Friday, August 2, 2013

Market Week Wrap-up  Weekly Market Update: Mixed Data and Accommodative Monetary Policy Keeps Markets On Trend

- Global equity market sustained a solidly risk-on tone this week as investors coped with a heavy schedule of data, central bank decisions and earnings. The US Q2 GDP reading was better than expected even as July payrolls were weaker, while other US data was very good. China's official PMI reading came in better than expected, fighting off forecasts of a contraction. In Europe, final July PMI readings were a bit better than preliminary readings, while some other positive data provided more glimmers of hope that a bottom could be found under the euro crisis. ECB President Draghi reiterated his new "extended period" pledge as rates were left unchanged, while the Fed tinkered with the language of the statement - slightly downgrading its outlook on the US to "modest" economic expansion from "moderate". The Fed also acknowledged concerns about low inflation, allowing Governor Bullard to withdraw his dissent. The US earnings season is about two thirds complete, and some analysts are complaining about tepid earnings growth and very low revenue growth seen in corporate numbers. For the week, the DJIA rose 0.6%, the S&P500 gained 1.1% and the Nasdaq added 2.1%.

- The June US job reports underperformed expectations. The +162K NFP print missed expectations of +185K, however equity markets took the data in stride. Analysts highlighted that most of the job gains were concentrated in the low-paying retail and service sector. Both hourly wages and the average work week contracted, while the June NFPs were revised lower from +195K to +188K. Nevertheless, analysts suggested it would likely require another big payrolls miss to change the trajectory of Fed tapering plans. Former FOMC dissenter Bullard commented that the jobs data was "a little bit softer than expected but still consistent with a modestly improving economy we have seen in recent data."

- The first reading of Q2 US GDP at +1.7% was better than expected, although still lags below the +2.0% level that would likely provoke a self-sustaining recovery. Nonresidential investment, imports and exports were all much improved over final Q1 levels, although analysts said the decline in the PCE measure to +1.8% from final Q1 levels of +2.3% is not a very good sign. The July ISM manufacturing index topped expectations and hit its highest level since April 2011.

- Oil majors Exxon, Chevron, BP, and Shell all reported pretty terrible Q2 results. All four firms saw lower profits and production over last year and blamed soft oil prices for their terrible performance, plus a grab-bag of other excuses, including maintenance downtime and asset divestitures. Exxon's EPS missed expectations in its Q2 and reported its lowest profit in more than three years. Contrast these results with Conoco, which crushed earnings expectations on another incremental production increase and a raised FY production forecast.

- Shares of Facebook surpassed their initial offering price of $38 on Wednesday morning, a key milestone for the firm around 14 months after its deeply flawed IPO. The firm's shares have been on a tear since its excellent Q2 report, and press reports this week suggested Facebook would start further expand its growing advertising business by offering 15-second television-style spots in user news feeds.

- Major automakers reported another decent month of US sales in July. GM, Ford, Chrysler and Toyota saw double-digit percentage gains, with GM and Toyota sales up more than 16% y/y, though a bit below expectations. GM and Ford saw strong gains in truck sales. GM said its full-size pickup sales were up 44 percent, the best July figure since 2007. In the China market, Toyota reported July sales down 3.5%.

- Activist investor Bill Ackman has disclosed a 9.8%, $2.2 billion stake in Air Products, helping shares of APD trade up 3%. The company said it would "thoroughly review constructive input from shareholders" and noted that it had not yet been contacted by Ackman. Note that Herbalife, Ackman's big short position,hit one-year highs following a solid earnings report on Tuesday.

- The world's largest potash producer, Russian firm Uralkali, upended the industry by abandoning limits on production after it froze cooperation with major supplier Belarus. The decision sent shares of leading global potash producers down by 20-30% as investors speculated a flood of supplies will undercut prices. Note that the industry had run as an informal cartel that supported higher potash prices over shipped volumes.

- On the M&A front, the story of the week was Omnicom and Publicis Groupe agreeing to create the world's largest advertising firm in a merger of equals valued at slightly more than $35 billion. Analysts suggested the deal was an effort to restore the balance of power between traditional advertising firms and their online counterparts like Google. Perrigo agreed to buy Irish firm Elan for $8.6 billion, ending bitter takeover battle in which Elan rejected three lower bids from Royalty Pharma amid injunctions, court hearings and a war of words. Saks Fifth Avenue agreed to be acquired by Lord & Taylor owner Hudson's Bay Company for $16/share in cash, in a total deal valued at $2.9 billion.

- Michael Dell and Silver Lake have come very close to clinching their buyout deal for Dell after boosting their offer to at least $13.88 (and likely as much as $13.96) by offering to pay shareholders additional dividends after the deal closes. In exchange, the board will alter the voting rules to favor their deal, leaving Icahn out in the cold at the new special meeting, scheduled for September 12th.

- There were no surprises in either the BOE or ECB rate decisions. With some doubting the ECB's newly minted forward guidance ("key rates to remain at current level or lower for an extended period of time"), ECB President Draghi warned that there is no implicit deadline for the end of the "extended period" and that current market expectations for interest rate hikes in money markets were unwarranted. So far the ECB is struggling only slightly less than the Fed to lower expectations built into the front end of their curves. EUR/USD saw a 61.8% retracement of its 2013 range (1.3713-1.2746) on touching 1.3345 following the Fed statement on Wednesday. After dropping to around 1.3200 ahead of the US jobs report, it rose to 1.3280 on the disappointing payrolls.

- USD/JPY began the week at one-month lows below 98. Decisions regarding the timing and amount of consumption tax increase were a big catalyst, with PM Abe reported to have hired a team to evaluate a number of options to perhaps put off implementation of a 10% hike until 2015 (up from the current 5% consumption tax). On Thursday and Friday, USD/JPY marched right back towards 100, but fell short after the US payrolls report.

- AUD/USD weakness followed a double whammy from bad data down under. June building approvals showed an unexpectedly deep contraction and RBA Governor Stevens hinted at further easing was in the pipeline. The pair broke below the 0.90 handle for the first time since Sept 2010.