs are well on their way to working through various governmental hurdles and could pay back TARP as early as next week.

In currencies, central bankers maintained their cautiously optimistic tone this week while traders debated the degree of risk appetite present in markets. The dollar's soft tone lingered over the concerns that the "AAA" US sovereign rating could come into question thanks to the revisions to the deficit projections. On Monday the Obama Administration revised its forecast for the 2009 federal deficit to $1.84T from $1.752T, while the 2010 deficit was also nudged higher, to $1.258T from $1.171T. Dealers have noted that comments from Fed Chairman Bernanke talking up the dollar were presumably designed to help fund massive deficits in the wake of the revisions. In any case, the greenback did manage to hold a few key technical levels during its weakest moments over the last few days, particularly the 1.13740 high from back in March and the 1.0980 level in the USD/CHF pair.

The economic data from around the world seemed to belie the emerging dogma that the worst of the global recession has past. China's April exports declined by 22.6% and imports also fared poorly. India's March industrial production figure declined by the largest amount in 16 years. Euro Zone industrial production registered its biggest annual decline on record. The IEA cut its global oil demand for the ninth straight month and saw few signs of any renewed demand. Don't forget the US RealtyTrac April Foreclosures data.

EUR/USD consolidated within the 1.35 to 1.37 range for much of the week. Dealers were noting that the revised US deficit projections curbed some of the dollar's upside momentum. The market is waiting to see if any serious rifts develop among the ECB members over quantitative easing. Members Kranjec and Weber aired diverging views over how much the central bank should spend on QE and the types of instruments that might be added to the program. Other members tried to smooth over any impression that dissent is loose inside the ECB. The Euro did dip below 1.35 late on Friday as US stocks finished near their lows for the week.

The yen ended the week on a firm tone, propped up by continued chatter that Japan's FSA might amend the FX margin requirement to curb currency speculation. FX chartists, meanwhile, were noting a potential H&S formation in the USD/JPY pair. Dealers are noting a break at 96.30 violated a neckline with a measured move objective of 500 bps to the 91.30 area. Recent currency moves have not been to the central bank expectations. Given the stronger JPY and CHF, dealers reiterated that in the past both the SNB and BoJ have expressed concerns about currency appreciation. Both the JPY and CHF are at near-term critical levels against the USD that could provide momentum for additional appreciation. Also aiding JPY were Japanese press reports the government would likely upgrade its economic assessment in May. If true, this would be the first upgrade in three years. Dealer chatter about an aggressive EUR/JPY option plays with a 3-month 110 strike position going through the market.

The aforementioned critical levels for the Swiss Franc came sharply into focus early Friday afternoon. Traders were locking in on the EUR/CHF cross as it neared the 1.50 mark, a level not breeched since the SNB's March 18th intervention. When the EUR/CHF cross reversed hard to trade up 140 pips in less than 1 hour. Dealer chatter quickly circulated that the SNB was in the market using a direct phone line to buy up to 800M euro. A SNB spokesperson declined to comment on the currency move but the EUR.CHF held gains while the USD/CHF rallied more than 2 big figures.

Sterling managed to maintain a steady tone against the USD during the week. The BoE lowered its economic growth outlook in its quarterly inflation report, indicating a relatively slow recovery taking hold in 2010 but warning the UK remains vulnerable to future shocks. AUD retraced from its best levels of the week after the release of the 2009 budget details from Treasurer Swan.

The week in Asia was highlighted by April update from the closely monitored export, industrial, and retail sectors in China. After a moderate bounce in March, China's trade numbers took a step back with $13.14B surplus as exports fell 22% while imports declined 23% - figure well below estimates across the board. While, there is little hope for surge in demand from credit strapped Western markets, most damaging for a case of regionally driven recovery was the 23.3% decline in Y/Y trade with ASEAN region. Industrial production was also short of estimates, coming in at 5.5% on Y/Y basis vs 6.2% expected - the lowest rate of growth seen in 2009. Retail sales figures were slightly above estimates at 14.8% on y/y basis, however that level of growth was also somewhat weak on a relative basis, with figures seen across 2008 residing predominantly above 20% growth threshold.

Trade The News Staff Trade The News, Inc.

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