Friday, May 4, 2012

Market Week Wrap-up

 Market Week Wrap-up

- Global growth fears were the central focus in markets this week. Last Friday saw a lower final reading of US Q1 GDP and this Friday the April US employment report saw the third consecutive decline in the number of job gains in non-farm payrolls. Taken together, these two data points suggest that while the economy is getting better, it will be a long, slow march to full recovery in the US. In the intervening week, the April ISM non-manufacturing index flopped, the April Dallas Fed index widely missed expectations and the Chicago Purchasing managers' index hit its lowest level since November 2009, Europe saw a raft of very weak April services and manufacturing PMI readings and Canada reported soft February GDP data and its lowest Ivey PMI in nine months. Down under, the Reserve Bank of Australia cut its GDP outlook. A persistent rumor that the ECB would launch another three-year LTRO hung in the background all week, while talk about the delicate state of Spain's banking sector rattled nerves. Commodity markets in general and oil markets in particular saw a surge in selling late in the week. The recent downshift in Chinese growth and the headwinds coming out of Europe appear to be creating ripple effects, sending June WTI down four dollars on Friday to test its 200-day moving average at levels not seen since early February. Heading into the weekend, analysts fretted about elections in France and Greece, where anti-austerity candidates stand a good chance of winning key races, potentially throwing a monkey wrench in the new EU fiscal compact. Note that despite all the bad news, the tone from the ECB and Fed remains steadfastly in favor of staying the course without fresh easing measures. During the post rate-decision press conference on Thursday, ECB President Draghi forcefully reiterated that there would be no more near-term stimulus measures, while various Fed officials repeated arguments that more stimulus would not do the US economy any good at this point. For the week the DJIA fell 1.4%, the S&P500 declined 2.4% and the Nasdaq dropped 3.7%. 

- Shares of insurance companies were big movers this week. Allstate rose to one-year highs after the firm handily beat consensus estimates in its Q1 report. The big y/y increase in net income was due in part to the company realizing some sizable capital gains in the quarter. Shares of life insurance name Prudential fell sharply after missing profit targets widely. Operating income was positive, however all-in-all the firm saw a huge net loss due to changes in the value of derivatives tied to the yen. Health insurance name Humana missed Q1 earnings estimates and offered a Q2 earning guidance range that was significantly weaker than expected. Hartford Financial beat both top- and bottom-line expectations on an operating basis as it continues with plans to shut down its annuity business and sell off other operations. Shares of MasterCard and Visa fell gradually this week despite very good quarterly reports. MA's CFO warned that the good growth rate seen in Q1 would not hold for the full year and said that growth was already slowing in April.

- With energy prices swooning this week, energy earnings were in focus. Like the other oil majors last month, BP's profits were under strong pressure from narrower margins in Q1, even as revenue outperformed expectations. And adding to BP's troubles, it has been forced to sell more assets to continue paying for the Macondo disaster, cutting its overall daily production by roughly 25% on a y/y basis. Independent refiner Marathon benefitted greatly from high gasoline prices in its Q1, crushing both top- and bottom-line expectations. Anadarko saw solid earnings and revenue growth in its Q1, topping analysts' estimates. The firm boosted its crude oil output sharply, as has been seen among other producers. Chesapeake Energy was much in the headlines this week. The firm's Q1 results widely missed earnings expectations, while revenue also fell short of consensus estimates. Chesapeake's natural gas output actually grew on a y/y basis even as average realized prices tanked. In addition, it turned out that CEO Aubrey, recently punished for dubious investments in Chesapeake wells, was also running a natural resources trading fund on the side. Oil services giant Transocean missed consensus targets thanks to a raft of one-time items, including some big goodwill impairments.

- Both Ford and GM saw y/y declines in auto sales in April as both firms pulled back on incentives. Fiat brand Chrysler saw 20% growth in sales in April, which was its best showing in four years or so. In earnings, GM notably grew income in its overseas units but concerns about North America drove weakness in GM's shares. The firm warned that it would not see much sequential growth in North America in Q2 or Q3, and of course Europe remains a big problem area. 

- Cable and media names roundly beat expectations thanks to rising advertising spending. Both Time Warner and Comcast did well, although TWX's profits were flat on a y/y basis while Comcast's net was up more than 30% y/y. CBS comfortably exceeded consensus estimates in its Q1, noting that its results continue to benefit from steady underlying advertising growth. CBS doesn't guide, however the firm said that it expects political ad spending to ramp up sharply in the second half of the year.

- April same-store sales were more mixed than the strong results seen in February and March. Major retail chains Costco, Kohl's, Macys and Target missed comp expectations. Interestingly the formerly high-flying luxury chain Saks saw comps slow significantly. Most firms cited the warm March weather and the early Easter for the poor showing in April. There were still pockets of strength in apparel, with discount giant TJX and Limited Brands both crushing expectations, even as comps slowed from the breakneck rates seen throughout Q1. 

- The greenback remained in familiar territory this week. In the immediate aftermath of the final Q1 GDP data last week the USD Index hit fresh two-month lows as market participants continued to lust after QE3, however more Fed commentary and weak European data helped reverse that trend. European markets did not get into the swing of things until after the May Day holiday, just in time for the lower final readings of the April manufacturing and services PMI indices on Wednesday and Thursday. Note that Germany's April manufacturing PMI had its lowest reading since July 2009, while Spain and Italy's numbers were perilously low. German 2- and 5-year notes saw all-time record low yields after the data. Besides the data, market participants are watching elections in France and Greece on Sunday (May 6th) with trepidation. Socialist candidate Hollande is expected to unseat Sarkozy in the second round of the French presidential elections, and the coalition of Greece's two main parties (and rivals) has a chance of falling if far right- and left-wing parties triumph in Athens. 

- Despite all the bad news, the euro was Teflon-coated this week, and EUR/USD kept within its four-week range despite the deteriorating sentiment. The pair tested 1.3270 early but it was all downhill from there. Dealers had been hoping that the ECB might lay the foundations for another round of monetary policy easing during the rate decision this week, however ECB's Draghi offered no concessions. Draghi provided no catalysts for a euro selloff either, and clearly stated that a rate cut was not discussed at the policy meeting. The weak US employment report also helped curtail euro losses on Friday.

 - Early in the week USD/JPY moved out to two-month lows below 80, spurring stern commentary from Japanese officialdom. Dealers marked support at 79.50 since that was the level where the G7 launched its last coordinated intervention in USD/JPY back in March 2011. The Japanese 2-year yield remains above the German 2-year Schatz, giving the yen the advantage in the carry trade. 

- The Reserve Bank of Australia resumed its policy easing campaign with a 50 basis point cut to 3.75%, wider than the 25 basis point move priced in by the markets and anticipated by the vast majority of analysts. The RBA noted that recent incoming data suggests that "economic conditions have been somewhat weaker than expected" and also conceded that inflation has moderated, as indicated by the quarterly inflation data released last week. Looking ahead, the RBA anticipates global economy will maintain its "below-trend pace" and acknowledged that the China growth engine has slowed, but does not foresee a deep downturn. Later in the week, the RBA quarterly policy statement also lowered the central bank's outlook for growth and core inflation in the first half of the year to 2.75% and 2.25%, down 75 basis points and 50 basis points from prior estimates respectively. In turn, AUD hit a 4-month low against the greenback around $1.0180. The EUR/AUD cross tested above the A$1.29 handle for the first time this year, while AUD/CAD made a 7-month low near C$1.01.