Friday, February 1, 2013

Market Week Wrap-up

The "Great Rotation" Continues

- Risk assets headed higher again this week as optimistic markets accentuated the positive and ignored the negative. Money flowed into risk assets in record amounts. Indices surpassed key psychological levels: the S&P500 established itself squarely above the 1500 mark and on Friday the DJIA closed above 14,000 for the first time since late 2007. US economic reports out this week were contrarian and hard-to-read, but on the balance positive. The December headline durable goods reading of +4.6% y/y was very strong, however ex aircraft it was much more tepid at +0.2%. The 2.6% surge in the December personal income data (the largest gain since 2004) was chalked up to the bubble of special dividends paid out before the end of 2012 ahead of the fiscal cliff. The first reading of Q4 GDP was -0.1%, way below consensus expectations, although the data was skewed by an unusual slump in defense spending. The January payrolls were uninspiring, while the December payrolls were revised much higher. In China, the Shanghai Composite rose 5.5% on the week thanks to solid manufacturing data. For the week, the DJIA rose 0.8%, the S&P 500 gained 0.7% and the Nasdaq jumped 0.9%. As equities forged higher, the yield on the US 10-year bond held above 2.0%.

- The first negative reading in quarterly US GDP since 2009 was being blamed on a sharp decline in defense spending, which was a big part of the decline in government fixed expenditure. Data showed that government spending on defense fell by the greatest amount since the early 1970s as the Pentagon anticipated potential 'sequester' budget cuts. Investors concentrated much more on the solid increases seen in business and consumer spending: disposable personal income was +6.8%," nonresidential fixed investment was +8.4% and residential investment gained +15.3%.

- The headline non-farm payrolls numbers were not inspiring, with the +157K figure right in line with the original December number. However, the revisions to the December data to +196K from +155K were a big positive, thanks to the nine-month benchmark revisions. Moreover, analysts blame the weaker job growth, like much of the rest of the data softness this month, to shenanigans in Washington.

- The Fed met this week with little fanfare. After expanding its QE3 program at the December meeting, the FOMC made no policy changes this week, and gave a slight upward tweak to its assessment of the economic environment. As the FOMC rotated its voting membership for 2013, Kansas City Fed President Ester George became the new dissenter on the committee, raising concerns that the continued high level of monetary accommodation will increase the risks of future economic and financial imbalances and cause long term inflation.

- A trio of tech earnings proved irresistible for the talking heads this week. Facebook's headline numbers and user metrics were all pretty solid, and mobile revenue grew to 23% of the ad revenue, however margins were down big on a y/y basis. Amazon missed top- and bottom-line expectations, but investors were heartened by an improvement in margins. Yahoo's FY revenue outlook was strong and CEO Mayer promised continuing improvements as her overhaul process continued. Despite strengths or weaknesses in the reports, shares of all three names were down 4-6% this week.

- Research in Motion unveiled its new Blackberry 10 (BB10) operating system and launched two new phones. The new models are the Q10, with a physical keyboard, and the Q10, which is touchscreen only. The firm also said it would change its name to Blackberry and its ticker to BBRY. After months of hype ahead of the BB10 launch, shares of RIMM sold off sharply after the official roll out.

- Quarterly reports from Ford, Caterpillar and Boeing provided a snapshot of US manufacturing. Caterpillar set a cautious tone for the year in FY13 guidance, offering a very broad range and warning that the outlook is very opaque. Ford's North American business remains very strong, while European revenue fell 25% y/y. Boeing's profits crushed expectations in its Q4 and its initial profit forecast for FY13 was well ahead of estimates. In regards to the 787 Dreamliner, the company said that progress is being made on narrowing the causes of the battery problem and production continues on plan.

- Oil majors Chevron and Exxon both beat consensus earnings expectations on solid y/y profit growth. Analysts highlighted that profits at the two firms and the industry in general are benefitting from high margins on the fall cost of domestic crude thanks to shale production.

- The greenback weakened against European pairs this week as money continued to flow into risk assets. Not even the patchy GDP or payrolls data put much of a break on the upward trend of EUR/USD. Multiple official commentators hammered away at the "euro-zone crisis is over" theme, Europe's new form of mild verbal intervention.

- Data out from the ECB and European banks showed that institutions were not rolling over three-year LTRO funds into shorter dated paper. Analysts said that this suggests the European banking sector was healthier than expected. Reports showed that Spanish banks repaid almost a third of their three-year LTRO borrowings.

- There was a big exception to the trend in European currencies: Sterling. Cable hit five-month lows of 1.5716 and continued to trade under pressure from the potential triple-dip recession risk after last week's Q4 growth reading. Dovish comments from incoming BOE Governor Carney over the weekend were also a factor.

- Japanese officials deflected criticism from the Davos summit against Japan's campaign to weaken the yen even as USD/JPY tested above the 92 handle late in the week. Dealer cited the pickup in US Treasury yields as a factor in price action after the US 10-year yields move firmly over 2%.