Markets
maintain cautious tone despite some signs of hope
- Investors opened the week trying to shake of the cob webs of a post-election
hangover that enveloped markets late last week. Some early bargain hunting in
stocks quickly gave way to headlines on the US 'Fiscal Cliff,' turmoil
surrounding the Greek bailout and another escalation of tensions between Israel
and Hamas in the Gaza strip weighing on sentiment. By mid-week a clean break
below the S&P 500's 200-day moving average spooked many technicians, and
the major US indices were testing multi-month lows with the NASDAQ officially
in correction territory. Economic data releases did little to stem the tide
despite some improvement in Chinese figures that included a better October
trade balance and the biggest uptick in industrial production in five months.
European economic reports remain unpleasant. Q3 preliminary GDP figures showed
the continent officially entered a double dip recession while a declining
reading in Germany's November ZEW economic sentiment index suggests problems in
the periphery have spilled over to the core economies. In the US, the November
Philadelphia Fed reading fell to a 4-month low along with October Advanced
Retails Sales figures, while October Industrial Production declined
unexpectedly. Weekly initial jobless claims jumped to 439K well above what was
expected. Analysts did note that much of the weakness seen in the US data can
be explained away by what are likely short term effects from Hurricane Sandy.
WTI crude oil futures finished the week up roughly 0.75% percent near $87 while
Brent prices declined by less than 0.5%. Natural gas prices rallied more than
8% to close just below $3.80 after technicians noted a bullish break above
converging 50 and 200-day moving averages. December gold finished down 1%
despite Chinese officials discussing the need to increase gold reserves. The
benchmark US 10-year yield declined a handful of basis points and remains just a
few ticks from fresh multi-month lows. For the week, the DJIA and Nasdaq each
fell 1.8%, while the S&P500 lost 1.5%.
- With the US economy hurtling towards the 'Fiscal Cliff' all eyes turned
squarely on Washington this week. On Wednesday, President Obama met with
business leaders ahead of a Friday meeting with Congressional leaders from both
parties. By mid-week reports circulated that the Administration would ask for
$1.6T in additional tax revenue throwing some cold water on hopes both sides
could come to an agreement quickly. Ahead of the meeting another press report
suggested the White House was in advanced talks on a plan to replace the
sequester portion of the Cliff, thus pushing back major deficit reduction talks
into 2013. A post meeting press conference on the White House lawn provided
some renewed hope. Representatives from both sides of the aisle including
Speaker Boehner and Senate majority leader Reid indicated the talks were
"constructive" and a deal can be achieved, with revenue remaining on
the table as long as it is accompanied by spending cuts. Equity markets rallied
hard following the press conference late Friday morning with the Dow rallying
more than 100 points off of the session and week low.
- Third quarter earnings season is slowly drawing to a close. A handful of
influential technology companies and the majority of big US retailers reported
results this week. Cisco systems saw modest growth in earnings and revenue in
its Q1 and forecasted flat growth for Q2. The bar was not set very high for the
firm after several quarters of declining outlook for IT in general and network
hardware in particular. CEO Chambers said that he is seeing a slightly better
environment in the US and in Asia, while also warning that Europe would get
worse before it got better. Dell missed consensus expectations while Q4 and
FY13 guidance disappointed once again. Shares of Sina Corp also came under
pressure falling roughly 13% after reporting Q3 gross margins down and
providing Q4 guidance below analyst forecasts.
- Retailers posted mixed results with many commenting on the impacts of
Hurricane Sandy. WalMart shares fell to the lowest level in three months after
reporting revenues a bit below consensus. Along with in-line guidance, the
company disclosed an investigation into foreign corrupt practices has expanded
to China and India. Target Inc fared better after beating noticeably on the
bottom line and guiding Q4 EPS above consensus. Home Depot performed well in
its Q3, with earnings and revenue just above expectations on modest y/y growth.
After raising its forecast Home Depot said it would see a boost from Hurricane
Sandy similar to the one saw from Irene last year, which added $360M in sales
in Q3 and Q4 of 2011. Specialty apparel names were particularly strong led by
Abercrombie and Fitch. Shares of Abercrombie jumped more than 25% after profit
growth widely outpaced expectations. In addition, Abercrombie hiked its
full-year guidance and said comps would return to positive growth in Q4. Luxury
name Saks came under pressure after Q3 revenue missed expectations. Executives
warned that they are seeing lower sales at many of the stores impacted by
Sandy, calling the storm a "punch to the stomach." Sears Holding
declined more than 15% following Q3 results that saw SSS decline by 1.6%.
Management noted particular shortfalls in categories like groceries, and
household and consumer electronics.
- Two iconic US technology bellwethers had another tumultuous week. Apple at
one point was down another 7% to trade near $500 for the first time since
February. Sentiment remains clearly negative with everything from a likely
increase in the US capital gains tax rate, to rising input costs in Asia, to
continued concerns surrounding the ability to recapture the culture of innovation
seen under founder Steve Jobs, seen as potential catalysts for selling Apple
shares. Microsoft slid 6% after the executive widely expected to become the
firm's next CEO resigned. Steven Sinofsky, head of Microsoft's Windows unit,
left the company only two weeks after launching Windows 8. The move was
unexpected and neither Microsoft nor Sinofsky gave an explanation, although
sources suggest the decision was "mutual" and that Sinofsky would not
take a job at another company anytime soon.
- In M&A, the news was relatively light with only a few small to midsize
deals getting attention. On Monday Jefferies Group announced at deal to be
acquired by Leucadia National for about $3.7B. Jefferies holders would receive
0.81 Leucadia shares per share, implying a deal value of approximately
$17.66/share. For Leucadia, known as a "mini Berkshire Hathaway,"
Jefferies comprises one of their largest current investments. Late last Friday
Precision Castparts said it would buy Titanium Metals Corp for $2.9 billion.
The all cash offer represented a 44% premium to Friday's closing price and does
include a "go shop" provision. Ally Financial is said to have reached
a deal to sell its auto financing operations in Europe and Latin America to
General Motors for around $4B. Late in the week Hertz confirmed FTC approval
for its purchase of Dollar Thrifty.
- For currency traders coming into the week risk aversion maintained a foothold
as the Greek situation remained unresolved and worries about the US Fiscal
Cliff remained. Monday's Eurogroup meeting proved to be a bit of a
disappointment. Discussions continued around just on how to cut the Greek debt
burden and in the end only served to highlight the differences between Euro
Zone Finance Ministers and the IMF. EU chief Juncker remained optimistic that a
decision on the Greek €31.5B aid tranche would be decided at its next gathering
on November 20th for the Eurogroup, but other senior officials indicated the
final decision could slip to a later date. At 1.2660 EUR/USD began the week at
new 2-month lows after the weaker than expected German ZEW survey served as
another reminder that the economic crisis was staring to infect core economies.
The pair found some support on reports Greece was to receive €44B in aid via
one lump payment (€31B plus the 2 tranches that were due in September). The
pair later tested various technical levels around 1.2730 after a Greek bill
auction raised the bulk of the expected €5B in redemptions that country faced
this week, and thus averted any immediate default risk. By Friday, dealers
noted that the pair might have the legs to probe back towards the 1.28 handle
but stalled just below its 200-day moving average at 1.2808.
- The JPY currency weakened noticeably on mid-week reports that the Japan
Cabinet would again downgrade its economic assessment in its upcoming monthly
report for the fourth straight time. The JPY weakened further after PM Noda
hinted he might dissolve Parliament on Friday, November 16th if LDP opposition
pledged to meet certain conditions. The USD/JPY edged towards the 80 handle
after Japan LPD (opposition) official Abe was said to have agreed to conditions
laid out by PM Noda for snap elections. The LDP looks to be in a position to
form the next government, and Abe has favored unlimited easing by the BoJ and
would likely seek the central bank cut in the benchmark rate to zero or lower.
By Friday USD/JPY broke above the 80.70 level to test the 81 level and 6.5
month highs.
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