Monthly Archives: January 2012

The MorningSnapshot- 01/31

Stocks are climbing this morning after yesterday’s EU summit in which the leaders of 25 European governments agreed on a pact for a tighter fiscal union, and signed off on the details of a permanent bailout fund for the euro-zone. EU leaders noted “tentative signs” of economic stabilization, but said tensions within the financial markets continue to weigh on the economy. After the summit, Greek Prime Minister Lucas Papademos met with senior European officials regarding the conditions to be imposed on Greece for it to receive financial aid. Afterward, Jean-Claude Junker, Luxembourg’s Prime Minister who attended the meetings, claimed the talks yielded no conclusions. Mr. Papademos said that Greece would continue negotiations with private sector creditors this week with a goal of reaching a deal that would not require further financing from official lenders. “It’s hard to predetermine if we will need additional financial support. Our intention is to avoid it,” Mr. Papademos said in a press conference.

U.S. stock market futures are up this morning as sentiment improves in the euro-zone after yesterday’s EU Summit and amid better than expected earnings. Eli Lilly advanced 1.2% after it reported earnings at $0.87 per share in the 4Q, compared with the average analyst estimate of $0.81. The world’s largest drug maker, Pfizer Inc., increased 1.3% after beating analyst estimates as the company’s non-pharmaceutical divisions helped make up for sales lost on its best-selling drug Lipitor which is coming under pressure from generic competitors. Archer-Daniels-Midland, the world’s largest grain processor, posted a 2Q profit that missed analyst estimates due to rising corn costs and lower than expected oilseed earnings; ADM was off 3.1% in early morning trading.

I recently wrote about the MOVE Index (Merrill Lynch Treasury Volatility Index) hitting near lows not seen since before the financial crisis began, but in the last several days we have seen a move even further to the downside. Back on Jan. 18, the index was as low as 75bps, but we have broken that level of support and the index now trades at 72.4bps. Low volatility in the treasury markets may currently indicate investors unwillingness to shed their safe-haven dollar denominated assets.

The MorningSnapshot- 01/30

EU Leaders gather in Brussels for their first summit of 2012, amid deteriorating economic conditions and a struggle to complete a Greek debt write-off that may make it more likely for Portuguese investors to be next in line to accept a loss. Germany has proposed the creation of a commissioner , appointed by euro-member states, with the power to veto budget decisions by Greece as a condition of a €130B bailout for Athens. “Our partners acknowledge that European integration is based on the institutional equality of nation-states and on respect for their national identity and dignity,” Venizelos said in an e-mailed statement from his office in Athens yesterday. “Whoever poses a dilemma between economic aid and national dignity is ignoring basic historical lessons.”

French President Nicolas Sarkoszy said he will impose a 0.1% financial transactions tax, sending shares of French banks broadly lower. European stocks are heading for their biggest two-day drop in two months as Greece signaled strong opposition to economic oversight in exchange for aid. As of 9am EST, the Euro Stoxx 50 was down -1.30%, led down by Spain’s IBEX 35 Index and Italy’s FTSE MIB, both down about -1.45%. Italy’s 10yr rose 23bps to 6.084% and the Euro tumbled 0.8% to $1.3112. Credit swaps now imply a 71% chance Portugal will default within 5yrs. Asian equities closed down today as well, with the Hang Seng Index down -1.66% and the Nikkei 225 down -0.54%. S&P 500 Index Futures had lost -0.9%, while the 10yr Treasury slipped 6bps to 1.827%; the U.S. Dollar Index had added 0.5%. Copper fell for a second day, and oil dropped 0.7% in New York to $98.89 a barrel.

Commerce Department figures released today showed consumer spending stalled in December, with purchases little changed this month, after rising 0.1% in November. 66% of the 169 companies in the S&P 500 that have reported earnings this year topped analysts’ forecasts, according to data compiled by Bloomberg.

Italy, Belgium, and Spain must sell €22B of securities this week. Spanish 2yr yields jumped 13bps today to 2.66%, and equivalent Portuguese yields were at 20.71%. The Markit iTraxx SovX Western Europe Index climbed 7.5bps to 331.5.

The MorningSnapshot- 01/27

Yesterday’s U.S. durable goods release may be pointing to a rebound in business investment. “We’re poised for a bounce-back in the first quarter in terms of business spending,” said Scott Anderson, a senior economist at Wells Fargo Securities LLC in Minneapolis.“Confidence is up, and there are some signs that the labor market is improving. We’re still facing issues with housing.”

It was the second day in a row for commodities and treasuries to rise, after the Fed extended their pledge to keep their benchmark rate interest rate low through late 2014 and said it was considering another round of quantitative easing (QE). U.S. stocks retreated from a 6-month high, with the S&P 500 closing down -0.57% on the day, led down by the Telecommunications and Oil & Gas sectors. The U.S. 10yr Treasury fell 6bps to 1.931% in late New York trading.

European stocks soared higher, with the Euro Stoxx 50 index up +1.62%, with almost all of the euro area indices broadly higher.

Morning Commentary
GDP climbed at a 2.8% annual pace, following a 1.8% gain in the prior quarter, showing the U.S. economy expanded less than forecast, as consumers curbed spending and government agencies cut back. The median forecast of 79 economists in a Bloomberg News surveyed called for a 3% increase. U.S. stocks lost around -0.4% as of 9:30am EST, sending the S&P into a loss on the week.

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.