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Saturday July 25, 2009 - 02:06:42 GMT
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Forex Blog - Market Week Wrap-up

Friday, July 24, 2009 5:08:12 PM
Market Week Wrap-up
- The broad-based earnings season rally continued this week as quarterly reports led markets higher in the absence of outright bad news. Earnings reports were generally positive, though skeptics again harped on the fact that much of the improvement was due to cost cutting measures rather than growth. Goldman Sachs touted the equity market, boosting its forecast for the S&P 500 Index, saying that improving earnings will spur the steepest second-half rally since 1982. Caterpillar's big earnings win kept the ball rolling on Tuesday as Fed Chairman Bernanke began his semi-annual monetary policy report to Congress. Morgan Stanley's lackluster results provided some weight mid week, but impressive reports from Dow components and tech names helped push the DJIA over 9,000 on Thursday for the first time since early January. On the data front, the June existing home sales number was in line with expectations, but the m/m growth trend in overall sales and median prices, coupled with a faint decline in inventory were all good news for housing. The National Association of Realtors (NAR) also emphasized that the share of distressed properties in sales is "declining measurably," further indicating a trend toward normalization. Financial markets also took heart from California lawmakers reaching a deal to close the state's $26B budget deficit, and from CIT striking a deal with bondholders to refinance and restructure outside of bankruptcy, averting Chapter 11 fears for the moment. Commodity markets followed in the wake of the equity rally, with front-month NYMEX crude up about 5.4% on the week, closing around $68 and gold up about 1.6%. Congressional healthcare negotiations apparently melted down toward the end of the week, with reports that centrist Democrats had run negotiations off the rails. On Friday, the Nasdaq finally broke a 13-day winning streak, closing down on the weight of disappointing earnings from Microsoft and Amazon. Stocks were still up for the week, with the DJIA gaining 4%, the S&P500 jumping 4.2% and the Nasdaq climbing 4.2%.

- Nearly half of DJIA components reported quarterly results this week, providing a broad-based view of corporate performance in the second quarter. If any theme emerged, it was that profits are holding up thanks to layoffs and cost cutting efforts, while revenue continues to be weak as consumers and businesses buy less. Caterpillar stomped earnings estimates and offered a very bullish outlook for the full year, with a range that was twice the consensus view at its high end, but missed revenue targets. Boeing also beat top-line estimates handily, although its quarterly results were overshadowed by news the company was still assessing the schedule for 787 test flights and deliveries more than a month after uncovering a problem component. 3M did exceptionally well, beating top- and bottom-line targets by broad margins and boosting guidance for 2009. 3M's CEO said he believes the US economy has bottomed out, although he also warned there has been little improvement in demand. DuPont managed to beat bottom-line targets modestly but missed revenue estimates by uncomfortably large margins. United Technology was in line with earnings targets and fell short on revenue, and also cut its revenue guidance for the year.

- Consumer-oriented Dow components McDonalds and AT&T offered solid quarterly results; they modestly exceeded analysts' estimates and reported healthy gains in major business metrics. Coca-Cola was a bit ahead of the Street on earnings, but missed revenue targets, blaming currency effects. Microsoft disappointed investors by missing revenue expectations, and warned that it is still being negatively impacted by weakness in the global PC and server markets. Microsoft's shares dropped a dramatic 10% in Friday trading, wiping out six weeks worth of gains. Pharma names Merck and Pfizer performed well, with Pfizer missing a bit on revenue thanks to the weak USD. American Express managed to keep up its net profits (ex TARP repayment), but it too missed on the top line. Write offs and provisions for losses continue to rise at AmEx.

- Morgan Stanley was the last of the top five bank holding companies to report earnings, offering results which at first glance put it well behind its competitors. The firm reported a quarterly loss that was bigger than expected, and more than twice the expected figure once charges for repaying TARP were factored in. Results were also significantly hampered by an accounting rule related to the value of its debt. Strength in the firm's wealth management and investment banking revenues was not enough to offset declines in trading revenue and real estate losses. Commentators remarked that Morgan Stanley is much healthier than wards of the state BoA and Citi, but has been much slower than Goldman Sachs to take on more risk and higher leverage ratios. The leading regional banks reported better-than-expected results, including Wells Fargo, US Bancorp, SunTrust and Bank of New York. But results from Wells Fargo and Bank of New York were well below expectations after additional charges for TARP, various write downs and merger expenses were taken into account. Quarterly losses at Regions Financial and KeyCorp were greater than analysts had expected.

- In other earnings, boldface tech names Apple and Yahoo both blew out analyst estimates, with Apple issuing its typical conservative guidance. Semi manufacturer Texas Instruments' results were not as dramatically good as those out of Intel last week, but they were still strong, and the CFO averred that an economic bottom is near. UPS reported in line with the Street, but missed a bit on its guidance for next quarter. On the conference call, UPS executives echoed 3M, noting that while they are seeing economic stabilization, there have been no signs that growth is returning. Steel makers Nucor and Reliance Steel did not have a good second quarter. Reliance racked up an unexpected quarterly loss and fell $200M short on the top line, making for the company's first net loss since becoming a public company in 1994. Nucor's loss was slightly smaller than expected.

- It was a tale of two moves for Treasury prices this week. US government paper continues to move inversely to stocks as overall appetite for risk among investors remains the key factor. The first half of the week saw prices rise and yields fall, helped along by Fed Chairman Benanke's testimony on the Hill. Although Bernanke covered the essence of his testimony in a WSJ editorial piece published on Tuesday morning, when addressing Congress the Fed chairman emphasized that unemployment would likely remain high into 2011 potentially undermining what is already expected to be a gradual recovery, and for that reason the Fed will only consider tightening fiscal policy once the job market shows signs of recovery. The 10-year rallied almost a full point from session lows on the first day of his testimony, pushing the yield back to the lows of the week near 3.5%. The 2-year yield slid more than 10 basis points from session highs of more than 1%, sparking a rally in fed fund futures contracts.

- By Wednesday yields were climbing along with stocks, helped by investors' positive reaction to several major Q2 earnings reports. Risk appetite continued to improve through the remainder of the week spurred by a better than expected June existing homes sales figure and an unexpected move up in the May house price index. Bond selling accelerated Thursday afternoon following the US Treasury note announcement and comments from the Fed's Fisher. The $109B in expected coupon supply for next week is $5B more than the aggregate sales of the same notes in June. Fisher stated he was not in favor of extending or expanding the securities purchase program. The curve steepened, with the both the long bond and 10-year giving back a full point. As the week came to a close the long bond yield remains comfortably above 4.5% while the 2-year looks to hold onto 1%.

- The corporate bond market also heated up this week, with several notable issuances of investment and speculative grade paper. Intel sold $1.75B 3.25% junior subordinated convertible debentures with the majority of the proceeds intended to repurchase shares of common stock. Boeing and St Jude Medical each came to market with investment grade offerings after their Q2 earnings results. KB Home sold $265M in speculative grade paper to buyback debt set to mature in 2011. Even a €1.25B high-yield 2012 offering from European automaker Fiat drew strong demand with subscriptions reportedly nearing €8B.

- In currencies, USD and JPY maintained a soft tone throughout the week as risk appetite surged worldwide, particularly with commodities strength supporting emerging market currencies. With CIT likely to avoid bankruptcy and Wall Street having its best week in four months, EUR/USD hit fresh six-week highs above 1.4280, AUD/USD moved above 0.82 and USD/CAD tested key support around 1.0800. Mid-week the EUR/USD pair consolidated as option expiration chatter impacted the price action; option-related selling forced by a good-sized 1.4200 European Digital option due to expire Friday afternoon and talk of a €1.0B 1.4200 plain vanilla strike in play. The writer of the European Digital option will look to keep the spot price below 1.4200 to avoid a payout; The 1.4200 plain vanilla strike would contribute to the delta-related demand on dips, which explains the tight range of late. Throughout the week there were spats of profit taking, but better corporate earnings from Caterpillar and other major US corporations only whetted risk appetite. Sovereign accounts continue to show buying interest on dips toward 1.4150, as they attempt to diversify reserve.

- In the UK, declining tax receipts are pushing Britain's budget deficit to record highs. The BoE minutes showed that the MPC unanimously voted to leave interest rate and the £125B QE program unchanged. UK retail sales beat expectations (sunny weather helped). Q2 GDP contracted for the fifth straight quarter, dampening hopes of a quick exit from the economic doldrums. Nonetheless GBP/USD held onto slight weekly gains.

- The CAD surged over the course of the week, helped by commodity strength. The Bank of Canada Monetary Policy Report stated that the recession would end in the current quarter. Canada also reported better retail sales data. Canadian Trade Minister Day commented that a rising CAD has impacted its exports and insisted the current level of the currency is not yet a concern.

- In Japan there was vague chatter that the Japanese MoF might have told some large Japanese accounts that it would be safe to buy USD/JPY around the 93 area. A very large Toshin (Japanese mutual fund) issuance, to the tune of ¥3.86 trillion yen (about $41.5B), is scheduled for around the end of July. Dealers said that many of them are invested in BRL, ZAR, AUD and the USD/JPY, adding to the mid-week weakness in the yen.

- The week in Asia reflected the healthy dose of strong earnings from the US tech sector, with equities in Taiwan, Singapore, and Korea capitalizing on the good news locally. The Taiex was helped by growing certainty of a China investment tie-up, with a number of mainland banking officials looking to set up representative office locations on the island. Singapore markets remained firm after record Q2 GDP reported last week, while the Korean economy registered a strong Q2 result of its own. Coming in at 2.3%, Korea's preliminary Q2 GDP was the highest rate of growth since Q4 of 2003, offering more evidence of the battered economy on the mend. Sentiment over Korea was also helped by the corporate sector, with both chipmakers Samsung and Hynix topping estimates in their Q2 results. Over in Japan, BOJ deputy Governor Yamaguchi reined in expectations regarding the exit timing of central bank's quantitative easing policy. Recall in its most recent decision, the BOJ upped its economic assessment for the third time in that many months, but extended the monthly Y1.8T program through December. Yamaguchi in turn noted that December may not mark the end of quantitative easing measures, underscoring prevention of deflation as the primary goal of BOJ policy.

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