Friday, February 21, 2014

Market Week Wrap-up  Weekly Market UpdateThe Good, The Bad, and The Frozen

- US equities moved sideways this week in the absence of any catalysts that would help propel indices back above all-time highs. Poor earnings from the likes of Coca-Cola and Walmart, slushy housing data and big misses in the Empire Manufacturing and Philly Fed surveys were unable to drive any serious declines, largely getting a pass because of bad weather. The Fed minutes on Wednesday sparked a bit of a sell-off, but it didn't last. In Asia, the BoJ's latest helicopter dump of fresh funds for Abenomics helped the Nikkei gain 4% on the week. Europe was consumed with the growing internal tensions in the Ukraine, and diplomats frantically hammered out a tentative deal to reduce the powers of President Yanukovych and to set new elections later this year, but not before 100 citizens died in street fighting between protestors and police. For the week, the DJIA fell 0.3%, the S&P500 slipped 0.1%, while the Nasdaq gained 0.5%.
- The FOMC minutes for last month's meeting show Fed officials are wrestling with how to shape forward guidance. Some officials called for revision of the 6.5% unemployment threshold, though they were split on how it should be changed. The Fed has made it abundantly clear that key rates will remain low well after unemployment falls below the 6.5% threshold - although two officials still believe evidence could support a rate hike in the second half of 2014. The Fed continues to expect the economy to "expand at a moderate pace" they supported continued "measured reductions" in QE asset purchases.

- Investors digested a trio of ugly reports on the US housing market this week, however there were few surprises in the data and shares of major homebuilders gained ground. Existing home sales in January hit their lowest level in 18 months, while inventory and share of distressed sales were a bit higher m/m. January housing starts fell 16% y/y and saw their biggest m/m slowdown in years, although permits held up better. The February NAHB housing market index plunged to its lowest level since last May, falling ten points to 46. Commentary on the January and February data concentrated on the outsized impact of the harsh winter weather.

- Energy prices pushed even higher, with natural gas breaking the $6 mark for the first time since 2010. YTD, natgas futures have already gained approximately 50%. With more freezing weather forecasted for next week, gas futures closed above $6 for the last three days of the week. Crude prices are at four-month highs around $103, up roughly 3% on the week. Dollar weakness and turmoil in Libya have both helped goose prices higher, and the weekly API report showed an unexpected drawdown in crude inventories.

- The December quarter earnings season is drawing to a close. Hewlett-Packard's first-quarter earnings topped expectations. The company's PC shipments fell for a seventh straight quarter, although CEO Whitman said the rate of decline is slowing. Sales in the enterprise businesses were flat to down. Walmart offered an uninspiring fourth quarter report. Headline figures met expectations but Q1 and FY15 guidance was well short of consensus. All of the company's sales comps were in the red. Coca-Cola's revenue fell short of consensus expectations and declined nearly 4% y/y, while North America volumes declined 1% y/y in the quarter. Tesla shares motored to new all-time highs after easily beating expectations and setting a target of 35K Model S deliveries in 2014, a 55% increase over 2013.

- Facebook's acquisition of texting app WhatsApp for an almost unimaginable $19B in cash and stock has been a major topic. The deal includes $4 billion in cash, $12 billion in Facebook stock and $3 billion in restricted stock. Analysts suggest that Facebook was interested in acquiring a huge user base while simultaneously neutralizing a rival - similar to the reasoning behind the Instagram deal last year. Over 450 million people use WhatsApp every month and an impressive 70% of those people are active daily.

- Carl Icahn scored yet another victory as global generics name Actavis agreed to acquire Forest Labs in a cash-and-stock deal valued at $25 billion. Icahn has been prodding the company to create value since 2009, and was instrumental in getting current CEO Brent Saunders into the top spot. Note that Actavis reported very strong fourth quarter results on Thursday and reiterated its FY14 guidance.

- In data out on Tuesday, annualized January UK CPI ticked down to +1.9% from +2.0%, marking the first time since 2009 that inflation had fallen below the BoE's 2% medium term target. This comes just a week after the hawkish BoE quarterly inflation report, which saw the bank hold firm on its 7.0% unemployment threshold. Note that later in the week, the very frank BoE hawk Martin Weale said Spring of 2015 would be the most likely time for the bank's first rate increase. After hitting 27-month highs above 1.6800 last Friday, cable moved gradually lower all week, ending on Friday around 1.6650.

- On Tuesday the Bank of Japan refrained from further policy easing in the wake of soft preliminary Q4 GDP data out over the weekend, kept its economic assessment unchanged for the sixth consecutive month, and reiterated its outlook on inflation and domestic economy. The BoJ's concession to weak growth was to double funding for the "Stimulating Bank Lending Facility" and the "Growth-Supporting Funding Facility" programs from ¥3.5T to ¥7.0T and to lengthen the term of the loans offered from the facilities. Preliminary Q4 GDP slumped to a one-year low of +0.3%, below the expected +0.7%. USD/JPY was confined to a pretty narrow range between 101.60 and 102.80.

- China February HSBC flash manufacturing PMI fell to a seven-year low of 48.3, below the expected 49.3. The Lunar New Year holiday week contributed to the lower reading, however even with that qualifier, analysts said the data was still too soft following poor January PMI readings. The value of the Chinese Yuan fell 1.3% against the greenback this week, marking the currency's biggest weekly decline since 2011. Most of the move came on Friday, following the PBoC's decision to set a lower fixing against the dollar for a fourth consecutive session. This was seen as an attempt by the PBoC to squeeze positions in offshore markets, where the yuan trades at a premium to onshore markets (as it is not subject to the daily trading band) and investors are heavily leveraged to the further appreciation of the USD/CNY. Offshore yuan plunged as carry trades unwound.