- Clarity on the Greek debt situation, incremental improvements in the US employment picture and other positive economic data kept markets moving in the right direction all week long. The US Feb ISM non-manufacturing index hit its highest level since Oct 2007, February same-store sales and auto sales figures were relatively strong, and January consumer credit figures registered their first increase in 12 months. In another sign that companies are raising output without adding many jobs, productivity rose sharply in Q4. Unsurprisingly, the January pending home sales data followed in the footsteps of several recent housing numbers to the downside. Friday's Feb employment reports showed that annualized unemployment held steady at 9.7%. Non-farm payrolls nearly turned positive despite fears last month's blizzards would white out over 100K jobs. Administration officials made the rounds after the data were released, insisting that the numbers would have been even stronger if not for the dire weather in February. Fed Governor Fisher said the US is far away from a pickup in hiring and said he expects unemployment rate to remain around 10% for a while. As expected, President Obama said the Democrats would push healthcare reform through the Senate using budget reconciliation rules, formally launching the "nuclear option." Speculation about an overheating Chinese economy was in the background all week. US press articles discussed whether the country is facing a real estate bubble or not, while government and PBoC officials all insisted that inflation would not get out of hand this year. Nearly everything went right for investors, and sharpening risk appetite pushed the Nasdaq out to a 52-week high by Friday afternoon, while the DJIA gained triple digits. For the week, the Nasdaq rose 3.9%, the DJIA increased 2.3%, and the S&P500 climbed 3.1%.

- Merger activity continued at a healthy clip this week, with a concentration in the pharmaceutical sector. Japanese drugmaker Astellas launched a $3.5B hostile takeover offer for OSI Pharmaceuticals, bidding $52 a share in cash, and Germany's Merck KGaA snapped up biotech supplier Millipore for around $6B in cash, at $107/share. Biotechs Geron and Cephalon, which are often the subject of market rumors, were mentioned as potential targets.

- The headline M&A deal of the week was AIG's agreement to sell its AIA unit to the UK's Prudential for $35.5B. Deals involving private equity funds are picking up again as well, indicating a broad return to health in credit markets. Elliott Associates offered $5.75/share in cash for enterprise software developer Novell, for a total transaction value of $1B. ABRY Partners signed a deal to acquire telecom services firm RCN Corporation at $15/shr, for a total of $1.2B in cash and debt. In other M&A news, CF Industries upped its offer for Terra, topping an firm offer from Norway's Yara International made in mid February. Note that Terra's board had already agreed to Yara's deal, after rebuffing CF for months. Later in the week there were reports Agrium might be mulling a fresh offer for CF, although the reports indicated that the firm would hold off until CF resolved its hostile bid for Terra.

- Retailers released another set of strong same-store sales figures, with February comps appearing even better than relatively positive showings in December and January. Shoppers were apparently not put off by the terrible weather seen in the month, providing more hope for a gradual recovery in consumer spending. Nearly every major apparel name beat expectations. Impressive outperformance was seen from former laggards Abercrombie and Zumiez. Department store names were more in line with expectations, with more misses, including high-end name Saks, which had delivered strong outperformance in the last two months. Monthly sales numbers from auto companies were also relatively strong, with Ford's sales a remarkable 43% above last year's levels (keeping in mind the state of the auto industry last February). In addition, Ford reported higher total monthly sales than GM for the first time since 1998. On Friday, GM said it would reinstate up to 1,000 dealerships that were dropped during the company's bankruptcy process last year.

- Corporate earnings were not a significant factor this week, although there were a few notable reports. Homebuilder Hovnanian reported its first quarterly profit since late 2006, thanks largely to a big income tax benefit. Like the rest of the industry, declines in Hovnanian's backlog are much smaller than a few quarters ago, while the cancellation rate is falling sharply. Home furnishings name Ethan Allen complimented the news out of Hovnanian, noting that orders for the first two months of 2010 are up an impressive 25% y/y. Mining equipment manufacturer Joy Global roundly beat expectations on a big gain in new orders and tightened up its 2010 guidance. According to executives, although the rate of growth in commodity imports into China has begun to moderate, imports are expected to remain near their current high levels. Staples's Q4 results were largely in line with expectations. Executives at the firm expect the US economy to remain more or less the same and are not projecting any dramatic improvements.

- Greece finally issued €5B worth of 10-year bonds this week, and reliable reports of healthy demand for the paper allowed nervous investors in debt, currency and equity markets alike to rest easy, at least temporarily. The issuance came hot on the heels of a €4.8B austerity package from the Greek government, which was widely applauded by officials across Europe. Moody's said the austerity measures would provide some certainty for 2010, but implementation was questionable in subsequent years. Although things are looking a little rosier for Greece's fiscal situation, protestors took to the streets all week in the capital, which may test the resolve of the government going forward.

- The market still estimates that Greece needs to raise somewhere in the vicinity of €20B by May simply to pay the interest on and to refinance existing debt. But the German government, for obvious reasons, remains steadfastly opposed to a bailout. Following the austerity package, Greek PM Papandreou upped the ante by threatening to seek help from the IMF - an outcome which would ultimately deal a monumental blow to the credibility of the European Union and common currency (two projects championed by Germany and France). As it stands a debt guarantee (as opposed to direct monetary assistance) is shaping up as the outcome most acceptable to both parties. As the week drew to a close the streets of Athens were stilled filled with protestors, and rumors that Greece is set to downgrade its GDP forecasts (effectively worsening its debt burden at the stroke of a pen) refuse to go away.

- The European peripheral situation remained the catalyst for price action in currencies this week. Greece's austerity package and the negative reaction to it among Greek unions initially sent the euro to nine-month lows below 1.3450. Overall EUR/USD maintained its familiar range between 1.3450 and 1.3730, with stops probed at either end. There were no surprises in the BoE and ECB interest rate decisions on Thursday morning, with both central banks leaving policy unchanged, as expected. The ECB press conference communicated that the decision to withdraw measures was made by overwhelming consensus and added that the decision was not a signal for rates. Trichet stated that the ECB would not pre-commit to more liquidity extensions and promised that the bank would lend out covered bonds purchased in its quantitative easing program. The reserve currency issue was lurking in the background, with talk focusing on gold reserves in the wake of last week's IMF gold dust up. Russian Central Banker Ulyukayev commented that Russia would increase the proportion of gold in its reserves. Data shows that gold makes up 5.3% of Russia's reserves, up from the 4.3% seen back in late November.

- Sterling was rattled by M&A flows and growing concerns that a hung parliament could emerge from the upcoming UK general elections. The pound was softer following announcement that Prudential (UK) would acquire AIA from AIG for $35.5B in cash and equity. GBP/USD hit fresh nine-month lows below 1.5000 level and EUR/GBP regained a foothold above the 0.9050 level in the wake of the announcement. With the election looming, the pound is at the mercy of various polls showing the Tory lead over Labour narrowing to as little as two percentage points, raising fears that neither party could win the decisive 10% margin over the other generally considered necessary for uncontested rule.

- The yen weakened in the latter part of the trading week. According to a draft of Japan's FY10/11 budget, the government may increase the borrowing limit for foreign exchange intervention (the last time this limit was raised was 2004). The draft budget suggests the foreign exchange special account's borrowing ceiling will be raised by more than ¥4.5T to ¥145T. Also weighing the JPY were interest rate factors, after three-month JPY Libor moved below the USD fixing on Thursday morning for the first time since Aug 2009. USD/JPY tested above the 90 level following the better US employment data on Friday.

- A report on Friday from Nikkei News suggested that Japan's central bank may consider expanding its liquidity program, helping the yen retreat from 3-month highs against USD seen on Thursday. Japanes Finance Minister Kan said he would welcome the move but conceded he has not heard anything specific from the BoJ. Kan also commented on recent yen trends, suggesting the gains since mid-February could be attributed to turmoil stemming from Greece and may subside going forward. The BoJ is expected to next meet on interest rates on March 16th.

- On Friday Chinese Premier Wen outlined performance target for the economy in 2010, in the equivalent of China's State of the Union address. Wen reaffirmed a GDP growth target of 8% and said CPI is expected at 3%, while targets for industrial production and M2 money supply growth were put at 11% and 17% respectively, with new loans expected to contract to CNY7.5T from CNY9.6T in 2009. Regarding currencies, Wen said exchange rate reform would continue to be improved in a way that would retain the basic stability of the yuan. On the fiscal front, China's Ministry of Finance said the budget deficit was expected at 2.8% of GDP in 2010 and below 3% in coming years. On the issue of the overheated housing sector, Wen noted the cabinet would "resolutely" curb housing price gains and speculative house purchases, promising to increase land supply for low and medium-cost housing. Banking regulator Liu also chimed in on the speculative housing bubble, stating that the pace of bank lending is more stable, and loan books of banks appear to be safer.

- After surprising some prognosticators last month by pausing its policy tightening campaign, Australia's RBA raised rates another 25bps to 4.00% on Monday. The RBA noted that growth in the global economy makes it appropriate for rates to be closer to average. In a notable deviation from last month's statement, the RBA omitted specific reference to China looking to reduce its stimulus, and also upgraded its assessment of resource sector investment to "very strong" from "strong." Tightening seemed justified a day later when the Australia government reported Q4 GDP strengthened at its highest rate since Q2 of 2008, rising on q/q basis by 0.9% and 2.7% y/y. On Wednesday, the country's January trade balance came in at a seven month high, at -A$1.2B v -A$1.6Be. On balance, shrinking import component was instrumental to the contraction, falling 3% m/m. Exports rose 1%, however exports to China as well as shipments of top 2 commodities--coal and iron ore--declined in value from prior month's levels.


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