Download April 26th, 2012 - BMO Capital Markets

August 13th, 2012
The Ryan for VP Decision: Why It Matters
On Saturday, US Republican candidate for President Mitt Romney announced his pick for a
running mate. His choice for vice president is Wisconsin Rep. Paul Ryan. This is a positive
for the markets for three reasons.
1. This will force both the Democrats and Republicans to focus on the biggest
problems facing the US: the fiscal deficit, the massive debt, and growing entitlement
spending.
2. Ryan will aid Romney’s election chances (even ahead of the Ryan pick, the latest
polls showed a closed gap), and subsequently, increases the likelihood of corporate
and individual tax reform, but also the type of reform that is the most positive for the
economy and thereby the markets.
3. The prospect of serious and focused reform on the corporate tax code, specifically
Romney’s proposals (here’s my analysis) to end the extraterritoriality of the current
system (i.e., taxing foreign profits at 35% on repatriation), will give a boost to smallcap stocks (Russell 5K) and those large-cap multinationals with strong foreign
earnings (Big Pharma, Big Tech).
Overall, the addition of Ryan to the ticket should give Romney a boost in the polls in the lead
up to the August 27th convention. If Romney pulls ahead, we should see the stock market
rally based on the reasons I stated above.
Last Shot of Earnings This Week
This week will see a focus on retail sales with Walmart, Target, and Gap reporting. Also,
tomorrow we get advance retail sales for July which is forecast at +0.3%.
Top Events
1. China –Despite weak economic data last week, the PBOC holds off on required
reserve ratio (RRR) cuts as open market operations are said to be effectively providing
liquidity to the banking system. The Shanghai Composite closed -1.51% on the day.
2. Japan – As a result of a slowing China, Q2 annualized GDP grew 1.4%, vse of 2.3%.
Markets shrugged off the lower growth as the NIKKEI closed down only –0.07% and
the yen is down 0.02% against the USD, both essentially unchanged.
3. Greece – 2Q GDP fell 6.2% (YoY), less than the expected -7.0%. This on the heels of
The Economist’s reporting that Germany wants to see and support Greek reforms
because the costs of a Greek break are large and unpredictable, “But if Europe just
keeps on arguing, that calculation will change.”
4. ECB – Governing Council member and Belgian central banker, Luc Coene, is quoted
as saying, “It makes no sense for the ECB to start financing those countries,” in
regards to plans for the ECB to buy Spanish and Italian sovereign debt. “It would only
lead to the ECB taking on the whole public debt of Spain and Italy onto its balance
sheet. That would in turn weaken the ECB and do nothing to resolve the underlying
problems.” Despite the negative implications, the euro is +0.49% against the USD over
the weekend.
5. Italy – Finance Minister Grilli announced that they would miss their 2012 deficit target
due to falling growth. Still, Italian 10-yr government bond yields continue to hold below
5.9% and the FTSE Italian Borsa is +1.01% on the day.
6. Iceland – The IMF has held out Iceland’s bailout and crisis response as an example for
other troubled sovereigns. The mix of austerity, capital controls, a sure safety net, and
no support for bank creditors led to a relatively quick recovery. The Iceland OMX stock
index is +0.28% on the session.
Asia Foreign Exchange Color – (B. Keane)
With little in the way of new news, we have a relatively quiet open with major currency
pairs opening close to Friday’s ending levels. EUR/USD opens at 1.2283 and deals
1.2277-1.2294 in the first couple hours. CBL opens at 1.5675, down slightly from the
1.5690 close. Early activity is confined to 1.5670-80. USD/JPY opens at 78.20 and
EUR/JPY at 96.10. AUD + KIWI open at 1.0565 and 0.8132 respectively while
USD/CAD kicks off the week at 0.9910 – exactly where it left off from
Friday. USD/CAD trades 0.9910-25 early on. Very modest Cross/JPY weakness seen
thru the Tokyo fix. EUR/JPY notches session lows at 95.95 and EUR/USD trades
down to 1.22615 around the same time. AUD + KIWI move down to 1.0543 and
0.8105 respectively while USD/CAD sticks to a tight range between 0.9908-20. After
setting session lows at 1.22615. The EURO pop helps to push EUR/JPY up towards
96.40 highs and AUD + KIWI rise back towards earlier highs as well. AUD/USD moves
up to 1.0571 and KIWI to 0.8125. CBL stays very rangy between 1.5660-80 for the
most part while USD/CAD slips to 0.9908. Ahead of London time, conditions are very
quiet as major currency pairs stick to narrow session ranges. EUR/USD goes out
close to session highs but amid a general lack of motivating news, the market seems
content to play the 1.2240-1.2320 range for the time being. USD/CAD ends Asia
around 0.9912, having stuck to a very narrow 17-pip range.
London Foreign Exchange Color – (S. Pilgrim)
Asian trading was quiet overnight with little motivating on the data slate aside from the
Japanese GDP released early in the session echoing the Chinese numbers last week
as weakening external demand was the notable takeaway from the disappointing print.
EUR opened heavy as the peripheries remain in the headlines with Finland and
Belgium as well as Germany voicing opposition to purchases of Spanish and Italian
bonds as Greece are scheduled to raise 3bio 91 day bills tomorrow. Demand at 1.2260
marked the EURUSD low overnight with the early European sell off stalling at 1.2270
as stock markets began to reverse their opening decline. Volumes remain light
however and Greek GDP printing above expectations as stocks also eek into positive
territory help push us through the 1.2300 offers that capped in Asia to a high of 1.2322.
We drift back to 1.2300 as inertia takes its grip again with early NY demand lifting us to
session highs of 1.2330 as this is sent. Elsewhere, following the poor GDP print
overnight JPY has retraced the negligible losses it made in Asia on the print, with
support at Friday’s 78.15 level holding as this is written amidst chatter of JPY
repatriation expectations on the back of large UST coupon and redemptions payments
later this week. As for USDCAD we remain well supported ahead of 0.9900 with talk of
barriers at that level. Resistance is expected above 0.9975 level which held after
Fridays numbers with the topside model stops interests still noted ahead of parity. On
the downside we note growing spec stops sub 0.9890 with model interest to add to
shorts through 0.9870 but corporate bids are lined up in such quantity that it’s expected
to remain a grind.
Busch Update Monitor
Level 1D % Change
82.294
-0.314
1 YR SWAPS
USD OIS
0.140
-0.356
GDP OIS
0.351
9.619
EUR OIS
0.055
27.907
JPY OIS
0.061
2.941
CAD OIS
1.066
0.538
AUD OIS
3.102
0.291
NZD OIS
2.406
0.376
10-Yr Sovereign Bond Yields
Spain
6.83
-1.129
Italy
5.89
-0.136
Portugal
9.94
-0.411
Switzerland
0.59
2.241
Austria
1.95
1.721
Belgium
2.59
3.068
Netherlands
1.73
3.657
Hungary
7.37
0.140
Germany
1.44
4.116
France
2.11
1.590
RISK
VIX
14.74
-3.534
TED
0.33
-0.745
CVIX
8.75
-0.228
$ Swap Spread 2yr
19.75
-6.531
8/13/2012 8:11
DXY
Spread
To USD
-0.21
0.09
0.08
-0.93
-2.96
-2.27
Curve
1.387
Level 1D % Change
2s - 10s
USG 10YR
1.65
-0.308
USG 2YR
0.26
1.612
EQUITIES
S&P 500 Futures
1400.80
-0.114
SOX
405.96
0.490
Shanghai Composite 2136.08
-1.509
COMMODITIES
CRB Index
302.48
0.222
WTI (NYMEX)
93.85
1.055
WTI (ICE)
93.85
1.044
Brent (ICE)
114.57
1.434
Nat Gas
2.78
0.036
Gasoline
303.82
1.149
Heating Oil
304.87
0.937
Gold Spot
1620.50
0.019
Gold Fut
1620.60
0.056
Silver Spot
28.05
-0.267
Silver Fut
27.96
-0.363
Aluminum
15375.00
-0.195
Copper
336.35
-0.825
Corn
785.00
-1.906
Wheat
866.00
-2.175
Soybean
1684.50
-1.462
Rough Rice
15.81
-0.847
Lean Hogs
91.88
0.000
Source: Bloomberg
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