Cannon Trading Blog

Fri, 31 Jan 2014 16:12 PM EST- Global equity markets saw even more turbulence this week, although the equity declines were more muted overall. The final week of January saw the Federal Reserve taper asset purchases for a second consecutive meeting, reducing the pace of monthly buys by $10 billion to $65 billion, split equally between US treasuries and MBS. There was little change in the Fed’s language and no press conference, but the absence of any commentary on the emerging market currency rout was unsettling for some. Three of the “fragile five” nations (Brazil, India, Indonesia, Turkey, and South Africa) raised interest rates in an attempt to stem capital flight and bolster currencies, but the sense is that the emerging market situation will only be getting worse. US GDP and inflation data were pretty solid, while European unemployment and inflation data was anything but, which pummeled the euro and drove key UST-Bund spreads to their widest levels in six months. For the week, the DJIA dropped 1.1%, the S&P500 lost 0.4% and the Nasdaq declined 0.6%, leaving all three major indices down low-single digit percentages for the opening month of 2014.- US advance fourth quarter GDP met expectations at +3.2% and the personal consumption expenditures component hit its highest growth rate since 2010. Recall that the Q3 final GDP figure was +4.1%; the Commerce Department said that the deceleration reflected lower nonresidential investment, a larger decrease in federal spending and weaker PCE and exports. It was estimated that the government shutdown subtracted 0.3% from the Q4 headline GDP growth, while Federal spending fell 12.6% y/y in the quarter, pushing total government spending down 4.9% y/y. Some analysts speculated that in the absence of Federal austerity measures, GDP would have been above 4%.- The Fed’s favored measure of inflation inched higher in December. The core PCE price index rose 0.1% from a month earlier, bringing the y/y core inflation rate to 1.2% from 1.1%. The core measure remains well short of the Fed’s 2.0% inflation target. Contrast the US data with the Eurozone flash January CPI reading: headline inflation was 0.7%, matching the four-year low seen in October. The German state CPIs for January all sank lower. The ECB has vocally dismissed arguments that Europe is facing deflation, however the bank cut rates by 25 bps to 0.25% in the wake of the October CPI report. The next ECB rate decision will be on Thursday, and many analysts are now forecasting another 15-20 bps rate cut. Recall that after the bank’s last decision, President Draghi stated two contingencies would force the ECB to act: a worsening inflation outlook or unwarranted money market tightening. In the wake of the two inflation reports, the US-German 2-year spread hit six-month highs, at a little more than 26 bps. EUR/USD dropped below the 1.3500 level for the first time in two months.- Three emerging market central banks boosted interest rates this week in attempts to grapple with the volatility seen in currency markets. India hiked its base rate by 25 bps to 8.00%, Turkey raised its overnight lending rate by a huge 425 bps to 12.00% and the South Africa Central Bank raised its key rate by 50 bps to 5.50%. The moves have limited the decay of the three nations’ currencies for now, but they have hardly reversed the ugly trend. USD/INR remains just shy of the 63.5 high seen before the decision. The Turkish Lira had spiked to a fresh all-time low of nearly 2.40 to the dollar and dropped to 2.16 after the decision, but weakened back to the 2.25 area in the second half of the week. The South Africa Rand got close to all-time lows, hitting 11.36 to the greenback before the decision, and has only strengthened slightly after the rate hike.

– Industrial names Boeing, Ford, and Caterpillar offered decent but not excellent results for the December quarter. Cat’s Q4 earnings and revenue totals widely topped expectations, with profits higher y/y but revenue down 10% from last year’s Q4. The firm’s initial FY14 earnings outlook was also very good, although executives cautioned that the mining industry would remain weak in the near term. At first glance, Ford’s earnings crushed the consensus view, but before a big tax benefit profits fell nearly 25% y/y. Likewise Boeing’s EPS blew out expectations, but only because of a very low corporate tax rate. Ford warned that the launch of a big range of new models, including the new aluminum body F-150, would hold back North America earnings in FY14. Boeing’s guidance for commercial deliveries around 715-725 planes indicates another year of growth for the firm.

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