Friday, February 3, 2012

Market Week Wrap-up

Market Week Wrap-up

- The risk-on rally returned this week as investors took heart from some improved economic data, capped off by an excellent US January employment report. China's improved January manufacturing PMI reading, better European PMI reports for January and strong Empire and Dallas Fed manufacturing surveys sustained the positive sentiment and helped markets get over the feeling that the situation in Greece may be heading for a crack up. At Tuesday's informal EU leaders' summit, 25 EU member states (ex the UK and the Czech Republic) further refined their commitment to the new fiscal pact and the €500B ESM permanent bailout fund, which further aided sentiment. In the background, Greece's murky negotiations with its creditors and concerns that Portugal might need a second bailout package generated headlines all week and caused the spread between 10-year Portuguese and German government bonds to hit record euro-era highs. Many analysts had been anticipating another cut to the PBoC's reserve ratio requirement following the Chinese lunar New Year holiday, however fresh worries about inflation seem to have trumped the desire for more easing. On Friday, US January payrolls soared above expectations and the unemployment rate declined to its lowest level in three years, casting doubt on whether the Fed could wait until 2014 to raise interest rates. For the week the DJIA gained 1.6%, the NASDAQ increased 3.2% and the S&P 500 was up 2.2%.

- Quarterly results from energy giants Exxon and Royal Dutch Shell were mixed. Results from both firms actually managed to beat consensus estimates, although trends affecting both names spooked investors. Higher crude prices only just offset falling margins in each firm's downstream operations and both are being substantially impacted by the continuing slide in natural gas prices. Refiners Tesoro and Marathon Petroleum, Marathon's spun-out downstream arm, got hit hard by crude prices in the quarter. Oilfield services names Diamond Offshore and National Oilwell Varco performed well on solid quarterly results.

- Dow component Pfizer met expectations in its Q4, but also cut its FY12 guidance slightly. On the conference call, executives warned that cost of sales are increasing y/y, putting downward pressure on margins. Competitor Lilly beat expectations and reaffirmed its FY12 guidance. Both firms said that the wave of patent expirations and generic competition would be a big factor this year.

- Insurance giants Aetna and Allstate did very well, thanks to big improvements in their combined ratios. Bottom-line profits widely beat expectations at both firms. Cigna missed expectations and offered sub-par initial FY12 guidance, thanks to some significant acquisition-related costs in the quarter. MasterCard satisfied consensus expectations in its Q4, with strong double-digit y/y gains in purchase volumes and transactions. On the conference call, executives said they are seeing continued strength in US debit and commercial cards business in January.

- Amazon shocked markets with a second consecutive quarter of very mixed results. Fourth quarter profits were down sharply y/y for a second quarter in a row, even as revenue continued growing respectably. Margins recovered from last quarter's terrible showing, but are still way below trend. However it was the firm's guidance that was most worrisome, as Amazon warned it could lose money in Q1. Broadcom broadly met expectations in its Q4 report and Q1 guidance, and also modestly increased its dividend. Seagate topped profit expectations thanks to big improvements in margins.
Qualcomm gained on solid outperformance in Q4 earnings and a hike in FY12 guidance. However the tech obsession of the week was Facebook, which filed to sell $5B in common stock, with the IPO expected in the second quarter of FY12. The news of the IPO filing sent stocks in the fledging "social" internet space surging, including big gains in Groupon, Linkedin, and Zynga.

- There was little in the way of concrete, confirmed news on Greece's negotiations with its private creditors out this week. There were, however, rampant rumors, unconfirmed reports and clarifications by spokespeople. A week ago, the deal was said to be "imminent," but as of writing no deal had been reached on PSI, and most news gave the impression that the talks are very difficult and aimed at a truly comprehensive deal. More issues are emerging in Greece as the due date for the second bailout package approaches rapidly and Greece's fiscal condition worsens. Press reports suggest the estimated size of the package has expanded to €145B from the original €130B proposal. In addition, the Greek leadership seems to be splintering under the pressure. Another round of austerity measures must be passed in order to clinch the second bailout deal, and there were reports that PM Papademos was threatening to resign if the three parties in the coalition government were unwilling to pass the measures. In addition, discord began to emerge over proposals for various European central banks to also take some losses on their Greek debt holdings (the so-called OSI negotiations).

- EUR/USD closed out last week at the upper end of its technical rebound of 1.3220, however the pair found it impossible to get above the that level. Investors have been doing their best to hedge for a euro collapse, although the more or less positive outcome from the EU leaders' summit provided an excuse for some of the recent risk-on sentiment. The ongoing debt exchange tragedy in Athens, poor Spanish unemployment data and Spanish and French bond auction results prevented the pair from taking out the key 1.3320 level. There was a certain amount of positive sentiment following comments by China Premier Wen, who during a state visit by German Chancellor Merkel, said China was considering involvement in EFSF and ESM. Wen later clarified that Europe needs to rely on its own resources. Many dealers said two-way flows were prevalent in trading, including a plethora of option-related orders.

- In other currency market action, moves in USD/JPY continued to test the BoJ's resolve. The pair bottomed out at three-month lows on Wednesday just above 76.05 and stayed there through Friday morning, when the US payroll report sent the pair higher. EUR/CHF cross tested its lowest level since the 1.2000 floor was imposed last September. A financial blog commented on retail positions in the cross and noted that the ratio of longs to shorts was roughly at 24 to 1. The recent lows had been 1.2020 as investors continued to bet that the SNB would defend the floor.

- China returned from a week-long Lunar New Year break to surprisingly improved economic data. January manufacturing PMI returned to above-50 expansion territory with a 50.5 print vs 49.6 consensus, a 4-month high. Improved economic conditions have led analysts to question the likelihood of further PBoC policy easing, previously anticipated to take place in the form of more reserve requirement ratio (RRR) cuts sometime around the holiday season. Instead, some of the policymakers in China have maintained their focus on continued threat of inflation. Most notably, Finance Minister Xie suggested substantial pressure on price increases remains given the upside potential of domestic demand.

-Down under, December trade data in Australia also showed an unexpected improvement, with the first rise in trade surplus in 4 months. Fixed income markets continue to price in a near-certain rate cut from the RBA early next week, while some of the analysts suggested the apparent recovery makes the case for further easing less clear cut.