Friday, January 17, 2014

Market Week Wrap-up  Weekly Market UpdateEarnings Season Off to a Weak Start

US equity markets were stuck in neutral for a second consecutive week. Mixed earnings from the big US banks and other corporates provided broader markets with no real catalysts. In Europe, the DAX hit another all-time high on Wednesday as the ECB clarified its positions on bank sovereign bond holdings and capital requirements under the AQR stress tests and Eurozone trade data. The World Bank raised its 2014 global GDP growth forecast to 3.2% from 3.0% prior, the first increase in global GDP projections in three years. On the data front, US December housing starts fell 9.8% y/y following a surge in November. The decline was certainly striking, but analysts like to point out that December's rate was still 2013's third highest rate, in a month of unseasonably cold weather. For the week, the DJIA edged up 0.1%, the S&P500 lost 0.2% and the Nasdaq gained 0.5%.

- December inflation reports out of the US and the eurozone highlighted the growing gap in economic performance between the two regions. In the Eurozone, December annualized CPI dropped to 0.8% from 0.9% in November, while in the US the annualized rate rose to 1.5% from 1.2% in November, and US core CPI was steady at 1.7%. The yield spread between US and German 10-year debt remains pretty steady around 1.0%, with yields on 10-year bund closing out the week around six-week lows at 1.752% compared to a 2.825% yield on the 10-year UST. In a speech on Monday, ECB President Draghi claimed that deflation is not broad based in the euro zone and explained the phenomenon as a consequence of "necessary adjustments" in some regions. ECB governor Weidmann said deflation risks in euro zone were "limited."

- In China, the PBoC has now held off on conducting open market operations for a week and a half. One-week Shibor rates pushed out to two-week highs as investors braced for the release of Q4 and 2013 GDP on Monday, January 20th. The central bank again urged lenders to strengthen liquidity management and set a reasonable pace on lending, even as reports said that the top four state banks accelerated new lending in January, handing over 320 billion yuan in the first 12 days of the month, compared to 270 billion in the same period a year ago.

- The big five US banking giants all reported December-quarter results this week. JPMorgan and Goldman Sachs disclosed pretty tepid results. Profits at JPMorgan were hampered by huge legal fees and the bank's total revenue fell 1% to $24.1 billion. Goldman's profits slumped 19% y/y, pulled down by a 15% decline in revenue from bonds, currencies and commodities trading. In contrast, Morgan Stanley's ongoing shift from trading to wealth management is proceeding very well, with revenue up comfortably y/y. Bank of America and Citigroup had very strong quarters, with BoA's profits up five times over last year and Citi's profits double the year-ago figure. Note that the recent sluggishness in housing markets were reflected in bank metrics: BoA's mortgage originations fell 46% y/y.

- The DJIA was volatile this week as several components reported mixed results. General Electric offered an inline fourth-quarter earnings report, with its FY14 outlook left unchanged. The company's profits were up 20% y/y, attributed mostly to big gains at the firm's newly important oil and gas unit. Intel reported Q4 earnings just shy of consensus, and the first quarter revenue guidance was in line. Intel saw strength in the data center, held PC revenue flat and said it saw back-half growth in tablets. American Express shares shot up four percent on Friday, though its headline EPS and sales were a little below target, it pointed to a healthy rise in card member spending.

- On Friday, UPS cut its FY14 guidance, blaming higher costs incurred in deploying resources to deal with a heavier-than-expected holiday shipping surge, including an "unprecedented" level of last-minute online shopping. Recall that just after Christmas, both Amazon and UPS said they would offer refunds to customers who did not receive orders on time. More than one analyst has connected weak physical retail sales with the surging levels of online buying seen this year.

- Shares of Best Buy fell more than 30% this week after the firm disclosed its holiday season comps fell 0.8% y/y. The firm touted its increase in market share, which came via heavy discounting and lower margins. It expects its Q4 operating margin to be 175 to 185 basis points lower than the same period last year.

- Royal Dutch Shell released a severe profit warning late in the week, advising that Q4 earnings would be around $2.2 billion versus $7.3 billion a year ago and full-year earnings would be down almost 40% y/y. The dire outlook was based on upstream earnings down 45% y/y and downstream earnings down 58% y/y. Shell cited weak refining margins in Asia and Europe, high maintenance expenses and a deteriorating security situation in Nigeria.

- The Detroit Auto Show was under way this week, providing a stage for industry names to talk about the upcoming year. GM offered an FY14 outlook that was more or less flat y/y, with North America industry volumes around 16-16.5M units and global industry sales about +2% to above 85M units. Note also that GM said it would resume paying dividends - set at $0.30/share for a 3.0% yield - for the first time in five years. Major auto parts names American Axle and Magna International offered in-line forecasts for FY14.

- FX trading saw the greenback bounce back from the lows prompted by last week's disappointing US December jobs report. After Friday's big dollar sell-off, Fed speakers, commentators and analysts were virtually unanimous in asserting that the poor December jobs data was a one-off and would not interrupt the Fed's plans to continue tapering QE asset buys. USD/JPY dropped briefly below 102.90 earlier in the week and then crept higher to briefly pop above 104.90, where the pair had been before the jobs report. EUR/USD had reached for 1.3700 after the jobs report last week, but by Friday the pair was looking to test 1.3500. After a brief respite from the jobs data, emerging market currencies were right back to getting hammered as the dollar strengthened.