Market Analysis

Beyond the Numbers

Risk Aversion Heightens on Macroeconomic Concerns
4/23/2012 9:20 AM

Risk Aversion Heightens on Macroeconomic Concerns
The major U.S. index futures are pointing to a sharply lower opening on Monday, with sentiment turning markedly negative following the release of a few economic reports, which showed contraction of the manufacturing sectors in China and the eurozone. Additionally, eurozone debt concerns have flared up after a couple of developments in the region. In Netherlands, a political crisis looms following the disagreement among the ruling coalition over budget cuts.

Additionally, traders may view the results of the French presidential elections as a threat for the progress made in tackling the debt crisis. The FOMC meeting scheduled for Tuesday and Wednesday could also keep some traders on the sidelines. The macroeconomic uncertainties are expected to stir up risk aversion.

U.S. stocks closed the week ended April 20th on a mixed note, as optimism generated by some positive earnings mitigated economic concerns stirred up by some lackluster data.

Last Monday, the major U.S. averages closed mixed amid the release of some mixed economic reports. While a Commerce Department report showed strong retail sales growth for March, a housing reading showed a dip in homebuilder confidence. Meanwhile, the averages ended uniformly higher on Tuesday on the back of some solid earnings reports, a successful bond auction by Spain and a positive German economic sentiment reading.

The major averages reversed course on Wednesday, closing moderately lower after European debt fears worsened in reaction to a report by the Bank of Spain showing an increase in bank bad debts. Slowing revenue growth reported by technology bellwethers Intel (INTC) and IBM (IBM) also weighed on sentiment.

Weighed down by some insipid economic evidence, the major averages closed moderately lower on Thursday. Stocks capitalized on a batch of positive earnings reports on Friday and ended modestly to moderately higher.

For the week ended April 20th, the Dow Industrials rose 1.40 percent compared to a 0.60 percent advance by the S&P 500 Index, while the Nasdaq Composite Index slid 0.36 percent.

Among the sector indexes, the NYSE Arca Airline Index climbed 2.64 percent and the NYSE Arca Biotechnology Index surged up 8.08 percent, while the Dow Jones U.S. Basic Materials Average and the Dow Jones Utility Average added over 1 percent each. Meanwhile, the NYSE Arca Gold Bugs Index declined 2.47 percent.

Currency, Commodity Markets

In their first day of trading as the front month futures, crude oil futures for June delivery are trading down $1.09 at $102.79 a barrel. The May futures expired last Friday at $103.05 a barrel, up $0.22 or 0.21 percent for the week ended April 20th.

Gold futures, which declined $17.40 or 1.05 percent to $1,642.80 an ounce in the previous week, are currently slipping $13.90 to $1,559.90 an ounce.

The currency market saw the strengthening of risk currencies last week, as the positive data out of Germany and the encouraging reception for the Spanish debt auctions perked up risk appetite. The U.S. dollar advanced 0.74 percent against the yen to 81.53 yen in the week ended April 20th, while it lost 1.08 percent against the euro before ending the week at $1.3219.

The greenback is currently trading at 81.09 yen and is valued at $1.3131 versus the euro.


The major Asian markets retreated, with the Hong Kong, Indian and Singaporean markets showing the biggest drops. Developments in the eurozone and a domestic data showing contraction in the Chinese manufacturing sector for the sixth straight month sapped risk appetite, resulting in a sell-off across the region.

After seeing some strength in the morning, Japan’s Nikkei 225 average retreated in the afternoon before ending down 19.19 points or 0.20 percent at 9,542. The strengthening of the yen exerted downward pressure on export stocks.

Australia’s All Ordinaries ended down 14.10 points or 0.32 percent at 4,430, as traders looked ahead to the monetary policy decisions by the U.S. Federal Reserve. Additionally, consumer price inflation data due to be released on Tuesday also kept sentiment subdued, as the Reserve Bank of Australia has predicated any policy move on the inflation data.

Hong Kong’s Hang Seng Index lost 386.25 points or 1.84 percent before closing at 20,624.

Flash estimates based on Markit’s manufacturing survey for April showed that the manufacturing purchasing managers’ index for China rose to 49.1 in April from 48.3 in March. The reading suggested that China’s manufacturing sector contracted, albeit at a slower pace, in April.


The major European averages are retreating sharply, with soft domestic private sector activity data and the results of the first round of the French presidential election impacting sentiment.

Markit’s survey showed that private sector activity in the eurozone contracted at the sharpest pace in 5 months in April. The manufacturing purchasing managers’ index fell 1.7 points to 46, while the service sector purchasing managers’ index declined 1.3 points to 47.9.

Meanwhile, French president Nicolas Sarkozy lost to his socialist rival Francois Hollande in the first round of the presidential election, rendering the second round scheduled for May 6th an uphill battle for the incumbent. The election results have increased fears that the firefighting aimed at diffusing the debt crisis in Europe may see a setback.

In corporate news, Vodfone (VOD) announced a recommended cash offer to buy Cable & Wireless days after India’s Tata Communications revealed its intention not to go ahead with an offer. The deal is valued at 1.04 billion euros.

AstraZeneca (AZN) announced a deal to buy Ardea Pharma (RDEA), which focuses on the development of small molecule therapies for the treatment of serious diseases, for $1.26 billion or $32 per share in cash.

Consumer electronics company Philips (PHG) reported that its first quarter EBITDA rose to 552 million euros from 438 million euros last year. Sales also rose modestly to 5.6 billion euros.


The FOMC meeting is likely to headline the economic events of the unfolding week, as traders anxiously await the Fed’s view on the recent turn of economic events and the central bank’s economic outlook.

The Commerce Department’s new home sales report for March, the National Association of Realtors’ pending home sales index for March, April consumer conference readings based on separate surveys by the Conference Board and Reuters and the University of Michigan, the durable goods orders report and advance first quarter GDP estimates are among the other economic reports that could attract attention.

The S&P Case-Shiller house price index, the Federal Housing Finance Agency’s house price index, the Labor Department’s employment cost index for the first quarter and the Treasury auctions of 2-year, 5-year and 7-year notes round up the economic events of the week.

The FOMC statement is unlikely to see much alteration, with the central bank expected to reiterate its view of soft growth. At the same time, the Fed is unlikely to signal any further quantitative easing, given its rationale that additional stimulus is warranted only if labor market deteriorates further.

Meanwhile, the Conference Board’s consumer confidence index may see a small dip, given the volatile financial market performance in the wake of the recent soft data point. BMO Capital Markets expects deterioration in the current situation index, while the expectations index may hold up.

The GDP growth for the first quarter is set to see a slowdown from the 3 percent pace seen for the fourth quarter. Fairly robust consumer spending, the recent improvement in the housing market and trade may have supported growth, while public spending is expected to remain weak. Additionally, the end of accelerated bonus and depreciation allowance may have impacted spending on machinery and equipment.

Stocks in Focus

Pfizer (PFE) announced an agreement to sell its nutrition business to Nestle for $11.85 billion in cash. French dairy company Danone was also interested in the division.

VimpelCom (VIP) said it has signed an agreement to sell its entire indirect 49 percent stake in GTEL Mobile Joint Stock company in Vietnam for $45 million and give up operational control of GTEL Mobile.

B/E Aerospace (BEAV) reported first quarter net earnings pf 67 cents per share on revenues of $747.3 million, up 24.5 percent. The results were better than expected. For 2012, the company expects earnings of $2.75 per share on revenues of $2.95 billion. Analysts estimate earnings of $2.79 per share on revenues of $2.98 billion.

Tellabs (TLAB) released a letter from its CEO Rob Pullen, in which he disclosed that he has been diagnosed with colon cancer.

ConocoPhillips (COP) reported worse than expected first quarter results.

Hasbro (HAS) reported a loss for its first quarter and net revenues declined from the year-ago period and missed the consensus estimates.

Ameriprise Financial (AMP), Crane (CR), Ethan Allen (ETH), Health Management (HMA), Illumina (ILMN), Netflix (NFLX), Owens & Minor (OWI), Rent-A-Center (RCII), Sanmina-SCI (SANM), STMicroelectronics (STM), Texas Industries (TXN), Tuesday Morning (TUES), Volterra Semiconductor (VLTR) and Zions Bancorp. (ZION) are among the companies due to report their quarterly results after the markets close.
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