Friday, July 25, 2014

Market Week Wrap-up  Weekly Market UpdateEarnings, Wars and Data

- Global markets vacillated between earnings and geopolitical conflict this week. There was a steady drumbeat of negative news out of Israel and eastern Ukraine, with bloody headlines countering much of the decent news from quarterly earnings reports. Quarterly reports out of the US and Europe were pretty strong, with only a few earnings disasters weighing on broader indices, though the earnings stinkers were in marquee names such as McDonalds and Amazon. June US housing data was mixed, inflation continues to be very subdued and weekly jobless claims took an unexpectedly big dip, possibly due to seasonality. In Europe, the first reading of UK GDP for Q2 indicated that annualized economic growth was back above 3.0% for the first time since the beginning of the crisis, though this was offset by worse than expected retail sales data. In China, July flash PMI numbers were very good, helping the Shanghai and Hong Kong equity markets handily outperform US and European indices. For the week, the DJIA lost 0.8%, the Nasdaq slipped 0.4%, and the S&P500 was about unchanged.

- June data offered contrasting views of the US housing sector. The June existing home numbers pushed out to eight-month highs and the May figures were revised slightly higher. According to the NAR, inventories are at their highest level in over a year and price gains have slowed to much more welcoming levels in many parts of the country. Meanwhile June new homes sales tumbled to 406K from May's eight-year high of 504K. Quarterly numbers from two homebuilders also saw some weaker trends: Pulte Homes saw closings and its backlog decline on a y/y basis (although new home orders were up 5% y/y), while M/I Homes saw a y/y contraction in new contracts signed. D.R. Horton, the largest homebuilder in the US, saw a 15% y/y gain in its backlog and a 25% gain in net orders.

- Inflation is still not showing up to the party, according to the June CPI data out this week. The increase in the headline CPI index was mild enough to keep the y/y growth rate unchanged at 2.1%, while the y/y growth rate of the core fell to 1.9%. Food prices decelerated faster than expected, turning in a flat performance in June after four months of growth. Energy prices were up less than expected.

- Fighting raged all week in eastern Ukraine, with pro-Russia forces shooting down more military aircraft and Russia supplying more heavy weapons. More EU sanctions on Russia appeared imminent, with action expected by the end of July. Sanctions could include a ban on investment in Russian banks, an arms ban (but not retroactive, allowing France to deliver contracted Mistral warships) and some form of energy sector sanctions. On Friday, EU President Van Rompuy was urging member states to restrict sale of technology to the Russian oil sector while excluding the gas sector from sanctions, which sent oil and gas futures in divergent directions. On Friday, the Russian central bank raised its key rate by half a point to 8%, citing heightened geopolitical risks to the ruble.

- A federal appeals court overturned a lower court ruling that allowed subsidy payments under the Obamacare reforms. The ruling voids the regulations that allow subsidies for insurance that is purchased through federal exchanges. Most commentators agreed that with several similar cases outstanding and more rulings to come, this decision was not terminal for the ACA.

- Bill Ackman's promise to deliver a deathblow to Herbalfe fell flat this week, buried under hundreds of slides in a hours-long, rambling presentation. Ackman asserted that the company deliberately targets lower income people and certain ethnic groups to expand its sales and runs nutrition clubs that are just as fraudulent as Enron trading rooms, but his presentation left the impression that Herbalife was merely a parasitic MLM, rather than any kind of pyramid scheme.

- General Motors' quarterly report took a big hit from recalls, but even before accounting for recalls profits were down sharply y/y. Meanwhile Ford beat earnings expectations on modest profit growth. Caterpillar hiked its FY guidance and beat expectations, and its June dealer statistics improved slightly from May's very bad performance. Defense/aerospace names Boeing, Northrop, and General Dynamics topped earnings expectations, while Boeing and Northrop both hiked FY14 EPS guidance.

- American Airlines announced its first dividend since 1980, at $0.10/share, based on record quarterly profits of $1.5 billion in Q2. American's revenues grew 75% y/y as the company has soared out of bankruptcy. United Airlines recovered very well from its first quarter losses, as Q2 earnings that topped expectations. Southwest beat expectations on solid profit growth. JetBlue's results were right in line on modest growth.

- Microsoft's fourth quarter revenue saw very strong gains y/y while net income declined slightly. Server and cloud sales continue to do quite well, even as the phone business flounders. Apple's revenue fell a bit short, but the company said it sold 35.2 million iPhones, up 13% y/y, with China iPhone sales up 48% y/y. On the strength of its quarterly report, shares of Facebook pushed out to new all-time highs, up approximately 100% from the IPO price. Facebook's user metrics sustained double-digit gains, and the firm said it had 1.5 million active advertisers, up from 1 million last June. Multiple analysts cut their ratings and/or price targets for Amazon after it reported negative operating income in its second quarter and forecast more of the same for Q3. Amazon executives said the losses were driven by business investment.

- The euro tumbled lower this week, dropping to fresh year-to-date lows. Besides a brief reversal on Thursday, the trade was one way: EUR/USD dropped from 1.3550 on Monday and closed a few pips off its low of 1.3421 on Friday. Traders say the gradual widening of interest rate differentials between the US and Europe are strengthening the greenback: the premium offered by two-year U.S. Treasuries over German debt has widened to around 46 basis points, levels not seen since 2007. The key break below 1.3477 (the January low) makes many think the pair has a ways to go to the downside. Similar dynamics sent the pound lower against the dollar. Additional downside momentum came from the weak June UK retail sales data and the lack of dissenting views in the minutes from the BoE's July policy meeting. FX traders had been bracing for a more hawkish tone among some members.

- Concerns about the Chinese property market have taken a back seat to more signs of improvement in the manufacturing sector. The July HSBC flash PMI jumped to an 18-month high of 52.0, well above the 51.0 expected, as the new orders and input prices components increased at a faster rate. HSBC cited the cumulative impact of mini-stimulus measures, commenting that policy makers would maintain their accommodative stance over the next few months to consolidate the recovery. The Shanghai Composite rallied impressively after the PMI data, ending the week up 3.2% at a three-month high. Monetary authorities in Beijing have also been noticeably more proactive, suspending their liquidity mop-ups on two occasions this week.

- Kiwi dollar tumbled nearly 2% against the greenback below $0.8550 mark, to six-week lows against the USD and AUD. As expected, the RBNZ hiked rates for the fourth time to 3.50%, but also signaled a pause in tightening. Governor Wheeler was increasingly critical of the elevated FX rate in the face of the falling dairy prices and slowing export growth, calling it "unjustified and unsustainable" with potential for a significant fall. In Australia, Q2 CPI topped consensus and now sits at the high end of RBA's 2-3% target range. While analysts remain unconvinced that the central bank would consider tightening measures in 2014, the case for more RBA rate cuts has now been closed.