Friday, February 7, 2014

Market Week Wrap-up  Weekly Market UpdateThe Correction Corrects

- The week began with a massive sell-off, as the DJIA and S&P500 fell more than 2% a piece on Monday and closed at their lows, while the DJIA also fell below its 200-day moving average for the first time since October. The declines came after a bad slide on the prior Friday and were exacerbated by another discouraging Chinese PMI reading. On Tuesday, the Nikkei saw a 4% slump, but global markets bottomed out mid-week and then recouped all of their losses. In Europe, healthy-looking PMI data helped limit losses, while the mixed US jobs report did not damage the bounce-back on Friday. Emerging market currencies stabilized this week following the recent round of rate hikes. For the week, the DJIA rose 0.6%, the S&P500 gained 0.8% and the Nasdaq added 0.5%.

- The January US non-farm payrolls figure widely missed expectations and the December figure was revised higher by a mere 1K, making for the weakest two-month period of job growth in three years. However, investors are looking past this to find some pretty good news in the numbers. The lack of upward revisions in December data was still blamed on harsh weather, and the November payroll gains were revised higher again to 274K from 241K. More significantly, unemployment rate fell again to 6.6% while the labor force participation rate edged up to 63%, and employment measured by the household survey increased by 616K, complemented by a huge decline in part-time employment.

- Janet Yellen was officially sworn in as the new Fed chairman this week. Nearly everyone expects a pretty smooth transition, with Yellen very unlikely to make any changes to the course charted by helicopter Ben. She will have to deal with policy contradictions now that unemployment is nearly at the Fed's 6.5% threshold while job growth remains anemic. At the December meeting, the Fed extended its forward guidance by stressing that low rates will likely remain appropriate "well past" reaching the 6.5% threshold, however market rates are still creeping higher. Next week will see Yellen's first big policy statement, during Congressional testimony on the economic outlook and monetary policy. Several Fed officials this week, both hawks and doves, affirmed that tapering was still on track and that it would take a significant change in the data to force them the reconsider it.

- Despite the week-long Lunar New Year holiday on the mainland, China released the official PMI figures for the month of January on Monday. Much like the disappointing HSBC final PMI readings, the government figures described more deterioration with manufacturing PMI falling to 50.5, a six-month low, and non-manufacturing falling to 53.4, a 23-month low. Perhaps most notable among components, the employment reading in the manufacturing sector fell to an 11-month low. Meanwhile, the China Commence Ministry reported 2014 Lunar New Year "golden week" retail sales that were up a mere +13.3% y/y, the slowest pace of growth on record for the key holiday retail period.

- Shares of Twitter were down as much as 24% on Wednesday after the firm released its first quarterly report as a publically traded company. Twitter's headline EPS and revenue numbers were much better than expected, but traders and analysts insist that slowing user growth and weaker engagement trends seen in metrics bode ill for the firm. In addition, the first round of lock-up expirations arrives on February 15th, followed by another round on May 7th. Cult tech names Pandora and LinkedIn saw losses as well in the wake of problematic quarterly results. Both firms disclosed decent fourth-quarter results but offered guidance that widely missed consensus estimates.

- Time Warner reported strong fourth-quarter results. Analysts focused on the company's decision to break out separate HBO revenue figures for the first time. HBO took in $1.26B compared to $1.19B y/y, citing the consolidation of Asia and certain European operations for the 4% gain. This compares to Netflix's $1.18B in revenue in the quarter.

- On Thursday, Apple disclosed that it has repurchased $14B in common stock over the last two weeks, amounting to 3.1% of its market cap. Over the last 12 months, the company said it has bought back $40B in stock, an all-time record for Apple or any company. CEO Cook said that the company had been surprised by the 8% decline on Jan 28th that came after reporting quarterly results. He also pledged to return $100B to shareholders by the end of 2015.

- Shares of Ford and General Motors saw losses early in the week after reporting weak January auto sales. Ford's January sales skidded 7% y/y while GM's slid 12% y/y. Both firms blamed the terrible winter weather in most of the country throughout the month. A Ford sales executive said that in areas where the weather was good, such as in the West, sales were up. Chrysler's January sales were up 8%, with gains credited to strong demand for Jeep Cherokee. In its quarterly report on Thursday, GM disclosed net income up a weak 2% and adjusted EPS well below expectations, but the company insisted its calendar year outlook remains unchanged.

- Microsoft officially named Satya Nadella as its new CEO and said Bill Gates will step down as chairman to become a technology advisor. When Steve Ballmer stepped down there were widespread reports that Microsoft needed a fresh face from outside the firm to shake things up, but Nadella has been with the company for 22 years, most recently heading up the cloud computing division.

- According to reports, last week saw massive reallocations among funds. A Citigroup analyst wrote that a record amount came out of equity funds and flowed into bond funds, and over 95% of the flows were in and out of ETFs. In the week ended Feb 5th, there was a $14.8 billion inflow into bond funds and a $28.3 billion outflow from equity funds. In addition, this was the 15th week of outflows from emerging market equity funds, while China funds ended a six-week run of inflows with a small outflow.

- In the summer of 2012, ECB President Draghi said the ECB would do whatever it takes to save the euro, in a move that marked the beginning of the end of the euro crisis. Among his biggest weapons standing behind that promise was the OMT bond buying program. In a long awaited decision out this week, Germany's highest court declined to rule on the program's constitutionality and deferred to the EU's highest court. In its decision, the German court said there were substantial reasons to believe that the OMT program exceeds ECB mandates but did not rule it was unconstitutional.

- There were no big surprises in either the BOE or ECB rate decisions. President Draghi took a less dovish tone in the post-rate decision press conference than some had expected, hammering home the point that the ECB is in no rush to cut rates. Draghi squashed speculation of any imminent halt to the SMP sterilization process and reiterated there was no deflation in the eurozone. EUR/USD climbed over 100 pips as the press conference progressed, putting the pair right back above 1.3600. The BoE offered no comments even as ILO unemployment dropped to just above the bank's 7% forward guidance threshold. Sterling fell to a two-week low around 1.6370 after the miss in the January UK PMI Manufacturing data.

- Following the Nikkei close at a 4-month low early in the week some analysts noted that BOJ would likely buy ETFs to keep the 225 Index above 14,000. The USD/JPY moved off its 2-month low of 100.73 to regain a footing above 101.30.

- In its decision this week, Australia's RBA abandoned easing bias and propelled the AUD to three-week highs as participants scrambled in a short covering rally. The RBA dropped language referring to AUD as "uncomfortably strong." The RBA's Edwards attempted to curb the post-decision strengthening trend by asserting that the AUD's decline was not necessarily over. Recall that the AUD/USD 0.90 handle has been a verbal intervention point in the past.