Friday, July 18, 2014

Market Week Wrap-up  Weekly Market UpdateMarkets Shake Off New Ukraine Tragedy

- Global equities continued their steady march higher in the first half of the week. The DJIA closed at a record high on Wednesday while the S&P500 came within points of its record high earlier in July. Decent earnings reports from the big US banks and other blue chip firms, plus another healthy dose of M&A deals, including Fox's $80 billion bid for Time Warner, helped underpin the gains, while there was little negative economic data to get in the way. In the US, the June retail sales numbers were strong after ignoring a decline in reported auto dealer sales. On Thursday, all three US indices lost more than 1.0% after Air Malaysia flight MH17 was shot down over eastern Ukraine, in territory controlled by the pro-Russia separatists, with declines exacerbated by an escalation of the Israel-Hamas conflict as well as negative housing data in both the US and China. World leaders have called for an independent investigation of the tragedy, but the evidence strongly indicates that the rebels most likely downed the commercial airliner after mistaking it for a Ukrainian military transport. Markets erased all of the losses on Friday, however there is a feeling that the crash has drawn the western powers closer to confrontation with Russia. Even at the height of the selloff in the wake of Air Malaysia disaster, selling was orderly, showing no signs of panic. For the week, the DJIA gained 0.9%, the S&P500 rose 0.5% and the Nasdaq added 0.4%.

- In Ukraine, there have been calls for a ceasefire to facilitate an international investigation of the MH17 crash. Wielding the threat of more sanctions, President Obama again demanded Russia use its influence to curb separatist violence, while both the OSCE and US intelligence are fingering the pro-Russia Ukraine rebels for shooting down the airliner. German Chancellor Merkel warned that if it is found that a missile attack brought down the plane, it would constitute a grave escalation of the crisis. In the meantime, Russia President Putin and the rebels are loudly declaring their innocence. Less than 24 hours before the plane was downed, the US added Gazprombank, Rosneft Oil and other Russian companies and officials to its sanction list, while the EU was reportedly close to adding more sanctions.

- Fed Chair Yellen provided her semi-annual monetary policy report to Congress this week, including testimony before House and Senate subcommittees. Little new emerged from the testimony, as Yellen more or less reiterated all her standard policy positions. Yellen said rates would be more accommodative if the economic performance is disappointing and could increase sooner if the labor market continues to improve faster than expected. Some market participants seemed to believe Yellen took a more hawkish tone, however on the whole she stuck to her prior talking points. The one interesting note came in the text of the full Monetary Policy Report, which warned that small cap biotech and social media valuations are a bit high relative to historical norms. Shares of momentum tech and biotech names dropped after the report was disclosed. Some on Wall Street derided the Fed for commenting on such specific market segments, while others merely took it as a signal from the central bank that it is keeping a close eye on all markets.

- The June US housing starts and building permits numbers were not confidence-inspiring. The monthly starts missed expectations by over 100K and the reading was at its lowest level since September 2013. Meanwhile the May starts figure was revised lower. June single-family starts fell to 575K, their lowest level since November 2012.

- Morgan Stanley and Goldman Sachs both beat earnings and revenue expectations in second-quarter results, with strong gains in investment banking revenue helping to drive profits higher. JPMorgan's headline numbers also met consensus targets, but profit fell 8% y/y and revenue declined 3% y/y, while fixed income and equity revenue fell 15% y/y. Both Citigroup and Bank of America beat earnings expectations, although both banks took very large litigation charges that cut profit totals significantly in the quarter: Citi took a $3.8B charge and BoA took a $4.0B charge, both were related settlements DoJ investigations of mortgage-backed securities fraud.

- In one of the more surprising tech stories this week, ancient rivals IBM and Apple entered a cloud computing and mobile device partnership. Under the deal, IBM will sell Apple devices with newly created business apps using IBM's big data framework. IBM's headline earnings were mixed, although revenue declined a hair y/y, dragged lower by much slower server sales. Shares of AMD fell sharply after the company reported revenue in its computing solutions chip unit was down 20% y/y. Intel's numbers were pretty strong, although its efforts to break into mobile continue to suffer.

- Microsoft said it would lay off up to 18,000 workers over the next year, and take a pretax charge of $1.1-1.6 billion to pay for the cuts. Two thirds of these cuts come in Microsoft's ill-fated hardware division, representing about half of the total employees that the Nokia deal brought into the company in April.

- Industrials General Electric, Honeywell and Johnson Controls reported solid, in-line earnings. Both GE and HON met expectations on good earnings and revenue growth, with FY14 guidance reaffirmed. With divestiture and restructuring costs, JCI's earnings were down sharply, but ex-costs the firm did well.

- Massive M&A deals were back in headlines. Rupert Murdoch's Twenty-First Century Fox made a $85/share, $80 billion bid for Time Warner, which rejected the bid. Subsequent reports indicated Fox could expand its offer up to $100/share. AbbVie reached a deal worth roughly $55 billion in cash and stock to combine with Shire. In other deal flow, AECOM agreed to acquire URS Corporation for $56.31/share in cash and stock in a deal valued about $6B, and Kodiak Oil & Gas agreed to be acquired by Whiting Petroleum in an all-stock transaction valued at $6B.

- For most of the week, EUR/USD remained locked in the same two big-figure range it has held since May. Key support in the pair remains the 1.3503 post ECB low in June and the 1.3477 January low. On Friday, cable took a nose dive as chatter made the rounds that an interview would be published over the weekend in which BoE Governor Carney made dovish comments. GBP/USD dropped from 1.7095 to 1.7040, prompting a denial from the BoE.

- On Monday the BOJ cut its FY14/15 GPD forecast to 1.0% from 1.1% as part of its quarterly review of targets and reiterated projections for FY15/16 and FY16/17 GDP as well as FY14-17 inflation. The BoJ maintained its economic assessment for the 12th consecutive meeting, commenting that "effects of decline in demand following front-loaded increase prior to consumption tax hike are expected to wane gradually." There were reports that the government would boost its economic outlook in the upcoming monthly report for the first time since January.

- China's Q2 GDP (+7.5%) and June industrial production (+9.2%, a five-month high) topped expectations, which in turn tamped down expectations that Beijing would be forced to add more stimulus beyond the targeted measures already being taken. Property investment numbers for the first half of the year were ugly: sales fell 6.7%, property construction fell 16% and home sales value declined 9.2%. The National Bureau of Statistics warned that cooling in the property market, while a reasonable adjustment, could create more pressure on broader economy. Later in the week, a report showed June property prices fell sequentially for the second consecutive month and the newly appointed Land and Resources minister signaled more tolerance for easing curbs on property investment.