Friday, August 8, 2014

Market Week Wrap-up  Weekly Market UpdateEbola, Rockets and Tanks, Oh My

- Geopolitical events dominated the conversation again this week, as turmoil in Israel, Ukraine, Iraq, and West Africa provided plenty of dramatic, market-moving headlines. In the meantime, negative Italian Q2 GDP and worrying German industrial data cast a shadow over Europe, while the Nikkei fell 5% on the week thanks to weaker-than-expected July numbers. Most of the June quarter corporate earnings reports are in the can, leaving just a few retailers and some big tech names to report next week. At the end of a volatile week, the DJIA ended up 0.4%, the S&P500 gained 0.3% and the Nasdaq tacked on 0.4%.

- The Ebola outbreak in West Africa has become very serious this week, and the World Health Organization has declared it a major public health risk requiring a coordinated global response. The disease has begun to appear in Nigeria, where the government declared a state of emergency, and there are concerns it could spread beyond Africa. Cases of people with Ebola-like symptoms have been reported in the US, Europe and Saudi Arabia, but no cases have been conclusively proved. Shares of Canadian biotech Tekmira have gained another 40% this week after the FDA partially lifted its clinical hold on the firm's experimental anti-Ebola viral therapeutic. Biocryst, which is also working on a treatment for Ebola, is up 15% on the week.

- In the first half of the week, there were mounting fears that Russia was moving closer to invading Ukraine after authorities in Kiev and NATO figures said Moscow had built its forces back up to around 20,000 troops (plus the 20,000 troops stationed in Crimea). The thought was that Moscow would introduce troops under the guise of a "humanitarian mission" after many armored units were seen with "peacekeeping" markings painted on their vehicles. However on Friday there were sudden signs of fresh de-escalation as the chairman of the Russia Security Council said his country would like to find ways to "de-escalate the Ukraine situation" and Moscow ended scheduled military drills and stated that air and air defense units have been ordered back to their home bases. Nevertheless, the political battle of wills continues and Russia imposed countersanctions on the West, banning a broad range of food imports.

- Within a few hours of each other, two huge M&A deals fell apart this week, while a third was altered to remove a tax inversion component following strong political pushback. 21st Century Fox abandoned its $80 billion offer to acquire Time Warner, citing hostility to the deal at Time Warner and reluctance to overpay. Sprint abandoned attempts to reach a deal to acquire T-Mobile, costing CEO Dan Hesse his job. Walgreen said it would go ahead with buying up the rest of Alliance Boots it does not already own but abandoned plans to move its tax address abroad.

- Media names CBS and Disney both saw very solid quarterly reports that topped expectations. Disney reported strong Q2 revenue growth, although the results were not quite as good as results seen in Q1. News Corp disclosed a mixed set of Q4 results, missing the consensus EPS estimate for the first time four quarters but beating on revenue. Revenue and earnings sagged on a y/y basis.

- Shares of luxury goods names Coach and Michael Kors were closely watched after quarterly reports. Kors widely beat top- and bottom-line expectations, saw a 24% gain in comps and raised its FY15 outlook. But on the conference call, executives warned that margins would suffer going forward due to increased markdowns and disclosed a big increase in inventories. Coach also topped earnings and revenue expectations, with the international business strong and Chinese comps up by double digits, even as North America comps sagged.

- Solar names soared on very good results out of solar power installer SunEdison, which reported decent profits (beating expectations for a big loss) and revenue swelled 61% y/y. SunEdison said it completed more projects in the quarter than it had expected, goosing results higher. Earlier in the week First Solar had widely missed expectations and saw earnings and revenue sag on a y/y basis, although SUNE's 15% post-earnings gain helped pull FSLR up nearly 10% on the week.

- The Fed cleared Bank of America's resubmitted capital plan. Recall that back in April, the Fed directed the company to resubmit its CCAR application after it emerged that the bank had incorrectly reported data used in the calculation of regulatory capital ratios. The Fed approval allows BoA to go ahead with its plan to boost its dividend to $0.05 per share from $0.01 per share.

- The ECB left its policies unchanged at the August meeting. While acknowledging ultra-low inflation and slowing economic prospects, ECB President Draghi continued to affirm his confidence that the ECB's June measures would ultimately push prices and growth higher over the medium term. During the press conference, Draghi pushed back against criticism that the ECB is not doing enough by further detailing the TLTRO program, asserting it will disburse up to €450-850B to the real economy. On Ukraine, Draghi warned the conflict had the real potential to negatively impact the Eurozone.

- Italy's economy unexpectedly contracted in the second quarter, deepening fears that a wider economic slowdown is under way in Europe. Italy GDP was -0.2% q/q and -0.3% y/y, after a final Q1 GDP reading of -0.1% q/q and -0.5% y/y , marking a rare triple dip recession. Germany, France and the Eurozone report initial Q2 GDP figures next Thursday. There are real concerns about the German data after Germany reported June factory orders -2.4% y/y on Wednesday and June industrial production -0.5% on Thursday, after which the two-year bund yield fell below zero for the first time since May 2013 and the 10-year bund yield fell to an all-time low below 1.07%. EUR/USD hit nine-month lows below 1.3340.

- In Japan, the strengthening yen and disappointing July economic figures sent the Nikkei225 down by nearly 5% this week. Despite speculation of a rift in the policy board, the BoJ's latest statement retained its unanimous stance on key policy settings even as the assessment of exports and industrial output were downgraded, as both have "shown some weakness." The BoJ still cheered improvement in employment and income situation along with some signs that consumption tax headwinds are starting to abate. Government bond yields in Tokyo have plunged to new lows, with the 10-year falling to a 16-month low of 0.5%.

- After two straight weeks of strong gains, the Shanghai Composite was down 0.3% this week, a modest decline against the backdrop of volatility in the emerging markets. A very strong set of China trade data helped restore markets on Friday. July's $47B surplus was the biggest on record, and even though imports fell, a 14% rise in exports more than made up for that decline. Shipments to Europe were particularly strong, up about 17% y/y, while exports to Japan reversed last month's drop with a 3% increase. The stream of economic data from China continues with the release of July inflation figures late on Friday.