Market Recap: 12.3.2010
The S&P sold off first thing this morning on the back of the worse than expected payrolls. However, at some point the market seemed to decide that bad data = more QE and started to buy equities. Or maybe it was just shorts covering. Either way, it was an impressive turnaround with the S+P closing up 3 at just under 1225. In terms of breadth, materials did the best although everything was up small on the day.
The VIX continued to slide, ending the day down -1.47 at 17.92, the lowest close in seven months.
As we suggested above, it remains unclear what correlation was driving FX today – though USD weakness was the clear theme. DXY drops almost 1% today with the majority of the decline coming after the weaker NFP print. That can possibly be attributed to the move in US rates but it’s a bit bizarre to see AUDUSD rally 50 points with SPX dropping 14 handles. More bizarre still to see the greenback weaken further as rates retrace. Flow today has been light. Stop loss buying of EURUSD first above the 100d (1.3330) then a further round through 1.3400. Comments from Merkel that Germany would consider leaving the EURO (see below from the Guardian) was the catalyst for the second round of stops. We were actually net better sellers today albeit in modest size. Similar story in USDJPY, better interest from leveraged accounts to buy the dip, though real money accounts were decent sellers. The AUD bid that emerged overnight continued. AUD up 1.6% vs. the dollar. Incredibly and somewhat confusingly, CHF performs ever better, which rallied 1.9% vs. the dollar. NOK the winner however gaining 2.2%, which actually makes sense as crude continues to levitate.
The US rates market rallied sharply immediately following the disappointing non-farm payrolls print, with 10y yields spiking from 3.04% to near 2.90%. 10s retraced the majority of the move over the course of the day, ending the day 1.5bps higher in yield than Thursday’s close. The curve however, reacted by jack-knifing, with 2s10s steepening by 8bps, while 10s30s finished nearly 3bps steeper. The underperformance of the long end indicates market participants view high unemployment as a catalyst for further QE which should increase longer term inflationary pressures. With the long end steepening out, we saw better real and fast money receiving of 30yr spreads, which led the spread tightening across the curve. Next week brings supply in the 3, 10 and 30 year sectors.
Credit opened stronger with IG 3 bp’s tighter, catching up to HY’s rally yesterday. The very weak employment report triggered HY selling but as the street was already short, the market took the flow well and HY barely budged lower. Late day selling in IG drove spreads another 1.5 bp’s tighter on light flows. On the day, IG dropped 1 bp to close at 91.50 and HY closed unchanged at 101.0625.
In commodities, wheat was the biggest mover, up almost +4%, on forecasts of too much rain in Australia, and too little rain in the US and Canada lowering crop yields. Gold and silver performed well, up +2.1% and +2.8%, respectively. Energy dipped initially on the worse NFP data, but recovered to end strongly, up almost +1.5%, on the back of JPM’s new forecast of crude at $120 by 2012 end. Flow-wise, we saw leveraged short-covering and long-rolling of crude.
Three hours or so ago, the following Bernanke quote hit the tapes: “CBS: BERNANKE DOESN'T RULE OUT BOND PURCHASES OVER $600 BILLION.” Apparently the interview was actually conducted on November 30thbut will only be aired Sunday night on 60 minutes. Just wanted to make sure the context was clear as it caused some confusion here in NY.
And in late news from the UK Guardian“The German chancellor, Angela Merkel, has warned for the first time that her country could abandon the euroif she fails in her contested campaign to establish a new regime for the single currency, the Guardian has learned. At an EU summit in Brussels at the end of October that was dominated by the euro crisis and wrangling over whether to bail out Ireland, Merkel became embroiled in a row with the Greek prime minister, George Papandreou, according to participants at the event's Thursday dinner.”
Next week brings trade balance data for the US, China, and UK; IP for the Euroland and India; German and UK manufacturing; and GDP for Japan. We also have central bank meetings for Australia, South Korea, the UK, Canada, and New Zealand.
And the FX recap from Talking Forex
Despite coming under heavy selling pressure earlier in the week the pair has since risen over 100 pips for the week against the USD after ECB’s Trichet succeeded in calming market tensions during the latest ECB press conference. In particular the sell off was attributed to unconfirmed market chatter that the French sovereign rating was to be put on watch negative, which despite being denied by various officials led to the yield spread widening between the French 10y and the German 10y Bund and consequently weighed on the EUR currency. Also, Apart from fretting over the Iberian Peninsula, it was the uncertainty regarding Belgium which has had a caretaker government since the last election in mid-June that attracted the majority of the attention. However, the anti-EUR stance was then reversed in the second half of the week when ECB’s Trichet hinted that the central bank is prepared to ease its hawkish stance which in turn prompted speculation of a “shock and awe” style bond buying program. Still, even though Trichet failed to deliver the sought after program, a combination of touted aggressive peripheral bond buying by the ECB and the fact that banks will continue to make full use of 1-week, 1-month and 3-month REFI ops at full allotment proved to be enough to tip the sentiment in favour of the bulls. As a result, the move higher saw the pair clear the 10DMA at 1.3274 and then close above the key 100DMA at 1.3330, with the 21DMA at 1.3501 seen as the next key target.
Similarly to the EUR, GBP finished higher against the USD this week as the sovereign debt crisis concerns that plagued the Eurozone in recent weeks abated. In addition, a round of strong PMI readings underpinned the view that the BoE was right to refrain from expanding its Asset Purchase Facility (APF). Still, gains were somewhat muted and the pair failed to break key levels which suggests that the Bearish pattern remains in place with the key resistance level seen at the 100DMA at 1.5722. Much of this underperformance was largely due to the fact that the ECB succumbed to market pressure and announced that it is to keep providing funds for banks in 1-week, 1-month and 3-month REFIs at full allotment. However a stronger EUR currency may yet prove to be a burden for the Eurozone, while in the mean time the BoE will continue to enjoy the competitive advantage that a weaker GBP brings to the UK economy.
The pair finished the week lower amid a weaker USD which reversed its recent trend higher following a move by the ECB to keep full allotment on 1-week, 1-month and 3-month REFIs. Aggressive USD weakness on Friday post a dismal Non-Farm Payrolls report saw the pair slip below the key 10DMA at 83.64 and also the 21DMA at 83.07 which suggests that JPY will now become the “risk averse” currency which will likely lead to renewed JPY appreciation and in turn prompt speculation of intervention by the BoJ. Also worth noting it is becoming increasingly obvious that current PM Kan is struggling to keep power, with much of the dissatisfaction stemming from the poor handling of foreign policy issues such as China and Russia.
Compiled from Goldman Sachs, Talking Forex and Zero Hedge