Market Week Wrap-up ( HOT ITEM)

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  • Traders have been buffeted by strong cross currents from earnings, economic data and further housing market fallout this week, but in the end risk is still being supported by expectations for more Fed quantitative easing. Markets eagerly awaited first the minutes of the September FOMC meeting and then a speech by Fed Chairman Bernanke on Friday for more hints about when QE2 might begin and how much the Fed might buy (little detail emerged from either source). The FOMC minutes merely reinforced the September statement and on Bernanke's speech did nothing to shake the conviction that the Fed will embark on a QE program later this year. In the meantime, a rising choir of skeptical voices from inside the US and abroad were heard insisting that further easing would be useless, or worse. Fed dissident Hoenig once again insisted that the economy would not really benefit from more liquidity and said that more easing would only boost uncertainty. The data out this week certainly did not paint a very bad picture: the October Empire manufacturing survey crushed expectations, September retail sales strengthened for the third consecutive month. Then again the weekly claims numbers slipped and the trade numbers were grim. Supported by Google's blowout earning the Nasdaq rose 2.8% this week, the DJIA gained 0.5% and the S&P500 was up 0.9%. A weaker dollar helped agricultural and precious metals futures forge higher, sending the CRB index to 300 for the first time since October 2008. At the same time the commodity currencies, the Australian and Canadian dollars, approached parity with the greenback.

  • It's been a rough week for the financial sector. The outlook for the banks heading into earnings season was not especially bright, with many analysts trashing the industry and slashing estimates, but two emerging scandals have inspired some apocalyptic commentary this week. In the first case, all 50 state AGs have now signed on to an investigation of questionable bank foreclosure processes, more specifically to what extent the banks will be able to provide viable paperwork to support the tidal wave of foreclosures they are undertaking. Note that monthly data from RealtyTrac on Thursday showed that the number of homes taken over by banks topped 100K for the first time in September. The second somber story to emerge was that of the very large percentage of mortgage-backed securities sold in 2005-07 that may have been improperly marketed due to the withholding or misrepresentation of critical information about the quality of the mortgagees that underlay the notes. The end result could be billions in buyback by the leading issuers, with an especially heavy burden seen for Bank of America (although it's worth keeping in mind that any discussion of these issues remains highly speculative). JP Morgan's quarterly results were mixed, with earnings well above expectations thanks to lower loan loss provisions but revenue below par. CEO Dimon said he expects charge offs to further improve next quarter, and also insisted that the emerging foreclosure scandal would have only an "incremental" impact on earnings. Citigroup, BoA, Goldman Sachs and several superregional banks are set to report quarterly results next week.

  • Contrasting results from leading industrial and transport names did not offer a very clear picture of the economy in the September quarter. General Electric's revenue miss overshadowed its slight earnings outperformance. GE's top-line trouble was reflected in lower energy infrastructure revenue, which declined on both a sequential and y/y basis. However, CEO Immelt said that the company saw growth in both equipment and service orders during the quarter. Rail name CSX met the Street's expectations and indicated that its freight volume growth remains strong, in double digit growth territory. In addition, executives said that business has remained robust in a quarter that is seasonally slow.

  • In tech, shares of Google were up sharply on Friday after the search giant crushed earnings expectations and delivered excellent revenue growth. Google said that ad pricing has remained healthy and stated that it is gaining significant diversified sources of revenue outside search. Intel was only a bit ahead of expectations in its Q3 report, while the firm's outlook for Q4 revenue was in line. Intel CEO Otellini said he is expecting customers to pare inventories in Q4 ahead of the release of the widely anticipated Sandy Bridge processors even as the corporate IT refresh cycle continues. AMD's profit was nearly twice the expected amount although revenue was just in line. AMD said next quarter's results would be flat and echoed comments from Intel by stating that the supply chain would not build inventories in Q4.

  • Merger action seemed to pick up a bit again this week, although there were a number of questionable calls from the rumor mill. Prime among the former was a report that AOL was said to be teaming up with private equity firms to buy Yahoo, though the story boosted shares of Yahoo 15% on the week. Shares of Avon headed higher after the UK's Daily Mail reported that that L'Oreal may be considering acquiring the company for $44/share. A L'Oreal spokesperson refused to comment on the rumor and no deal has been announced as of yet. Among actual deals, Pfizer said it would acquire King Pharma for $14.25/share in cash, for a total deal value of $3.65B, and Gymboree announced that it would sell itself to Bain Capital for $64.40/share in cash in a deal worth $1.8B. Seagate jumped 16% after the firm received a preliminary going-private proposal from an unnamed group of investors.

  • Treasury markets experienced some selling during the holiday shortened week, particularly at the long end of the curve. Yields entered the week at all time lows on the short end and levels not seen since early 2009 for longer dated maturities. Traders had become increasingly comfortable with the expectation the Fed will resume asset purchases next month and the FOMC minutes and Bernanke's speech on Friday only solidified that belief. Disappointing results for both the 10- and 30-year reopenings resulted in some initial selling midweek, and Bernanke's unwillingness to offer anything novel that might clarify the shape of QE2 led to more aggressive profit taking. The 10-year yield has reclaimed 2.5% while the long bond briefly traded back to 4%. The curve is noticeably steeper with the 10-30 year spread at new all-time highs above 143 basis points and the 2-10 year spread widening out to above 220 basis points. On Friday, the yield gap between 10-year TIPS and 10-year cash Treasury notes-tracked by economists as a gauge of the market's long-term inflation expectations-hit 2.14%, the widest level since mid-May, after running as low as 1.50% in August on fears of a slowing recovery.

  • FX markets remained fixated on the potential for currency war this week, an outcome last weekend's IMF meeting did little to resolve. The central front in the conflict is the level of the Chinese Yuan, and the midweek release of US and Chinese trade balance and Chinese FX reserves data only cranked up the volume of calls for Beijing to accelerate currency reform. The China September trade data came in lower than numbers seen in recent months, although the August US trade data showed that China's trade deficit with the United States hit record levels. The other major FX catalyst was the anticipation for more Fed quantitative easing, the effects of which will likely continue despite Bernanke's remarks on Friday. Other factors included contrasting ECB and Fed policies coupled with big funding flows into emerging currencies. Notably, on Friday, the US Treasury again chose to delay the release of its semi-annual currency report, which can be used to name currency manipulators as Congress has urged. As explanation, Treasury officials said it would publish the currency report after the November G20 meeting to "take advantage of the opportunity provided by the G20 discussions."

  • The dollar remained vulnerable to key psychological issues, as highlighted by CFTC data that showed speculative dollar shorts are at their highest levels since mid-2008. Nevertheless the Chinese Yuan firmed ahead of the US Treasury's pivotal semi-annual currency manipulators report that was originally scheduled for release on October 15th (before it was delayed). The greenback's soft tone was reinforced mid-week via the combination of the FOMC minutes and hawkish comments from ECB Governor Weber. The Fed minutes further focused markets on the Fed's assertion, first issued with the September rate decision, that further easing is under consideration. Euro strength was supported by Weber, who said that ECB bond buying should be phased out permanently and interest rates could rise before exit measures were completed.

  • Singapore garnered attention for its currency on Thursday after the central bank widened its currency trading bands. Dealers feel that pressure on Asian and emerging market currencies continue to drive anti-dollar diversification pressures, and some saw Singapore's move as a precursor to China pursuing a similar strategy. Later in the week, a rumor made the rounds that the US and China had secretly agreed that China would allow the yuan to appreciate at a faster pace if the US took a less aggressive stance on quantitative easing. By week's end EUR/USD tested nine-month highs above 1.4150, USD/JPY hit fresh 15-year lows below 80.90, The USD/CHF exhibited fresh all-times lows at 0.9461 and the USD/CAD and AUD/USD finally tested parity.

  • With the dollar testing nine-month lows against the euro, commodities have been a prime beneficiary. Besides the weak greenback, gold and silver benefitted from vague chatter that China was buying precious metals as part of its reserve diversification process. Spot gold spiked back toward all-time highs of $1,387.15/oz while spot silver tested its best level in three decades at $24.83/oz. The energy complex did not join in the euphoria. Crude oil moved sideways, ending the week around $81, while natural gas continued to slide to multi-year lows below $3.60. OPEC ministers meeting this week seemed largely content with the price of oil and made no change to quotas. The squeaky wheels at OPEC - Iran, Venezuela, and Libya - called for $100 oil and were awarded with some grease. OPEC members elected the Iranian minister to the rotating presidency of the cartel and agreed to hold an extraordinary meeting in December to revisit quotas.

Comments (2)

 
Oct 16, 2010 - 1:09pm

Thanks Olga. Bullet points would be better.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 
Oct 16, 2010 - 1:48pm
Still not sure if I want to spend the next 30+ years grinding away in corporate finance and the WSO dream chase or look to have enough passive income to live simply and work minimally.
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