Monday, November 30, 2009

Weekly Market Wrap

In the first half of the week, risk appetite roared back ahead of the Thanksgiving holiday in the US, erasing last week's losses in the equity market. Good data, mildly positive FOMC minutes, strong corporate earnings and light volume kept investors from fretting over the reduction in the second Q3 US GDP reading (to +2.8% from +3.5). The FOMC minutes showed the Fed believes the continuing decline in the dollar is orderly and unemployment will remain elevated for an extended period of time; the Fed also hiked its US GDP growth forecasts slightly. Weekly initial claims dipped below 500K for the first time since January, putting the four-week moving average below 500K. With the sharpened appetite for risk, the dollar got close to 12-month lows against the euro and ten-month lows against the yen. Natural gas futures rose to their best level in three weeks on Wednesday, surging 8.3% in part due to lower than expected inventory data from the EIA.
But the positive tone in the markets was sand blasted away by a storm blowing out of the Middle East. Dubai World's surprise restructuring announced on Wednesday shook global markets in the latter half of the week on fears of a new contagion spreading through the world financial system. The Dubai story was used as cover for punishing what was perceived by some as a growing recklessness in credit and asset markets: Equity markets fell an average of 3% worldwide, the dollar strengthened rapidly, and commodities tumbled. After approaching $1,200 early in the week gold fell back to as low as $1,140 on Friday, and crude hit its lowest mark in six weeks. For the week, the DJIA lost 0.1%, the Nasdaq fell 0.4%, and the S&P 500 ended flat.

Apart from Dubai, the other overall theme of the week was the start of the holiday shopping season. Early returns from Black Friday have been somewhat positive. With retailers going all out including some opening their doors on Thanksgiving day, anecdotal evidence appears to show foot traffic has improved over last year. On Friday, Wal-Mart management said that it was getting "positive feedback" from its stores nationwide, while BestBuy commented that Black Friday shoppers 'materially' outnumber those seen last year. Macy's and Toy's R Us also reported brisk foot traffic.

Another handful of retailers disclosed quarterly results, with many roundly beating estimates. Apparel names American Eagle, J. Crew and DSW all came in well ahead of the consensus. High-end retailer Tiffany beat expectations and even hiked its full year guidance. Note that the October personal spending numbers showed that unemployment has yet to entirely cripple the US consumer, which only bodes well for the retail sector.

In other equity news, John Deere blew out consensus estimates and guided higher for the year. Hewlett-Packard's results were firmly in line with expectations. M&A action was highlighted by some ongoing dramas. There was much talk this week that Hershey was putting together a $17B friendly bid for Cadbury, topping Kraft's $16.8B offer launched back in early September. The offer, which is not ready for prime time as of yet, would reportedly include $10B in cash. Cadbury is said to be much more agreeable to a Hershey offer. Meanwhile, reports now say that three different brewers are eying FEMSA's beer operations with an expectation that a deal can be reached by sometime in January.

Shares of the leading US banks have declined noticeably this week on a string of cautious commentary from various sources. S&P said it believes capital remains a negative to neutral factor for the majority of global banks. The FDIC published its Q3 troubled bank list, noting that 552 institutions are on the list, the highest amount since 1993. The FDIC said the balance in its deposit insurance fund turned negative for the first time since 1992. The FDIC's Bair said US bank earnings remain weak and warned that she expects charge offs to increase in Q4. Also note that there were reports out of Washington that House Democrats were drafting a bill to impose a 0.25% Tobin Tax on certain financial transactions. Standard & Poor's chimed in with a warning that nearly all of the world's big banks lack sufficient capital to cover trading and investment exposure, risking further downgrades over the next 18 months unless they move swiftly to beef up their defenses.

Key October housing data buoyed markets during the week, although as usual there was much discussion whether the numbers really indicate any stabilization in the sector. The S&P/Case-Shiller home price index was basically flat over August levels, and nine of the 20 cities surveyed showed price declines. Karl Case noted that the US still faces a large backlog of homes to work through. Existing Homes Sales data for October showed sales were up 10% from September levels, while the October New Homes Sales were up 6% on a sequential basis. Some observers repeated the often-heard refrain that the uptick in home sales reflects the expiration of the new home buyer tax credit and distressed home sales (prior to the recent extension of the program), rather than any fundamental improvement in the economy. Contrasting with the better data was a report from real estate industry analysts at First American Corelogic, who wrote that 23% of US homeowners have "underwater" mortgages, which bodes very poorly for home prices.

A historical perspective enveloped the forex market this week as dealers pointed out that the EUR/USD had finished the last few weeks of the trading year on firmer territory in at least 7 of the last 9 year ends since 2000. The price action was subject to 'whippy' movements as traders noted that they could "just feel market liquidity getting thinner." Dollar sentiment was initially driven by dovish weekend Fed speak. Chicago Fed President Evans noted in a FT interview that prevailing policy settings would remain for some time yet, possibly into 2011. The Fed's Bullard commented that he supported asset buying beyond Q1 2010 period.

The release of the FOMC minutes mid-week appeared to pave the way for additional dollar weakness. The minutes described the dollar's decline as "orderly," which dealers took as a hint for the trend to continue. The dollar was testing some key technical levels as thin holiday conditions set in. USD/CHF busted below the parity level for the first time since April 2008. USD/JPY moved below the 88 level, which was a long suggested 'intervention' zone via the Japanese post office. Complementing the tone was chatter that India's Central bank (RBI) was reportedly mulling could consider buying the remains 201.3 metric tons of gold from the IMF. Spot gold hit fresh-all-time highs just below $1,200/oz

The dollar continued to receive verbal support from various officials throughout the week. ECB Chief Trichet reiterated yet again that he "appreciates" US support for a strong dollar. Japanese Government and ministry officials took notice of the JPY's appreciation and its potential to harm the fragile Japanese economic recovery. Finance Minister Fujii commented that he was prepared to contact the U.S. and Europe officials to organize some sort of coordinated intervention after the pair hit fresh 14-year lows below 85.00. There was also chatter that the BOJ 'checked rates' on Friday (seen as a closer step to currency intervention).

But the risk aversion theme provided a life-line for the dollar as the Thanksgiving holiday descended upon the US. The dollar regained some composure aided by official rhetoric coupled with concerns about the fallout of the still uncertain Dubai World debt situation. Dubai was shaking confidence across the Persian Gulf after its proposal to delay $59B debt payments risked triggering the biggest sovereign default since Argentina in 2001. Middle Eastern names were noted as active sellers of European currencies.

Renewed dealer chatter that the SNB was 'seen' on the interbank dealing machines and bidding for dollars USDCHF pair sent the pair moving off the lows of 0.9920. As usual, the Swiss Central Bank (SNB) declined to comment on any intervention rumors, which is its standard policy.

In Asia, Vietnam grabbed some of the regional spotlight after its central Bank unexpectedly raised benchmark interest rates to 8% from 7% and narrowed the Dong trading band to 3% from 5%. More notably, the central bank governor called for exporters to sell their foreign currencies in a move to devalue the currency. Fitch was the first credit agency to chime in on the potentially destabilizing developments, welcoming the devaluation decision as a positive that would not have any immediate ratings implications.

Vietnam's move comes ahead of an Australian rate decision next week, when the RBA is expected to raise its rate another 25 basis points. Ahead of this decision, the RBA's Battellino commented this week that Asian economies are recovering quickly and that he expects a return to a relatively normal pace of growth with Asian trading partners in 2010.

Trade The News Staff
Trade The News, Inc.
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