Friday, April 19, 2013

Market Week Wrap-up  Weekly Market Update: Markets Facing Headwinds and Heavy Hearts

- The combination of weak Chinese data, troubling US corporate earnings and the Boston Marathon bombing took global equity markets lower this week. China's Q1 GDP and March industrial production both came in lower than expected, adding more evidence of a spring swoon. The April German ZEW sentiment survey dropped into the 30s, suggesting that the situation in Europe is getting worse, not better. US corporate earnings saw some notable flops, especially among blue-chip Dow components such as IBM and McDonalds. But the defining event of the week was the bombing of the Boston Marathon on Monday, in which three bystanders were killed and scores wounded, making for the worst domestic US terrorist incident in years. By Friday one suspect in the bombing was dead and another was on the run. For the week, the DJIA fell 2.1%, the S&P 500 declined 2.1% and the Nasdaq lost 2.7%, the tech index's biggest drop since the second week of October.

- Commodity markets faced another round of heavy selling pressure from liquidation early in the week. Spot gold saw its biggest one-day decline in decades on Monday after it plunged to test below $1,325/oz while silver slumped to $22.00/oz. Copper prices fell into bear market territory, and mining names have been hit hard. There was a slight bounce later in the week and spot gold almost managed to close above $1,400 on Friday.

- US Treasury yields remain near multi-month lows helped by weakness in equities. Bond prices were further aided by a noticeable ratcheting down of inflation expectations: the March CPI was in the red (for the first negative reading since last November) and commodity prices slid lower. Thursday's five-year TIPS auction included an 8 basis point tail and a low BTC ratio signaling the lowest investor demand since Oct 2008. For the week, the 5-year TIPS breakeven spread narrowed 30 basis points back toward 2%.

- On the earnings front, Citigroup and Goldman Sachs both did very well in Q1. Citi modestly topped expectations on net income that was up 30% y/y. Citi managed to hold NIM steady, unlike many other big retail banks. Goldman Sachs widely beat both top- and bottom-line expectations and saw a very strong 36% y/y growth in investment banking revenue. Morgan Stanley contrasted strongly with Goldman: trading revenue fell more than 25% y/y. Bank of America saw a huge y/y increase in net profit, although it was not enough to satisfy the Street. BoA's mortgage originations grew to $24B (from $15B y/y), but revenue made on the business actually declined.

- Certain precincts of the tech sector had a grim first quarter. IBM posted a rare quarterly EPS miss as a sliding yen hurt earnings from Japan and it failed to close some major deals. Microsoft's Windows business held up better than expected, but unit revenue was flat y/y, adding evidence of a very weak launch for Windows 8. Intel's earnings and revenue declined from last year, and the PC business suffered. In contrast Google had an excellent Q1, with strong earnings growth, paid clicks up sharply and executives chatty about a full pipeline of new hardware products from Motorola.

- Shares of Apple gave up another 8% this week, dropping below $400/share for the first time since December 2011. Note that Apple reports quarterly results after the close next Tuesday.

- McDonald's managed to eke out a higher Q1 profit even as global comp sales turned negative for the first time in a decade. The company also warned that sales for April are expected to fall slightly. EPS from GE was up 16% y/y, beating consensus targets, but the firm trimmed the FY outlook for its industrial segment slightly.

- Dish Network offered to buy Sprint Nextel for $25.5B in cash and stock. Shares of Sprint rose sharply after Dish's surprise offer, which exceed the $20B takeover deal Japan's SoftBank reached with Sprint last fall.

- EUR/USD shook off a worse-than-expected German ZEW Survey and maintained a fairly steady tone this week. Dealers noted that the pair saw little volatility despite the events on Monday (both the gold sell-off and the Boston Marathon bombing). The euro seemed aided by ZEW comments that 81% of survey respondents see no change in short-term rates over the next six months. The euro strengthened mid-week as journalists and traders read too deeply into a comment by noted hawk and Bundesbank President Weidmann, who said that the ECB could adjust rates if new information warrants a change. Later in the week Weidmann commented that his remarks were not at all meant to signal a change in his policy view.

- USD/JPY strengthened early in the week in response to the Boston bombing and China's weak data, testing below the 95 handle just over a week after the BoJ's big pivot. The pair spent the rest of the week creeping back toward the 99 handle, aided by the G20 giving Tokyo a pass on its bold easing measures despite the group's explicit stance against competitive devaluation.

- Last weekend China released another round of shaky economic data, deepening concerns that the global economic recovery is facing serious headwinds. China Q1 GDP missed expectations, dropping to +7.7% from the +7.9% a year ago. After the release, the China Stats Bureau insisted that China was off to a steady start for 2013 but also warned the potential GDP rate is a moving target with a pronounced downside bias but acknowledged that the Q1 slowdown was due in part to government policy controls. The China March industrial production figure was +8.5%, the lowest pace of growth since May 2009.