Thursday, April 17, 2014

Market Week Wrap-up  Weekly Market UpdateChinese Medicine for a Dizzy Market

- The vague sense of unease in global markets continued on Monday and Tuesday as heightened volatility sapped risk appetite and drove the yield on the 10-year UST as low as 2.60%. China's Q1 GDP reading on Tuesday night (7.4% v 7.3%e) seemed to calm nerves and equity markets in the US, Europe and Japan moved higher in the second half of the week. Despite the better overall GDP growth, other Chinese March economic data was less reassuring. US corporate earnings were not especially strong, as firms across a wide spectrum of industries failed to show appreciable revenue growth. Early in the week, the situation in Ukraine only got worse, with Kiev seeming to botch attempts to reassert its authority in the restive eastern cities. On Thursday, four-party talks (Russia, Ukraine, the US and the EU) generated a tentative plan to de-escalate the crisis, but it remains to be seen if Russia and its partisans in Ukraine will play along. A mid-week policy speech from Fed Chair Yellen gave some solace to markets, reiterating that rates will likely stay lower for longer in this cycle due to lingering aftereffects of the economic crisis. For the week, the DJIA added 2.4%, the Nasdaq rose 2.4%, and the S&P500 gained 2.7%, for the best week in the broad index since July.

- Housing market reports out this week indicated the industry continues to weaken even after getting past severe winter weather. March building permits and housing starts missed expectations, driven by a slowdown in multi-family starts. The April NAHB housing market index was weaker than expected, moving to an anemic 47 from the 46 seen in the March report, marking the third consecutive month the index has been in contraction territory.

- Factory data yielded better results. The March US industrial production data came in at +0.7%, beating expectations, and the February numbers were revised higher. More importantly, capacity utilization rebounded to 79.2% from 78.4% in February, putting utilization at its highest level since the very beginning of 2008. This is only 0.9 percentage points below the long-run (1972-2013) utilization average.

- The flood of IPOs continued, although market turmoil has been hard on new issues. Out of the 10 IPOs that launched this week, eight priced below their expected ranges and two, Chinese firms Weibo and Leju Holdings priced at the low end of their expected range. The most anticipated new offer was the Twitter of China, Weibo, whose shares gained nearly 20% in trading on Thursday. Chinese e-commerce giant Alibaba, which owns an 18% stake in Weibo, is expected to file for its own US IPO as early as Monday.

- Gold prices tumbled approximately 2.5% on Tuesday, with spot gold dropping below $1,300 from $1,325. There was no immediate catalyst for the move, and prices closed out the week below $1,300. Commentators cited stronger US growth and flagging demand that would follow lower economic growth in China, and ignored the tensions in Ukraine. Silver and copper both moved lower along with gold.

- Earnings season picked up pace with a flurry of financial firms reporting. First quarter results out of Bank of America and Citigroup were mixed. Citi's headline results beat expectations, with net income up y/y and revenue down about 1% y/y, driven by an 18% decline in fixed income revenue. However, the firm's income growth came mostly from lower losses at Citi Holdings as the unit rolls off beleaguered legacy assets. Bank of America reported a headline loss of $0.05, well below expectations, but this was after $6.0 billion in litigation expense ($0.40) related to the FHFA legal settlement and reserves for mortgage-related matters. Much like JPMorgan and Wells Fargo last week, BoA's consumer residential mortgage originations were horrible, down 65% y/y.

- Both Goldman Sachs and Morgan Stanley posted good headline first quarter results, beating top- and bottom-line expectations. However, a deeper look at Goldman's results show a more mixed picture profit and revenue declined on a y/y basis whereas Morgan's profits were up 18% y/y. Goldman's FICC trading arm saw net revenue continue to slump, while Morgan's fixed income business grew its revenue take. Investment banking units at both firms saw double-digit revenue gains.

- United Heath was the first insurer to report earnings for the period covering the rollout of Obamacare, and it claimed health insurance reform related costs (plus lingering sequestration costs) reduced earnings by around $0.35/share. Executives warned that additional losses were possible related to the ACA.

- Investors were unhappy with quarterly results out of Google and IBM after both firms missed revenue expectations. Yahoo was more or less in line, and reported more modest gains in key advertising revenue metrics. Google saw solid y/y growth in profits and revenue, but the key paid clicks metric was negative, raising eyebrows. Sandisk crushed earnings expectations thanks to a big increase in margins and very good retail sales.

- Industrials General Electric and Honeywell, and chemicals name DuPont all missed revenue targets. Revenue and profits fell modestly on a y/y basis at GE and sharply at DuPont, although the latter had warned investors of the slump in guidance a month ago. Honeywell saw modest revenue and earnings growth, and said the firm was "cautiously optimistic on the macro environment, even with some nice momentum exiting the quarter."

- Extensive verbal intervention by European officials continued to exert little downward pressure on the EUR/USD pair. Press sources reported that the next move by the ECB would be to adopt a negative deposit rate, perhaps as soon as the June meeting. EUR/USD bounced around in the 1.3800 handle all week long. GBP/USD hit a 4.5 year high above 1.6800 after the UK unemployment rate moved below the BoE's 7.0% threshold.

- China released a full gamut of March economic data plus Q1 GDP this week. GDP slightly topped expectations, calming fears raised earlier when March M2 money supply increased at the slowest rate in years and aggregate funding fell 19% y/y. The China stats bureau noted consumption was a "decisive contributor" to Q1 GDP growth, and it also said it may begin releasing online sales figures. A researcher with China's top economic planning agency NDRC said that even a slowdown to 6.5% in 2014 overall would be acceptable without triggering more stimulus. On Thursday, a separate report showed that China foreign direct investment fell 1.5% y/y in March, for its first decline in over a year.