Conviction Lacking but Stocks End Nervous Week Higher
While stocks ended Friday in positive fashion, the session experienced more of the same volatility that was typical of the week, with a solid loss to start the day, an intra-day move that had the S&P 500 higher by 1.0% at one point, then nearly unchanged with half an hour left to trade. Investors lack conviction amid a plethora of concerns converging during the week, with the pace of economic growth in Europe, China and US under question, as well as increased financial institution regulations, and traders moved to de-risk portfolios by moving to the perceived safety and liquidity of the US dollar and Treasuries. However, Treasuries fell on the rise in stocks today and the US dollar fell as the euro bounced, and there was no major economic news out of the US. Equity news in the US was mixed, with Dell Inc's earnings beat being offset by margin concerns, while Marvell Technology and Gap Inc reported favorable results. In M&A news, Abbott Laboratories acquired a generic drug unit in India for nearly $4 billion, Google received Federal Trade Commission approval to acquire AdMob, and Johnson Controls offered $1.25 billion to acquire a portion of Visteon Corp.
The Dow Jones Industrial Average gained 125 points (1.2%) to close at 10,193, the S&P 500 Index added 16 points (1.5%) to 1,088, and the Nasdaq Composite advanced 25 points (1.1%) to 2,229. In heavy expirations-related volume, 2.3 billion shares were traded on the NYSE and 3.3 billion shares were traded on the Nasdaq. Crude oil fell $0.64 to $70.04 per barrel, wholesale gasoline declined $0.01 to $1.95 per gallon, and the Bloomberg gold spot price fell $5.25 to $1,177.10 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was down 0.8% to 85.36. For the week, the DJIA lost 4.0%, the S&P 500 Index fell 4.2%, and the Nasdaq Composite declined 5.0%.
Dell Inc. (DELL $13) reported 1Q EPS ex-items of $0.30, four cents above the consensus estimate of Wall Street analysts, with revenues jumping 21% year-over-year (y/y) to $14.9 billion, above the $14.2 billion that the Street was forecasting. The company said an overall improving business environment contributed to its 1Q results and commercial customers increased their purchases of its enterprise solutions. Looking ahead, DELL said it believes it is seeing the early stages of a corporate IT refresh, and it is optimistic the trend building in commercial demand will continue throughout the year. However, shares were under pressure as the company's gross margin declined to 16.9% from 17.6% last year.
Google Inc. (GOOG $472) erased an early loss and was higher after the Federal Trade Commission (FTC) closed its investigation on the world’s largest internet search engine’s $750 million acquisition of AdMob. The FTC approved the takeover saying the deal is unlikely to harm competition in the market for mobile advertising networks. GOOG said it is very excited about the possibilities in the mobile ad field.
In other M&A news, Abbott Laboratories (ABT $47) announced that it has reached a definitive agreement to acquire full ownership of the healthcare solutions business of Piramal Healthcare Limited, for an up front payment of $2.12 billion, plus $400 million annually for the next four years. ABT said the deal is expected to give it the number one position in the Indian pharmaceutical market. ABT overcame an early loss and was slightly higher.
Meanwhile, Johnson Controls (JCI $28) was higher after offering $1.25 billion for Visteon Corp's (VSTNQ $1.33) interiors and electronics businesses in a letter dated May 7 to Visteon's CEO. JCI said that any acquisition would significantly expand its technologies and capabilities and provide global scale and complementary products, as well as cost savings, and provide superior value versus the Visteon restructuring proposal. Shares of Visteon surged.
Marvell Technology Group. (MRVL $19) reported 1Q EPS ex-items of $0.38, one penny ahead of the Street's forecast, with revenues rising 64% y/y and 2% quarter-over-quarter (q/q) to $856 million, above the $845 million that analysts were anticipating. The semiconductor firm said sales due to new customer programs and of new products, especially its mobile and wireless products, were a significant driver of growth. Shares were nicely higher.
Gap Inc. (GPS $22) announced 1Q EPS of $0.45, three cents north of the consensus estimate of analysts, with revenues increasing 6% y/y to $3.3 billion, roughly inline with the Street's forecast, and same-store sales-sales at stores open at least a year-increasing 4% y/y. Sales at its Old Navy North America unit led the way, and the company raised its full-year EPS guidance. Shares were higher.
Treasuries erase gains as stocks rise
There were no major US economic reports today, and Treasuries erased an early advance and were lower in late-day action. The week saw solid gains in Treasuries in a flight-to-safety as equity markets posted declines and the outlook for the global economic recovery came into question. On the day, the yield on the 2-year note was up 5 bps to 0.76%, the yield on the 10-year note gained 2 bps to 3.23%, and the 30-year bond yield was 1 bp higher at 4.10%.
Germany votes in favor of euro-area bailout
European debt concerns persisted despite both houses of the German Parliament approving the nation’s portion of the $1 trillion euro financial bailout package, although stock markets closed off the lows and the euro rebounded. In related news, Spain announced that it approved the first public wage cuts since returning to a democracy in 1978, per Bloomberg, and it downwardly revised its GDP growth forecast for next year.
On the euro-zone economic front, Germany reported its Ifo Business Climate Index-a measure of business confidence-unexpectedly declined from 101.6 in April to 101.5 in May, compared to the increase to 101.9 that economists had expected. Also, a separate report showed that Germany's 1Q GDP was left unrevised at a 0.2% rate of expansion quarter-over-quarter (q/q). In other economic news, Manufacturing PMI reports out of Germany, France, and the euro-zone all deteriorated in May, while UK mortgage applications increased by an amount that was below forecasts.
The Asian economic calendar was relatively light, with markets in South Korea and Hong Kong closed for holidays. The Bank of Japan concluded its two-day policy meeting, leaving its benchmark interest rate unchanged at 0.1%, while a separate report showed the final reading of Japan's Leading Index for March was revised slightly lower.
Elsewhere in the Americas, Canada released much higher-than-expected retail sales, while CPI data was inline with expectations.
Perspective on a Difficult Week
- Stocks plunged roughly 5% on the week in the US on six major themes:
- The transition from liquidity to solvency and growth concerns in Europe
- The fate of the largest global growth driver, the Chinese economy
- The slowdown in the pace of economic growth in the US
- Government proposals on markets and banks that could slow growth and increase the cost of capital
- A shift in sentiment toward a flight-to-liquidity and safety from one of risk-seeking
- Negative technical factors as the S&P 500 falling through the 200-day moving average
Market talk centered on the hit to euro-area economic growth that would likely be experienced as governments need to make sharp cuts to spending in order to cut deficits, and as money in stronger nations (namely Germany) is put to more unproductive uses in order to support weaker nations. Additionally, the euro fell to a four-year low versus the dollar as investors believe it is increasingly vulnerable with the ECB's balance sheet deteriorating in quality by purchasing low-quality debt, and amid the strains of a group of nations that have diverging economic growth and lack of cohesion from 16 different political systems, with some speculation of an eventual break-up in the euro.
News from the euro-area was punctuated with a temporary ban by Germany on naked short-selling-the selling of a security without ownership-of 10 banks and insurers, as well as euro-area government bonds and credit-default swaps, and governmental verbal support for a tax on the financial market sector. The increased pressure on financial institutions was mirrored in the US, as the Senate passed financial regulatory overhaul. Stocks fell as intra-bank lending continued to experience some stresses at the margin and as markets considered the potential for increased cost of capital that could be a consequence of the actions.
Concerns about the potential for a hard landing in China came as local stocks continued to fall and on reports that the property market was experiencing a sharp slowdown after stricter measures were introduced in mid-April.
Housing and second look at 1Q GDP headline the economic docket
Although the attention may remain on the developments in the euro-area, next week is poised to provide some major economic releases that could deflect some of the attention from the European debt crisis. Housing data will likely dominate the economic calendar, beginning with Monday’s release of existing home sales-which account for the majority of total home sales-forecasted to increase 5.6% month-over-month (m/m) in April, while Wednesday's new home sales report will complete the picture, expected to rise 2.8% m/m. The homebuyer tax credit expired in April and is likely to have impacted home sales during the month. Other reports on housing will provide insight to housing prices and activity, with Tuesday's reading of the S&P/CaseShiller Home Price Index, forecasted to dip 0.4% m/m for March, and Wednesday's release of MBA Mortgage Applications for last week, which declined in the previous week's report on a sharp drop in purchase applications, possibly as a result of the expired tax credit.
Moreover, Thursday's second look at 1Q GDP, expected to be revised slightly higher, from an expansion of 3.2% in the advance report, to a reading of 3.4% growth. Inventory building, along with consumer and capital spending, all contributed to the solid pace of expansion. Since the first GDP report, we have seen strong factory orders and construction spending report for March, as well as increases in consumer spending and both wholesale and business inventories for the final month of 1Q, which may help explain the upward revision forecast.
Other reports on next week's US economic calendar include, the Richmond Fed Manufacturing Index, consumer confidence, durable goods orders, weekly initial jobless claims, personal income and spending, the Chicago Purchasing Manufacturing Index, and the final University of Michigan Consumer Sentiment Index for May.
International economic reports next week include UK 1Q GDP and housing prices, euro-zone industrial new orders, Bank of Japan policy meeting minutes, the Japanese jobless rate, Japanese and German CPI, and French consumer spending. Additionally, the US-China Strategic and Economic Dialogue meeting takes place in Beijing.
No comments:
Post a Comment