Friday, April 25, 2014

Market Week Wrap-up  Weekly Market UpdateRussia Menaces Ukraine, Squelches Earnings Enthusiasm

- US equity markets bounced erratically between earnings enthusiasm and Ukraine-induced fear this week in a low-volume, post-Easter holiday environment. Strong quarterly results from major tech names and Dow components helped push indices higher, with Apple and Facebook the particular standouts. In addition, several huge merger deals in the pharmaceutical space also helped risk appetite. But the steady deterioration in the Ukraine situation dragged things lower and the continuing rotation out of momentum names whipped around the Nasdaq all week. For the week, the DJIA is down 0.3%, the S&P500 is off 0.1% and the Nasdaq fell 0.5%.

- The Ukraine crisis deepened this week as Kiev pressed its "anti-terrorist" operations in Eastern Ukraine and Russia conducted "military exercises" along the border. At one point, Russian armor was said to have moved in force to within one kilometer of the border, inspiring real fears that the invasion was imminent. Russia President Putin called the use force against pro-Russian forces in Ukraine "a crime" that will have consequences, while Russia's UN ambassador went as far as invoking a nation's right to self-defense under the UN charter as a justification for potential direct intervention in Ukraine. Officials in Kiev warned that any Russian incursions would be met directly with military force, while the Western powers convened on Friday to discuss arranging possible sanctions on the broader Russian economy.

- New home sales in the US tumbled to eight-month low in March, dropping 14.5% y/y. However the January and February totals were revised up 3% and 2%, respectively. Affordability is likely becoming a big factor for the market: the median new home price rose to a record high of $290K, up 13% y/y.

- Front month WTI crude lost over 3% this week, dropping from nearly $104 to just above $100 on profit taking. Concerns about further builds in US crude oil inventories overshadowed tensions between Russia and Ukraine. Last Wednesday, the EIA weekly report showed that US crude inventories were only 3.4 million barrels below the peak reached in May 2013. This week's EIA report pushed US crude oil inventories above the 2013 high to 397.7 million barrels, levels not seen in 80 years.

- Excellent earnings from Apple, Facebook and Netflix could not save the Nasdaq from Amazon and the continuing rotation out of hot tech stocks this week. Both Facebook and Apple beat earnings and revenue targets, while Apple crushed expectations for iPhone shipments and boosted capital returns to shareholders. Facebook saw solid gains in user metrics and an 82% y/y gain in advertising revenue. Netflix sustained decent metrics and met expectations. Apple sustained 8% gains on the week, while gains in FB and NFLX evaporated rapidly. Amazon dropped 5% on the week after operating income shrank y/y and the firm's second quarter revenue guidance fell short of consensus expectations. Microsoft offered solidly in-line, vanilla results.

- Results from the big US automakers were hampered, like everything else, by bad weather, although there were some self-inflicted wounds as well. General Motors beat earnings forecasts, despite a big decline in profits due to its recent recalls. Ford's first quarter profit was down from the same period last year and missed expectations. Caterpillar posted a quarterly profit that topped analysts' estimates and raised its full-year outlook on a stronger-than-expected rebound in sales in the construction industry.

- Defense names Lockheed Martin, Northrup Grumman and General Dynamics beat top- and bottom-line expectations, and raised FY14 guidance, although revenue at the companies declined y/y as Pentagon budget cuts continued to eat into business. Integrated manufacturers United Technologies and Boeing saw revenue growth driven by non-defense related demand. Raytheon's revenue also dropped, but unlike its competitors it was unable to raise guidance. Only Boeing closed out the week in the black, with the other firms all flat or in the red on the week.

- The global pharmaceutical business was rocked by news of multiple megadeals this week. Canadian pharma giant Valeant teamed up with activist investor Bill Ackman's Pershing Square in a $46-billion hostile bid for eye and skin care company Allergan, which is currently reviewing the deal. Ackman accumulated a 9.7% stake in Allergan in the days and weeks leading up to the deal announcement, using a veiled options strategy. The SEC is investigating the trades, which some commentators have called unethical. Novartis sold its animal health unit to Eli Lilly for $5.4 billion in cash and its vaccines unit to GlaxoSmithKline for $7.1 billion. In turn, Novartis is buying Glaxo's oncology products business for $14.5 billion and up to $1.5 billion in milestones. There were also UK press reports that Pfizer offered $100 billion for AstraZeneca recently, but negotiations went nowhere. Some analysts said another approach is in the works.

- EUR/USD was locked in a fairly narrow range between 1.3790 and 1.3850 as FX traders debated the probability of unsterilized large-scale ECB quantitative easing. ECB President Draghi, Vice President Constancio and several other core Eurozone ECB members reiterated the now familiar line that it is too early to say whether QE will be needed and that deflation is not a problem right now. USD/JPY zipped into the week at two week highs around ¥102.60 after the Japan March trade deficit came in wider than expected, much to Japan's advantage. The yen strengthened modestly to 102 on Friday. Trades watched the Chinese yuan continue to weaken, as USD/CNY traded above 6.25 for the first time since 2012.

- Japan March national CPI figures met expectations and the FY13/14 core CPI reading of 0.8% was above the 0.7% BOJ target ahead of next week's central bank update on growth and inflation projections. April Tokyo CPI, a forward looking gauge reflecting adjustment for the April 1st start to the higher sales tax, rose to a 22-year high on core basis at 2.7%. Analysts are divided whether the data is sufficiently high enough to keep the BoJ on the sidelines without more easing. President Obama paid a long-delayed state visit to Japan with hopes of coming home with a bilateral trade deal, however agricultural interests in Japan torpedoed the agreement. The failure bodes ill for the Trans-Pacific Partnership (TPP) negotiations, and Japan government officials were very hesitant about the TPP's chances in the near term.

- The resumption of the IPO process in China following a 14-month moratorium continued to weigh on mainland markets. The pre-IPO disclosure tally rose steadily to 97 filings by the end of the week, adding a profound headwind of dilution to investment sentiment already hampered by the slowing economy. HSBC flash manufacturing PMI for April offered yet another reminder that the consistently disappointing data points in early 2014 reflected more than seasonality around the holidays. Despite rising for the first time in four months, HSBC PMI has now been in contraction territory for four months and counting. Moreover, the closely monitored new exports and employment sub-indices were decidedly negative - the former "changed direction" and is now decreasing while the latter is "decreasing at a faster rate" - signifying both a soft external demand and the challenges in implementing Beijing's ambitious "urbanization" program. The accompanying statement from resident HSBC economist saw the recently announced "targeted stimulus" by the government as too limited, forecasting more fiscal measures to be unveiled in the coming months. The Shanghai Composite ended its second consecutive down week off by 2.9%.