Friday, April 26, 2013

Market Week Wrap-up  Weekly Market Update: Spring Swoon Prompts Talk of More Easing

- Events this week once again showed how in the new world of QE and central bank "puts", bad news can be good news. In Europe, the German preliminary April manufacturing PMI fell below 50, indicating the first contraction in five months in Europe's only remaining engine of growth. Germany's April IFO survey was also notably weak. In the US, the March durable goods and advance GDP readings were subpar. In China, the April HSBC flash PMI data fell to 50.5, missing expectations, and there were signs of trouble in both import and export data. Earnings in Europe and the US were not especially strong: while Q1 profits have been ok, revenue outlooks for Q2 and Q3 have been downgraded. Nevertheless, major global equity indices (with the exception of the Shanghai composite) racked up good gains on the week, with European bourses up an average of 4 percent in anticipation of the ECB flexing its muscles again. After the weak European data, Commerzbank, Deutsche Bank, Barclays, JP Morgan and Nomura all said that an ECB rate cut of 25 bps is expected at the May meeting next week. Meanwhile talk of the Fed tapering asset purchases this year has quieted. The one bright spot was the UK, where advance Q1 GDP came in at +0.3% q/q, two-tenths higher than expected. Gold has slowly regained ground lost in the first half of April, with spot gold closing out the week around $1,474, a 40% retracement of its April losses. For the week, the DJIA added 1.1%, the S&P 500 gained 1.7% and the Nasdaq rose 2.3%.

- There were ominous signs in both the March durable goods orders report and Q1 advance GDP. The headline -5.7% durables figure was the lowest reading since last August, while February's +5.7% figure was revised lower to +4.3%. The first reading of US GDP was weaker than expected at +2.5%, although it was a big step up from Q4's anemic +0.4%. The consumer spending component of the report was +3.2%, beating estimates and growing at the fastest since late 2010. A big bump up in imports and declines in government spending impaired GDP, while inventory growth and especially farm inventories formed a large part of the positive growth.

- US energy giants Exxon, Conoco and Chevron were impacted by lower crude prices. Exxon's earnings grew barely 1% y/y, while Chevron and Conoco saw profits fall y/y. Strong downstream profits from Exxon and Chevron helped make up the difference, while Conoco, which recently spun off its downstream operations, fared less well.

- Caterpillar missed top- and bottom-line expectations and executives made very mixed comments about business in key US and Chinese markets. The firm cut its FY13 guidance, blaming lower mining demand in an environment of falling commodities prices. However the CEO said this is the first time in years the company is beginning to see stability around the world.

- The sentiment headed into Apple's Q1 report had been very bad for months, so it was no surprise when the firm posted its first quarterly y/y profit decline in over a decade. Investors were not very impressed with Apple's announcement that it would return $100B of its cash to shareholders over the next three years through an increased dividend and share buyback (using borrowed money so it won't have to face a tax penalty from repatriation). Shares had bottomed out from their seven-month slide below $400 just ahead of earnings report, and even with the steep after-hours sell-off on Tuesday, actually gained 2% on the week.

- Shares of Amazon dropped 6% as investors looked past the firm's Q1 headline earnings growth and EPS beat to focus on weaker Q2 guidance. Revenue and income guidance for Q2 was markedly weaker than expected. The firm's gross margin expanded nicely on a y/y basis, however operating margins were narrower both y/y and on a sequential basis.

- Airlines had a turbulent week as the sequester's impact on the FAA snarled traffic across the US, prompting Congress to rapidly pass a special selective withdrawal of the FAA funding cuts. On the earnings front, airline earnings were mixed, but carriers universally benefitted from rock-bottom capacity and lower fuel costs.

- EUR/USD was well contained within recent ranges this week, with the pair gravitating to the lower end of the 1.30 handle. In the wake of the disappointing German PMI and IFO data, ECB members Weidmann, Asmussen, Nowotny, Knot, Bonnici and Constancio widely discussed the pros and cons of more interest rate reductions ahead of next Thursday's policy setting meeting. The Bank of Spain commented that the ECB was tracking economic data with "special attention." Analysts believe that all this commentary clearly suggests that more ECB cuts are on tap if the growth outlook deteriorates further. EUR/USD very briefly touched 3-week lows on Wednesday around 1.2953 but held above 200-day moving average of 1.2936 which now appeared to be formable support.

- Yields on Italian government bonds continued their steady declines as politicians in Rome inched toward forming a new government. On Tuesday, ten-year yields dipped below 4% for the first time since November 2010 after 87-year old President Giorgio Napolitano said he would stay on for another term. Center-left leader Luigi Bersani had failed to gain support for his Presidential candidates and subsequently resigned, turning over the process of forming the new government to lieutenant, Enrico Letta, who began consultations with various senior party officials throughout the week.

- Sterling benefitted from the better-than-expected UK GDP data on Thursday. GBP/USD moved out to four-week highs above the 1.54 handle after the data dropped. EUR/GBP fell 50 pips to test 0.8450. Trade-weighted Sterling hit a 2 month highs. Analysts say the improved GDP data probably took additional QE off the table as an option at the May BoE meeting.

- The yen currency entered the week around recent lows after Japan got the tacit backing of the G20 for its bold policy measures. USD/JPY probed towards 100.00 but fell just 15 pips shy of the key level, which was last broken in May 2009. While the yen has been weakened, the BoJ easing campaign is failing to inspire Japan investors, who sold a net ¥862.6B in foreign bonds last week, for the sixth consecutive week of elevated net sales as Japanese bring money home and pump the Nikkei225 index higher. Dealers continue to watch Japanese life insurance companies and their FY14 funding plans for signs of allocation out of domestic JGB markets and into international bonds.

- In Asia, there were some worries about China on Tuesday after the April HSBC flash PMI data fell to 50.5, less than the 51.5 expected and below the 51.6 reported in March. In addition, the sub-index of new export orders fell below the 50-point level to 48.6 suggesting demand for Chinese exporters remain weak. The yuan rose to a new record high against the dollar on Friday after the PBoC guided the yuan fixing to a surprisingly strong new high for the second consecutive session. Asian markets hit their lows of the week but recovered to trade higher through week's end; conversely the Shanghai Composite closed out the week down 2%. The South Korean economy grew at its fastest pace in two years reporting a preliminary Q1 GDP of 0.9%, higher than the 0.7% expected.