Friday, January 20, 2012

Market Week Wrap-up

Market Week Wrap-up

- Equity indices gained substantially nearly everywhere this week. Investors around the globe embraced risk following S&P's one-notch downgrade of France's sovereign rating and its downgrade of eight other euro zone nations on Friday. With the uncertainly cleared out of the way, markets concentrated on corporate earnings, many of which were less dismal than the likes of Alcoa and JPMorgan last week. Among the factors aiding risk was China's +8.9% Q4 GDP reading and the first sequential improvement in Germany's ZEW survey in nearly a year. Note that in its draft World Economic Outlook, the IMF cut its global GDP growth forecast to +3.3% from +4.0% prior. There were few inflammatory headlines regarding the European debt crisis -- Greece is very close to striking a successful deal on haircuts for private debt holders and the IMF is working hard on proposals to boost its firepower by $500B before the next G20 summit. Portugal and Spain both had relatively successful debt auctions, and while Portugal stuck to shorter-term paper, Spain successfully sold 2019 and 2022 bonds at lower average yields than at the prior auction, greatly aiding sentiment. Corporate earnings in the US were tepid, at best, with concerning misses seen out of Citibank, Google, and General Electric. For the week the DJIA gained 2.4%, the NASDAQ rose 2.8%, and the S&P 500 tacked on 2%, the third straight week of gains for all three indices.

- The rest of the major US banks reported earnings this week. Citigroup's Q4 results seemed even worse the JPMorgan's dismal showing last Friday: revenue totals missed analysts' expectations, while net profits fell 11% y/y. Citi's declining investment banking revenues were a prime suspect, with revenue from the securities and banking division down 10% y/y (excluding a very favorable DVA adjustment, the unit's revenues fell 29% y/y). Fourth-quarter reports from Goldman Sachs, Morgan Stanley, and Bank of America were less bad. Goldman managed to meet diminished expectations, however profits were down more than half over year-ago levels. Goldman's investment banking revenues were down by nearly half over last year. Morgan Stanley posted a much smaller loss than expected; equity-trading revenue actually increased over a year ago. Bank of America's results were apparently good, in as much as they met expectations and were markedly better than the year-ago results. However the results were padded by a tangle of one-time gains and losses.

- American Express was more or less in line with expectations in its Q4, with steady card services revenue. On the conference call, AmEx executives warned that consumers continue to be cautious on taking more credit card debt. Other regional and super-regional banks were characterized by gradual growth in commercial and consumer loans, plus further declines in provisions and non-performing loans. Wells Fargo met expectations across the board and reported its seventh straight quarter of loan reserve releases. US Bancorp and PNC were a study in contrasts: USB grew its earnings substantially y/y in Q4, while PNC's earnings fell by a comparable amount. Both firms saw continued improvements in credit quality and good growth in new lending activity. Asset management names State Street and Charles Schwab both met consensus expectations and highlighted that their quarterly results were particularly impacted by elevated market volatility and lower interest rates.

- With the exception of Google, big tech had a good week. Investors dumped shares of Google on Thursday, following the firm's big earnings and revenue misses. Google's results were hurt by unfavorable FX rates, increased spending levels, changes to ad formats and the sale of more mobile ads, which cost less. IBM, Intel, and Microsoft all topped expectations and reported solid results. IBM's software revenue was up 9% as most of its key products saw growth, while its services segment reported 3% revenue growth. Microsoft saw lower PC-related sales, in line with the industry, however this was more than offset by robust gains in its server and entertainment divisions. Intel offered in line revenue guidance for Q1, and also said that its margins would be considerably higher on a y/y basis. Note also that Eastman Kodak finally filed for bankruptcy this week. Advisors were said to estimate that the firm's intellectual property assets are worth $2.2-2.6B.

- General Electric missed revenue expectations in its Q4, which executive blamed on slower growth in Europe, FX issues and some lower investment levels at GE Capital. GE's FY12 profit guidance was unchanged, however the firm warned that revenue would be slightly lower than its prior forecast. CEO Immelt had good things to say about the firm's key energy and GE Capital units, but warned that he expects continued volatility in 2012 and restructuring in the Europe business. Oil services leader Schlumberger modestly topped consensus estimates, on very strong growth in oilfield services revenue.

- The euro gained steadily against the major pairs this week. Traders embraced the single currency after S&P's downgrades of nine euro zone member states, happy to see at least one vector of uncertainty cleared out of the way. In Greece, the government was very close to completing negotiations with the Institute of International Finance (IIF) on the long awaited debt exchange with the country's private creditors, but as of late Friday no final agreement was in place. On the technical front, dealers noted that the 1.2600 level in EUR/USD provided pivotal support for the cross late last week and on Monday, as it has in prior quarters (there was chatter suggesting large euro sell-stops lurk below the level). As euro sentiment brightened through the week, EUR/USD moved above the prior three-month channel resistance of 1.2830 to lunge for 1.30 by Friday. The EUR/JPY cross also saw a big reversal after testing 11-year lows earlier this month at 97.00. By Friday the pair was probing back above the 100 handle. Japanese officials were vocal about the weak euro: Vice Finance Miniser Igarashi warned that the government would continue closely watching the euro but that now was not the time to take action. Former Finance Ministry official Sakakibara (aka Mr. Yen) reiterated his view that intervention would not be effective. Markets were bent on testing the SNB's resolve to hold the EUR/CHF floor at 1.2000. The cross stayed around 1.2070 for the bulk of the week.

- Chinese economic data tracked closer toward a managed "soft landing" scenario than the precipitous decline feared just a few weeks ago, supporting commodities and related currencies late into the week. China Q4 GDP of +8.9% topped consensus despite coming in at the lowest point since the second quarter of 2009, while December industrial production broke a string of two consecutive declines with a 12.9% y/y increase. Foreign direct investment into China, despite trailing off in December (-12.7% y/y), registered a record high for the year at $116B. Speaking after the release of year-end data, China Stats Bureau chief Ma said some moderation in GDP is in fact desirable, just as the influential Academy of Social Sciences put its 2012 GDP target at 8.5% v 9.2% for 2011. Later in the week, China January flash PMI marked a 3rd consecutive contraction at 48.8 but off the 48.7 final print in December.

- Down under, New Zealand Q4 CPI fell for the first time since the end of 2009, prompting speculation among analysts that RBNZ will remain on hold for the remainder of the year. In Australia, December employment data was a mixed bag, showing an unexpected decline in the jobless rate alongside eight-month lows in total employment change primarily due to a fall in part-time labor. The Australian dollar broke key trend line resistance above $1.0480, with the focus turning toward quarterly inflation metrics on tap for early next week.