Reports

Weekly market update (March 20, 2010)

Contributed by Trade The News

- Equity markets sustained their gradual upward trajectory this week, with the S&P500 and DJIA joining the Nasdaq at new 16-month highs, as traders were transfixed by finance and healthcare legislative dramas in Washington. The fate of the healthcare reform bill hung in the balance all week as the Democrats desperately tried to coral the simple majority they need to pass the final package in the House. The final House vote is expected on Sunday, with a final Senate vote seen early next week. Passage seems likely, although it appears to be far from a sure bet as of Friday evening. Meanwhile, policy meetings at the FOMC and the Bank of Japan left rates alone, most data was comfortably in line with expectations and at its Spring conference OPEC kept its output quotas unchanged for the fifth consecutive time. On Thursday, rumors of a second intra-meeting hike in the Fed discount rate made the rounds, prompting the Fed to issue a "no comment," but ultimately no discount rate action ensued. Among economic reports, the headline February PPI number showed its biggest decline since last July, prompting more deflation jitters. Stocks and commodities traded off somewhat on Friday when India surprised investors with a rate hike just after the US equity market open, driving a sudden wave of risk aversion (volatility in stocks was accentuated on Friday by quadruple witching). A down day on Friday, broke an eight day win streak for the DJIA, but for the week, the DJIA still gained 1.1%, the Nasdaq rose 0.3%, and the S&P500 climbed 0.9%.

- Senator Dodd outlined his proposal for financial regulation reform on Monday. Dodd's bill would create an independent consumer agency within the Federal Reserve, require hedge funds with over $100M in assets to register with the Fed and force trading in certain derivative onto public exchanges. In an attempt to end the "too big to fail" problem, the bill would restrain the Fed's ability to bail out failing firms and require approval of three bankruptcy judges within 24 hours to liquidate a large firm. The Volcker Rule, restricting proprietary trading by banks, is part of the package. Republican members of the Senate Banking Committee have been surprisingly receptive to the measures after condemning Dodd just last week for unveiling the bill before it was totally complete. The major sticking point is apparently over regulating certain derivative contracts, which were at the heart of the financial crisis. Fed Chairman Bernanke told Congress that he is concerned about provisions that would limit the size of the banks regulated by the Fed, saying the Fed should have oversight over smaller banks. Former Fed Chairman Greenspan commented that increasing capital requirements for banks would be more effective than the new financial reform legislation. Dodd's committee will begin markup of the bill starting next Monday.

- There continues to be a susurrus of takeover rumors in circulation, including talk of private equity offers for Harley Davidson and Beazer Homes making the rounds. Teva signed a deal to acquire German drug maker Ratiopharm for ?3.63B, further securing its position as the world's number one generic drug maker. Teva, which beat rival bids from Pfizer and Iceland's Actavis, said the combined company would have had 2009 revenues of more than $16B, up from Teva's own sales of around $14B. Phillips-Van Heusen said it would acquire Tommy Hilfiger from buyout shop Apax Partners in a cash-and-stock deal valued at about $3B. The combined company's revenue will total about $4.6B and allow PVH to introduce its brands in international markets. In other ongoing merger stories, BJ Services and Baker Hughes said the DoJ has raised some concerns about their pending merger deal. OSI Pharmaceuticals rejected Astellas' unsolicited tender offer for $52/share cash, stating that the offer substantially undervalues OSI.

- The TARP was back in headlines this week as three major firms, including Comerica, Hartford Financial and Discover Financial Services, signed deals to pay back their government funds. Discover surprised investors with a sizable quarterly loss, versus expectations of solid profitability. Discover's delinquency rates are improving, however its provision for loan losses continues to grow. In addition, Discover said the Treasury has approved its request to pay back TARP funds. HIG announced it would offer $1.45B of common stock and $500M of convertible preferred stock to pay back the TARP, and CMA said it redeemed the $2.25B of preferred stock issued to the U.S. Department of the Treasury.

- In tech, there were reports that Google would formally announce its withdrawal from the Chinese market next week, setting off a debate among industry watchers about which firms would most benefit from the move. Additionally, the London Independent reported that Facebook overtook Google as the most popular site in the US for the first time, based on data from Hitwise. Apple is reportedly encountering some difficulty getting media companies to provide content for its forthcoming iPad product; the tablet computer is scheduled to launch April 3rd. In earnings, Palm's quarterly losses was higher than expected as the smart phone maker's business continues to be hammered by the competition. Palm's CFO said he see next quarter's revenue at half the expected amount due to a "significant decline" in orders for its Pre and Pixi smart phones and building inventories caused by insufficient training of retailers' staff.

- The FOMC meeting, not surprisingly, was the main focus of Treasury market coming into the week. Prices rallied and yields dropped after the Fed left rates unchanged and indicated they were still months away from considering moving the funds rate. Fed fund futures even ticked a little higher initially, indicating slightly lower expectations the Fed will move at the end of this year, but better demand was primarily seen at the long end of the curve. Thursday's announcement the Treasury would be auctioning off another $108B in new short term paper this coming week returned focus to the government's historical borrowing needs. Also rumors that the Fed was considering another unscheduled hike in the discount rate helped reversed some bullish sentiment. The 2-year yield is stubbornly holding within striking distance of 1% while better demand has kept a lid on the 10 and 30-year yields. By Friday the spread between the 2 and 10-year narrowed to less than 270 basis points for the first time since late last year.

- FX traders shifted focus away from European peripherals and toward the FOMC and BOJ central bank meetings early on this week. But the Greek tragedy refused to leave the stage, and the euro continued to suffer from more EU discord over how to help Greece get out of its debt hole. EU Finance Ministers provided a strategy for emergency "standby" loans in case Greece's ?4.8B austerity measures failed to bring the country's budget deficit back into line with Maastrict Stability Pact criteria. The ratings agencies were out once again with commentary on the stability of US and UK sovereign ratings. Moody's said the US's Aaa rating would see pressure from the budget's 10-yr projections and noted that higher Gilt yields could test the UK's "Aaa" sovereign status over time. Moody's also said that whichever party emerges the winner from upcoming UK elections would take appropriate action on the deficit, even if there is a hung parliament. US TIC data released on Monday provided some ammunition for dollar bears as Chinese holdings of US Treasuries declined for the third straight month.

- Greece submitted a progress report on its ?4.8B deficit cutting plan to the EU. The rating agencies seem pleased with Greece's progress so far. On Tuesday S&P took Greece off its credit watch negative list and affirmed the country's BBB+ sovereign rating. At their meeting this week, European finance minters discussed the proposed European Monetary Fund (EMF), while France and Germany exchanged barbs over how best to handle the problem. The Greeks mainly wants lower borrowing costs now that they feel they've taken appropriate steps and appear to be threatening to go to the IMF for aid (the feeling is that this would embarrass the Euro Zone). Traders are now focusing on the EU Summit scheduled for March 25th.

- The hot-button Chinese currency issue hit a fever pitch this week ahead of next month's semi-annual US Treasury report that could see China formally labeled a currency manipulator. Bipartisan support quickly fell in behind Senator Schumer, who said he would reintroduce legislation to confront China on currency late last week. A group of 130 members of the House sent a letter to Treasury Secretary Geithner urging him to name China a currency manipulator. The Treasury response was measured, calling the currency concerns significant and warranting review of Senate proposal, though Geithner told one interview the Treasury does not believe China is a currency manipulator. The IMF's Strauss-Kahn also chimed in on the debate, suggesting the Yuan is "much undervalued." Later in the week, China Commerce Ministry called US currency demands unfair and harmful to China-US trade concerns, echoing weekend commentary from Premier Wen rejecting the notion that renminbi is undervalued. Conflicting opinions were heard from other quarters: Morgan Stanley's Steven Roach said calls for a strong yuan is "very bad advice," while noted US Economist Joseph Stiglitz said yuan appreciation would not fully resolve trade imbalances and could affect China's demand for US Treasuries.

- All in all the euro maintained its now familiar range of 1.34 to 1.38 but saw bearish momentum from the Greek situation. The currency hit 17-month lows against the Swiss Franc at 1.4315 (just above the all-time low made back in Oct 2008 at 1.4297) after the SNB newest member Danthine said exchange rates should be guided by market forces, seeming to go against the SNB's well established policy of fighting CHF appreciation. After the currency reacted sharply, he later added that the standard SNB statement that the central bank will continue to fight excessive Franc strength

- Sterling price action continued to reflect political uncertainties, setting out on a soft tone as the latest election polls continued to point toward a hung parliament. Comments from BoE's Barker about a possible negative GDP reading also weighed on the early sentiment. Overextended bearish technicals coupled with the largest monthly decline in the jobless claimant count since Nov 1997 provided the basis for a rebound above 1.5350 before drifting back to probe the mid 1.51 area.

- The Bank of Japan yielded to political pressure to address deflation with new easing measures by expanding its 3-month 0.1% funding operation to ?20T from ?10T, but failed to impress the markets, which had expected either a 6-month lending expansion or an increase in monthly JGB purchasing. Instead, the BoJ left its JGB buying unchanged at ?1.8T and pointed to a moderating trend in deflationary pressure. Governor Shirakawa further downplayed the measure by calling it a part of monetary policy rather than quantitative easing, also suggesting market operations alone will not increase economic activity. In turn, Japan Government Spokesperson Hirano said the cabinet welcomes the BoJ's doubling of its lending program, reiterating the need for the government and central bank to cooperate in fighting deflation.