Friday, October 25, 2013

Market Week Wrap-up  Weekly Market UpdateMarkets Back to the New Abnormal

Fri, 25 Oct 2013 16:07 PM EST

- With political noise out of the way, investors got back to focusing on fundamentals this week. Economic data delayed by the fiscal battle in Washington, DC was released, most notably the September jobs report. The weak numbers reinforced the sense that there is little chance that the Fed will begin tapering QE at either its October or December meetings. As has been the case over and over this year, 'bad news' was taken for 'good news,' and market closed higher after the weak jobs data. In Europe, advanced October manufacturing PMI readings were lackluster - France's stayed in contraction for the 20th straight month - although the first reading of the UK Q3 GDP was pretty good, with the y/y figure at +1.5%, the best growth rate since early 2010. Earnings were a mixed bag, while the dollar continued to weaken. Nevertheless, the S&P500 pushed out to fresh all-time highs. For the week, the DJIA gained 1.1%, the S&P500 rose 0.9% and the Nasdaq added 0.7%.

- On Tuesday, the Labor Department released the delayed September jobs report. Non-farm payrolls were +148K, more than 30K below expectations, but largely offset by an upward revision in the August payroll figures. Unemployment fell to 7.2%, the lowest level since November 2008. Traders clearly discounted the data, waiting instead for the October report, which will include the full impact of the US fall fiscal crisis. The consensus view is that the soft jobs data assures that the Fed will not begin the taper at its October 29-30th policy meeting, and a growing number of analysts now expect the taper to be put off until the Spring of 2014. Note that the yield on the 10-year UST bottomed out at around 2.5% this week.

- The Shanghai Composite fell 2.8% this week on some uncertainty in money markets. The PBoC refrained from conducting open market operations during the week, and Chinese money market rates rose all week long. Overnight Shibor had pushed out to its highest levels since June by week's end. Additionally, the PBoC took more steps toward interest rate liberalization by announcing that it would allow banks to set a prime lending rate while phasing out its own policy lending rate. Data showed that Chinese new home prices continued to soar in September, with average house prices in 70 major cities up 9.1% year-on-year, making it the 9th consecutive month of increases.

- Shares of tech darlings Amazon and Netflix saw sizable gains on very good results. Netflix added nearly 1.3M new US subscribers, pushing its total US subscriber base higher than HBO's. Strong revenue at Amazon set it up for another record holiday season and a return to profitability in Q4. Microsoft also had solid results, and said that consumer PC Demand was better than anticipated. Not all the tech earnings were rosy: Broadcom, Altera, and Juniper Networks all saw steep losses after offering disappointing Q4 guidance.

- Caterpillar took a step down this week after reporting poor Q3 results and cutting its FY13 guidance yet again. Most of the softness comes from Cat's mining business, where revenue is expected to fall 40% y/y in FY13 thanks to slowing growth in China. Defense names General Dynamics, Northrop Grumman, and Raytheon offered very good results and seem to be thriving despite the sequester cuts. Boeing's adjusted earnings topped expectations for the eighth straight quarter. Ford saw record Q3 profits and raised its total FY13 outlook to be higher y/y.

- UPS had a firmly in-line third quarter. Executive said some retailers were cautious about the holiday season outlook but expect to see more online orders, and indicated UPS's daily volumes would rise about 8% y/y due to fewer shopping days since Black Friday comes late in November this year. Delta soared on good growth while United couldn't get off the ground. UAL's CEO said management was "not satisfied with our financial performance."

- In the materials space, 3M was flat despite hiking FY guidance, while DuPont shares gained a few points on modest outperformance. Dow Chemical was a bomb, with shares down 6% on the week after the company said it had raised its asset divestiture target, including most of its performance materials business, which it blamed for a weak quarter. Mining giant Freeport crushed expectations.

- Dollar weakness remained a theme in FX markets. The euro made another big move up after the weak US jobs report, with EUR/USD pushing out to two-year highs in the low 1.3800 handle from 1.3670 ahead of the data. USD/JPY moved back into the 97 handle after the jobs data and by Friday had briefly dipped below 96, but remained above its US fiscal food fight low of 96.60.

- In Japan, the Abe Administration was happy to see September CPI break out to +1.1%, ahead of expectations. However, the main reason for the surprise was the rapid increase in food prices - Core CPI, ex food inflation, remained subdued, though it posted its first non-negative number since 2008. The September trade numbers indicated another big trade deficit, the 15th in a row. Shipments from China, Japan's largest trade partner, rose by 30.9% to a record high of ¥1.68T