Friday, February 28, 2014

Market Week Wrap-up  Weekly Market UpdateMarkets Shrug Off Frigid Data and Unraveling Ukraine

Stocks moved sideways early in the week as they consolidated before testing all-time highs. The S&P500 made three runs up to all-time intraday highs on the first three days of the week but closed lower, and finally closed at all-time highs of 1854 on Thursday. The debate on whether or not US growth is flagging rages on: Fourth-quarter US GDP was revised lower, while January durable goods orders were not too bad, with the non-defense, non-transport figures defying expectations for a decline to rise slightly. Retailers offered dismal quarterly numbers but their stocks saw solid gains as traders waxed optimistic about the possibility of strong spring sales (in defiance of generally poor guidance numbers). The events in Ukraine have provided a very dramatic backdrop to trading, culminating with a fresh crisis as Russia appears to be working hard to hold onto Crimea. After peaking around $5.20, the hot air came out of natural gas futures and the contract exited the week around $4.60, in part due to the front month contract roll-over. Meanwhile crude has been rock solid in the $102 handle. The Friday afternoon equity selloff was blamed on month-end pension rebalancing and another flare up in Crimea. For the week, the DJIA rose 1.4%, the S&P500 gained 1.3%, while the Nasdaq added 1%.

In an ironic twist, Fed Chair Yellen talked on Thursday about the economic impact of severe winter weather during Senate testimony that had been delayed by severe winter weather. Yellen said it was as yet unclear to what degree the weather has disrupted the economy but was quite precise on the drag imposed by Congress's fiscal policies, which she said have subtracted 1.5% from growth. Yellen also made it pretty clear that the 6.5% unemployment threshold has been de-emphasized as a key threshold for the economy, but was vague on the indicators the FOMC would be considering moving forward. While other Fed speakers offered supportive commentary that left little doubt that the taper would continue unchanged, there was more uncertainty regarding on how to untangle communications challenges on forward guidance as the Fed considers shifting back to more qualitative guidance.

- On Friday, Fourth-quarter US GDP was revised lower in the second reading to +2.4% from the +3.2% advance reading published a month ago. Analysts see weak consumer spending in the final quarter of 2013 behind the revision lower; the personal consumption component was revised down to +2.6% from +3.3%. After the data, Fed Governor Bullard said the outlook remains pretty favorable for 2014 even if GDP was revised lower, with second half of 2013 GDP still around +3%.

- Just weeks after the FCC's 'net neutrality' rules were struck down, Netflix agreed to pay Comcast for a direct connection to its internet service customers. The terms of the deal were not disclosed, but it appears that Comcast will connect directly with Netflix - which will mean that CDNs like Level 3 and Limelight Networks will no longer be getting the same fees from Netflix. Verizon said it was working on a very similar deal with Netflix, while there were rumors AT&T has already reached a deal.

- The 2014 Mobile World Congress 2014 took place in Barcelona this week. Nokia unveiled an Android-based smartphone priced at $129 and also unveiled another bare bones smartphone that sells for $67. Ford dropped Microsoft in exchange for BlackBerry to run its Sync in-car communications and entertainment system. Deutsche Telekom said it was developing a secure voice and text app in the wake of the Snowden affair and the Facebook/WhatsApp deal.

- Shares of Tesla gained another 20% this week after the company disclosed that it was massively expanding its battery manufacturing plans with Panasonic. The two companies have agreed to invest up to $5 billion in a plant, "the gigafactory," with a capacity amounting to 30 gigawatts worth of lithium ion batteries a year by 2020. That's enough for 500K vehicles, more than total global production in 2013. Tesla offered $2B in convertible notes this week to fund the venture.

- A long list of major retailers reported fourth quarter results and the numbers were very mixed. With few exceptions, revenue and earnings declined and comps were negative. Macys eked out positive comps while Best Buy saw a big y/y improvement in profits, compared to its formerly collapsing numbers. Target and Kohls had very poor results, while corporate downer Sears Holdings' numbers were epically poor. Late in the week reports suggested Sears may also have been the victim of a data breach like the one that hit Target. Revenue and sales comps held up surprisingly well at Home Depot and Loews, given weakness in housing and tough y/y comps from Sandy last year. Abercrombie & Fitch delivered a surprising EPS beat, Gap was middling and TJX was pretty poor. JC Penny managed to report its first positive sales comp since the second quarter of 2011 and saw a big recovery in margins. Investors looked past the bad news to the possibility of a strong spring selling season after a hard winter and shares of nearly all major retailers saw solid gains on the week.

- Toll Brothers' headline numbers in its first quarter were not terrible, with earnings above expectations and revenue up very strongly on a y/y basis. However the firm's metrics reflected the housing market slowdown seen in data over recent months: orders fell 6%, the first decline in nearly three years. Additionally, Toll trimmed its FY14 homes outlook slightly and said severe winter weather was holding back sales.

- The euro stayed pretty steady for the first half of the week, until the German government failed to sell a full allotment of 30-year bunds Wednesday morning. This was the second uncovered auction in a week after a German 10-year auction was technically uncovered last week. While the declining demand for fixed income instruments is not a new story, the uncovered auction weakened the euro and sent EUR/USD down to 1.3660. The pair broke lower to 1.3640 on Thursday after German state February CPI inflation figures came in pretty weak. Better Eurozone February CPI on Friday sent EUR/USD out to fresh YTD highs, above 1.3800.

- The Chinese Yuan continues to weaken in a dramatic fashion. On Monday USD/CNY hit 6.11 and by Friday the pair had briefly seen 6.17, a ten-month high. Friday also saw the biggest one-day decline in the pair since Spring 2007 after Chinese regulator SAFE said the moves in the currency were not extreme but were normal, confirming suspicions that Beijing was happy to see the currency move lower. The emerging consensus is that the government is weakening the yuan in order to deter capital inflows and crack up the carry trade. Friday night will see the release of Chinese manufacturing PMI data that will give traders something to chew on over the weekend.