18 Dec 2013 AMC- Fed decides to taper in January

18 Dec 2013 AMC- Fed decides to taper in January

Market Summary 

European Markets Closing Prices

European markets are now closed; stock markets across Europe performed as follows:

·         UK's FTSE: + 0.1%

·         Germany's DAX: + 1.1%

·         France's CAC: + 1.0%

·         Spain's IBEX: + 1.1%

·         Portugal's PSI: + 0.3%

·         Italy's MIB Index: + 1.2%

·         Irish Ovrl Index: -0.5%

·         Greece ATHEX Composite: 0.0%

Before Market Opens

S&P futures vs fair value: +1.50. Nasdaq futures vs fair value: +2.20.
The S&P 500 futures continue trading right above fair value.

Markets across Asia ended mixed as traders erred on the side of caution ahead of today's FOMC rate decision. In Japan, the Nikkei jumped 2.0% after a survey revealed that nearly all investors are expecting additional easing from the Bank of Japan. Elsewhere, the People's Bank of China has banned third-party payment processors from clearing bitcoin payments. The ban caused the digital currency to tumble from $717 to below $550.

Investors received several economic data points. China's House Prices rose 9.9% year-over-year (9.6% previous) while foreign direct investment increased 5.5% (5.77% prior). Japan's trade deficit widened to JPY1.29 trillion from JPY1.09 trillion (JPY1.32 trillion expected). On an adjusted basis, the trade deficit widened to JPY1.35 trillion from JPY1.09 trillion (JPY1.19 trillion forecast) as exports increased 18.4% year-over-year (17.9% expected, 18.6% prior) while imports rose 21.1% (21.4% consensus, 26.1% prior). Australia's MI Leading Index ticked down 0.1% month-over-month (0.1% prior). New Zealand's current account deficit widened to NZD4.78 billion from NZD1.34 billion (-NZD4.30 billion expected). Also of note, the Reserve Bank of India held its key interest rate steady at 7.75% (8.00% expected). 

·         Japan's Nikkei (+2.0%) led the region higher after the latest trade data showed a record November trade deficit. Exporters gained as the yen weakened with Honda Motor climbing 3.1% and Toyota Motor adding 1.6%. Real estate names were also strong as Sumitomo Realty & Development surged 4.2% to lead the sector higher. 

·         Hong Kong's Hang Seng (+0.3%) eked out a gain amid a sloppy trade. Insurance stocks led as Ping An added 2.5% and China Life rallied 1.4%. 

·         China's Shanghai Composite (-0.1%) extended its losing streak to seven as a late bid fell just short of the breakeven line. Defense stocks saw profit-taking after their recent gains as Shaanxi Aerospace Power Hi-Tech shed 5.0% and Jiangxi Hongdu Aviation Industry shed 3.7%. 

Major European indices hover near their best levels of the session as they rebound from yesterday's losses. Among news of note, the Bank of England released the minutes from its latest policy meeting, revealing a unanimous vote to maintain the key interest rate and asset program unchanged at their respective 0.5% and GBP375 billion. Elsewhere, Italian Prime Minister Enrico Letta commented on the euro, saying the Eurozone should aim to lower the exchange rate. Mr. Letta also reiterated his country's intent to maintain budget discipline.

Economic data was limited. Germany's Ifo Business Climate Index climbed to 109.5 from 109.3, as expected. The Current Assessment fell to 111.6 from 112.2 (112.5 expected). Great Britain's claimant count declined by 36,700 (-35,000 expected, -42,800 prior) while the unemployment rate fell to 7.4% from 7.6% (7.6% expected). Separately, the Average Earnings Index + Bonus increased 0.9% (0.8% expected, 0.8% prior). Also of note, the CBI Distributive Trades Survey surged to 34 from 1 (10 expected). Swiss ZEW Expectations improved to 39.4 from 31.6 (36.0 expected). 

·         Great Britain's FTSE trades higher by 0.3% with ARM Holdings in the lead. The chipmaker trades higher by 1.8%. On the downside, consumer names lag for the second day in a row. J Sainsbury and Tesco are down near 2.0% each. 

·         In France, the CAC trades up 0.9% as financials contribute to the advance. AXA, Credit Agricole, and Societe Generale all hold gains close to 1.6%. Technip weighs, trading lower by 7.0% after peer CGG issued a profit warning. 

·         Germany's DAX is higher by 1.1% as 27 of 30 components register gains. Countercyclical names outperform with Beiersdorf and Henkel up 1.5% and 1.8%, respectively. Deutsche Bank is the weakest index component, trading lower by 0.4%.

Market Internals

Market Internals
The Dow closed up 292 (+1.8%) at 16168, the Nasdaq closed up 46 (+1.2%) at 4070, and the S&P 500 closed up 30 (+1.7%) at 1787. Action came on above average volume (NYSE 868 mln vs. avg. of 701; NASDAQ 2054 mln vs. avg. of 1770), with advancers outpacing decliners (NYSE 2461/685, NASDAQ 1841/748) and new highs outpacing new lows (NYSE 186/85, NASDAQ 145/35).

Relative Strength: Homebuilders-XHB +3.0%, Biotech-IBB +2.8%, Russia-RSX +2.6%, Healthcare-XLV +2.5%, Greece-GREK +2.4%, Financial Services-IYG +2.4%, Financials-XLF +2.3%, Sweden-EWD +2.3%, Spain +2.2%, Timber-CUT +2.0%, India-INP +2.0%, Japan-EWJ +2.0%, S. Korea-EWY +2.0%, Peru-EPU +1.8%, REITs-ICF +1.8%, Real Estate-IYR +1.8% 

Relative Weakness:  Volatility-VXX -7.1%, Gold Miners-GDX -1.6%, Japanese Yen-FXY -1.4%, Silver-SIL -1.2%, New Zealand-ENZL -1.2%, Swiss Franc-FXF -1.0%

Leaders and Laggards

Technical Updates

Briefing's Commentaries 

Closing Market Summary: Stocks Notch Record Highs as Fed Trims Asset Purchases
Equities settled on their highs after dovish forward guidance from the Federal Reserve offset the immediate impact of a tapering announcement. Although the Federal Open Market Committee reduced the size of its monthly asset purchases from $85 billion to $75 billion, it pledged to keep the target Fed Funds Rate near its current levels ‘well past the time that the unemployment rate declines below 6.5%.'

The dovish guidance was also the likely reason for Treasuries retracing all of their post-announcement losses. The benchmark 10-yr yield ended with a five basis point gain at 2.89%, which is essentially where it traded before the afternoon announcement.

During his press conference, Chairman Bernanke elaborated on the decision, saying the Committee plans to introduce further gradual reductions should economic data continue showing measurable improvement.

The S&P 500 surged 1.7%, wiping out its entire December loss. The index ended at a fresh record closing high as nine of ten sectors added at least 1.0%.

Heavily-weighted financials (+2.4%) and health care (+2.4%) finished in the lead. The health care sector received a considerable boost from biotechnology as the iShares Nasdaq Biotechnology ETF (IBB 219.31, +5.92) rose 2.8%.

Despite the relative strength of the two top-weighted sectors, the S&P 500 was kept from registering additional gains by the underperformance of technology (+0.8%). The sector lagged throughout the session as its top component, Apple (AAPL 550.77, -4.22), weighed. The largest tech stock fell 0.8% in the wake of Jabil Circuit's(JBL 15.67, -4.05) disappointing earnings report. Comments from China Mobile (CHL 52.61, +0.81) also weighed as the company said it is still working on an Apple iPhone deal after last week's reports implied the deal was nearing completion.

Today's broad gains overshadowed another key laggard, Ford (F 15.65, -1.05). The stock lost 6.3% after issuing fiscal-year 2014 guidance that fell short of expectations. Specifically, the company said it expects FY14 auto revenue to be about equal with FY13 (the current consensus calls for 11% growth) while adding its global auto operating margin target of 8-9% is at risk. The guidance update pressured rival General Motors (GM 41.27, -0.26) which slid 0.6%.

The removal of the uncertainty associated with today's FOMC decision caused the CBOE Volatility Index (VIX 13.80, -2.41) to slump to last week's levels.

Today's economic data focused on housing. The weekly MBA Mortgage Index fell 5.5% to follow last week's 1.0% increase.

November building permits rose to 1,007,000 from the prior month's upwardly revised rate of 1,039,000 (from 1,034,000). That was above the pace of 983,000 that had been expected among economists polled by Briefing.com.

Regarding Housing Starts, September starts came in at 873,000 while the consensus expected a reading of 915,000. For October, Housing Starts were reported at 889,000 against the 920,000 expected by the consensus. Lastly, November starts increased to 1,091,000 while a reading of 950,000 was broadly anticipated.

Tomorrow, weekly initial claims will be reported at 8:30 ET while Existing Home Sales for November will be reported at 10:00 ET. In addition, November Leading Indicators and the December Philadelphia Fed Survey will also be released at 10:00 ET. 

·         Nasdaq +34.8% YTD 

·         Russell 2000 +33.5% YTD 

·         S&P 500 +27.0% YTD 

·         DJIA +23.4% YTD

Commodities

Closing Commodities: Gold Pullback In Electronic Trade, Now In Negative Territory

·         Feb gold spent most of today's session chopping around near the unchanged line ahead of the FOMC policy statement. The yellow metal dipped to a pit session low of $1227.00 per ounce but gained steam in the last half hour of floor trade. It popped to a session high of $1237.50 per ounce and settled with a 0.4% gain at $1234.60 per ounce.

·         Mar silver pushed to a session high of $20.11 per ounce in late afternoon pit trade after trading in a consolidative fashion near the $19.95 per ounce level. It settled at $20.06 per ounce, booking a gain of 1.1%. Gold fell as low as $1220.00 per ounce in electronic trade and silver slipped to a low of $19.42 per ounce following the 14:00 ET FOMC taper announcement. The Committee stated that beginning in January, it will taper its asset purchases by $10 bln per month. Gold is currently down 0.3% at $12226.80 and silver is up 0.2% at $19.88.

·         Feb crude oil traded as inventory data showed a draw of 2.941 bln barrels when a draw of 2.3-3.0 mln was anticipated. The energy component dipped to a session low of $97.46 in morning pit trade but eventually settled with a 0.6% gain at $98.08 per barrel, slightly below its session high of $98.30 per barrel.

·         Jan natural gas, on the other hand, trended lower today, erasing its earlier gains. Prices pulled back from a session high of $4.32 per MMBtu and slipped into the red by late morning floor action. Unable to regain momentum, natural gas settled 0.5% lower at $4.26 per MMBtu.

CBOT Agriculture and Ethanol Closing Prices

·         Mar corn fell 2 cents to $4.25/bushel 

·         Mar wheat fell 7 cents to $6.12/bushel 

·         Jan soybeans fell 19 cents to $13.25/bushel 

·         Jan ethanol rose 2 cents to $1.83/gallon

NYMEX Energy Closing Prices

·         Feb crude oil rose $0.61 to $98.08/barrel 

·         Jan natural gas fell 2 cents to $4.26/MMBtu 

·         Jan heating oil rose 5 cents to $3.01/gallon

·         Jan RBOB rose 5 cents to $2.70/gallon

Treasuries

Treasuries Slide as Fed Scales Back its Bond-Buying: 10-yr: -10/32..2.882%..USD/JPY: 103.81..EUR/USD: 1.3704

·         Treasuries finished with modest losses after today's FOMC Statement announced what the Committee hopes is the beginning of the end of its easy money policy. 

·         The Fed will reduce its bond-buying program to $75 bln per month ($85 bln previous), lowering both the buying of Treasury securities ($40 bln per month) and MBS ($35 bln per month) by $5 bln. 

·         The complex hovered little changed in early action before sliding to its worst levels following this morning's strong housing starts (1091K actual v. 950K expected) and building permits (1007K actual v. 983K expected) data and printing its pre-announcement highs in response to the ugly $35 bln 5y note auction. Click here to see an intraday yields chart.

·         The auction drew 1.600% and a weak 2.42x bid/cover as both indirect (25.8%) and direct (11.8%) bids were well below their 12-auction averages. Primary dealers were stuck with 62.8% of the supply. 

·         The 2y climbed briefly above 0.37% ahead of the Fed, marking a more than 20% increase on the day; however, as the dust cleared action slipped back to a still elevated 0.335%.

·         The 5y saw a volatile reaction to the taper as aggressive selling caused the yield to spike to a three-month high above 1.600%. Buyers piled in at that level, and managed to drop the yield back down to 1.515% (+2bps) by the cash close. 

·         Yields of longer durations saw the biggest impact with the 10y adding +4.2bps to 2.885%. The benchmark yield kissed the 2.930% level thanks to the post-announcement selling, but slipped back down to 2.885% by the close. The 10 ended at its highest level in three months. 

·         At the long end, the 30y tacked on +4.1bps, ending @ 3.913%. Action over the next several days will be watched closely as these levels correspond with the highest since August 2011. 

·         A slightly steeper curve took hold as the 2-10-yr spread widened to 254.5bps. 

·         Precious metals eked out gains with gold +$1 @ $1231 and silver +$0.13 @ $19.98. 

·         Tomorrow's Data: Initial and continuing claims (8:30), existing home sales, Philly Fed, and leading indicators (10). 

·         Tomorrow's Auction: $29 bln 7y notes.

Next Day In View 

Economic Commentary

Economic Summary: Fed tapers asset purchases by $10 bln
Economic Data Summary:

·         Weekly MBA Mortgage Applications -5.5% vs Briefing.com consensus of ; Last Week was 1.0%

·         September Housing Starts 873K vs Briefing.com consensus of 915K; August was revised to 883K from 891K

·         October Housing Starts 889K vs Briefing.com consensus of 920K

·         November Housing Starts 1.091 M vs Briefing.com consensus of 950K

·         November Building Permits 1.007 M vs Briefing.com consensus of 983K; October was revised to 1.039K from 1.034 K

o    This was the first housing starts data released since the government shutdown. Start levels for September (-0.9%, 883,000) and October (+1.8%, 889,000) were unknown prior to the release. The big increase in starts was, statistically, very unusual. Yet, the underlying trends support such a move. Over the last three months, the moving average for building permits was at its highest point since July 2008. Furthermore, inventories of new homes were well below normal stocking points and required an increase in construction. 

Fed/Treasury Events Summary:

·         The Fed concluded its meeting today. 

o    Statement Key Points:

§  Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. 

§  The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. 

§  The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

o    Economic Projections:

§  Co sees GDP in 2014 of 2.8%-3.2%

§  Co sees Unemployment Rate in 2014 of 6.3%-6.6%

o    Ben Bernanke Press Conference

§  Decision to reduce asset purchase program: have seen meaningful cumulative progress in labor; recent economic indicators have increased confidence in a continued improvement in unemployment rates; expect economic growth will be strong enough to support additional job gains; notes that even after the reduction it will still be expanding balance sheet and reinvesting maturing securities.

§  Ben Bernanke said steps will remain data dependent... says if continue on the trend it will continue to do modest reductions which will take it to later in the year; if things pick up it could reduce at a faster pace but current expectations is to continue to keep today's pace moving forward. 

§  As for the $10 bln reduction says that this will be a general range but it will be data dependent; could still pick purchases up if a weaker economy warranted; staff says equal reductions (MBs and Treasury) was the better way to do the reduction... Asked why it did not give a number for the Unemployment Rate threshold: Notes Unemployment Rate is a great indicator but it does not want to use that as the only metric when determining the health of the jobs market. 

Upcoming Economic Data:

·         Weekly Initial Claims due out Thursday at 8:30 (Briefing.com consensus of 333K; Last Week was 368K)

·         Weekly Continuing Claims due out Thursday at 8:30 (Briefing.com consensus of 2.760 M ; k was 2.791 M )

·         November Existing Home Sales due out Thursday at 10:00 (Briefing.com consensus of 5.00 M ; October was 5.12 M )

·         December Philadelphia Fed due out Thursday at 10:00 (Briefing.com consensus of 5.0%; November was 6.5)

·         November Leading Indicators due out Thursday at 10:00 (Briefing.com consensus of 0.6%; October was 0.2%)

Other International Events of Interest

·         Japan's Nikkei (+2.0%) led the region higher after the latest trade data showed a record November trade deficit (JPY1.35 trln deficit (JPY1.13 trln expected, JPY1.09 previous). The record deficit was a result of a 21% jump in imports, and came despite exports climbing 18%. 

On other news.... 

FOMC releases policy statement: Fed will add to its holdings of agency MBS at a pace of $35 bln per month rather than $40 bln; treasuries at $40 bln per month rather than $45 bln

·         Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

·         Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. 

·         Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. 

Key Statements and Changes from the Fed statement

·         Remains the same: economic activity is expanding at a moderate pace.

·         Remains the same: Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. 

·         Remains the same: Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months.

·         Dec 18:  Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing... Oct 30: Fiscal policy is restraining economic growth.

·         Dec 18: Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable... Oct 30: Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

·         Remains the same:The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.

·         Dec 18: The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced... Oct 30: The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall.

·         Change in asset purchases: In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

·         Dec 18: If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

·         Dec 30: Rosengren takes over as lone dissenter from George; Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the target.

·         Remains the Same: reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens

Currencies 

Dollar Flat After Fed Tapers: 10-yr: unch..2.835%..USD/JPY: 103.30..EUR/USD: 1.3780
The Dollar Index has been whipped around in a volatile trade as participants digest the word the Fed will begin to scale back its bond-buying program to a pace of $75 bln per month ($85 bln previous). Post-announcement buying lifted trade to its best levels of the session near 80.25 before a sharp selloff briefly dropped trade below the 80.00 level. Currently, action holds steady near 80.05. 

·         EURUSD is flat @ 1.3770 as action remains trapped near the October highs. Post-Statement buying provided yet another test of the 1.3800 level, but sellers once again emerged in defense of key resistance. A breakdown of 1.3725 sets up a move into the 1.3600 region. 

·         GBPUSD is +150 pips @ 1.6415 as an aggressive bid has action testing the December highs. Sterling has seen steady buying over the course of the session following this morning's better than expected claimant count change and unemployment rate. 

·         USDCHF is +20 pips @ .8870 as volatility has picked up considerably following the FOMC announcement. Early selling tested the recent lows, but bulls stepped in to defend the .8850 area. A minor victory for the bulls would be the retaking of .8900. 

·         USDJPY is +75 pips @ 103.40 as action looks to post its best close in five years. Japan's latest trade data was released overnight, posting a record deficit for the month of November. The weak data has many speculating the BOJ will announce more stimulus at tomorrow night's meeting. 

·         AUDUSD is +5 pips @ .8900 as action has recovered all of its losses. The hard currency saw a quick drop down into the .8820 region post-FOMC, but is now climbing back towards the highs (.8930). 

·         USDCAD is +35 pips @ 1.0640 as trade holds at pre-FOMC levels. The pair spiked to almost 1.0700 on the Fed announcement, but has given up those gains. Earlier, Canada's wholesale sales were released, posting a better than expected 1.4% MoM (0.4% MoM expected).

Jason's Commentaries


Ben Bernanke decides to pull stunt and starting tapering in QE in January... before he hand over the chair to Janet Yellen. Market started this massive spike and rallied till the closing bell right after the FOMC statements was released. Volumes were at 883m shares traded on the NYSE, pushing all the indices to their highs again. Internals were pointing to the upside and VIX totally sunk. The question is... will it resume or start the Santa Claus Rally? Personally I felt that the taper is likely to cause the market to sink, but instead the market decides to rally on the day. There could be a possibility that funds are buying in to price in the correction, just in case the market decides to tank after the news. Let's just wait how the market behaves towards the end of the week and we'll form our opinion by then. 

Fed is currently reducing their MBS purchase from $40b to $35b and the Treasuries purchase from $45b to $40b. That caused the bond market to have some jitters. Maybe its time to go short on Treasuries? Meanwhile, don't go guns blazing into the market with such uncertainty and stay safe!  

Market Call:FLAT

Date: 19 Dec 2013