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Week in Review: Greek debt drama caps volatile week

For the week ended 17 April 2015

  • China’s first-quarter GDP growth contracts to 7%
  • Risk of Greek debt default rises
  • US consumer and housing data show improvement
  • Nokia to buy Alcatel-Lucent
  • Big banks report earnings growth; other results mixed

The rising risk of a Greek debt default jolted markets Friday. Global stock volatility increased, while “safe-haven” government bond yields fell. The 10-year US Treasury yield slipped below 1.90%, and German 10-year bund yields dropped to new lows near 0.07%.

Investors took weak Chinese economic growth as increasing the likelihood of further central bank stimulus. Oil prices climbed in response to evidence of peaking US production, as US oil rig counts fell sharply in February and March. Corporate earnings reports for the first quarter were mixed.

US and global economic news

China’s growth slows in first-quarter
China’s first-quarter GDP grew 7.0% at an annual pace, the slowest in six years. Monthly retail sales, industrial output and fixed asset investment data all fell short of expectations. People’s Bank of China stimulus measures have so far failed to boost economic growth, although the Chinese stock market has surged 70% since November, when the PBOC began cutting interest rates.

Greek default risk rises
Investors responded to the increased risk of a Greek debt default with a massive selloff of the country’s government bonds. Yields on Greece’s 2-year government bonds soared to an all-time high above 27% and 10-year bond yields climbed above 13%. An inverted yield curve like this indicates a high risk of a default that could trigger Greece’s exit from the eurozone and spark heightened volatility in the periphery countries of Spain, Italy and Portugal.

S&P downgrades Greece’s credit ratings
Standard & Poor’s Ratings Services cut the credit rating for Greece to CCC+ with a negative outlook, as S&P expects Greece’s debt and financial commitments to be unsustainable without serious economic reform.

US industrial output falls in March
US industrial production fell by 0.6% seasonally adjusted in March, deeper than the expected 0.3% drop. Hurt by the retrenching US oil industry and stronger US dollar, industrial output contracted at an annual rate of 1% for the first quarter — the first such decline since 2009.

Signs of spring in US economic data

  • The University of Michigan consumer sentiment index rose to a preliminary April reading of 95.9 from a final reading of 94.0 in March.
  • US retail sales increased 0.9% in March — the biggest monthly gain in a year — but fell short of the predicted 1.1% increase.
  • The National Association of Home Builders/Wells Fargo homebuilder confidence index rose to 56 in April from a revised 52 in March, the first gain in five months.
  • US housing starts rose a less-than-expected 2% in March to a seasonally adjusted annual rate of 926,000. Single-family units increased 4.4%, while multifamily units fell 2.5%.

US jobless claims rise to 294,000
Initial claims for US unemployment benefits rose 12,000 to 294,000 for the week ended 11 April, while the four-week moving average edged up 250 to 282,750. Continuing claims fell 40,000 to 2.27 million for the week ended 28 March. The 4-week average and continuing claims remain at or near 15-year lows.

US and global corporate news

Nokia to buy Alcatel-Lucent for $16.6 billion
Finland’s Nokia will buy France’s Alcatel-Lucent in an all-share deal valued at €15.6 billion ($16.6 billion). Nokia is looking to build up its telecommunications equipment franchise to compete with the market leader, Sweden’s Ericsson.

GE posts quarterly loss on sale of lending arm
General Electric reported a loss of $13.6 billion for the first quarter on costs related to the planned sale of GE Capital assets. Excluding those charges, GE’s operating earnings barely topped expectations while revenue disappointed, hurt by weakness in the oil and gas business and the impact of the strong US dollar.

Bank profits grow in first quarter, boosted by trading
Market volatility in the first quarter helped drive bank trading revenues higher. Goldman Sachs posted a 40% increase in first-quarter profits as revenue rose 14% to a four-year high, with trading revenue up 23% from a year earlier. J.P. Morgan Chase reported a better-than-expected 12% increase in profit as first-quarter trading revenue rose for the first time in five years.

Citigroup sheds expenses to grow profit
Citigroup reported a 21% rise in first-quarter profit, beating analyst estimates despite a 2.3% decrease in revenue. The key factor was a 10% drop in expenses from a year earlier.

BofA posts profit, misses expectations
Bank of America swung to a first-quarter profit but slightly missed expectations. BofA’s revenue fell 5.9%.

Wells Fargo earnings drop but beat forecasts
Wells Fargo announced the first decrease in quarterly earnings in more than four years, citing pressure on lending margins. However, earnings beat expectations and revenue rose 3.2%.

Amex, AMD disappoint
American Express and Advanced Micro Devices were among the companies reporting disappointing earnings. Amex’s quarterly results missed estimates, while AMD cited its lack of confidence that annual results would improve after a weak first half.

The week ahead

  • China reports its flash manufacturing purchasing managers’ index on Wednesday, 22 April.
  • US existing home sales are reported on Wednesday, 22 April.
  • General Motors and Google report first-quarter earnings on Thursday, 23 April.
  • The European Union reports its flash composite PMI on Thursday, 23 April.
  • US durable goods orders are reported on Friday, 24 April.

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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