Friday, July 26, 2013

Market Week Wrap-up  Weekly Market Update: Choppy Corporate Earnings Hold Back Markets

Fri, 26 Jul 2013 16:03 PM EST

- Corporate earnings reports for the June quarter took center stage this week. In the US, equity indices saw choppy trading as investors reacted to a slew of earnings reports. There have been few stand-out positive reports outside of Apple and Facebook, both of which were much better than expected and have bolstered the Nasdaq. On both Tuesday and Wednesday, the S&P500 came within points of crossing above the 1,700 in inter-day trading, but the level appears to provide strong psychological resistance. In Europe, there were a few markedly better economic reports, while US data was pretty much on the back burner. June existing home sales dipped a little lower after two straight months of very strong growth. While the July Richmond Fed Manufacturing survey widely missed expectations, it contrasted sharply with the New York and Philadelphia Fed July manufacturing readings last week. For the week, the DJIA edged up 0.1%, the S&P500 was flat, and the Nasdaq gained 0.7%.

- A few rays of sunshine were seen in European economic data. Preliminary manufacturing PMI data for July showed real improvements: the German PMI data nosed above 50 for its first growth in four months, the euro zone PMI figure hit 50.1 for its first positive growth in two years, while the France reading nearly went positive and hit a 17-month high. In the UK, the advanced Q2 GDP reading expanded to 0.6% from the 0.3% final Q1 figure, for its best rate since early 2011. The Spanish unemployment rate declined for the first time in two years.

- After the back-and-forth on 2013 growth targets last week, Chinese Premier Li drew a line in the sand on GDP by saying the government won't tolerate anything below +7%. Unfortunately, data out this week added to the evidence that the Chinese slowdown is well under way: the July HSBC Flash Manufacturing PMI hit 47.7 for an 11-month low while the employment component hit a 52-month low and the new orders component touched an 11-month low. HSBC wrote that the continuous slowdown in manufacturing is being driven by weaker new orders and faster destocking, which reinforces the need to introduce measures to stabilize growth.

- Caterpillar came close to taking the prize for worst major earnings report of the week. The firm missed top- and bottom-line expectations and cut its FY13 guidance. The company blamed dealers tamping down on new orders in favor of drawing down inventories. Other manufacturing names reported pretty strong June numbers: Ford and Boeing did better than expected on solid y/y growth, while Lockheed and Raytheon looked very good despite ongoing sequester issues. General Motors' net income actually declined on a y/y basis, although the company has managed to staunch the bleeding in Europe.

- Among consumer-facing names, McDonalds rivaled Cat: the fast-food titan missed both top- and bottom-line consensus expectations, comps were unimpressive and the firm complained about "flat to declining informal eating-out markets." Starbucks offered a strong contrast, beating estimates and delivering solid comps. Colgate saw decent revenue increases, however the strong dollar shaved these gains down, forcing the firm to cut its FY13 outlook.

- Apple's report confounded the critics. After weeks of negative press coverage predicting a terrible quarter, the firm topped EPS estimates and delivering much better than expected iPhone shipments. CEO Cook confirmed the widely discussed line of cheaper iPhones for emerging markets are in the pipeline and promised a "busy fall" of product roll-outs. Apple rival Samsung reported net profits below expectations, disclosing it lost some market share to Asian competitors in the smartphone market. Netflix saw solid y/y gains in net income and revenue, but the net streaming additions disappointed many investors after a strong showing in the prior quarter. AT&T saw largely in-line results and its overall net wireless subscriber additions were half the amount seen a year ago.

- Facebook had its best trading session ever on Thursday, rising 25% to $34 following Q2 results. The firm doubled mobile revenue and generated greater than 20% growth in monthly and daily active users in the quarter. Amazon reported a small loss in Q2 and missed both earnings and revenue expectations, and warned it would likely lose money in Q3 as well. Despite the results, Amazon shares rose on Friday, with several analysts raising their price targets, forcing some short covering and driving shares to fresh all-time highs.

- Market participants are looking forward to policy statements from the Fed and the ECB next week. Late in the week, the WSJ's Jon Hilsenrath wrote that the Fed would most likely maintain its $85B/month asset purchase program on track at the meeting on July 30-31st but could revise its forward guidance or policy thresholds. Among the new policy options, Hilsenrath suggested the Fed may match its 2.5% upper bound for inflation with a new lower bound, such as 1.5%. At last month's ECB press conference, ECB President Draghi took the "unprecedented step" of offering forward guidance, saying the ECB expects all rates to stay as they are or lower for an "extended period" of time. Note that in a report this week the IMF wrote that the ECB may need to cut interest rates again to support growth and should consider launching another LTRO for the financial system.

- The euro strengthened steadily this week against the greenback, as EUR/USD closed out Friday at its best levels since mid-June, rising from 1.3130 to 1.3290. The Portuguese political crisis faded from the headlines after President Anbal Cavaco Silva accepted a cabinet reshuffle despite the inability of squabbling parties to agree to his proposed 'national salvation' pact. Meanwhile, Greece met all of the Troika's conditions and received approval for its latest aid payments, although Athens still needs to reckon with a €3.8B funding gap in its 2014 finances. The better European PMI data helped the euro end the week on a strong note.

- USD/JPY hovered around parity for six straight sessions before breaking lower on Friday in the wake of the July Toyko CPI data. Core CPI increased 0.3% y/y, for a two-year high, taking some pressure off of the government and the BoJ to launch additional monetary stimulus. Politicians in Tokyo pointed to the data as evidence that Abenomics is working, while analysts suggested higher energy costs and not Abe's policies were responsible for the CPI rise. Last weekend, Japan's ruling coalition was victorious in the upper house elections, giving the LDP and its coalition partner Komeito a 130 seat majority in the 242-seat Senate, and solidifying Abe's political power base.