Friday, October 19, 2012

Market Week Wrap-up 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.