Friday, March 23, 2012

Market Week Wrap-up

Market Week Wrap-up

- The S&P500 snapped a five-week uptrend this week, as poor data in Asia and Europe made for lousy sentiment. Continuing fears about economic slowdown in China got the ball rolling early on in the week, after BHP offered flattish guidance for China iron ore shipments and unsubstantiated rumors of a coup brewing in Beijing made the rounds. The coup rumors were quickly dismissed by China watchers, however the story hung in the background all week. In addition, a key China PMI reading fell to a four-month low and continued to indicate contraction. In Europe, preliminary March manufacturing PMI data in both Germany and France also came in at four-month lows, both below 50, making it more and more obvious that Europe is creeping into recession. Ireland officially entered recession, after delivering its second quarter of negative economic growth. UK Retail sales were below expectations. Euro zone finance ministers gather in Brussels at the end of next week to possibly finalize the fiscal firewall, and traders wondered nervously how the peripheral nations will fare in a European slowdown. In the US, some good earnings and otherwise positive equity news held off some of the gloom, but trading volumes were still pretty weak. February building permits jumped to their highest level since October 2008, while existing home sales slipped 0.9%. Oil remained a central focus, with headlines about the ongoing supply issues related to the Iran embargo roiling markets every day. WTI traded in a broad range between $104.50 and $108.50, in a real game of headline roulette. Good news in tech kept the Nasdaq in the green for its sixth straight week of gains, rising 0.4%, while the S&P500 fell 0.5% and the DJIA ended 1.1% lower.

- Early in the week Treasury yields continued to hit the highest levels of the year. The benchmark 10-year yield briefly neared 2.4% steepening the curve to a 200 basis-point spread between the 2- and 10-year notes. By Wednesday buyers emerged as a string of softer economic data globally pushed investors back toward bonds. The US 10-year yield moved back below 2.25% and the Bund slipped under 1.9% as the week came to a close.

- Among the biggest equity stories this week, Apple committed itself to a $2.65 quarterly dividend and a $10B stock buyback program, following months of speculations about the company's plans for its cash pile. This news helped put a floor under shares which hovered near $600 all week, even after the huge year-to-date run up. Later in the week, Apple said that it has sold 3M new iPads since launch, for its strongest iPad launch yet. Hewlett-Packard confirmed widespread reports that it would combine its print and PC units, after new CEO Meg Whitman put an end to speculation last year that HP would sell off the PC business. UPS inked a deal to acquire Dutch parcel firm TNT Express, for a total of $6.9B, turning UPS into the world's largest package delivery company outside the US. Harford Financial caved to activist investor John Paulson and decided to exit the annuity business, and to seek strategic alternatives for its individual life, insurance broker-dealer, and retirement planning units. Hartford will focus on property & casualty, group benefits and mutual funds.

- There were a handful of impactful earnings out this week. Oracle reported decent Q3 results, with very strong margins driving modest earnings outperformance and respectable guidance for Q4. Oracle's CFO commented that the company is on track to deliver the highest operating margins in its history in 2012. Fedex's Q3 profits crushed expectations and the operating margin was nearly twice the year-ago amount, thanks to the mild winter, fuel surcharges and lower taxes. Analysts were concerned about the freight segment, however, which racked up a big quarterly loss. General Mills broadly met consensus expectations in its Q3 results and reaffirmed its full-year guidance. Margins at the firm have contracted significantly, however, and executives said that the company has seen the highest level of commodity inflation in 30 years this year, with input inflation running around +11% y/y.

- In a preliminary decision, the US imposed unexpectedly low duties on imports of solar panels from China. Analysts had expected duties of 20-30% (the industry wanted 100% duties), but the rates announced were only 2.90-4.73%. Just last week, the US, the EU and Japan said they would open a case at the WTO against China rare earth trade practices. Note that Digitimes reported this week that prices for solar modules in Europe and China have fallen to new lows, with quotes for 6-inch polysilicon solar wafers recently seen around $1.10/unit.

- The poor economic data reports out this week made for volatile markets, but the EUR/USD maintained a fairly level tone, trading firmly in a range between 1.3150 and 1.3280. The run of softer European data made traders look nervously over their shoulders at the euro zone peripheral nations, and in a sign of the uncertainty yields on Spain's 10-year debt made fresh two-month intraday highs above the 5.50% level.

- There was more attention paid this week to turn-about in USD/JPY, as the yen gained after six solid weeks of softness. Japanese exporters stepped into the markets to buy after being noticeably absent for the prior six-week period. Japan's trade deficit was also a factor in the yen's earlier decline, and data out this week showing record trade surpluses suggested that the yen's sustained weakness might not be sustainable. Risk-off sentiment was another factor that contributed to broad JPY currency strength in latter part of the week. USD/JPY found support around the 82.40 area after Japanese PM Noda warned the BoJ would continue to act when appropriate.

- Cable held a steady tone despite the slightly elevated UK CPI data. GBP/USD stumbled from the 1.59 area following a much more dovish tone in the BoE minutes and a sharp deterioration in government borrowing. The pair tested 1.5840 after MPC members Miles and Posen again voted for £25B in QE.

- Uncertainty over China's economic landing (soft or hard?) continued to weigh on Asian markets. Early in the week, comments from BHP iron ore division president suggesting that iron ore demand from China is "flattening" spooked some of the bullish bets, leading to an unwind in copper and the Australian dollar. Other miners gathering at Australia's Global Iron Ore & Steel Forecast Conference looked to contain the damage, noting the underlying demand in Asia is still strong. However China-related concerns resurfaced yet again on Thursday following a disappointing March flash manufacturing PMI print. Spoiling some chatter regarding expectations of about-50 expansion, China flash PMI registered its 5th month of contraction at 48.1, which was also the first drop following three months of improvement. Markets deemed the deterioration evident in March PMIs as particularly telling in light of altered months of Lunar New Year confounding seasonality of local demand, sending AUD to a 2-month low below $1.0340.