Friday, October 12, 2012

Market Week Wrap-Up

Earnings On, Risk Off

- Markets were in a risk-off mood this week as the September quarter earnings season began. Equity indices in the US, Europe and Japan lost ground after the World Bank and IMF cut their 2012 and 2013 global growth estimates ahead of their respective annual meetings in Tokyo. The cuts were no great surprise, and investors seem to have used them as a good excuse to take more profits after the late September top. Europe limped along as German Chancellor Merkel flew into Athens for a "solidarity visit" that was greeted with mass demonstrations and generated no concrete results. One of the largest growth downgrades in the IMF report was Spain's 2013 GDP, which the IMF cut to -1.3% from the prior view of -0.7%, further undercutting the overly-rosy projections that underpin the Spanish government's 2013 budget proposals. The ESM was officially activated, although Spain continues to officially insist that a bailout is really not necessary. Yields on Spanish 10-year debt remained well below 6.0% this week, and some commentators suggested Madrid may continue to drag its feet on any bailout request until yields are forced higher again. An S&P downgrade of Spain's sovereign rating to the lowest level of investment grade may have foreshadowed a Moody's downgrade to junk that could be forthcoming in the next few weeks. For the week the DJIA fell 2.1%, the S&P500 dropped 2.2% and the Nasdaq declined 2.9%. Interestingly, the Dow Jones Transports were flat on the week, closing some of the conspicuous gap that has been growing between the Transports and the Industrials.

- Shares of Apple, which is now nearly an index in and of itself, officially entered correction territory this week, as they have now fallen more than 10% from the high of $705/share seen on September 21st, the day iPhone 5 sales began. The unveiling of the new iPad mini, Apple's entry into the e-reader sized tablet dominated by the Kindle Fire, was pushed back a week to October 23, two days before its quarterly earnings report.

- Most of the big banks traded lower in the wake of the JPMorgan and Wells Fargo reports on Friday morning. Both firms met or exceeded consensus expectations, with JPMorgan's profits blowing out forecasts, however investors looked deeply into the details to find fault. Despite JPMorgan's excellent profits and minimal impacts from the CIO Office losses or DVA (debit valuation adjustments) that had such an impact last quarter, investors seemed to be disappointed with the bank's inability to grow fixed income or investment banking revenues, despite the strong business and consumer lending business. At Wells Fargo, the problem was more definite: a pronounced contraction in the bank's net interest margin. Wells had warned back in September that the margin would take a significant hit, but the decline to 3.66% from 3.84% is greater than the market expected. Traders await results from Citi on Monday, Goldman on Tuesday, BoA on Wednesday, and Morgan Stanley on Thursday.

- Alcoa's Q3 results surprised to the upside, with earnings and revenue a bit higher than expected. Alcoa moderated its 2012 global aluminum demand forecast to 6%, down from 7% prior, blaming the slowdown in China, although the company also discussed strength in the US aerospace and car industries. Yum! Brands had a mixed result, with earnings meeting expectations but revenue a bit off. Yum also raised its FY12 earnings outlook by a hair, maintaining its positive outlook for the Chinese market.

- Cloud technology company Workday soared after its IPO on Friday, gaining more than 70% in the first day of trading. Note that Workday's stellar performance followed four companies that debuted Thursday - Shutterstock, Realogy, Intercept Pharmaceuticals and Kythera Biopharmaceuticals - each of which traded up more than 20% in its first day of trading. Analysts say cloud-based human resources firm Workday could be the blockbuster that investors are looking for to revive the tech IPO market, following Facebook's disastrous offering in May.

- EADS and BAE Systems called off their difficult merger talks this week and pinned the blame on Germany for obstructing the deal. The companies said it was clear that the interests of the UK, French and German governments could not be reconciled with each other. A BAE spokesperson said that Germany gave no clear reason for blocking the merger, while a German official said there were also reservations on the French side. The other big deal news was word that Softbank was looking to acquire a stake in Sprint (either 66% or 75%, depending on the report), as part of a strategy to roll up wireless interests in the US market. It seems that Softbank's main interest is Clearwire and its spectrum resources. Of course the MetroPCS merger drama is part of this picture as well: T-Mobile has an agreement in hand to merge with MetroPCS and Sprint has been said to be evaluating a counter-bid for T-Mobile or even an offer for the combined entity. Some reports even suggested that Softbank was considering an acquisition of PCS once a potential Sprint deal has been completed.

- Europe's ESM bailout mechanism was declared operational this week, garnering AAA ratings from Fitch and Moody's, cementing hopes that the ESM will attract the same investors as the EFSF. Rumors continued to circulate about when Spain would ask for a bailout from the ESM, although analysts pointed out that a request would be unlikely before regional elections scheduled for October 21st. European officials convened Eurogroup and EcoFin meetings this week, however nothing new was said at either meeting. Later in the week solid Italian auction results helped to soften the effects of another sovereign downgrade of Spain, as S&P cut the nation to the lowest level of investment grade. EUR/USD came into the week moving lower from Friday's highs of 1.3070. The IMF numbers, especially the Spain GDP revisions, and the empty rhetoric from the Eurogroup, helped force EUR/USD lower over the course of Tuesday's session, and the pair touched lows below 1.2830 on Wednesday, bouncing back to just below 1.3000 through the end of the week.

- USD/JPY was trading around 78.00 during the early part of the week as numerous Japanese officials continued the use of verbal intervention to curb JPY strength ahead of the G7 Summit in Tokyo. The yen was notably weaker on potential M&A flows on the Softbank-for-Sprint reports. USD/JPY moved above the 78.50 level ahead of the G7 meeting. Dealers noted that Goldman Sachs was a tad bearish on the AUD currency at their global economic forum in Sydney. Goldman said that the AUD was 20% overvalued