Friday, November 1, 2013

Market Week Wrap-up  Weekly Market UpdateUndead Taper Stalks Zombie Markets

- More FOMC (mis)communications set the tone for global market sentiment this week. Heading into the Fed's two-day October meeting this week, consensus was for an ultra-dovish statement, however the FOMC offered more hawkishness than expected, leaving many scratching their heads and wondering just how far out the taper actually is. Bond yields and the dollar gained steadily. Earnings season marched on, and approximately 75% of the S&P500 have already disclosed quarterly results. The US Treasury's semiannual currency report again declined to name China as currency manipulator, instead shifting more focus to Germany and its large current account surplus, which the US said was contributing to deflationary pressure in the rest of the euro zone. The October US ADP jobs report missed expectations, preparing investors for what could be a spooky October jobs report next Friday. For the week, the DJIA gained 0.3%, the S&P500 edged up 0.1% and the Nasdaq slipped 0.5%.

In its policy decision this week, the FOMC announced again that it is in a wait and see mode and QE tapering remains on hold. It also acknowledge the slowing housing recovery, dropping language that the "housing sector has been strengthening." Some analysts giving the policy statement a closer read came away with a whiff of hawkishness, noting the removal of reference to "tightening financial conditions," and no additional cautionary statements about the fiscal uncertainty in Washington. This comes after many Fed governors justified holding off on tapering in September on concerns about the anticipated budget battle in Congress.

- After a patch of softness, the dollar strengthened notably this week. In Europe, weak data helped drag down the euro, and then the slightly more hawkish FOMC statement piled on more pressure. EUR/USD was probing above 1.3800 late last week and early on Monday, but it was all down-hill after that, with support at 1.3700 broken rapidly. The November ECB meeting is next week and the soft European data prompted analysts to reassess their expectations for possible action. RBS, UBS and BoA are now forecasting the ECB will cut its main refi rate by 25 basis points next week, while BNP, JPM and Scotia bank moved up rate cut expectations to December. The consensus view is that the deposit rate will be held steady and not dropped into negative territory.

- A broad range of commodities dropped to multi-month lows this week, thanks to higher inventories, a stronger dollar and speculation about the Fed taper schedule. WTI crude was as high as $99 on Monday session, but the contract dropped as low as $94.70 during Friday's session. DoE weekly reports over the month of October showed crude inventories have remained elevated and dollar strength has compounded the downward pressure on crude prices. Spot gold touched four-week highs last week around $1,353, but pulled back on Thursday and Friday to below $1,315.

- A raft of global manufacturing data for the month of October out this week indicated that the industrial segment of the global economy may be healthier than expected. China's manufacturing PMI rose slightly to 51.4, an 18-month high, while the China HSBC/Markit PMI hit a seven-month high. Japan's Market/JMMA manufacturing PMI was 54.2, its highest level since May 2010. The HSBC/Markit PMI for South Korea showed factory activity expanded for the first time in five months. Taiwan's PMI reached its highest level since March 2012. Europe's PMI numbers moved back into expansion over the summer, and the euro zone advanced manufacturing PMI for October sustained modest growth. The UK figure edged a bit lower to 56. In the US, the ISM manufacturing survey rose slightly from September's 56.2 reading, with growth seen in all components except employment. The regional Chicago PMI spiked to 65.9, its highest level since spring 2011, although the Dallas Fed's manufacturing activity index fell to 3.6 from September's 12.8 reading.

- The October US ADP employment report missed expectations and bodes ill for nonfarm payrolls next Friday. The September number was revised down to 145K from 166K. The last three ADP reports have overstated the initial NFP number by an average of 34K per month. ADP warned the government shutdown and debt limit game hurt the already softening job market in October, and any further weakening would trigger rising unemployment.

- US automakers Ford, General Motors and Chrysler all saw double-digit y/y gains in October auto sales, marking a sharp reversal from September's very weak results. Ford's sales were a little shy of consensus expectations. Auto executives said the government shutdown slowed sales in the early part of the month, but they did not expect any lasting impact. Both Toyota and Nissan missed expectations on less impressive growth. GM reported solid earnings for Q3, with good gains in North America helping to offset weakness in the international business.

- The US oil majors disclosed mixed earnings. Earnings out of ConocoPhillips topped expectations while Exxon's crude output rose in Q3 for the first time in more than two years. Chevron whiffed on the top and bottom line in its third quarter, missing expectations on weaker y/y upstream and downstream earnings. All three saw notably weaker refining margins due to increased industry capacity and plenty of supply. Valero widely beat very weak expectations, but it is worth noting that its Q3 profit was down more than 50% on margin compression.

- Apple lost ground on the week despite decent Q4 earnings and long lines for the sales launch of its new iPad Air. In Q4, shipments of iPhones exceeded expectations, and several analysts raised their price targets on the stock after the report. Despite beating top- and bottom-line expectations and offering Q1 guidance that was unusually robust, investors appear to be upset by the firm's margin compression (to 37% from 40% y/y), though Apple explained that this was attributable to increased deferrals related to its decision to give away its productivity software suite with new device purchases as well as FX headwinds.

- Shares of Facebook were volatile this week before and after earnings. The firm's headline numbers and both its monthly and daily user totals looked pretty good, with the latter items still registering double-digit growth. However, investors focused on negative commentary on the conference call, as management finally admitted that it is seeing decline in usage among younger teens and warned that it would not boost the percentage of ads in the newsfeed. Social media names Yelp and LinkedIn both lost ground on mixed quarterly reports.

- On Thursday, the BOJ voted unanimously to maintain the increase in its monetary base at an annual pace of 60-70T yen, its standard policy setting, as widely expected. Using its most optimistic language in more than two years, the BoJ upgraded its assessment of the economy, saying it is starting to "recover moderately" and signaling that no additional easing steps are in the cards in the near term.

- In China, the PBoC resumed open market operations due to rising money market rates, conducting its first liquidity injections in two weeks. Despite the initial rush in risk appetite, the repo rate and Shibor hit multi-week highs after the first operation, only declining after the second attempt, for total injections of CNY29B in the week.