From Trade The News:
Political events in Europe mesmerized markets this week, as voters in France and Greece delivered rebukes to the reigning dogma of belt-tightening austerity. In France, the transition from Sarkozy to Hollande has not generated a great deal of immediate tension, as Hollande does not officially take office and name a cabinet until next week. Greece is another story.
Greek voters deprived the ruling socialist and conservative parties PASOK and New Democracy of enough seats to maintain their coalition, instead splitting the vote among the two establishment parties and seven other right- and left-wing anti-austerity parties. There were three attempts to form a new government coalition, all of which failed, and new elections in June are looking more and more likely. In any case, the uncertainty generated by the situation in Athens drove risk-averse trading all week long. But taken together, voters have broken the pro-austerity axis between Paris and Berlin, and even Euro Group President Juncker has begun talking about a growth pact to accompany austerity.
In Spain, market fears about the capital position of the Spanish banking system forced Madrid to launch extensive measures to support the banks, and to execute a "partial takeover" of Bankia, the nation's third largest bank by assets.
Traders dumped the euro and commodities, pushing funds into the usual safe havens, USTs and bunds. Yields on 5-year, 10-year and 30-year German bonds fell to fresh all-time lows, with yields on the 10-year bunds dropping below 1.5% at one point. Gold has been a big casualty this week, dropping below $1,600 to five-month lows thanks to the stronger greenback. Selling pressure has also forced down silver, copper and crude, with the front-month WTI contract sliding even further after last week's big drop.
On Friday, a relatively mild downward revision of Euro Zone economic forecasts and the highest Michigan confidence reading in four year helped markets go out on a more stable note. Despite JP Morgan's trading flub damaging the US banking sector, and disappointing guidance from the likes of Cisco and Fossil that drove down individual stocks, the appetite for US equities remained strong enough to limit losses in the indices this week: the DJIA lost 1.7%, the S&P500 declined 1.1% and the Nasdaq dropped 0.8%.
Shares of Cisco closed out the week down about 12% following the firm's Q3 report. Cisco's headline Q3 results met expectations, but invests were spooked by its much weaker than expected revenue outlook for Q4. The company said the guidance was conservative and reflects longer sell cycles and an uncertain global environment, not a new downturn in spending. Shares of competitor Juniper Networks fell nearly as much as Cisco's. Online media name AOL may be turning a corner, with net income quadrupling on a y/y basis and advertising revenue rising solidly in Q1.
Investors found a lot to dislike in March quarter earnings out of major retailers, following last week's mixed April comps. Department store names Kohl's and Macy's met or topped expectations, although Macy's merely reiterated its outlook instead of hiking it as many were expecting. Kohl's predicted lower Q2 earnings and cut its FY12 sales outlook. Nordstrom's bottom-line missed expectations and the firm repeated its softer-than expected FY12 outlook. Both watchmaker Fossil and online travel site Priceline.com disclosed weak guidance and blamed Europe. Shares of McDonalds fell after the firm's April comps in the US and Asia-Pacific regions disappointed expectations.
The biggest banking news of the week comes courtesy of JPMorgan. On Thursday the home of the fortress balance sheet disclosed a whopping $2B loss on a derivatives-based hedging play, including up to $800M in mark-to-market losses in the current quarter. It turns out that the big loss stems from the huge position sustained by the UK-based CIO office, positions that were originally publicized in a Wall Street Journal article at the beginning of April and created a storm of skeptical media coverage (the trader who put on the position was nicknamed the 'London Whale'). Back then, JPMorgan admitted that the office made big bets on credit derivatives to "hedge structural risks." At the firm's Q1 earnings conference call later in April, CEO Jamie Dimon said that issues surrounding the CIO office were "a tempest in a teapot" and classified the activities as standard practices. On Thursday's call, Dimon, in a slightly shaken voice, said that the CIO portfolio demonstrated "errors, sloppiness, and bad judgment" and warned that the losses could get worse and it could go on for some time longer. In other news, Fannie Mae made a profit in its Q1 and said that that it would not request additional bailout funds in Q2 - a first since Washington took it over in 2008. It saw a $2.7B net profit versus a $6.5B loss a year ago.
Casino names with exposure to Macau saw big losses this week, following Wynn Resorts' Q1 report. Wynn's profits were weaker than expected and the firm blamed the outcome on slowing growth in its Macau operations. On the conference call, Steve Wynn insisted that the Macau market was still very robust and noted that the firm is still generating strong cash flow in China. Recall that the other day, Wells Fargo said early checks on Macau gaming revenue for May put it in a +15-19% y/y growth rate, compared to forecasts for +19% y/y. Shares of WYNN are down more than 10% on the week, while MGM is down more than 8% and LVS is down 4% on the week.
Investor Warren Buffett made headlines during and after Berkshire Hathaway's quarterly report and annual shareholder meeting last weekend. Berkshire reported big y/y increases in profits and revenues in its Q1. At the meeting Buffett disclosed that he nearly paid $22B to make a big acquisition recently (he also said that he might do a $30B+ deal in 2013) and there has been lots of speculation about the target of his interest. Unsubstantiated chatter suggested that Dollar General or Eaton Corp were in Buffett's crosshairs, while others mentioned were Chubb, Devon Energy, and Mosaic.
With full-on political turmoil in Europe roiling global markets, the euro broke out to a new trading range against the major pairs this week. EUR/USD dropped to the 1.29 handle, moving below levels last seen in late January. Dealers are beginning discuss the potential for a test of the January low at 1.2604. A breach of this key level could ignite volatility in the pair based on historical patterns. Risk aversion strengthened the greenback and the yen steadily throughout the week. USD/JPY hit fresh ten-week lows below 79.64 but held above the pivotal 79.50 level. Recall that 79.50 was the level where the G7 last launched a coordinated FX intervention in the pair back in March 2011. The BoE left both its interest rate and asset purchase targets unchanged which provided some upward momentum for sterling. There had been some speculation earlier in the week that the BoE could increase its QE measures.