Little was expected from the FOMC this week, although ahead of the decision an FT article prompted speculation that, in a nod to the ECB, the Fed might choose to distinguish between liquidity and monetary policy, specifically by raising the discount rate from the existing 0.50% level and simultaneously keeping the Fed Funds target rate steady at 0-0.25%. The discount rate hike never came to fruition, but the FOMC did alter its policy statement to remind markets that most of its special liquidity facilities are scheduled to wind down in Q1 2010. As expected, the Fed funds rate was kept unchanged and the commitment to keeping rates on hold for an "extended period" was reaffirmed, with the economic outlook paragraph slightly more optimistic.
Citigroup has wasted no time in scaring up the capital it needs to pay back the US Treasury. The bank said on Monday that it would sell more than $20B in debt and equity to repay a portion of its TARP funds, and had priced a 5.4B share offering at $3.15/share by Thursday morning. Wells Fargo was right behind Citi, announcing later on Monday that it would repay its entire TARP stake. It priced an offering of 426M shares at $25/share. Note that a number of regional banks have not disclosed any plans for repaying TARP as of yet and have lost ground this week, including SunTrust and Fifth Third Bank. Meredith Whitney was out this week ripping the more solvent end of the industry, cutting her earnings estimates on Goldman Sachs, Morgan Stanley and JP Morgan well below the consensus.
Exxon made a big vote of confidence in the shale gas industry by announcing a $31B deal to acquire major player XTO Energy. The deal could begin a new rush to own North American natural gas assets by major integrated names and may set off significant consolidation in the energy industry.
Exxon will buy the firm for $31B in Exxon common stock and also assume $10B in XTO debt. Other leading natural gas names such as Apache, Devon Energy, Anadarko, EOG, Chesapeake and Nabors gained steadily this week on news of the acquisition. The deal is not a sure thing, however. Congress will certainly hold hearings on the move, while scrutiny of the environmental impact of shale drilling technology has been growing. Note that Congress is mulling restrictions on some of these techniques.
Strong earnings from selected tech names helped the NASDAQ outperform the Dow and S&P500 this week. Adobe, Oracle and Research in Motion reported better than expected quarterly results and offered strong forward-looking guidance. Executives from Adobe said demand improved in the quarter, while over at Oracle management said they expect the EU to clear Oracle's acquisition of Sun. RIMM's shipment volume grew more than 20% sequentially and new subscribers were up by more than 12% q/q. Intel took a hit this week when the FTC sued the company for using its dominant market position for a decade to stifle competition and strengthen its monopoly.
Trading in US Treasuries revolved around the FOMC statement this week. The yield curve hit fresh steepening highs post FOMC, with 2 10-year spread getting as wide as 278bps. Yields have traded in a fairly wide range over the course of the week, the benchmark 10y Note ascended though 3.60% for the first time since late summer, only to retreat to more respectable levels holding near 3.5% as the week drew to a close.
The Greek fiscal tragedy took more twists and turns this week. The government announced a number of ambitious debt and deficit reduction targets early on while the finance minister embarked upon a confidence building tour of Europe's major financial centers. But in the absence of any specifics bond markets and rating agencies remain unconvinced. S&P joined Fitch in downgrading the Hellenic Republic to BBB+ on Wednesday. The downgrade leaves Moody's flying solo with an A1 rating two notches above its peers. Should Moody's choose to recalibrate its rating to be closer to the other agencies, Greek government bonds would be ineligible collateral for ECB liquidity operations (if and when it decides to return to pre crisis rules) which would likely set off a chain reaction of issues for Greek banks. With the ECB making tentative steps toward the exit earlier this month, the story is clearly not going away any time soon. Bunds have been the main beneficiary, with safe haven flows sending the yield to within one basis point of the 3.10% level last tested in April. Greece's 10-year is now a hefty 260bps wider , while 10y UK Gilt yields hit fresh 2009 highs above their German counterpart near +70bps as polls began to point to a hung parliament in next year's general elections.
In currencies, trading saw more turbulence in the Euro Zone thanks to Greece's second credit downgrade and a negative call out of Moody's on the Irish banking system. Safe-haven flows out of peripheral debt weighed on the euro throughout the week, while year-end repatriation flows further aided dollar sentiment. Stresses are starting to filter down to the European financial sector: a Fitch analyst said European banks could face rating actions over commercial property losses and the ECB revised its Euro Zone bank write-down forecast to €553B from €488B prior for the 2007-09 period. The greenback is at its best levels of the last three months against the Euro and Swiss Franc thanks to these stories as well as thinning year-end liquidity conditions. Interest rate differentials have also played a role in helping the dollar, as reflected in notably widening yield spreads between the US and both Europe and Japan.
The technical picture has been constructive for the dollar, with 200-day moving averages were back on the radar, particularly against the European pairs. The FOMC statement only sustained the dollar's momentum, with the Fed offering a slightly more optimistic economic outlook. An alleged 1.4500 option barrier was breeched mid-week electing some stop loss selling in EUR/USD and triggering a broad adjustment across the G10 currency regime. Dealers said there were decent option flows, with a European name buying two-month EUR/USD puts with strikes between 1.36-1.40 early in the week. EUR/USD tested the 1.4530 level after the German IFO barely registered a 50 reading, demonstrating the fragility of the economic recovery. EUR/USD tested just below 1.4300 on Friday, hovering near its 30-week moving avg.
Sterling benefited the most on the initial news regarding Dubai World debt restructuring as the week began. GBP/USD tested above 1.64 after UK jobless claims declined for the first time since Feb 2008, although GBP was weighed down following the weaker UK retail sales data. UK newspaper The Daily Mail noted that the world was losing faith in the UK's debt load and concerns about the vast quantity of gov't bonds that would have to be sold over the coming years.
Commentators discussed the Swiss National Bank's slow exit from expansionary policy this week, strengthening the Swiss Franc. Although the SNB's Roth confirmed that the bank would continue to work to avoid franc appreciation, the market had other ideas. The rush to safe havens weighed on EUR/CHF during the latter part of the week, sending the cross below the pivotal 1.5000 level. Recall that this was deemed the "line in the sand" during the initial Swiss currency intervention back in March on rumors of a coup in Pakistan. The cross was off its Asian lows of 1.4910 but has yet to regain a foothold above the 1.50 level.
Expectation for a fourth consecutive interest rate tightening by the Reserve Bank of Australia at its next meeting in February repeatedly came under pressure from disappointing economic data and dovish central bank rhetoric this week. Starting on Tuesday, the minutes from the last meeting revealed a closer than expected decision to raise rates. The Board saw policy at a "less accommodative setting" after the move, offering policymakers "greater flexibility" for adjustment going forward. Despite the recent upside surprise in November jobs growth, RBA was also more cautious in its employment outlook, noting that the jobless rate may not have reached its peak. Then on Wednesday, Australia's disappointing Q3 GDP further downgraded RBA prospects, pushing February tightening probability below 40%. The Q/Q 0.2% figure - below the 0.4% expected - marked the lowest rate of growth since Q4 of 2008, while also revealing a greater chunk of economic expansion coming from the stimulus-infused public sector. Following that GDP release, Treasurer Swan - an early opponent of RBA tightening - said the data demonstrates that growth momentum is not yet self-sustaining, suggesting that Q3 would have been a contraction without the stimulus.
A Bank of Japan interest rate decision on Friday saw monetary authorities yielding to cabinet pressure with a notable shift to a more dovish tone, helping spark the regional equity rebound going into the weekend. Keeping the economic assessment unchanged after consecutive upgrades, BOJ said it would keep monetary conditions "very easy" amid signs that the economic recovery would slow until mid FY10. On the inflation front, BOJ dropped its prior view that the decline in core consumer prices is likely to keep narrowing, vowing not to tolerate CPI at or below zero and targeting 1% for price stability. BOJ then expressed its deflation fighting resolve by pointing out it would "patiently support the economy" until it comes out of deflation. JGB yields fell across the board on the dovish BOJ comments, with the 5-yr note registering a 4-yr low below 0.45%.
The Asian Development Bank maintained China's growth forecast at 8.2% in 2009 and 8.9% in 2010, but raised India outlook for 2009 to 7% from 6%. ADB also raised the overall developing economies growth target in the region to 4.5% from 3.9% in 2009 and 6.6% from 6.4% in 2010. The upgrade follows an upward revision as recently as late September.
Trade The News Staff
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