Friday, August 3, 2012

Market Week Wrap-Up

Promise of Future Accommodation and US Payrolls Send Markets Higher

- Trading was subdued in the front half of the week as investors awaited the Fed decision on Wednesday afternoon and the ECB decision on Thursday morning. Markets had great hopes for more easing out of each institution, with many saying that the Fed was bound to respond to deteriorating economic conditions and the ECB could not avoid further bond buying to cap Spanish and Italian yields, especially after ECB Chief Draghi's strong words in London late last week. Neither decision offered much in the way of satisfaction. The Fed tweaked the language of its statement to lean a little more toward future action, but sat on its hands. The ECB did not launch another round of bond buying and didn't cut rates further, however Draghi's comments were not easy to dismiss. He stated that the ECB could launch a bond buying program in the future but it has not decided to do so as of yet, and in any case it would not move to buy bonds unless individual euro zone governments asked the EFSF/ESM bailout funds for help first. Equities traded off in the aftermath of both decisions, with US and European indices marking their weekly lows after Draghi concluded his remarks. Indices recouped all their losses on Friday as markets reconsidered the import of Draghi's words and were also helped by the relatively good US July employment report. Nonfarm payrolls snapped three straight months of sub-100K gains, though unemployment ticked up one-tenth to 8.3%. Knight Capital's algorithm meltdown on Wednesday left the company gravely wounded and seeking a white knight, though markets shook off the incident that brought back memories of the "Flash Crash." The snap back rally in equities on Friday erased the losses experienced in the first four days of the week: On the week the DJIA rose 0.2%, the S&P500 gained 0.4%, and the Nasdaq was up 0.3%.

- Major P&C insurers like MetLife and Allstate, and health insurance names like Cigna reported excellent results. Prudential more than doubled its profit on a y/y basis, although analysts expected more. Aetna's profits were down on a y/y basis, even as the firm's Q2 earnings beat expectations, while Humana had a bad quarter due to an unexpected 18% jump in new Medicare Advantage enrollments, generating lots of upfront costs. Hartford continues to restructure and posted a loss, and on an operating basis still missed expectations widely. AIG reported its third profitable quarter in a row in its Q2, with operating income up 27% y/y and EPS nearly twice the expected figure. Performance at the firm's key Chartis and SunAmerica units bolstered profits. Separately, the US Treasury announced it would sell another $4.5B of AIG shares and the company said it would buy back two thirds of the shares being offered.

- Like many other major energy firms reporting June quarter results, Anadarko suffered from record low natural gas prices. The firm reported a big loss in its Q2, thanks to a one-time impairment charge stemming from the steep declines in the price of gas, although it also recorded impressive gains in sales volumes and production. Oil services name Transocean crushed earnings expectations on an operating basis thanks to a big jump in fleet utilization, although after reserving funds to cover ongoing Macondo issues it recorded a quarterly loss. Refiner Tesoro saw profits up nearly 80% in its second quarter and its revenues widely beat expectations.

- Ag names Archer Daniels Midland and Agrium are being strongly impacted by the drought situation in the US Midwest. The two firms reported contrasting quarterly results: Agrium's profits were up 20% y/y and well ahead of expectations, while ADM widely missed consensus expectations due to the impact of a big reversal in the firm's ethanol margins. Shares of both ended the week deep in the red, as the state of the corn crop overshadows the industry.

- Procter & Gamble beat its own lowered Q4 guidance issued back in late June. Note that between now and then, activist investor Bill Ackman stepped in and bought about $1.8B worth of its shares, helping to bolster the name. Kraft's Q2 results were more or less in line.

- General Motor's earnings were very strong, thanks to very great revenue in its North America markets and lower losses than expected in Europe. General Motors and Ford both saw y/y declines in June sales, which both firms blamed on sagging fleet sales. Ford's retail sales in the month rose 2%, however GM saw a 3% decline in retails sales. Fiat unit Chrysler reported a 13% gain in July sales, its best performance in the month in five years. Both Toyota and Nissan saw very strong double-digit sales gains, although both firms are facing pretty easy comps due to last year's production problems.

- Retail chains had a solidly positive month of sales in July, suggesting that the back-to-school selling season will be strong. Gap, Limited Brands, TJX, Macy's, American Apparel and Kohl's all reported very good comps. Limited and TJX both raised their Q2 guidance slightly, and TJX noted that traffic was up sharply at all divisions. American Eagle Outfitters no longer discloses monthly comps, however the firm did raise its Q2 outlook, citing very good traffic and sales levels. A sour note came from Aeropostale and Abercromie & Fitch, both of which offered very weak Q2 guidance thanks to flagging sales.

- Various data reports out this week suggested recessionary conditions are not going away in Europe: German unemployment rose for the fourth straight month and EMU unemployment rate hit a fresh record high of 11.2%. July manufacturing PMI data saw no improvements. EUR/USD remained mostly within a 1.2150 to 1.2350 range, with the top and bottom ranges tested during the ECB press conference. Note that the day before the decision, comments by Bundesbank Chief Weidmann were leaked to the press (from an interview originally published in an internal Buba publication on July 27th). Weidmann seemed to rebuke Draghi for his London comment last week, when Draghi asserted that dealing with surging yields was "part of the mandate" of the ECB. In the interview Weidmann said that central bank independence obligates the ECB not to overstep its mandate. The conflict between the two bankers will only deepen now that Draghi has put bond buying back on the table.

- The USD/JPY pair spiked up about 50 pips following the release of better-than-expected nonfarm payrolls on Friday, breaking out of its narrow range to a two-week high around ¥78.80. Earlier in the week, Japan Finance Minister Azumi reiterated that Japan would take decisive steps if needed to deal with one-sided yen moves that clearly did not reflect fundamentals. The Bank of Japan meeting next week will feature two new board members who recently took a vocal stance in support of further policy accommodation.

- Commodity currencies also reached multi-week highs following the better US jobs report. USD/CAD fell back below parity for the first time since May while AUD rose above $1.0550 against the greenback, its best level since March. AUD also hit fresh record highs against the euro, further supported by indicated interest in Aussie bonds from China FX regulator SAFE. Fresh economic data from Australia was decidedly more bullish, with June trade balance printing its first surplus in 6 months and retail sales rising to 3-month highs.

- The latest developments out of China were more mixed but overall still supportive of the soft landing scenario. The official July manufacturing PMI came in at an 8-month low of 50.1 vs 50.5 expected, as output, new orders and input price components fell two ticks and inventories retreated into outright contraction. The China Iron & Steel Association (CISA) reported steelmakers' first half profit fell by over 90% while also warning that second half EU-bound exports would likely deteriorate further. The housing market and recovery in lending continued to cushion the Chinese economy, with the top four banks said to have lent over CNY200B in all of July, up from just CNY50B in the first half of the month. Shanghai property brokers indicated transactions held up for the month, with less discounting keeping the market supported. The Q2 PBoC Monetary Report reiterated policymakers stance of "prudent policy" with fine-tuning as appropriate, suggesting the central bank is likely on hold until at least the next round of economic data for July.