– Trading this week pivoted around the FOMC decision on Wednesday, with investors bidding equities higher early in the week, waiting to see how upbeat the Fed would be on the economy and whether it would offer more detail on exit strategies (a rumor even made the rounds that the Fed might increase rates). Just after the moderately upbeat but still cautious report, the DJIA pushed above the 9900 handle, prompting many to bring out their Dow 10,000 hats. But the Fed fueled sugar high was short lived, and equities traded off hard though Friday, with the three leading indices losing ground for the first time in three weeks. For the week, the DJIA fell 1.6%, the S&P 500 dropped 2.3% and the NASDAQ Comp declined 2%. The annual UN assembly in New York and the G20 summit in Pittsburg provided entertaining side shows of little practical consequence, as world leaders apparently failed again to set specific targets for their initiatives, including plans to taper off fossil fuel subsidies and limit bankers’ pay. Crude and gold fell apart after getting smacked by dollar strength and less sanguine data. After opening the week above $72, the front month crude contract closed on Friday around $66. Gold peaked on Thursday just above $1,020, then fell rapidly to close out the week just above $990. Natural gas has moved in the opposite direction, making steady progress up to $4 through Friday, closing some of the gap that has built up between the relative prices of gas and crude.
– Ahead of the FOMC meeting, there was chatter that the NY Fed had made overtures to primary dealers about conducting reverse repos, which sent the rumor mill into overdrive. But the Fed ultimately maintained its commitment to keeping rates “exceptionally low for an extended period” and maintained the sizes of its MBS and Agency $1.25T and $200B respectively, extending the duration of the programs until the end of March 2010. In its statement, the Fed noted that economic activity has “picked up” but reaffirmed its conclusion that “inflation will remain subdued for some time.” The Fed also reiterated it continues to monitor “the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted,” leaving the door open for more unwinding. Later in the week, the Fed said it would reduce the amount of money available to banks in short-term loans under the TSLF and TAF, while also noting it may make the latter program permanent. Note that back in June the Fed extended the duration of many of its other emergency loan programs, including the TSLF.
– The housing market was an area of concern this week, as green shoots that had been in evidence in the sector through the summer were seen turning brown. Although the July House Price Index came in modestly higher, lower numbers for new and existing home sales spooked investors, as did terrible quarterly results from homebuilders KB Home and Lennar. August existing home sales missed expectations and declined relative to July numbers. The August new home sales data was a bit below expectations and more or less in line with last month’s reading. Both Lennar and KB reported quarterly losses that were considerably greater than expected, and both companies recorded shrinking backlogs and declining new orders. But what really rattled investors was a comment from an NAR official, who said there was a risk of a “double-dip housing recession” in the US if the first time homebuyer tax credit was not renewed.
– One sign of normalizing markets is the wave of IPOs that hit the NYSE and NASDAQ, with seven initial offerings rolled out this week. The NYSE saw debuts from asset management firm Artio Global (ART), REITs Apollo Commercial Real Estate (ARI) and Colony Financial (CLNY), and hospital operator Select Medical Holdings (SEM). Over at the NASDAQ, electric car battery manufacturer A123 Systems (AONE), health products retailer VicaCost.com (VITC) and Chinese online game firm Shanda Games (GAME) debuted. In addition to IPOs, a flood of firms came to market with debt and share secondary offers, prompting commentary from some quarters that the extended summer rally may have run out of steam.
– Pre-earnings season guidance calls kept piling up throughout the week. Seagate and Xilinx both offered improved guidance, adding to the raft of improved outlooks presented by tech firms over the last several weeks. Note also that Intel’s CEO said the PC market is poised for growth. Meanwhile, Potash slashed its 2009 earnings outlook for the second time this year, citing weak sales volume, and said its Q3 EPS would come in at the low end of its prior guidance range. Lowe’s reiterated its 2009 guidance range and offered a first glimpse at its 2010 forecast – ranges for both periods missed analysts’ expectations.
– Treasury markets had little difficulty taking down a record $112B in coupon supply, and modest declines in equities have helped keep yields in check ahead of the G20 summit in Pittsburgh. Government debt and deficits are likely to feature prominently in Pittsburgh as part of a broader discussion of global imbalances. The benchmark 10 year note remains entrenched at the low end of the 3.30-3.50% range it has maintained over the past month. The yield curve is flatter, with 2s and 10s back below 240bps and the 10s and 30s below 80bps. The 2-10-30 fly is sitting just below 82bps at the time of writing.
– One week after the expiration of the Treasury’s money market fund guarantee, some ultra risk-averse money has been taken out from under the mattress and stuffed into government bonds. Direct bidders participated in each leg of this week’s auctions with well above average enthusiasm, taking almost 12% of the two year – a level not seen since 2005. Despite dollar weakness, indirect bidding (which includes foreign central banks) was also robust and the only 5-year auction, which tailed by 3bps, could be considered weak. And even then, that auction took place about an hour ahead of one of the most highly anticipated FOMC statements in months.
– In currency trading, the greenback entered the week on a firmer note against the major pairs, thanks to news the IMF was planning substantial gold sales and chatter China would discuss gold purchases at the G20 summit. The dollar faced renewed pressure mid-week following comments from Canadian PM Harper and a Russian deputy PM to the effect that the dollar’s reserve status would be examined at the G20. But the real highlight of the week in FX was a comment from BoE Governor King, who said weaker sterling would benefit UK exports, convincing many that the BoE plans to pursue a policy of “benign neglect.” Dealers also wondered to what extent the Obama administration might pursue a similar weak dollar policy. In Europe, the ECB’s Weber weighed in with a rare FX observation, saying that the behavior of the currency markets of late has not been out of line with Euro Zone economic data. The ECB’s Nowotny commented that he sees the Euro Zone economic recovery as being “L” shaped rather than “V” shaped.
– Note that another factor boosting risk appetite early in the week was an FT opinion piece that insisted the “G7 should deal with the dollar,” as the article noted that a dollar collapse would have grave consequences for the world. According to the article, coordinated intervention has worked in the past and should be considered again. Dealer chatter also circulated that the Fed has begun discussions with dealers on using reverse repos to withdraw liquidity to remove one of the crutches of economic support in place since last year.
– The Federal Reserve and other major central banks extended most of their joint USD liquidity operation through Jan 2010 on Thursday. The ECB, SNB, BoE and BoJ all agreed to extend the operations past their October expiration date, but also said they would scale back the scope of the operations as improvements in financial markets have reduced demand for this type of credit. Some risk aversion sentiment crept back in as dealers noted that the news suggested the beginning of the exit process from extraordinary stimulus measures, and that the days of fast flowing liquidity were numbered. In a related move, the Norwegian Central Bank moved up its expected interest rate hike from mid-2010 to its next policy meeting, scheduled for October. The Norwegians maintained their deposit rate at 1.25%, while saying they debated a rate hike as well.
– In specific price action, EUR/USD seemed to be focus on a 1.48 digital option expiration in mid-week trading, although the USD managed to recoup its losses and ended near the 1.46 handle. The yen was firmer against the majors this week as dealers focus on repatriation issues as the fiscal half-year comes to an end in Japan. USD/JPY tested the 90 handle early on Friday after former Japanese official Sakakibara (aka Mr. Yen) said Japanese Finance Minister Fujii would likely view USD/JPY below 80 as abnormal and might consider currency intervention below 85. In Britain, the BoE minutes expressed more optimism about the economy, helping GBP/USD test the 1.6470 area. The BOE noted that higher asset prices, lower interest rate expectations, a softer pound and Libor could all help nominal spending. GBP/USD tested the lower 1.59 handle as the week concluded. Note that the London Telegraph wrote that Goldman Sachs feels the 20% decline in GBP over the past year has been enough to push the UK’s current account into “comfortable and permanent surplus.” USD/CHF tested 1.0180 for 14 months lows.
– The week in the Asia-Pacific region saw New Zealand claw its way out of a prolonged recession, with Q2 GDP eking out 0.1% growth after five consecutive quarters of contraction. It’s worth noting that the recovery is being led by growth in private spending and business investment, while government spending actually contracted by a full percentage point. The Q2 current account was also on the upswing, registering its first surplus in over six years with improvements seen in the terms of trade. Whether that trend can be sustained remains uncertain however, with August trade deficit rising to its highest level in a year.
– Over on the continent, the Asia Development Bank helped reignite risk appetite in the region early in the week, raising its 2009 China GDP forecast to 8.2% from 7.0%. The ADB was just as upbeat on the nature of recovery, calling for a V-shaped bounce even as external demand was hardly evident. The tone of Chinese officials ahead of the G20 summit was significantly more subdued. Speaking at the UN gathering in New York, President Ma warned that China unemployment could continue rising, justifying the subsequently adopted restraint by the G20 in withdrawing its simulative stance.Trade The News Weekly Update System.
Courtest: Trade the News