Friday, October 18, 2013

Market Week Wrap-up  Weekly Market UpdateStocks Charge Higher After US Debt Stalemate Ends with a Whimper

- The United State Congress managed not to let the country default on its debts this week, passing a bill to reopen the government and to raise the debt ceiling for a few months. After two weeks of a government shutdown, the Congressional bluster quieted and a backroom deal was reached just ahead of the Treasury's October 17th debt ceiling deadline. All in all, the impact of the shutdown is expected to be fleeting, though S&P suggests it cost the United States $24 billion in economic activity, and will shave about 0.6% off of Q4 GDP, not to mention sacrificing a significant but intangible amount of the country's international standing. In response to Washington's brinkmanship, Fitch put its AAA US rating on watch negative and Chinese agency Dagong cut its US rating to A- from A, while investor Warren Buffett labeled the debt limit a "political weapon of mass destruction." The GOP and the Congress garnered record-low approval ratings. Meanwhile earnings season rolled on, with 75% of the S&P500 companies that reported this week meeting or beating consensus expectations. Very weak showings at Goldman Sachs and IBM hampered the DJIA, while the S&P500 closed out the week at new all-time highs and the Nasdaq pushed to within 100 points of the 4000 handle. For the week, the DJIA gained 1%, the S&P500 rose 2.4% and the Nasdaq surged 3.2%.

- Budget negotiations continued all through the weekend in the Senate following two weeks of squabbling in the House. Senators from both sides of the aisle stepped in to help outline a consensus solution, and by Tuesday Majority Leader Reid and Minority Leader McConnell were reassuring the country that they were very close to a deal, which was passed by the Senate (81 to 18, with more than half of GOP members voting yes) and then the House (285 to 144, with 87 Republicans voting yes) on Wednesday. The agreement funds the government through January 15th and extends debt limit through Feb 7th, with the Treasury granted the authority to use extraordinary measures to push the debt limit through March. After the deal, McConnell pledged that he would not allow another shutdown or debt ceiling gambit aimed at defunding Obamacare. The deal also requires the creation of a bipartisan budget panel to facilitate negotiations on a longer-term debt reduction agreement. Senate Budget Committee Chairwoman Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) were tapped to lead the budget panel, which has been charged to reach a budget reconciliation by Dec 13 (a Friday). Most Washington insiders now expect that any agreement reached will likely be a modest reallocation of the automatic cuts imposed by the sequester rather than the elusive 'grand bargain.'

- Fed hawks Fisher and George offered contrasting opinions about the potential for tapering QE. Fisher said he does not expect QE bond buying to be reduced at the October FOMC meeting, warning that markets were too delicate at the moment to begin the taper. Fisher also said that personally he would not consider tapering a good idea in October due to the current fiscal standoff. Meanwhile George said the Fed should begin tapering QE now, while also cautioning that the time is not yet right for tightening rate policy.

- There were no surprises in most of China's September economic data, with the exception of trade numbers. Third quarter GDP growth was in line at 7.8%, supported by strong domestic and foreign demand. The GDP data continues to place China on path to achieve the government annual growth forecast of 7.5%, although there are still uncertainties about whether the current recovery is sustainable. September industrial production and retail sales met expectations. The China trade balance fell to a six-month low, with exports negative for the first time in three months. Imports were in line with expectations at +7.4%.

- WTI crude continued its extended its six-week decline, closing out the week just above the $100 handle. In Geneva, the P5+1 group of western powers plus Russia concluded a very positive two-day round of talks with Iran, and agreed to meet again on November 7-8th in order to keep talking. Newly elected Iranian President Rohani continued to make conciliatory statements, and the majors powers were cautiously optimistic about the change in tone, but cautioned that they were a long way from a breakthrough.

- The threat of the Fed taper during the last quarter took a bite out of Goldman Sachs, whose Q3 profits fell 2% and revenues dived 20%. CEO Blankfein said the results reflected "a period of slow client activity." Bank of America posting solid profits although revenue was down slightly y/y and loan growth was nearly flat. Citigroup's North America retail banking revenues fell 35% thanks to a big drop in mortgage origination revenue and fixed income revenue fell 26% y/y. Morgan Stanley reported very strong Q3 results, with earnings and revenue topping expectations on very strong growth in trading revenues at the firm. Note that Morgan Stanley's gains in equity trading revenue more than offset most of the decline in fixed-income, FX and commodity trading, where revenue fell 44%.

- IBM's revenue was severely compromised in certain areas: hardware revenues were down 17% y/y, and revenue in BRICs areas were down 15%, both largely due to slow China hardware sales. Management said execution issues and a pause related to China's government developing a new economic plan due in November caused Chinese hardware sales to plummet 40% in the quarter. Both Google and Yahoo saw double-digit gains in paid clicks, even as revenue per click for both declined. Shares of Google soared above $1,000 as the firm emphasized strong metrics, while Yahoo offered poor Q4 guidance, keeping shares in the red on the week. Intel beat expectations in its Q3, but delayed launching its 14nm 'Broadwell' chip production, hampering the stock.

- Earnings at Johnson & Johnson, Verizon, and American Express were pretty solid. J&J beat estimates and raised its FY13 guidance. Verizon's postpaid phone service and the FiOS internet business continue to see subscriber growth and overall revenue grew modestly. American Express saw strong gains in both US and international card services revenue. All indications are that customers continue to expand card spending at a steady rate.

- The dollar remained weak against the euro even after the end of the debt ceiling standoff. EUR/USD spiked up to the 1.3700 level late in the week, testing the January highs. There was plenty of snarky commentary out of the usual sources questioning the reserve currency status of the dollar, aiding the euro, the dollar's only realistic reserve currency alternative. ECB officials continue to soft-peddle the stability of the euro, however some admit they need to begin factoring in FX issue to the ECB inflation outlook.