- Global markets were volatile this week as crosscurrents from US earnings reports, European peripherals, sovereign debt auctions and Chinese rumors kept sentiment very unsettled. In Europe, investors prepared for the worst ahead of French, Spanish and Italian auctions on Tuesday and Thursday, although the sales were oversubscribed (and featured higher yields). Nevertheless, Spanish and ECB officials insisted that Spain would not need a support program, while officials from beyond the euro zone suggested that it would be difficult for Spain to avoid a bailout. In core Europe, some decent UK March employment data and the sixth sequential month of improvement in Germany's April IFO survey helped put the FTSE and DAX solidly in the black for the week. Earnings out of major US banks were not especially good and troubling trends in a spectrum of major tech firms kept the Nasdaq weak. Apple was a real wildcard this week, with several sessions of 5% swings in the shares. AAPL closed out the week in correction territory, more than 10% below its recent all-time highs. Outside of tech, corporate earnings have largely been strong. In Asia, there was further speculation about a cut to the PBoC's reserve ratio requirement after the March new home prices data saw another round of big declines. On Wednesday, Rio Tinto, BHP and Vale all reported that their quarterly iron ore production slid sharply on a sequential basis (although all three blamed factors besides the slowdown in China). For the week the DJIA gained 1.4%, the S&P500 rose 0.6%, while the Nasdaq lost 0.4%.
- Results out of major US banks Citigroup, Bank of America, Goldman Sachs and Morgan Stanley did not inspire much confidence this week. While the headline numbers from the four firms were in line with or above consensus expectations, analysts found plenty to question in operating metrics. Citi had the least bad report, with a nice sequential gain in investment banking income and healthy growth in loans and deposits. Goldman delivered lower y/y VAR totals, investment banking revenues, fixed income and trading revenues and a big reduction in risk. The one big revenue gain y/y was in financial advisory and stock trading for clients. Much was made in the financial news media about the "strong" results from Bank of America and Morgan Stanly. However, debt valuation adjustments (DVAs) had a huge impact for both banks as narrowing credit spreads forced both to take sizable one-time accounting charges. Including a big $2B DVA, Morgan Stanley lost money in the quarter (-$0.06/shr), but excluding the DVA the firm made $0.71. At BoA, including the $4.8B DVA the firm made $0.03, but ex DVA it made $0.31. Morgan saw a big bounce back in trading revenue, which was well over twice the figure seen in Q4. However, overall investment banking revenue was flat sequentially and actually declined on a y/y basis, very much reflecting the trends seen at JP Morgan and Goldman.
- Insurance name Travelers crushed expectations as price gains continue to support strong quarterly results. American Express was solidly in line, however investors did not like the decline in RoE, sending shares of AXP lower on the week. Regional banking names US Bank, Key Bank, and Bank of New York all reported excellent results, as growing activity levels continue supplanting loss reserve reductions as earnings drivers.
- DJIA components Coca-Cola, Johnson & Johnson, McDonalds and Verizon broadly met expectations in Q1 reports. JNJ saw 5% decline in domestic sales and on the call executives warned the company has seen a certain amount of caution among its customers. Both McDonalds and Coca Cola have greatly benefitted from growth in China, and both firms warned that they are seeing a moderate slowdown in that market. Countering these assessments, Yum Brands said that its China sales grew 28% in its Q1 and said it is still seeing robust strength in its Chinese operation, even as margins are expected to contract in Q2. Investors like what they heard out of Verizon, especially the big jump in wireless ARPU and lower churn levels, even though wireless net adds were weak.
- For much of the last three months, the Nasdaq had been handily outperforming the S&P500 and the DJIA, but that trend reversed this week as investors divined troubling trends in tech earnings reports. Qualcomm topped consensus estimates in its Q2 and even hiked its 2012 outlook, but very weak guidance for its Q3 spooked investors. Headline results from IBM, Intel and Qualcomm met or beat consensus views, although one-time items padded profits for Intel and IBM. Market participants fixed on comments about the broader markets: IBM warned that it faces challenges in the hardware area (analysts noted that declining hardware revenue at IBM kept the company's revenue flat on a y/y basis). Qualcomm blamed supply constraints for 28nm chips. EMC's CFO warned that the company is still seeing some supply constraints in HDD supply chain, contradicting the more rosy assessment out of Seagate the other day. There were few surprises in Microsoft's Q3 earnings report and company said PC sales exceeded projections, with demand up as emerging markets supported sales.
- It's worth noting that share of Apple were volatile again this week, following last week's big slide. There were various theories floating around that sought to rationalize the declines, none very compelling. As of Friday, shares of Apple had fallen more than 10% from its recent all-time high of $644. Last week there were concerns that wireless carriers were threatening to trim iPhone subsidies, which would naturally crimp sales. However, Verizon's Q1 results were buttressed by smartphone revenue, suggesting it is very unlikely the carriers would do anything that might stem sales. Almost half of Verizon's smartphone sales in the quarter were iPhones, at 3.2M units of a total 6.3M smartphone units sold. Late this week the rationalization for the moves became Qualcomm, which on its earnings conference call warned it is experiencing supply issues with its 4G mobile radio chips. This prompted fears that the launch of the iPhone 5 would be pushed back to October.
- Industrial names General Electric and Honeywell both offered solid Q1 results. GE merely repeated its standing FY12 guidance, and offered vaguely positive commentary on the conference call, although some analysts were unhappy to hear that margins on gas turbine equipment margins would decline in FY12. Honeywell slightly upped its FY12 outlook, and said that strong orders growth in all segments and very good margin expansion bodes well for the rest of the year. Oil services name Schlumberger said that strong international demand from high crude prices would help offset expected weakness in North America drilling. Mining giant Freeport comfortably topped expectations, as higher realized gold prices helped offset lower copper prices. Production of both gold and copper was down on a y/y basis. Coal miner Peabody is being impacted by the big declines in coal demand, as both consumption and production in the US fall due to coal-to-gas switching, mild winter weather and low economic growth.
- Peripheral stress in Europe was highly evident this week, manifesting itself chiefly in the yields on Spanish and Italian 10-year debt and the all-time low yields on the 10-year German bund. But the story was not one-sided, as decent economic data and positive results from sovereign bond sales, including two Spanish auctions, made for see-sawing sentiment. It was also a big week for international meetings, including the G7 and G20 finance ministers' meetings and the spring meetings of the World Bank and the IMF. In connection with the latter, the IMF released its World Economic Outlook and raised both 2012 and 2013 global GDP growth forecasts. The outlook described the global environment as one of 'uneasy calm.' At the G20 meeting, participants were asked to increase the resources available to the IMF by more than the $400B, bringing IMF funds to over $1T.
- EUR/USD began the week testing below the 1.30 handle at two-month lows before stabilizing. The pair met stiff resistance in the 1.3050-70 area but managed to bust through this level, as price action remained choppy throughout the week as peripheral concerns simmered. Italy confirmed earlier speculation after the government approved a three-year reform plan that revised its 2013 deficit-to-GDP ratio to 0.5%, and cut its overall GDP forecast to -1.2% from -0.4% prior. European sovereign downgrade rumors were resurrected on Thursday, driving some risk-off trading, until Fitch stepped in and reiterated its AAA sovereign rating for France. The Chinese helped hold up the euro with positive comments: China Premier Wen reiterated his confidence in Europe and the Chinese sovereign wealth fund CIC said it was looking at opportunities in Europe.
- USD/JPY was testing the key 80.30 level early in the week. This level is the high that followed the BoJ's unilateral intervention on August 3, 2011 and the level represents key support. BoJ Governor Shirakawa responded to the yen moves with more verbal intervention, reiterating that the central bank was deploying an aggressive policy easing policy. All eyes will be on the BoJ meeting next week.
- Sterling was broadly firmer after better UK employment data and the more hawkish tone in the BoE minutes. Perennial dove Posen made the switch back into the majority camp after voting not to increase quantitative easing, as seen in the minutes. GBP/USD hit 5-month highs above 1.61 after better March retail sales data while EUR/GBP hit fresh 20-month lows below 0.8170 level.
- SNB Chairman Jordan was formally appointed chairman of the central bank and reiterated his pledge to maintain the 1.2000 floor in EUR/CHF. He had no comment over speculation that the 1.2000 floor would be raised at some point in the future, but Euro crisis uncertainty continues to drive safe havens flows toward the Swiss Franc.
- The Bank of Canada left its interest rates steady for the 14th straight policy meeting but noted economic headwinds were abating. It added that some modest withdrawal of monetary stimulus might be appropriate but the timing and degree of rate hikes would be weighed carefully against both domestic and global economic developments.
