TTN Market Update and Wrap Up (week 19)
Trade The News Weekly market update: Market Week Wrap-up
by: Trade The News
- Equity markets worldwide surged on Monday after the European Union agreed to a €750M “shock and awe” emergency aid backstop for the entire Euro Zone, the ECB said it would buy European sovereign and corporate debt and Fed reopened swap lines with key European central banks. The DJIA rose nearly 450 points before the opening bell on Monday, while markets in Europe experienced an even sharper rise. Skepticism emerged early from market experts of every stripe, while investors expressed their doubts by dumping the euro, which fell to October 2008 lows, below 1.24 to the USD on Friday. Much of equity gains in seen in European indices vaporized on Friday, while US equities were hit hard as risk aversion exploded in the wake of fears over the sustainability of Spain’s budget austerity measures and an inflammatory press report in Madrid’s El Pais newspaper, suggesting that at a conference on Greece last Friday, French President Nicolas Sarkozy threaten to pull France out of the euro if Germany did not agree to fund the big backstop package (France has since denied the report). In a sign of returning volatility, the VIX index jumped back above 33 on Friday, but well below the heightened levels seen late last week. For the week the DJIA gained 2.3%, the Nasdaq rose 3.6% and the S&P500 added 2.2%.
- More US and European banks were pasted with fraud allegations this week surrounding their behavior during the housing boom. On Wednesday the Wall Street Journal reported that Federal investigators are probing Morgan Stanley to determine whether the bank misled investors about CDO deals and whether the firm fully disclosed its roles in setting up and then shorting the deals (Morgan Stanley flatly denied the report). Then on Thursday, the New York Times reported that New York Attorney General Cuomo is probing eight banks – including Goldman Sachs, Morgan Stanley, UBS, Citi, Deutsche Bank, Credit Agricole and Merrill Lynch – in regards to alleged improper influence over the ratings agencies. The investigation seeks to determine whether the banks provided misleading information to the agencies in order to inflate the grades of certain mortgage securities.
- In the US Senate debate and voting on the financial reform bill got underway after months of posturing and negotiations. There are nearly 75 proposed amendments to the bill, many of which hold unpleasant surprises for both publically traded corporations and markets as a whole. A controversial one-time audit of the Fed’s balance sheet was approved in one amendment. Another amendment that would require the government to relinquish control of housing finance giants Fannie Mae and Freddie Mac within two years failed to gain approval. Card issuers Visa and MasterCard plunged on the passage of an amendment requiring “reasonable” debit card interchange fees. One analyst noted that 57% of Visa’s US purchase volume and 41% of MasterCard’s volume is from debit cards. Voting on amendments will continue next week, although it is worth noting that the final shape of the bill is far from certain.
- News of the European Union rescue package kicked off a rush by investors to add risk to their portfolios early on in the week. Government bond markets, especially in the US and Germany, saw prices decline sharply on Monday, sending yields higher. The US benchmark 10-year yield moved above 3.5% heading into the US Treasury’s $78B in quarterly refunding auctions, which concluded on Thursday with the sale of $16B in 30-year bonds. Buyers were rewarded when the fresh bout of risk aversion permeated markets on Friday, as bond prices surged and money flooded the relative safety of US government debt. Credit spreads widened for both investment and speculative grade corporate debt while issuance dropped off precipitously throughout May. The US 10-year yield ended the week below 3.45% while the 2-year nears 0.75% once again. Fed fund futures markets are ticking higher as the problems in Europe give support the Fed’s decision to keep rates low. The Dec contract now prices in less than a 40% chance the fed hikes rates at the end of this year.
- European sovereign CDS spreads tightened and cash yields were broadly lower, which is only to be expected following the massive EU bailout. In the first major test of investors’ appetite for peripheral debt post bailout, Italy successfully sold €5B in 5- and 15-year BTPs on Thursday. But the supply was overshadowed by Greece, which reported an unemployment rate of 12.1%, the highest reading in over five years. Encouragingly for bond markets, the wave of austerity continued across Europe as both Spain and Portugal both announced deficit reduction packages worth €15B and €2B, respectively.
- Currency trading was highly volatile, as investors watched the euro recover early on and then plunge to record lows by the week’s end on concerns the bailout plan would lead to slower growth, monetized debt and ultimately only delay the inevitable. By Friday EUR/USD pair moved below 1.24 for the first time since Oct of 2008, but was unable to take out the 2008 low of 1.2330. EUR/JPY remained above last week’s low of 110.56 as speculation continues that the SNB was deliberately holding EUR/CHF above 1.40. Waves of risk aversion have been preceded by run-ups in the yen, particularly against the US and Australian dollar. Sterling rebounded early after a compromise was finally reached and a government was formed following the election on the 6th, but cable could not escape the risk aversion flows driving up the greenback. GBP/USD remains not far from one-year lows, trading just above 1.4560.
- Gold prices soared to fresh highs this week, sending in what might be the strongest signal yet that contagion is inevitable in the European debt crisis. A report out of the Austrian mint stated there were signs of “panic buying” in Europe, with total gold coin and bar sales over the last two weeks equaled sales in the entire first quarter. Note that on Monday the EU bailout announcement did little to check gold’s upward momentum, with the front-month contract taking out fresh all-time highs in three of the next four sessions. The June contract finished the week above $1,230 after nearing $1,250. Silver prices have also reached levels not seen in over a year, trading above $19.
- Unfortunately for a basket of other commodities the stronger dollar and unwillingness to take on risk has led to steep declines. June crude prices are down almost $7 from the highs of the week trading below $72. The selling has been less pronounced in the July contract ahead of next week’s role but that contract is still down roughly 6% on the week to finish just above $75. It is also worth noting that this decline comes as many anticipate increased regulation in the United States, as BP has been unsuccessful in plugging the leak in the damaged Horizon rig in the Gulf of Mexico, worsening the environment disaster. The CRB commodities index closed out the week at three-month lows. OPEC officials appeared calm in the face of the price drop, with the Libyan oil minister stating the cartel is not likely to call an emergency meeting unless oil hits $60/barrel.
- The UK’s post election stalemate has been resolved sooner than many Westminster observers had anticipated. Following the resignation of Gordon Brown, Queen Elizabeth appointed Conservative leader David Cameron Prime Minister on Tuesday evening. Governing in a coalition with the Liberal Democrats, Cameron is the youngest UK Prime Minister in almost 200 years, with the Lib Dem leader Nick Clegg his new deputy. The Conservatives’ George Osborne has assumed the role of Chancellor of the Exchequer, but the Liberal Democrats’ Vince Cable (a former BP chief economist) is expected to be an influential figure on economic policy within the new administration in his role as Business Secretary. An emergency summer budget is expected in a matter of weeks. In leading the first coalition government since World War II, Prime Minister Cameron is faced with the daunting task of reigning in the UK’s massive budget deficit, while simultaneously managing the competing aims of two parties diametrically opposed on the ideological spectrum. The reaction in currency and debt markets to the new administration could not have been more mixed. While sterling has suffered amidst renewed USD strength, Gilt markets expressed relief, with yields drifting lower on the week, particularly in the fiscally sensitive long end of the curve.
- China’s April economic data revealed a mixed picture: consumer inflation was hotter than expected while industrial production was lower than forecasted. Lending activity recovered, as new yuan loans rose to a 3-month high of CNY774B. Speaking after the report, China’s National Bureau of Stats said that CPI growth has been relatively mild, affirming 3% inflation target for 2010. The bureau also warned that strong inflationary pressure in the near term will likely result from higher food, housing, and commodity prices, and then decline to a slower rate later in the year.
- Australia reported another strong month for employment in April, with the numbers hitting a three-month high at 33.7K new jobs created. For the third consecutive month the data was also heavily tilted in favor of full-time rather than the seasonal part-time job creation. Despite the solid growth, the national unemployment rate unexpectedly rose to 5.4%. Subsequently, several analysts noted that population growth is outpacing job creation. AUD was supported by the jobs report, with the currency briefly testing the 0.90 handle against the dollar and also rising to a record high against the euro. Government bond yields were also higher, even as expectations for another round of RBA tightening remain extremely low.
- The Bank of Korea left interest rates unchanged at 2.00% as widely expected, removing the reference to easy policy “for the time being” clause with a move to less defined timing. Speaking after the decision, BoK Governor Kim said the passage was dropped to reflect a change in underlying conditions, also pledging not to yield to external pressure for higher rates. Despite the unemployment rate falling to 4-month low earlier, BOK also said a considerable degree of uncertainty over the economy is still present, specifically pointing to fiscal constraints in Europe and monetary risks in China.