Weekly Summary

Trade The News Weekly market update

– Weak economic data hit markets hard this week, prompting traders to take profits as one of the best quarters for equities seen in decades came to a close on Wednesday. More than one commentator noted that the big slide that many had predicted for September has apparently arrived a month late, given the 200-point slide in the DJIA seen in the first two days of October. In any case, four consecutive sets of economic data rattled investors: Tuesday’s Sept consumer confidence missed expectations and slipped below August’s level, Wednesday’s Sept ADP employment survey was surprisingly high and the Sept Chicago PMI reading was much lower than projected, and Friday’s payrolls data was much worse than expected. Bearish comments from Fed governors only added weight to markets, with Rosengren stating employment would likely remain high for the next two years and Lockhart saying the Fed’s exit strategy may have to wait as near term economic strength may not last. Pianalto added an optimistic note, saying that she sees signs the economy is emerging from steep decline, such as a sense of optimism that was not present a few months ago. Front-month crude tested back above $71 briefly, before closing out the week around $70, while gold made a run up to $1,010 mid week before closing the week just above $1,000. For the week, the DJIA fell 1.8%, the S&P 500 dropped 1.8% and the NASDAQ Comp declined 2.1%.

– The September US employment data was especially worrying this week, prompting many commentators to express strong concerns over the state of the recovery. Late in the week, Noriel Roubini took the opportunity to reiterate his fears of a “double-dip” recession in the US. On Wednesday, the September ADP employment reading indicated a much bigger increase in job losses than expected, setting the table for negative September payrolls data on Friday, which declined nearly 100K more than the consensus view (-263K v -175Ke). Analysts were quick to point out that a hefty portion of the unanticipated declines came in government jobs (associated with the start of the school year), but that even if these losses were only a one-month anomaly, the overall trend in employment remains worrying. PIMCO’s Bill Gross said that the Fed does not move to tighten unless unemployment is down for 12 months in a row, “so we’ve got plenty of jobs to create before the Fed raises rates.” The September hourly earnings data was more or less flat, as was the September annualized unemployment rate. The decrease seen in weekly hours may suggest that lower wages are not prompting employers to bet on green shoots and boost the hours worked by existing staff. Analysts believe this shows there is plenty of caution about the durability of the downturn.

– Financials helped drive overall gains early in the week. On Monday Goldman Sachs said it may hire as many as 200 asset managers. “We are moving back on the offensive,” said one Goldman executive. The FT wrote that the recent rally in markets for “toxic securities” could help boost the banks’ Q3 earnings, if they choose to book gains on mortgage-backed securities. Note that the IMF warned that up to $1.5T in bank writedowns are still expected through 2010 on a global basis, but also reduced its estimates for overall writedowns faced by the industry by $600B. News that the FDIC would require banks to pre-pay deposit insurance fees three years in advance hardly impacted share prices. But the dire data hit the banks hard later in the week, with JP Morgan and Morgan Stanley particularly weak. Citi was a notable exception, as the name was up around 3% on the week. Bank of America had a big week: the firm announced CEO Ken Lewis would step down at the end of the year (without naming a successor), and sold asset management unit Columbia Management to Ameriprise for $1B in cash.

– A burst of M&A action also helped boost markets on Monday, and an uptick in deals was seen all week long, providing some of the only optimism in a grim week. On Monday, Xerox said it would acquire Affiliated Computer Services in a $6.4B in cash and stock deal, Abbott said it would buy Solvay’s prescription drug unit and vaccines business for €4.5B in cash, GenTek agreed to be acquired by private equity firm American Securities for $673M and Aspect Medical said it was being acquired by Covidien for $210M. Later in the week Cisco bought Norweigian video conference technology firm Tandberg for almost $3B, continuing Cisco’s big move into online video applications, and ViaSat acquired private satellite internet provider WildBlue Communications for $568M in stock and cash. In two other ongoing merger soap operas, Facet Biotech once again rejected Biogen’s $14.50/shr offer as inadequate, while across the pond the UK Takeover Panel said Xstrata has until October 20th to make a concrete offer for Anglo American or drop its bid (for six months).

– Treasury markets surged on Thursday as equities slumped and bond traders rolled the dice in anticipation of an ugly reading in Friday’s pivotal September employment report. Yields subsequently took out some key technical levels, with the 30-year Bond moving below 4% for the first time since late April and the 10-year Note below 3.25% for the first time since mid May. European government bond rates followed suit early on Friday. The moves came in the context of a choir of Fed, ECB, and other various government officials, whose chorus remains it is still too early to begin withdrawing stimulus; but they are ready to act decisively when the recovery finds self sustained traction. Ultimately, the skeptics on the recovery story were vindicated with worse than expected readings on virtually every available labor metric. The cognitive dissonance that has been building between bond markets and equities diminished when stocks plunged and bond prices surged following the data.

– The knee jerk reaction quickly abated though, with buyers stepping into the equity markets while bond traders took profits. The 10-year yield appears to have found a floor around its 200-day moving average at 3.15% and as clawed back above 3.2%. The long bond pushed back towards 4% in late Friday trade. Whether or not yields can hold these key levels will face a stern test next week. The Treasury will introduce a fresh round of supply ($12B in 30 year bonds, $20B in 10 year notes, $7B in 10 year TIPS, $39B in 3 year notes), while Aloca’s earnings report on Wednesday signals the commencement of Q3 earnings season for stocks.

– In currency trading, sharp price movements were prompted by government rhetoric and undercurrents from the G7 summit, which is set to commence in Turkey this weekend. In particular, rhetoric from government officials bolstered the JPY and GBP crosses. World Bank President Zoellick commented several times, insisting that the US should not take for granted the dollar’s status as the world’s main reserve currency. Zoellick said the yuan would have more influence in the future and the euro would likely continue to appreciate, setting the stage for volatility. IMF Chief Economist Blanchard noted that while global recovery has commenced, the strength of the recovery would depend on rebalancing growth. This was a major theme at the G20 summit, with the conclusion that countries with surpluses would do well to focus on domestic growth, while countries with deficits should focus on savings and fiscal consolidation.

– The tug-of-war between risk aversion and risk appetite remains firmly entrenched. Appetite for risk was whetted by news that the IMF raised its 2010 global GDP outlook to 3.1% from 2.5% and strong results from the second ECB 12-month tender operation, with the latter prompting optimism that balance sheet stresses in the Euro Zone and emerging market countries had fallen significantly. Some commodity-related news suggested that the restocking process by China seemed to have diminished. The Chinese Steel Group CISA forecast a glut in global iron ore supply in 2010 and the dollar seemed to take note of this projected demand slump, especially when various central bankers in both Europe and the Far East issued cautious statements on the sustainability of the recent recovery. Risk aversion struck back as the September US jobs report raised fresh skepticism about the sustainability of the economic recovery, with weaker-than-expected US consumer confidence as a precursor mid week.
– In Europe, German Chancellor Merkel’s pro-business coalition survived the election, but with a weakened mandate. Following the results she noted that there would not be any new tax cuts before 2011. For most of the week the EUR/USD and stock indices exhibited strong correlation, with the stock price decline leading the currency pair to dip below the 1.4500 level in the aftermath of the payroll data on Friday. However, dealers noted that some reserve managers were taking advantage of the post-payroll report to sell into USD strength. Spot gold level continued to hold the key support level of $970; which continues to provide a catalyst for any USD retracement from recent its downtrend path. EUR/CHF continued to test its 200-day moving average, as has been the case since mid-August. Dealers were watching for any Swiss bank intervention and CHF demand from Swiss institutions taking advantage of the inexpensive euros available from the ECB 12-month tender.

– The UK press began the week by defending the BoE’s recent stance on the pound, with the general tone that BoE Gov King was not trying to depreciate the value of the pound but was presenting a more macro view. A closed-door meeting between BoE Gov Bean and various London economists sparked speculation that the BOE might still pursue a deposit rate cut in the manner of Sweden. However, the GBP recovered following talk that no such measure would occur. The CBI distributed trade data which registered a positive reading, while the UK manufacturing PMI dipped back below the 50 level.

– Traders made every attempt to understand the new Japanese government’s position on the yen, which firmed up against major pairs after Japanese Finance Minister Fujii noted that he was unlikely to bring up the recent JPY appreciation issue at the G7 weekend meeting. Throughout the week, Fujii seemed to adjust his prior position, noting that he would not rule out action in the FX market, especially when currency moves seemed “abnormal,” reiterating that a global competition to devalue each country’s currency would be wrong. MoF Special Currency Advisor Gyohten commented that he doesn’t see JPY rise as “sharp” and does not see a great deal of turbulence in FX price action.

– Russian Central Bank’s First Deputy Chairman once again shared his opinion on the reserve currency issue, reiterating Russia’s desire to diversify away from the dollar in favor the CAD and AUD pairs. The comments helped CAD and AUD pairs maintain their firm tone following the upward revision in the IMF’s global GDP forecast for 2010. AUD crosses inched higher also with the increase in spot gold prices which tested the $1008 level before consolidating lower.

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