Friday, July 19, 2013

Market Week Wrap-up  Weekly Market Update: Equities Melt Higher in Summer Heatwave

- Global equity markets marched higher this week as relatively decent corporate earnings and economic data spurred risk appetite. There had been fears last week about China's Q2 GDP reading, although on Monday the figure came in at an annualized rate of 7.5%, precisely in line with Beijing's targeted pace. In his semi-annual testimony before Congress this week, Fed Chairman Bernanke reiterated his preferred timeline for winding down QE, with buys slowing later this year and ended by mid-2014. Both the July Empire Manufacturing and the Philadelphia Fed indices topped their excellent June results and widely outperformed expectations. Weekly initial jobless claims dropped to a nearly five-year low. Analysts note that the numbers are not seeing the usual bump higher from the auto industry's annual summer shutdowns for retooling thanks to sustained demand for cars. Government crises continue to fester in Italy, Portugal, and Greece, however markets seem to be ignoring them for the time being. Oil prices continued to rise on signs of economic recovery and on technical factors, helping erase the spread between Nymex and Brent crude futures for the first time in nearly three years. For the week the DJIA gained 0.5% and the S&P500 tacked on 0.7% for fresh all-time highs, while the Nasdaq lost 0.3% on poor tech sector earnings.

- Bernanke's Congressional testimony offered very little that had not already been heard from the over the last four weeks. Besides reiterating his preferred timetable for the QE wind down, he addressed recent criticism about the Fed's new commitments to openness. Bernanke asserted that if there were no communication about tapering, there would be a risk of possible dislocation in the markets. He also asserted that market participants are beginning to understand the Fed's message.

- China's Q2 GDP and June economic data disappointed the pessimists on Monday. Going into the release, official Chinese press backtracked on reports from the prior week that Finance Minister Lou Jiwei had said growth in the 6.5-7.0% range would be acceptable. Sources insisted the quote had been "mistranslated" and clarified that Lou had actually stated the government is committed to its 7.5% 2013 GDP target. June industrial production and retails sales also met expectations. Outside of China, critical voices continue to discuss the potential for massive dislocations from slowing Chinese growth and a potential crisis from staggering debt levels. At the Delivering Alpha Conference, veteran China skeptic Jim Chanos discloses he is short Caterpillar because of its strong reliance on Chinese markets and the end of the commodities supercycle that has been anchored by Chinese demand.

- Quarterly results from Citigroup and Bank of America both followed in the footsteps of Wells Fargo and JPMorgan with solid numbers. Citi said no strategic changes would be needed to meet the new stricter US capital ratio requirements, disclosing that it had a ratio over 5% in June. Goldman Sachs widely topped expectations powered by another strong showing in the debt capital markets, edging out the prior quarter's record underwriting revenues by a hair. Morgan Stanley's quarterly numbers narrowly topped expectations, but its big gains in securities and trading revenue really impressed investors. Asset managers Blackstone, BlackRock, and State Street widely outperformed expectations in a quarter of very strong market gains.

- Big tech had a terrible second quarter. Microsoft, Intel and AMD all offered highly problematic results, with earnings at the firms pressured by the flagging global PC market. Citigroup called it Microsoft's "sloppiest quarter in memory." Google's numbers also fell short thanks mostly to a second consecutive quarter of contraction in the firm's revenue per click. On the other hand, Yahoo, on the one year anniversary of CEO Marissa Mayer, topped expectations and saw its shares soar. IBM also reported strong results and hiked its FY13 outlook.

- Industrial names did quite well: General Electric, Ingersoll-Rand, and Honeywell all met or modestly exceeded consensus views. Note however that there have been few big hikes in FY13 guidance in the sector. One exception is Whirlpool, which hiked its FY guidance citing continued strength in housing. Investors were pleased with General Electric's results, but management cautioned it is not counting on the economic environment to improve and is planning for slower growth.

- There was more drama in the long-running battle between Michael Dell and Carl Icahn for control of troubled PC firm Dell this week. No vote was taken on Tuesday at the special shareholders meeting intended to ratify the $24.4 billion offer from Silver Lake/Dell; instead the meeting was abruptly adjourned to provide more time to solicit proxies from shareholders. The special meeting will reconvene on July 24.

- The greenback traded in a very narrow range this week against the euro and the yen. Besides a brief stab below 1.3000 on Monday the EUR/USD was locked between 1.3070 and 1.3170. USD/JPY pivoted around the 100 handle ahead of this weekend's Upper House elections in Japan that are expected to solidify PM Abe's powerbase. The LDP is widely expected to secure a heavy majority, allowing it to deliver more reforms. The long three-month slide in the Aussie seems to have bottomed out in the wake of the Chinese GDP data. AUD/USD has slid from 1.0500 in mid-April to approximately 0.9000 ahead of the Chinese data. This week the pair popped back up to around 0.9200.