Alcoa missed earnings targets on Tuesday, and that was before hefty one-time restructuring charges. Revenue was well ahead of expectations, although investors are evidently shaken by selected sequential declines in various income segments (with the notable exception of flat-rolled products). On the conference call, executives were upbeat, noting that the aluminum market would grow 10% in 2010.
Intel reported one of the most profitable quarters in its history on Thursday evening, beating earnings and revenue targets and racking up a stunning gross margin of 65%, with similar results expected next quarter as well. On the conference call, Intel's CFO said consumer demand has returned to normal levels and is driving PC demand, while also warning that businesses are not purchasing PCs. Despite the outperformance, shares of INTC were down nearly 3% on the day on Friday.
JP Morgan offered a mixed earnings report on Friday morning, featuring strong bottom-line outperformance, a big revenue miss and disturbing trends in mortgage and card loans. Revenue was off primarily due to a big sequential decline in investment banking revenue. Losses were seen in both mortgage and credit card lending.
The firm expects losses at Chase card unit to only increase next quarter, while losses at WaMu unit could climb dramatically. CEO Dimon said that "while we are seeing some stability in delinquencies, consumer credit costs remain high, weak employment and home prices persist. Accordingly, we remain cautious." Citigroup was out on Friday with a similarly dire outlook, warning that it expects $1B in credit card losses in the first half of 2010.
Google made headlines this week after threatening to pull out of China over allegations that entities linked to the Chinese government had hacked into Gmail and stolen mail from Chinese dissidents' accounts. There were scattered reports that other US corporations, including Juniper Networks and Dow Chemical, had suffered intrusions. In other tech news, analyst firms Gartner and IDC published Q4 PC market analyses, both of which show strong sales growth for the industry. Gartner saw global PC shipments up more than 22% y/y, IDC said the US PC market grew by 24% y/y in the quarter. Both firms noted the growth was driven by sales of small, low-priced devices including netbooks and small notebooks.
US Treasury prices began the week on a stable footing as traders used the softer than expected Dec payrolls figures as an indicator the Fed is unlikely to change its stance in the near term. Buyers forced yields dramatically lower on Tuesday as money flowed to the relative safety of government bonds after the PBoC's reserve requirement hike rippled through markets. That afternoon a 3-year note auction led off $74B in reopened coupon supply in fine fashion, only adding to the positive sentiment. The subsequent 10- and 30-year reopenings were greeted with even more enthusiasm. The intensity of demand opened some eyes and speculation grew out of the unusually high percentage of awards to direct bidders. Whispers were heard that the enormous domestic bid could likely be the US government while others offered up darker hypotheses. Government bond bulls remained in charge as the week drew to a close further aided by sovereign debt jitters festering in Europe. Overall the US benchmark 10-year yield has declined a shade under 20 basis points on the week and remains roughly 8 basis points below what the mid-week reopening drew. With the 10-year yield back below 3.7% rates are at levels not seen since the middle part of December. The 2-10 year spread has come off of all time highs to dip back below 280 basis points.
In currency trading, the greenback began the week on a soft note in the aftermath of the prior week's US payroll data and China's strong December trade reading. The euphoric sentiment that characterized early January continued to wane as the dollar suffers from the double whammy of lower yields in two-year instruments and dented prospects for economic recovery. At this point the themes that hampered the greenback throughout 2009 seem likely to resurface as skepticism regarding US finances grows. In Europe, the ECB maintained its key main refinancing rate at 1.0%, as expected. Verbal intervention from German Economy Minister Bruederle didn't help euro sentiment after he commented that Germany was not experiencing a self-sustaining economic recovery.
The Greek sovereign debt situation continued to deteriorate. The Greek PM reiterated that Greece was not seeking any IMF bailout or planning to exit the Euro Zone, but then again he provided practically no details on how the country would finance its budget or drastically cut its debt-to-GDP ratio in order to meet the EU's Maastrict criteria. The ECB published its opinion on Greek debt restructuring law, stating that the move could hinder the flow of credit and hurt markets. On Friday, the ECB's Trichet talked tough, declaring that the country has a "major debt problem" and that "no government should expect special treatment," specifically mentioning both the Greek and Irish situations. His words pushed the 10-year Greek/Bund spread beyond the 280bps level. Spreads among other peripheral European debt have widened noticeably as well: the Ireland/Bund 10-year spread was at +162bps, while the Portugal spread was at over +95 bps, at its widest level since last April.
Sterling was firmer against the majors pairs with dealers attributing the strength to mid-week press comments from BOE's Sentance. The central banker commented that the BoE had done enough to stimulate the UK economy and prompted a string of GBP short-covering. Sentance hinted at a potential move to a neutral bias as the recovery gets underway in the UK. The peripheral European sovereign concerns also aided pound sentiment.
In Japan, newly installed Finance Minister Kan has already given up on the govt's new approach to the yen and redefined his initial FX views. Kan said FX rates should be left to the market and walks the standard G7 line on excessive volatility. He also noted that the Chinese currency might be discussed at the upcoming Feb G7. Dealers say a huge 91.25 option that expires later this month could contain the volatility in USD/JPY over the next two weeks. The 90.70 area continued to be weekly pivot point.
Fresh evidence of strong economic recovery and a surprise reserve requirement hike put China in the macro spotlight. China's robust December trade figures saw exports rise for the first time in just over a year (+17.7% y/y) and imports advance at an all-time high pace of expansion of +56% y/y. Interestingly, the data showed China has become a net importer of fuel, in yet another sign of growing domestic demand. On Friday, Commerce Ministry official Yao said that despite the recent blowout trade numbers, exports and imports will see only slow recovery in 2010, constrained by weak external demand from Europe and US markets. Yao also suggested that Germany may yet take back the title of the world's top exporter.
The PBoC's increase of the reserve requirement ratio by 50bps to 16.0% was the first move in policy since December 2008. The measure also followed consecutive days of 4bp increases in 3-month and 1-yr debt auctions this week as well as numerous warnings by the Chinese officials regarding excess speculation across asset classes. Nevertheless, regional markets were taken by surprise, with post trade data "risk-on" trade unwinding throughout the Wednesday session.
Australia's jobless rate fell for the second consecutive month in December to 5.5% against expectations of a rise. Speaking after the release of the report, the Australian Deputy PM said the data proves that Australia's economy is outperforming others and that the fiscal stimulus is working. Subsequently, probabilities for a 25bp RBA rate hike in Feb repriced above 70% from below 60% after better than expected jobs data. Moreover, The Australian newspaper said that following better than expected Australia jobs data in prior session, economists now see peak unemployment at 5.8% reached in Jun-Oct of 2009 and falling below 5% in 2010. Formerly govt ministers were said to have anticipated unemployment reaching 6.75% peak.
Trade The News Staff
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