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Weekly Market Update: Focus Shifts from Euro Crisis to Fiscal Cliff
- Earnings season dominated US markets this week as investors digested results
from rest of the big banks and some weak numbers out of the tech sector. A
constant theme heard from corporate executives was gloom about the possibility
the US could go over the fiscal cliff as Washington continues to twiddle its
thumbs before the election, with negative psychological implications for the
struggling economic recovery. Meanwhile the situation in Europe appears to have
calmed further this week, despite no new breakthroughs. Leaders gathered in
Brussels for the European summit agreed on a very basic outline for
establishing a euro zone banking supervisor. As previously framed, the plan
puts the supervisor under the auspices of the ECB and assumes a legal framework
will be in place by the end of 2012, and leaders agreed that the ambitious
start date should be pushed farther back into 2013, though many other questions
about the bank union remain unanswered. The big headline on the continent this
week came from Moody's, which affirmed Spain's sovereign rating at Baa3, the
lowest level of investment grade. Many market watchers had expected Moody's to
cut Spain to junk status, but the rating's firm rationale for affirming the
sovereign rating was the impact of the extraordinary EMU and ECB support
mechanisms being put in place. Yields on Spanish government debt fell to
seven-month lows following Moody's announcement and yields on the debt of other
crisis countries contracted as well. In the US, September data showed retail sales
advanced for the third consecutive month and existing home sales kept up, with
the slight decline from the two-year highs in August, numbers explained as
resulting from tight home supplies, not a lack of buyer interest. Gold racked
up a two-percent decline this week, its biggest weekly drop in nearly four
months, driven in part by some late-week dollar strength and equity market
weakness. For the week the DJIA eked out a 0.1% gain, the S&P500 rose 0.3%,
but the Nasdaq fell 1.3%, as the tech heavy index fell for the fourth week in
the past five.
- Data out this week helped remove some of the uncertainty related to the China
economic slowdown, offering a less bleak picture of the so-called managed
landing. China's Q3 GDP did in fact fall to a fresh 3.5-year low at 7.4% - in
line with consensus - but subsequent commentary reinforced perceptions of Q4
tracking stronger. On the flip side, September industrial production rose for
the first time in four months while retail sales growth was a full point above expectations
at 14.2%. The National Bureau of Stats (NBS) said growth stabilized and
reiterated its 7.5% GDP objective for this year. An NBS spokesperson noted that
upward CPI pressures still exist and highlighted easing actions by Western
central banks. This latest set of comments and economic data will increasingly
bolster expectations of PBoC on hold for a more extended period; it last moved
the RRR in May and hasn't touched one-year rates since July.
- Goldman Sachs' Q3 was excellent: revenue doubled y/y and the firm saw good
growth in the investment banking business. Citigroup, Bank of America and
Morgan Stanley all reported decent results that were substantially aided by DVA
(debit value adjustments) adjustments. But good headline numbers concealed more
mixed details. BoA's and revenue contracted from levels seen a year ago, and
executives warned buybacks of bad loans from private investors and the GSEs
could cost another $6 billion above current reserves. Morgan Stanley lost money
before their big $2.3B DVA adjustment, although its trading and investment
banking businesses are seeing strong growth. Citi did well on an operating
basis, although this excluded a $4.7B write-down of the value of the stake in
Morgan Stanley Smith Barney brokerage joint venture sold to MS in September.
The big story for Citi was the surprise announcement on Tuesday, the day after
earnings, that CEO Pandit would step down immediately. Reports suggest that
Pandit's departure was due to disagreements with board members regarding
strategy and performance measures.
- Quarterly reports from IBM, Google, and Microsoft were a major source of
weakness. IBM's headline numbers were roughly in line with expectations,
however there were concerns about its software and its tech services revenue
being down on a y/y basis. Microsoft's profits fell more than 20% on a y/y
basis and revenue was challenged as PC (and Windows OS) sales fall. Shares of
Google fell approximately 10% after the firm's accidental early release showed
profits falling sharply on a y/y basis, missing expectations widely. Executives
blamed the softness on the lower rates the firm is getting for mobile ads. The
quarterly results were bad enough to entice CEO Larry Page, with a weak and
raspy voice, to join the conference call for the first time since this spring
when he lost his voice to an unspecified ailment. Intel warned that it is
seeing softness in both business and consumer markets. On the bright side,
flash memory powerhouse Sandisk comfortably beat expectations, on outstanding
smartphone/tablet demand and some initial recovery in NAND prices.
- Telecom giant Verizon saw a solid increase in profits in its Q3, although
they were only just in line with expectations. Following the switch to
multi-device data connections and a rise in rates back in June, Verizon
Wireless now reports average revenue per account (ARPA) instead of average
revenue per user (ARPU); the new APRA figure saw a nice boost for the firm. Net
adds were solid. Third quarter smartphone sales included 3.4M Android devices
and 3.1M iPhones, 21% of which were iPhone 5s.
- General Electric's profits were right in line, although revenue missed and
the tone of executives was hesitant. Notably GE cut its revenue growth outlook
for the full year to +3% from +5%. CEO Immelt said business in FY13 business
would like be a lot like it was in FY12, and that no big improvement was
expected in the world economy. Honeywell's profits were solid although revenue
missed expectations and barely grew y/y. North America-centric oil services
firm Baker Hughes missed both top- and bottom-line expectations thanks to the
continuing slowdown in drilling activity, while the more
internationally-oriented Schlumberger managed to top expectations helped by
strong demand overseas.
- Shares of McDonalds fell after the firm reported disappointing earnings. The
company also warned that October's comps are currently trending negative,
boding ill for Q4. Coca-Cola had a good quarter whereas Pepsi's revenue fell 5%
on a y/y basis, an outcome attributed to the ongoing restructuring process that
led to unprofitable businesses being shut down. Earnings were good, and the
firm reiterated its FY12 outlook.
- Japan's Softbank reached a deal to buy 70% of Sprint Nextel for $20B. The
merger unites two firms that are the third biggest mobile carriers in their
respective markets, in a deal that would be the largest ever foreign
acquisition by a Japanese company. In the wake of the deal, there have been
reports that Sprint will acquire a majority position in Clearwire, if not take
out the entire company. In the oil patch, Exxon said it had a deal to acquire
Canadian oil and gas company Celtic Exploration for $2.6B, helping it to grow
its output and expand its asset base in western Canada. Exxon will pay C$24.50
for each share of Celtic, a 35% premium to Celtic's prior closing price. The
deal is being compared to CNOOC's $15B bid for Nexen and Malaysian state oil
company Petronas' $5.0B deal for Progress Energy.
- The decent Chinese data and a more positive tone in Europe drove funds out of
safe-havens and kept the dollar and the yen on the back foot. A few pieces of
encouraging US economic data complimented China. There were continuing reports
that Spain would make a formal aid request in November to coincide with a
revised Greek program and a Cyprus aid package. The aid looks like it will
arrive in the form of a precautionary credit line, though Spanish officials are
remaining cagy about their intentions. Moody's decision to keep Spain's
sovereign rating at investment grade aided the euro. EUR/USD came into the week
around 1.2910 and rose as high as 1.3140 in the wake of Moody's action on
Spain. The pair slumped in the second half of the week as European officials
quarreled at the Euro summit over the shape of the banking union. M&A flows
from the Softbank/Sprint deal helped push USD/JPY higher all week, with the
pair moving from 78.40 to around 79.40. Mitt Romney reiterated his pledged to
name China as a currency manipulator if he won the election, pushing CNY to
fresh post-2005 revaluation highs against the USD, with USD/CNY trading below
the 6.2450 level.
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