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Forex Blog - Trade The News Weekly market update
Trade The News Weekly market update
- Quarterly results from corporate America provided firm upward momentum as earning season hit its stride this week. US equity indices made solid gains after two consecutive down weeks, with a strong updraft on Monday in anticipation of blowout results from Goldman Sachs and then another big leg up on Wednesday on hopes for more good news out of JP Morgan, with an assist from Intel's strong quarter and positive industrial performance data. That morning the July Empire Manufacturing survey came in dramatically better than expected (-0.55 v -5.00e) while the Fed's June Industrial Production data crept even closer to positive. Indices leveled off on Friday as Bank of America and Citi offered tepid results. Drama at CIT and Congressional negotiations over healthcare, including proposals for 5% wealth tax, didn't manage to put a damper on the overall market, but will doubtlessly remain hot stories in the future. Brighter economic outlooks from Singapore, China's PBoC and the Japanese cabinet helped drive commodity gains; copper rose 9.5% on the week, finishing at its best level in a month. Spot gold rose 2.8% to finish the week around $937, after hitting a two-month low just last week. Crude oil reversed its recent bearish trend gaining almost 6% on the week, ending above $63. For the week, on the strength of earnings reports, the DJIA rose 7.3%, the S&P500 jumped 6.9% and the Nasdaq climbed 7.5%.
- Goldman Sachs and JP Morgan reported blow-out second quarter results that crushed analysts' estimates. JP Morgan reported a better than expected profit despite big charges for retuning TARP funds and paying the FDIC's special assessment fee. Investment banking activities at the two firms drove the big gains: Goldman said trading and investment revenues were up a whopping 93% y/y and 51% q/q, while JP Morgan CEO Dimon said that investment bank fee revenue of $2.2B was a record for his firm (or for anybody in the business in one quarter). Analysts and commentators spent the rest of the week discussing the firms' renewed willingness to take on risk to drive big profits. Goldman's CFO offered a veiled commentary on his firm's future direction, stating that the company is talking with regulators about altering its financial holding status to "allow additional activities," prompting some to wonder just how dead the investment banking model really is.
- Earnings from Bank of America and Citigroup on Friday were a stark contrast to results from Goldman and JP Morgan. Citi's earnings were something of a mirage: on the one hand, the bank racked up a $4.2B profit in the quarter thanks to the sale of Smith Barney to Morgan Stanley. But after backing out these gains, quarterly losses were only slightly smaller than expected. Bank of America's results were a bit above expectations. Loss provisions, write downs and charge offs continue to rise at both companies, with BoA's non-performing assets rising significantly on a sequential basis (the firm put special emphasis on trouble in commercial real estate) and Citi's total write downs rising to $6.57B.
- The deteriorating situation at CIT provided a background of tension for the big quarterly reports this week, as the company struggled to arrange financing for major debt payments ($1B to 3B, according to various reports) due in mid-August. On Tuesday the government decided CIT was not worthy of a bailout, leaving any rescue to the private sector. The Treasury is evidently making an example of CIT, stating that a "high threshold" exists for exceptional government aid. At least one analyst believes this is a good thing: PIMCO's Crescenzi said markets are taking the situation in stride and their reaction shows stability returning to the system. There were reports on Friday that CIT is negotiating with JP Morgan and Goldman Sachs for a lifeline, although there has been no confirmation of these reports. CNBC reported that CIT debt holders may be leaning toward a 'debtor in possession' scenario, and a bankruptcy announcement could come over the weekend.
- Dow components General Electric and Johnson & Johnson both reported Q2 earnings that were a bit above estimates. On the conference call, JNJ's CFO said the results were among their most challenging ever for annualized comparisons due to the loss of patent coverage for several major drugs. JNJ reiterated its full-year earnings outlook, while GE, which has discontinued giving guidance, talked a lot about its outlook on the conference call, noting that its FY09 forecast for non-finance related profits is "little changed" and warned that equipment revenue would be down 10-15% y/y in 2010. CEO Immelt insisted that GE Capital is profitable, and also said he is seeing big improvements in capital markets. GE stock traded down 6% on Friday following the report.
- Intel reported earnings that were more than double Wall Street's expectations, while revenue significantly outperformed the consensus view. The firm said its results reflect improving conditions in the PC market, confirming the many reports suggesting improvement for the sector over the last six to eight weeks. IBM and Google both managed to beat Wall Street's earnings expectations, although revenue results at both firms were lukewarm. Big Blue remains positive looking forward, raising its 2009 earnings forecast and offering a sanguine FY10 outlook. Google managed to grow margins, meet revenue expectations and keep top-line growth in positive territory; on the conference call executives said that business has "stabilized" and large advertisers have "come back to the table."
- Mobile phone giants Nokia and Sony Ericsson reported weak second-quarter results (Nokia missed expectations, Sony Ericsson's loss was a bit smaller than expected) and their outlook on the rest of the year was dim. Nokia said its market share would remain flat and overall industry volumes would fall 10% in 2009 y/y. Sony Ericsson saw challenging market conditions everywhere in the quarter and expects things to remain difficult all year. Elsewhere in the mobile device market, Apple rapped Palm, announcing the latest version of iTunes fixed a "bug" that will prevent Palm's workaround from mimicking an iPod for easy connectivity to iTunes.
- Treasury markets have been overshadowed by equities and corporate earnings this week, but with several high-profile reports beating expectations, risk appetite ratcheted up noticeably. The result was a steady decline in government bond prices, pushing yields higher. Thursday was the exception as Treasuries managed to rally modestly in tandem with equities; some market participants began to speculate whether bond traders were unconvinced early Q2 earnings reports were indicative of better things to come for the broader economy or even whether the second quarter sell-off in government paper (when yields rose by roughly 50bps in the US 10-year) was undergoing a rethink. But Friday's better-than-expected housing starts and building permits data helped bond prices resume their move lower. Yields have moved out to their highest levels in nearly three weeks as stocks consolidate gains in their best week in months. The long bond yield has retested 4.5% while the two-year briefly ticked above 1%. With the 10-year yield regaining 3.6% the benchmark spread widened out to more than 260 basis points for the first time since early June.
- In currency trading the risk aversion/risk appetite dynamic remains in force. Renewed concerns over the health of corporate America and the financial sector prompted a degree of risk aversion early in the week, to the continuing benefit of USD and JPY pairs. Constructive comments from China's PBoC and the Japanese cabinet on their respective economic outlooks put this trend on ice mid week, shifting trade toward risk appetite. A PBoC assistant governor said there were some positive signs for the Chinese economy, while the Japanese Cabinet's monthly report raised its view on exports, imports, business spending and private consumption sectors. Note that both nations warned that uncertainties have not disappeared. These comments also helped send commodities on an upward trend for the week, another factor for the softer greenback sentiment late in the week. EUR/USD reflected these moves in a gradual uptrend line, testing 1.3900 on Monday but above 1.4140 by Thursday and apparently breaking out of its one-year downtrend line on Friday after hitting its all-time high of 1.6030 last summer.
- China and Japan were hardly the only bright spots in the global economy this week. Euro Zone industrial production rose for the first time since last August. The Australia's business employment index jumped record 18 points to -7, its business confidence index was positive for the first time since December 2007 and business conditions survey hit its highest level in nine months. In the UK, the RICS house price index hit its highest level since September 2007. Singapore raised its 2009 GDP forecast to a range of -6% to -4% from a range of -9% to -6%, and said its Q2 GDP soared +20.4% q/q. Germany's ZEW economic sentiment survey declined for the first time in nine months. Not all the data was positive, however. The UK's June Commercial Property Values survey fell by 0.9%, making its 24th consecutive decline. In the US, Realtytrac said Q2 foreclosures hit all-time record highs.
- The reserve currency issue is still simmering on the sidelines. In China (whose currency reserves rose to a record $2.13T in June), PBoC economist Wang Yon said the government should moderately increase its holdings of US Treasuries and suggested that countries with large dollar reserves should hold talks with the U.S. government on the possibility of shifting bond holdings into other assets such as stocks and gold. More than one dealer concluded that China is trying to hit the reset button on the reserve currency question. South Korean sovereign fund KIC said it was planning to purchase inflation-hedging assets, including property and commodities. Treasury Secretary Geithner once again reiterated that the dollar would remain the principal reserve currency and repeated his commitment to a strong dollar.
- Sovereign ratings are another area of concern, although they had little effect on the price action during the week. The IMF raised new questions about the state of the Britain's public finances. France's latest bond issue raised doubts over the country's "AAA" rating. A UK press article noted that Fitch was paying close attention to French plans for a "special national bond" to raise up to â‚¬80B for projects outside the normal budget. While Fitch said there is no immediate threat to France's rating, the agency warned that concerns could mount if the country failed to map out a clear path toward fiscal discipline over the next year or so. S&P cut California's Economic Recovery Bonds by one notch to A from A+.
- The week in Asia saw a fairly strong set of Q2 performance reports from Singapore and China, with the latter also posting some critical figures for industrial, retail sales, and inflation trends. In Singapore, Q2 Preliminary GDP saw the island leap out of recession with the biggest q/q increase on record at 20.4% -- well above the 13.4% expected. China's GDP topped estimates by a tenth of a percent at 7.9%, bouncing from Q1's 6.1% on the back of stimulus driven investment flows. Sharp gains in industrial production were also impressive, but left some analysts wondering to what extent they reflected post-slowdown restocking activity. June retail sales were in line with estimates at 15.0%, however inflation data dipped to a multi-year low pace, with the PPI reading at -7.8% and CPI -1.7% y/y. This could effectively forestall concerns over another inflationary bubble emerging out of the PBoC accommodative stance, keeping its liquidity draining activities to a minimum. Following this mixed bag of data, China's government stats office acknowledged improving conditions, but also warned that the momentum of economic recovery was still not particularly stable, pledging to keep proactive fiscal policy and moderately loose monetary policy amid overcapacity in certain industries and ongoing pressure on the employment sector
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