Monthly Archives: January 2012

The MorningSnapshot- 01/26

Yesterday’s Wrap-Up: Bernanke Puts QE3 on The Table; Fed Funds to Stay Low Until Late 2014
In statements released in Washington, the Federal Open Market Committee (FOMC) stated intentions to keep their benchmark interest rate low through at least late 2014, and voiced that they expect continued high unemployment and “subdued” inflation; this was a more dovish release than the market had expected. “The Committee expects to maintain a highly accommodative stance for monetary policy… Economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” Many anticipated just simple “wordsmithing”, and certainly not something very tangible out of this particular release. The extension of the plan to keep the fed funds rate “exceptionally low” through late 2014, from mid-2013, was apparently tangible enough. Risk markets reversed early losses and were up significantly after the release of the FOMC statement, with the dollar declining -0.39% to 79.486, the 10yr treasury falling 6bps to 2.002%, and the S&P 500 closing up +0.87%. (We’re looking at a high inverse correlation between the USD and the S&P 500; selling dollars means moving money to more risky assets- this relationship obviously changes at different phases of the business cycle.) Nine of seventeen officials anticipate borrowing costs will remain below 1.0% through the end of 2014, and six officials expect zero rates to remain into 2015. The Fed’s estimate for growth in 2013, using the central tendency approach, is projected at 2.8% to 3.2%; inflation is likely to fall below the 2% goal. The committee did not change its plans to lengthen the maturity of its current bond holdings, a move dubbed “Operation Twist”. Policy makers are “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate,” Mr. Bernanke said at a news conference today after the FOMC meeting. Bond buying is “an option that’s certainly on the table.”

European stocks were lower after economic data released showed the U.K. economy has contracted more than estimated, Ericsson AB’s earnings missed analyst estimates, and Novartis AG told investors sales may stagnate in the near future; the Euro Stoxx 50 closed down -0.45%. According to the Office for National Statistics, the U.K. economy shrank 0.2% in 4Q 2011. The Portuguese 5yr climbed to a record 18.88% YTM and the Italian 10yr climbed 11bps before the U.S. FOMC release. By 4pm EST Italian 10yrs were up only +4bps, while the U.K., France, Germany, Spain, and Switzerland all experienced declines in debt of similar maturity.

Morning Commentary: Yield Curve Talk
Thinking logically about the yield curve after yesterdays FOMC release, we understand the curve is likely to continue flattening, while the belly of the curve (5yrs-7yrs) will continue to outperform, and the front end should stay anchored until the market begins to price-in inflation. Inflation won’t be a concern until the economy can generate some real growth, which will not likely happen until the labor market starts to make a comeback. Bond traders focusing on curve extension trades have been rewarded more than they could have anticipated. The 10yr treasury yield fell significantly after the release, down to 1.958% this morning, and looks to technically be in a position to fall to its support at 1.80% in the near-term; a friend, analyst TJ Marta with Bloomberg’s First Word Team, has said the 10yr may not find its bottom until 1.50%. 5yr notes are testing all time lows of 76bps, and 2yrs are testing resistance around 20bps- close to their all time low at 14bps. Now that we have even more clarity on the Fed’s intentions, the market will focus on whether Greece can secure a debt deal sooner, rather than later. Caterpillar Inc., the world’s largest producer of construction and mining equipment, posted 4Q earnings and full-year profits that beat analysts’ estimates.

In Europe, sovereign yields have fallen considerably, with Italian and Spanish 10yr down 19 & 18bps respectively; stocks are much higher with the Euro Stoxx 50 up +1.65%.

The MorningSnapshot- 01/25

Yesterday’s Wrap-Up
U.S. equities were lower on the day, with the S&P 500 down -0.10%, led down by Telecommunications and Utilities. Volume was lighter than normal yesterday as investors waited to hear Mr. Obama’s State of The Union address last night, and for today’s FOMC meeting. The 10yr Treasury advanced +1bps yesterday to 2.056%, still holding above a recent downtrend; support still rests at the 100-day MA which is 2.01%. The U.S. Dollar Index rose yesterday, as sentiment was broadly lower amid worries over the Greek debt deal and uncertainty surrounding the State of The Union address and the FOMC releases today.

European stocks slid from a 5-month high on reaction to much of the same news; the Euro Stoxx 50 closed down -0.38%. Yields on sovereign debt increased yesterday, with Italian yields up +6bps to 6.134%. Germany’s 10yr bunds are trading at 1.989%.

Apple announced earnings that beat analyst estimates, its profit doubled on demand for iPhones and iPads in 4Q.

Morning Commentary
U.S. equity markets opened moderately lower this morning and for the most part remain mostly unchanged before today’s FOMC release. The S&P 500 was down -0.17% at 9:31am (EST). The 10yr is at 2.058% and the U.S. Dollar Index is up on the day amid deteriorating sentiment. LIBOR/OIS has decreased to 46.6bps, down from its early Jan. high of 50bps, and the spread has narrowed between commercial paper and t-bills from an early Dec. high of 58bps to 48.95bps; both indications of increasing investor risk tolerance as credit markets show early signs of easing.

European stocks are down for the day after data out of the U.K. indicated its economy shrank more than economists forecast in 4Q, as manufacturers cut output and services stagnated; Britain’s FTSE 100 is down -0.66%, and the Euro Stoxx 50 is down -0.87%.

The Hang Seng Index remains closed today in observation of the Lunar New Year Holiday, but the Nikkei 225 closed up +1.12%. Japan had its first annual trade gap since 1980, driven by an energy import surge and a shift of manufacturing overseas that threaten to undermine the nation’s status as the world’s largest creditor.

The MorningSnapshot- 01/24

Yesterday’s Wrap-Up
U.S. stocks were little changed yesterday after investors contemplated whether the rally over the last three-weeks was warranted given the current environment. The S&P 500 closed almost even on the day at +0.05%, the DJIA down -0.09%, and the NASDAQ at -0.09%. Shares in energy stocks rallied as natural gas started to rebound from its 10 year low of $2.32; the OTR natural gas contract soared more than +10% on the day. The CBOE Volatility index (VIX) has decreased more than -20% this year and closed below 20; the VIX had remained over the emotionally significant 20 level since the end of July. The 10yr Treasury increased +4bps to a high for the year of 2.064%; technical support is along the 100-day MA at 2.01%. The U.S. Dollar Index was moderately lower at -0.068% to 79.74.

European stocks closed higher and bond yields fell on a possible Greek debt deal and amid speculation that the meeting held in Brussels yesterday would produce measures that would help ease the euro debt crisis. 10yr Italian yields dropped 14bps to 6.11%, the lowest level in six-weeks and their spread to German bunds contracted 19bps to 413bps (refer to pg. 6 in the attachment for charts).

Morning Commentary: Excited For Mr. Obama’s State of The Union Address?
Tonight we will have the pleasure of watching Mr. Obama address Congress at the annual State of the Union speech which, according to the Washington Post, is to focus on what he calls “a return to American values.” In a video released Saturday Mr. Obama said his speech should be viewed as a “blueprint for an American economy that’s built to last.”

The market will be focusing on tomorrow’s FOMC Rate Decision and this evenings State of the Union Address. Apple releases earnings today after market close. For now, S&P 500 futures are trading lower -0.615%, as sentiment retraces after Greece talks hit a snag. The 10yr Treasury is down a basis point to 2.046% this morning. The U.S. Dollar Index is gaining on the day, yet another indication of more risk-off trades.

European finance ministers pressed bondholders to dig deeper into their pockets to provide greater debt relief for Greece. “The current state of the negotiations with the private creditors is that we’re a bit short of where we want to be,” German Finance Minister Wolfgang Schaeuble told reporters after EU finance officials met in Brussels today. “As long as we don’t have debt sustainability, there won’t be a new program.” The Euro was down -0.1% following the news to $1.2965. European stocks are broadly lower, falling from a five-month high amid a stalemate between policy makers and Greek bondholders; the Euro Stoxx 50 is off -1.11%.

Asian equity markets rose for a sixth day in a row, but today’s rally was not very decisive and light on volume, as the global markets proceed cautiously before a resolution for Greek bondholders comes to fruition. The Nikkei 225 closed up +0.22%, and the Hang Send was up +0.84%. India’s central bank unexpectedly cut reserve ratios, the amount of deposits lenders are required to set aside as reserves, for the first time since 2009, and signaled future interest rate cuts. The cash reserve ratio was lowered from 6% to 5.5%, adding around $6.4B to lenders according to a statement released in Mumbai today. They now join other BRIC nations in trying to shield growth.