Friday, April 13, 2012

Market Week Wrap-up

Market Week Wrap-up

- Rollercoaster trading made for highly volatile markets this week. Monday was relatively quiet, with some Asian and all European markets closed for holidays, but the big unwind seen last week continued apace on Tuesday as European traders got their first chance to sell in the cash market following last Friday's disappointing US payrolls report. With the Spanish government working overtime to convince its European partners that it would be able to deliver a 3% deficit-to-GDP ratio in 2013 and control the budget excesses of its profligate regions, the bond vigilantes returned and briefly pushed yields on Spain's 10-year debt above 6%. Italian yields were also elevated after a poor bill auction. Risk-off trading knocked over European indices and the DJIA fell more than 200 points on Tuesday. The DJIA rose 180 points on Thursday, thanks in part to rumors of a very strong preliminary Q1 GDP reading out of China (the whisper number suggested +9%, well ahead of the +8.5% estimates). The reported Chinese GDP figure turned out to be a mere +8.1%, helping to drive another 100-point decline in the DJIA on Friday morning (although the index perked up a bit through the afternoon). Hard commodities, already hammered after last week's softness, were crushed by the bad news from China, with copper dropping out of the range seen since mid January to test three-month lows around $3.60. Natural gas futures keep plumbing the depths, dropping below the $2 handle for the first time in a decade. Alcoa rang in the March earnings season on Tuesday evening with excellent results, although the other two big names reporting later in the week, Google and JP Morgan, did not do enough to impress investors. For the week the DJIA fell 1.6%, the S&P500 declined 2%, and the Nasdaq dropped 2.2%.

- JP Morgan's headline earnings and revenue numbers topped consensus estimates. However, earnings were down 3% on a y/y basis, and only exceeded estimates thanks to a big $1.1B benefit stemming from the Washington Mutual bankruptcy settlement. Earnings also continue to be padded by reserve releases, and executives warned that there would not be substantially more releases in the near future. Revenues were helped by a stronger showing at the investment banking unit, although fixed income and equity market revenue was down 10% on a y/y basis. CEO Dimon warned that the bank expects to see elevated costs and losses associated with mortgage-related issues for a while longer. Results from Wells Fargo were slightly higher than expected. Wells highlighted strengths in its mortgage business, where applications rose sharply in the quarter on a sequential basis even as the rate of decline in loan-loss provisions has slowed. Wells Fargo's CEO said the US is nearing a tipping point in the housing market and the mortgage business is "very good."

- Google more or less met expectations in its Q1, although analyst were troubled to see steeper declines in the firm's key cost-per-click metric, even as the number of paid clicks grows furiously. Then there is the new stock structure, with the creation of a non-voting Class C stock class, which will be given to existing Class A and Class B shareholders as a dividend. The move is effectively a 2-for-1 stock split, allowing the founders to retain super majority voting power; most investors probably would have preferred a dividend. CEO Paige defended Google+, boasting that the social service now has over 170M members and is on the "right track", without providing deeper activity metrics asked for by analysts.

- Alcoa offered very strong results in its Q1 report, with a $0.10 profit versus expectations for a small loss. This is the firm's best earnings beat in quite a while, and investors were heartened by comments from the CEO to the effect that he is seeing stable growth in aluminum demand, and that Europe has not worsened as feared. In its interim update, Chevron said Q1 earnings would rise on a sequential basis, although there is a fair amount of room between its EPS total last quarter ($2.58) and the consensus estimate ($3.20e). Chevron said that upstream business would improve, benefiting from higher crude oil prices and lower operating expenses.

- Nokia's US-listed ADRs tumbled after it cut its outlook for mobile devices for its Q1. The firm said it shipped only 2M units of its new Window-powered Lumia smartphone, and said that sharp competition negatively affected net sales of all mobile units, particularly in India, the Middle East and Africa and China. AOL soared after Microsoft agreed to pay more than $1.0 billion to acquire 800 patents and gain licenses to the rest of the intellectual property AOL will continue to own after the pending sale of its patent portfolio.

- FX trading was thin on Monday with some Asia markets closed and Europe off for the Easter holiday. Then the stock market slide on Tuesday and the rebound on Wednesday and Thursday whipped FX markets around, although most major pairs were contained within the ranges seen over the course of the last two months. The euro made steady gains through the week against the dollar, despite background concerns about Spain, until Thursday afternoon. EUR/USD topped out around 1.3210 at that time, and then gave up nearly all of its weekly gains and dropped to 1.3070.

- The return of stress in the euro zone periphery was blamed in part by much higher yields demanded by investors at an Italian auction of 3- and 5-month bills on Wednesday. The same day, a German auction of 10-year bunds was 'technically uncovered,' after the bid-to-cover ratio fell below the level seen in the last auction in the series. The spread between yields on the Spanish and German 10-year bonds highlighted investor nervousness, broadening out to 400 bps, the widest spread since last November. The ECB's Coeure reminded markets that the ECB's SMP bond buying program still exists, even though it has been little used in recent weeks. Later the ECB's Knot insisted that the ECB is very far from making more purchases under the SMP bond program and went as far as to say he hoped the ECB never had to purchase government debt ever again.

- A week-long barrage of economic data out of China was mixed, with upbeat trade, lending and inflation data early on overshadowed by a disappointing Q1 GDP on Friday. Monday's CPI report came in at 3.6%, two tenths higher than expected, as increasingly pronounced food inflation resurfaced on the mainland. On Tuesday, the Ministry of Commerce reported an unexpected March trade surplus of $5.4B, following the biggest monthly deficit in three decades and spoiling forecasts for another drop. Thursday's new loans data was also surprisingly strong at a 14-month high 1.01 trillion yuan against consensus CNY798B. Consistently strong data points spawned whisper numbers for Q1 GDP to solidly beat 8.4% consensus with a figure as high as 9%, however the 8.1% result damaged some of the China-specific recovery optimism, keeping alive the speculation that the PBoC could be readying additional easing. Late on Friday, financial press speculated that the PBOC did in fact loosen the reserve requirement ratio for some of the financial firms in the agricultural sector. Both the World Bank and Asia Development Bank cut their China 2012 GDP targets marginally to 8.2% and 8.5% respectively, levels still above the new 7.5% official 2012 target. The Shanghai Composite ended the week up 2.3%. Sydney markets, trading as a proxy to China economic data, ended up flat despite the positive news on the Australia jobs front that briefly boosted AUD to a 1-week high $1.0450.

- Elsewhere in Asia, the Bank of Japan kept policy rates unchanged as expected but also voted unanimously to keep its asset purchase fund unchanged. Markets anticipated the BOJ would leave the door open to another easing at the late April meeting, with several press reports suggesting that facility could be raised by as much as ¥10T at the next meeting. BOJ also left its economic assessment unchanged, noting that activity remains more or less flat but showing some signs of picking up. The USD/JPY hit 1 month lows below 80.60 but held the pivotal 80.30 area which was the former high (now likely support) back in Aug 2011 when the BOJ performed one of its solo FX interventions. Japanese official were quite vocal with the recent appreciation of the JPY currency, even though finance minister Azumi said he is not prone to reacting to every move in FX markets.