Weekly Wrap-Up | The April Correction; Markets reacting bearishly this week

– The Fed minutes displayed an FOMC that
was struggling to build consensus and craft a message that would keep the
markets from getting ahead of themselves even while inevitable rate hikes creep
closer. Several members were concerned that the market might misconstrue
the upward drift in the dot chart (which charts where FOMC members sees the fed
funds rate over the next three years), given several members moved their dots
up a notch despite soft recent data. Several participants noted that the shift
in the position of the median dot overstated the extent of the shift in the
FOMC’s view. More dovish sentiment was found in the line that the FOMC
anticipates keeping the target rate below levels viewed as normal in the longer
run, even after employment and inflation get close to the mandated levels.

– The Nasdaq led the charge higher on
Tuesday and Wednesday, and then led the slide lower in the second half of the
week, slipping below the psychologically important 4000 level on Friday
afternoon. The usual suspects were complicit in the Nasdaq’s big slide on
Thursday and Friday: NFLX, TSLA, AMZN and FB fell 6-8% a piece, while BIIB was
down 8%, emblematic of the biotech implosion. Twitter shares sank 10% on the
week.

– Alcoa unofficially kicked off the US earnings season with a mixed
first-quarter result. Alcoa topped earnings expectations but missed on the
revenue line. Alcoa reaffirmed that global aluminum demand growth would be flat
y/y at +7%, although it also hiked its demand growth forecasts for the
aerospace and auto industries, and more generally asserted that global
end-market growth remained solid.

– The first quarter headline results out of banks JPMorgan and Wells Fargo
contrasted sharply. JPMorgan’s earnings fell 28% y/y and the firm missed
estimates for the first time in over two years (it was only its fifth miss in
the last ten years). Wells Fargo beat earnings expectations in its first
quarter, on a healthy y/y gain in net profit. However both firms saw big
weakness in mortgage originations: JPM’s issuance slid nearly 70% y/y while
WFC’s new home loans were down nearly two-thirds y/y during the quarter. JPM
said that mortgage production would be negative in Q2 – driving a loss for the
business unit – and also negative for the year.

– The IPO market was a major theme, as up to 16 companies were planning to
begin trading this week making it the busiest week for IPOs since before the
financial crisis. The equity correction dented enthusiasm for the new issues,
and about half of the planned IPOs were put on hold due to volatility. The two
biggest IPOs that did go forward – Ally Financial and hotel chain La Quinta
Holdings – priced shares cautiously, below the top end of projections initially
given to investors. La Quinta gained as much as 7% on Wednesday, but was only
about 2% above its opening price by Friday, while Ally was about 2% below its
opening price. The best performing opening was fast casual restaurant chain
Zoe’s Kitchen.

– Online commerce giant eBay reached a deal with Carl Icahn to end his proxy
battle. In exchange for appointing Icahn’s man to the board (he originally
wanted two), Icahn has agreed to withdraw his PayPal spinoff proposal and will
sign a confidentiality agreement, ensuring that further conversations about
enhancing shareholder value stay private. eBay’s CEO observed that the proxy
battle was not helping shareholders or innovation, while Icahn called the deal
a “win-win.”

– March same-store sales were mostly in the red, as continuing bad weather kept
consumers at home, although the declines were generally not as bad as projected
by consensus expectations. As usual, the big outlier was Costco, where a
healthy +6% comp beat expectations. In retail earnings, discount retailer
Family Dollar missed top- and bottom-line expectations, cut its FY14 outlook
and warned it would lower prices on a wide range of items.

– WTI crude futures saw strong gains this week, rising to $104.44 from around
$101 on Monday, coming within a few cents of a fresh multi-year high. Several
factors were at work. Ukraine tensions have ratcheted up since armed pro-Russia
protestors seized administrative buildings in several eastern cities. In its
March monthly report, OPEC disclosed that output declined 626K bpd on the month
to 29.61M bpd. The weaker dollar also helped strengthen the contract. Brent was
stable around $107 most of the week after Libya finally reached a deal with
protesters to reopen occupied oil terminals. Note that the Brent-WTI spread is
at its lowest level since last September.

– Greece sold its first bonds this week since March 2010, just weeks before the
markets lost confidence in Athens and forced its first bail-out. This week
Greece raised €3 billion in five-year bonds at a yield of just under 5% in a
heavily oversubscribed issue. The yield on the Greek ten-year fell below 6%,
although many pointed out that is still much too high to be affordable for a
country forecast by the IMF to grow by only 0.6% in 2014 and experiencing
deflation. While the Greek leadership insists there will be no need for a third
rescue package, on Friday Eurogroup Chief Dijsselbloem said Athens might
require a bailout program after the summer was over.

– Eurozone officials were very loquacious this week on the subject of possible
non-standard measures to deal with slowing deflation. The overall tone from the
ECB was that the governing council is not ready to initiate QE, although
contingency plans are being made. Weidmann emphasized that extraordinary
measures would be have many conditions and should target banking sector. ECB
Vice President Constancio echoed his boss Draghi by again saying that April
data might show inflation returning to growth, obviating the need for measures.
ECB’s Nowotny suggested that a decision on QE should not be taken until the
June meeting. IMF Chief Lagarde said it would only be a matter of time before
the ECB launched a program. EUR/USD was a one-way trade all week, as the pair
held support around 1.3700 early on and then traded up to 1.3900.

– The BoJ policy statement on Tuesday dashed any hopes for a fresh round of QE
later this month to help offset the rise in consumption tax that went into
effect on April 1st. The BoJ maintained its economic assessment for the eighth time
in a row, stating that the “economy is recovering moderately” and
only made a passing reference to “fluctuations” related to the sales
tax. Kuroda’s press conference sealed the bank’s passive stance, indicating the
BoJ does not believe additional easing is warranted at this time and that
conditions remain sufficient to achieve the 2% inflation target in the
specified 2-year time frame. Already weighed down by falling US treasury yields
and general risk-off sentiment, USD/JPY hit three-week lows below ¥101.50. In
turn, Nikkei225 collapsed approximately 7.3% this week to its 6-month lows
below 14,000. Year-to-date, the Tokyo market is down about 15%.

– China reported its second consecutive disappointing trade balance, only this
time around the government was unable to blame seasonality around the Lunar New
Year. Although March trade recovered from the deficit seen in February with a
surplus of $7.7B, both imports and exports fell, spoiling expectations of a
modest y/y increase. The authorities acknowledged softer conditions in Q1 but
also remained optimistic that exports would rebound in Q2. Separately, March
CPI came in line with consensus at 2.4%, reversing a trend of five consecutive
months of slower price growth and allaying investors’ concerns about the threat
of deflation following the 13-month low of 2.0% in February. China premier Li
addressed the Boao Forum on Thursday, reiterating the state council would
sacrifice its 7.5% GDP target to achieve stable employment. Li also announced
that Beijing would not undertake significant stimulus measures to deal with
short-term market volatility.