Friday, January 25, 2013

Market Week Wrap-up

Markets At Fresh Five-Year Highs Despite a Bruised Apple

- It was an action-packed week despite US markets being closed on Monday for the Martin Luther King holiday. President Obama's second term officially began with his inauguration on Monday, and later in the week Congressional Republicans passed a three-month extension of the debt ceiling in order to lower the temperature in Washington ahead of the looming confrontation over the budget and spending. In Japan, the BoJ yielded to pressure from newly-elected PM Abe and agreed to a 2% inflation target and an open-ended asset buying program. In contrast with Japan, Europe showed the first sign of moving away from emergency measures as the ECB announced that more than half of the banks that took out three-year LTRO funding a year ago would begin repaying funds in Q1, with the initial round coming in much higher than expected. On Friday, German stocks benefited from better than expected German Ifo Business Climate data sending the DAX out on a positive note. The UK's advance Q4 GDP reading came in at -0.3%, indicating Britain could be on course for its third recession in four years. In earnings news, there was a maniacal focus on Apple's quarterly numbers, with shares of the company dropping nearly 14% in the two sessions after the report. For the week, both the Dow and the S&P500 hit fresh five-year highs, with the DJIA up 1.8%, the S&P 500 gaining 1.1% and the Nasdaq up 0.5%. Meanwhile, the 10-year yield moved to 1.95%, back toward January highs.

- The slow, steady US housing market recovery has been a real source of strength over recent months, and the soft December new and existing home sales readings this week are not being seen as evidence of a real slowdown. December existing home sales fell 1.0% following a 4.8% rise in November (revised from 5.9%). December new home sales fell to 369K from a revised November figure of 389K.

- Apple more or less met earnings and revenue expectations in its first quarter and its iPhone shipments rose to an all-time high of 47.8M units, but still missed consensus expectations for more than 50M units. This miss plus a big contraction in margins and signs of cannibalization of iPad sales by the new iPad mini drove the huge sell-off. Analyst sentiment shifted after the report, with many asserting that the best days of the Apple growth story is now over and that high-margins will continue to erode as competitive dynamics demand a lower-priced (and lower margin) handset offering. When the dust cleared, Apple lost its title of most valuable company in the world as the market cap fell below that of Exxon Mobil.

- Microsoft met expectations in its Q2, with revenue at record highs even as earnings fell slightly. However, the real focus was on the company's Windows division, where revenue grew around 25% y/y. Windows 8 was available only about halfway through the quarter, and correcting for the firm booking early Windows 8 revenues, the unit only saw an 11% revenue increase. In any case, both figures were far below the Windows division's 70% revenue increase seen in the quarter when Microsoft released Windows 7.

- Shares of Netflix are up 60% since its quarterly report, trading around 14-month highs. Netflix shocked markets with a tidy quarterly profit versus expectations of a loss, and it nearly doubled its streaming net adds to more than two million users on a sequential basis. Note that the company attributed much of its impressive gain in streaming to consumers snapping up tablet computers and smart TVs over the holidays.

- In other earnings news, IBM and Google had solid quarterly. Google saw higher paid clicks, lower costs and steady advertising revenue. IBM modestly topped expectations and saw excellent growth in emerging markets. General Dynamics had a terrible Q4 and blamed the slowdown in defense spending, while Lockheed and Raytheon did well. Shares of all three fell on the threat of Pentagon spending cuts. McDonalds managed to top lowered expectations in its Q4 report, although analysts are concerned about the firm's negative comps in the Asia Pacific business and flat December comps. Airlines United Continental and Southwest had misses in their Q4 reports, however the overall rosy outlook offered by executives from both firms supported the shares and helped keep the Dow Transportation Average at record levels.

- Japan has come under fire this week for new monetary policies that critics say deliberately devalue the yen, and rekindled discussion of a "currency war." The BoJ's new 2% inflation target and open-ended asset purchases were seen as somewhat compromised. Two board members voted against the inflation target, while the asset buying program is tilted toward the very short end of the curve and only begins in 2014 (when its current round of bond buying expires). USD/JPY had pushed out to 31-month highs above ¥90.20 ahead of the decision but reversed those gains to trade down just shy of ¥88, thanks to the compromises in the program plus fears that the 2% inflation target was already priced in. More verbal intervention from Japanese officials sent the pair higher later in the week, especially after Deputy Econ Minister Nishimura said USD/JPY at 100 would not pose a problem. The EUR/JPY cross got an additional boost after Japan's largest hedge fund said it would be back in market for EFSF bonds after a two-year absence.

- EUR/USD trading was listless for most of the week, well contained within the 1.3250-1.3400 corridor. On Friday, the ECB disclosed that it would receive higher initial three-year LTRO repayments than expected. This caused short-term interest rates to pop higher in Europe and sent the EUR/USD to fresh 11-month highs around 1.3470.

- The pound hit 10-month lows on turbulence from questions about the UK's position in the European Union and initial look at the UK's Q4 GDP. Technical charts suggested that more downside momentum could take place in GBP/USD pair with a double-top formation in play related to its September price action. The neckline was seen at 1.5830 with 1.53 as price objective. PM Cameron proposed a referendum take place on the question of UK membership in EU in 2017 if the Conservative party wins the next round of parliamentary elections.