Weekly Recap | US Markets keep surging, Europe goes back into Recession, and China’s Surprise Rate Cut

The unexpected contraction in Japan’s preliminary Q3 GDP data (-1.6% y/y, -0.4%
q/q) drove the Nikkei down 3% on Monday and gave the excuse Japanese PM Abe
needed to delay the planned sales tax hike. Abe said he would call early
elections to cement his “three arrows” economic reform program. The
yen continues to be a one-way ride, with USD/JPY rising from 115.5 to 119,
another seven-year low for the yen.

China’s PBoC responded to recent soft economic data by cutting its benchmark
lending and deposit rates by 40 basis points and 25 basis points, respectively.
Meanwhile, the deposit rate ceiling was increased to 1.2x the benchmark deposit
rate. In a note, Goldman Sachs said while the move itself is unlikely to have
much of an impact on the economy, it sends a very clear signal that Beijing is
willing to loosen its policy stance to support the economy and its willingness
to use a broad spectrum of policy tools, much as it did earlier in 2014.

The minutes from the Oct 28-29th FOMC meeting showed that members are looking
ahead to next year, continuing discussions about how exit strategy should be
communicated. Only one member advocated dropping the key “considerable
time” clause on forward guidance, but many said that it would be helpful
if the Fed would soon clarify its approach to the pace of interest rate hikes.
The committee observed that problems in overseas economies presented only a
“limited” impact on the US recovery. The need to watch inflation was
highlighted, and the notes observed that market-based measures of inflation had
declined somewhat, but survey-based measures of longer-term inflation
expectations had remained stable.

On Monday Draghi provided his quarterly update to the EU Parliament, and apart
from familiar monetary policy talking points he offered heavy suggestions that
sovereign bond buying by the ECB was still in the realm of possibility. Later
in the week, Draghi recalled his landmark “whatever it takes” moment
by saying the ECB will “do what we must to raise inflation and inflation
expectations as fast as possible.” Draghi said he fears low inflation
could percolate through the economy and worsen the economic situation. His
comments were taken as a strong signal that the ECB will forge ahead with
quantitative easing in the months ahead. EUR/USD tanked late in the week,
testing 1.2400 after the second Draghi speech and the ECB officially launched
it ABS assets purchase program.

WTI crude pivoted around $75 this week before breaking out above $77 on Friday
while Brent rose back above $81, aided by the implications of the PBoC rate
cut. The OPEC guessing game of cut or no cut continued all week, with both
analysts and OPEC nations seemingly split on the prospects for lowered quotas
at the organization’s meeting in Vienna on November 27th. Smaller non-Arab
members led by Venezuela want to cut production and halt the slide in prices,
while Persian Gulf members want steady policy. Non-OPEC member Russia is deeply
distressed by lower oil prices and there was talk that the Russians might
preemptively cut production to bolster prices.

Gold and EUR/CHF were whipped around by polls out ahead of Switzerland’s
“Save Our Gold” referendum, scheduled for November 30th. In recent
weeks, polls had suggested more support in favor of the measure than against
it, however two polls out this week suggested the no vote at well above 50%.
Spot gold traded as low as $1,170 after the release of the new polls, but
rebounded late in the week on the Chinese interest rate cuts. EUR/CHF had been
testing 1.2010 all week, but backed off after the polls and talk of additional
SNB intervention to defend the 1.2000 floor.

President Obama unveiled a sweeping executive order on immigration reform,
including measures to let five million undocumented aliens remain in the
country, to increase border security, and to provide more visas for high
skilled foreign workers. The directive does not provide a pathway to
citizenship. The Republicans widely condemned the move.

Retailers reported more third-quarter results this week, with nearly all citing
a very highly competitive environment that is crimping margins. Big box
retailer Target delivered an upside surprise, although y/y growth in profits and
revenues was pretty anemic. BestBuy’s margins, profits and revenue all saw
healthy growth, while US comps were good and online comps were strong. Gap Inc
met expectations but cut its FY guidance, while same store sales were negative.
L Brands had a decent quarter with good comp sales gains.

Two gigantic deals took markets by storm on Monday. After a week of rumors,
Actavis reached a deal to acquire Allergan for $219/share in cash and stock, in
a total deal valued around $66B. Allergan’s hostile suitor Valeant said it
could not justify matching the price, giving up the fight. Baker Hughes agreed
to be acquired by Halliburton in a cash-and-stock valued at around $34.6
billion.