Friday, April 27, 2012

Market Week Wrap-up

- Political turbulence in Europe, some troubling data and dimmer prospects for QE3 all failed to suppress robustly positive tone in markets this week, helping global equity indices make steady gains. Sentiment was shaky early on thanks to various political factions opposed to further austerity in Europe. In the first round of the French presidential elections, Socialist candidate and austerity skeptic Franois Hollande beat Nicolas Sarkozy by a narrow margin. In the Netherlands, a far-right party that was part of the governing coalition refused to sign off on deeper budget cuts and withdrew from the government, undercutting the position of conservative PM Rutte. A coalition of left and centrist parties came to his aid, but not before investor confidence in one of the last European AAA-rated nations was shaken. In Germany, the April manufacturing PMI was very weak, while outside the euro zone the Czech Republic saw huge anti-austerity protests against the government. In Spain, unemployment hit 24.4%, levels last seen in the early 1990s, and S&P cut the nation's sovereign ratings by two notches to BBB+. The FOMC decision on Wednesday appeared to further reduce the chances of QE3 after the Fed modestly increased its GDP and employment forecasts. Initial US weekly jobless claims jumped a bit higher again, generating cautious words from analysts worried about next Friday's payrolls data. But even with all these troubling events, plus an advance US Q1 GDP reading that missed expectations, equities floated higher all week long. Apple and Amazon turned in incredible results, however beyond that, there were plenty of misses and signs of strain among DJIA and S&P500 components. For the week the DJIA gained 1.5%, the S&P500 rose 1.8%, while the Nasdaq increased 2.3%.

- In the consumer sector, the biggest story of the week was the New York Times allegations of widespread bribery at Walmart's Mexico unit in the mid part of the last decade. Both the company and the DoJ are investigating the claims, and shares of WMT fell as much as 8% on the week at one point. On Monday Kellogg cut its FY12 revenue guidance due to weak growth in certain US segments and softness in Europe, although in its earnings release on Thursday the firm's Q1 results were better than expected despite the evident slowing in overall performance. Colgate-Palmolive met expectations in its Q1, and both Kellogg and Colgate indicated that the worst of the higher cost/higher price cycle was over. Starbucks met expectations and raised its FY12 revenue outlook. However investors sold the name on concerns about profits, as the firm's Q3 and Q4 EPS outlook was subpar. Pepsi was slightly ahead of consensus estimates, although the firm repeated that its core earnings would fall in FY12. Otherwise, Pepsi continues to see solid revenue growth in major markets. UPS slightly missed bottom-line expectations on Thursday, helping to pull down the Dow Transports on an otherwise up day.

- Unsurprisingly, tech news was dominated by Apple this week. Shares of the company had fallen more than 8% in the weeks running up to earnings, however on Wednesday the firm astonished investors by reporting profits that were more than 20% above consensus, on sales of 35M iPhones (which was at the high end expectations). Shares of Apple retook the 8% lost over the month after earnings, popping back above the $600 handle. Shares of AT&T and Sprint both gained ground this week regardless of their headline results. With AT&T, investors were excited about lower iPhone activations (totaling 4.3M v 7.6M q/q), reasoning that fewer phones equals less payouts in subsidies, aiding margins. Sprint's quarterly losses were lower than expected, although commentators were most hopeful about the sustained recovery in the firm's net new customer growth and higher wireless APRU levels. Traders disregarded Netflix's better headline figures and decent guidance and punished the stock for the firm's outlook for slowing net customer growth. shares gained over 15% on Friday after reporting blow out earnings, touting the continued success of its Kindle franchise.

- Oil majors Exxon and ConocoPhillips missed earnings estimates thanks to lower production and lower income, despite the elevated crude prices seen throughout the quarter. Chevron missed revenue targets by a wide margin but profits held up well, growing 4% y/y, helping the company meet EPS expectations. Like rivals Exxon and Conoco, the firm saw lower production, but its margins held up better. Dow Chemical had a terrible Q1, thanks in part to what it called "recessionary conditions" in Europe.

- MetLife's operating earnings were in line with expectations, however the firm saw a significant $2B loss when taking into account a big loss on derivatives used for hedging. Recall that MetLife was the biggest US SIFI to fail the Fed's stress tests earlier this year.

- Caterpillar's profits grew more than expected in Q1, although its revenue totals fell short of expectations and its FY12 guidance increase was barely enough to meet the consensus view. Ford's Q1 headline numbers were better than expected, although softness in Europe continues to hurt the firm, as net profits were lower on a y/y basis. Executives said that Ford's profit would be slightly better in the second half of the year thanks to more product releases. Defense names Northrop Grumman, Lockheed Martin and Raytheon all crushed expectations in quarterly reports, but gains in shares of the three were limited as investors pondered the reality of defense funding in the years to come.

- As traders returned to their desks on Monday, EUR/USD was under pressure as the Dutch government teetered and Hollande savored his victory in the first round of the French presidential contest. However, despite the negative sentiment the pair turned around just above 1.3100, and headed higher throughout the rest of the week. Strength in the pair puzzled dealers given the political uncertainty in Europe and stubbornly high peripheral bond yields. The euro even weathered the two-notch sovereign downgrade of Spain and Spanish unemployment data for Q1 that was near the record level seen in 1994. By Friday, EUR/USD was around 1.3267, at four-week highs in a search for buy-stops. In the UK, GBP/USD maintained a firmer tone all week, hitting fresh six-month highs above 1.6250 despite the fact that the UK slipped back into technical recession with a negative Q1 advance GDP print.

- Japanese Yen trading centered on the BoJ rate decision, as softer inflation and the stronger yen seen over the course of the past six weeks spurred expectations of more policy easing on Friday. Indeed, the yen softened by mid-week on reports that the asset buying scheme would be expanded by at least ¥5T and as much as ¥10T. Bank of Japan succumbed to market pressure with an expanded ¥10T JGB facility and also extended the JGB term maturity from two to three years in an effort to lower short-term borrowing rates. However, the BoJ also reduced its fixed-rate fund-supplying operation by ¥5T for a net program increase of ¥5T, disappointing some of the more dovish views. In the wake of the choppy post-BOJ action, the yen hit one-week highs against the dollar, further supported by BoJ Gov Shirakawa commenting that the central bank would not be able to ease policy every month. Going into the weekend, USD/JPY was hovering above its the pivotal support at ¥80.30, corresponding to the former high that followed Bank of Japan's Aug 2011 solo intervention.

- In Asia, China's flash HSBC manufacturing PMI on Monday saw a modest uptick from last month's disappointing 48.3 to a slightly less dire 49.1 print. Despite the improvement, HSBC's measure of production continued to suggest contraction for the 6th consecutive month - a stark contrast to the official state manufacturing data on tap for next Tuesday expected to remain in modest expansion. Australia's quarterly CPI and PPI data confirmed central bank expectations that inflation is confined to its target range, cementing the case for a rate cut next week. First quarter CPI rose just 0.1% q/q and a paltry 1.6% y/y, the slowest annual increase since Q3 of 2009. AUD tumbled on the news, hitting 5-month lows against GBP and CAD, as fixed income market expectations for the RBA meeting on Tuesday priced in a 25bp move entirely with a near-30% chance of a 50bp cut. Over in New Zealand, RBNZ policy decision also introduced a remarkably more dovish tone. Governor Bollard noted that while inflation was restrained and commodity prices have retreated, the Kiwi dollar remains stubbornly strong, potentially requiring a "reassessment of policy" down the line.