Weekly Wrap-Up | Markets Treading Water | SchoolOfTrade.com

– Global
equity markets muddled through this week as participants watched earnings
season wind down.

There was little in the way of big
data reports to drive trading, although the China consumer price index rose at
its slowest pace in a year and a half, prompting renewed calls for more
stimulus measures.

China reported improvement in its
trade data, while the March US trade report was very strong, as exports
rebounded to the second highest level on record, led by strong gains in sales
of aircraft, autos and farm goods.

The post-decision ECB press
conference was the highlight of the week, as President Draghi hinted that the
ECB council was prepared to take action at the next meeting, if necessary.

Global bond yields fell to new
record lows late in the week as investors positioned themselves for another
round of ECB easing. Benchmark yields for debt issued by Spain, Italy and
Ireland all hit their lowest levels since the nations entered the Eurozone,
while Portugal’s benchmark yield fell to levels last seen in 2009.

In Ukraine, the violence continued
although there was some indication that the Russian side could be opting for a
less confrontational approach.

The DJIA notched an all-time intraday high around 16,622
on Thursday, while declines in momentum stock hobbled the Nasdaq again. For the
week, the DJIA added 0.4%, the S&P500 slipped 0.1% and the Nasdaq lost
1.3%.

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– In her semi-annual monetary policy report to Congress, Fed Chair Yellen
reiterated a lot of her rhetoric from recent speeches and offered little
commentary that was new. Yellen said that low inflation is mostly transitory,
that weak Q1 GDP was mostly due to weather, and that continuing policy
accommodation is warranted. The only moderately impactful comment was that the
recent flattening in the housing market may last longer than expected.

The Fed’s Fisher, Tarullo,
Plosser, and Stein also spoke this week, and the most remarkable thing was how
similar all their comments seemed: Q1 GDP weakness was due to weather, the
taper will end on schedule, rates will remain low so long as inflation is below
2%. Interestingly, Fisher said he would like to get rid of the ‘dot chart’
forecasting future rates, calling it a flawed tool.

– The situation in Ukraine worsened over the weekend after dozens of pro-Russia
separatists died in a building fire in Odessa last week and government forces
continued military operations in the east, surrounding Slovyansk. Midweek the
Russian side made conciliatory comments: after meeting with the OSCE to consult
on a roadmap for calming tensions, Russia President Putin called for
postponement of May 11th independence referendums in south and east Ukraine and
said Ukraine’s presidential election on May 25th was a move in the right direction.
He also claimed Russian military forces were withdrawn from the border with
Ukraine, although NATO later said that no troops had been pulled back.

– Earnings season is winding down at this point, with the retailers, Deere and
Cisco on tap next week. Of the 451 S&P 500 constituents that have released
results this earnings season, 76% have beaten estimates for profit, while 53%
have exceeded projections for revenue. The Nasdaq continued to be a big source
of weakness as investors sold off four-letter biotech and tech names at any
hint of trouble: between Monday’s close and the first hour of trading on
Wednesday, the Nasdaq lost 2.5%, and saw plenty of volatility through week’s
end. Tesla was down 15% on lackluster Q2 earnings guidance. Groupon fell 20% on
concerns about its Q1 earnings quality.

– Between the closing bell on Monday and midafternoon on Wednesday, shares of
Twitter lost nearly one quarter of their value in heavy volume after its second
post-IPO share lockup expired. Shares dipped to post-IPO lows below $30 after
475M shares became eligible for sale, although they regained some ground in the
latter half of the week, reaching $33. Co-founders Jack Dorsey and Evan
Williams and CEO Dick Costolo said in April they had no intentions to sell their
shares, but other insiders likely got out, especially given that none of them
sold stock during the IPO.

– Alibaba filed for its US IPO this week. Officially the filing was for $1.0
billion, but nearly everybody expects this figure to rise to $15-20 billion
eventually. Most observers expect the massive offering will begin pulling money
away from other high-growth tech names. Note that Yahoo owns 23% of the firm,
and it plans to sell about two-fifths of its stake in the offering, which could
generate in excess of $10 billion and more than double Yahoo’s cash stockpile.
Asked about the windfall, Yahoo CEO Mayer would only say that Yahoo intends to
be “good stewards of capital.”

– Barclays outlined its turnaround strategy this week and it involves buckets
of blood. The UK bank said it would cut 20,000 jobs (~14% of total workforce),
14,000 of which would be gone by the end of 2014, and ax big parts of its
investment banking business. Barclays will focus on four core areas: retail and
corporate banking, credit cards, banking in Africa and finally a much
diminished investment banking unit. In addition, Barclays will set up a ‘bad
bank’ to run off around €90 billion worth of risk-weighted assets.

– In M&A news, the contentious $35B merger of equals between Publicis and
Omnicom has been called off. Reports pointed to frayed relations at the top
level of management in addition to regulatory snags surrounding tax issues.
Publicis and Omnicom were said to have lost various large contracts due to the
delayed closing of the merger. Other contentious M&A deals saw new
developments as well. Regulatory momentum appears to be building against
Pfizer’s offer for AstraZeneca, on concerns it is trying to game international
taxes. Meanwhile Allergan reportedly continues its search for a white knight
alternative to Valeant’s hostile takeover bid, but it appears it has not gotten
any nibbles yet. In the consumer tech space, Apple was said to be close to
inking a $3.2B deal to acquire hip hop legend Dr. Dre’s Beats Electronics.
Beats got its start in high-end headphones, however most analysts suggest Apple
is most interested in the firm’s streaming music service, given the dismal
performance of its own iTunes Radio streaming service.

– At Thursday’s post-ECB decision press conference, “Super Mario”
demonstrated that his verbal intervention powers retain their potency. ECB
President Mario Draghi said the central bank would be comfortable taking action
in June, if it were needed, driving the biggest move in EUR/USD since the March
FOMC meeting when Yellen uttered her now famous six-month remark. Ahead of the
conference, EUR/USD was testing the key 1.4000 level, while after the comment
about June action the pair dropped steadily without looking back, settling
around 1.3760 on Friday for one-month lows. June Bund futures hit a fresh
contract high while the 10-year German govt yield hit a 12-month low below
1.44%. Analysts are now forecasting cuts of both the refi rate and deposit
facility of 10-15bps at the next ECB meeting. One observer highlighted that
Draghi has now partially abandoned Trichet’s principle that the ECB never
pre-commits by admitting that the committee had laid the ground work for action
next month.

– Sterling pushed out to five-year highs just shy of 1.700 ahead of the BoE
rate decision. The big move up on Tuesday was fueled by an FT article that
asserted the MPC would discuss raising rates for the first time in the current
cycle at Thursday’s meeting. No action was taken on Thursday and there was no
statement, so it will be two weeks before the minutes give an idea of what was
discussed at the MPC meeting. In any case, GBP/USD drifted lower until early on
Friday, when weaker data sent the pair from 1.6930 to around 1.6840.

– China’s April CPI (+1.8% v +2.4% prior) slowed sharply to its lowest level in
a year and a half, putting it even further away from the official 2014 target
of +3.5%. Slowing growth in food prices (+2.3% v +4.1% prior) was behind most
of the deceleration. The April PPI numbers remained in deflation territory for
the 26th consecutive month, although the decline narrowed for the first time in
five months. Economists said the April CPI would mostly likely be the lowest in
the first half and would not prompt policymakers to take any proactive steps, though
it could give officials more leeway to relax monetary policy if necessary. An
improvement in China April trade data pointed at recovery after consistently
disappointing prints over the past few months. Both imports and exports grew
despite expectations of another month of y/y declines.