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Week in Review: Quarterly earnings drive stocks downward

For the week ended 24 July 2015

  • Greece passes austerity, ready for bailout
  • China’s manufacturing PMI falls
  • Japan’s export volume flat
  • US home sales, prices climb
  • Apple, Microsoft earnings disappoint

Stocks retreated globally, largely driven by weak corporate earnings, as US companies posted their second-quarter results. Apple, IBM, Caterpillar and Microsoft were among big names to miss earnings estimates or cut full-year forecasts. However, Morgan Stanley and Amazon beat expectations. So far, more than 75% of companies have exceeded earnings forecasts, while only 52% have surpassed revenue expectations.

The yields on the 10-year US Treasury note and 10-year German bund fell to 2.26% and 0.66%, respectively, as investors sought more safety. Gold prices fell to a five-year low, below $1,000 per ounce. The euro rose to near $1.10. Oil prices for US West Texas Intermediate and international Brent crude oil tumbled to about $48 and $54.50 per barrel, respectively.

US and global economic news

Greece passes austerity measures
Greece’s parliament passed new austerity measures Thursday, clearing the way for negotiations with its international creditors over a third bailout package, worth up to €86 billion. Greece hopes to have funding in place by 20 August, when it is due to repay €3.2 billion to the European Central Bank. Greece’s banks reopened Monday after being closed for three weeks, although many capital controls remain in effect.

China’s manufacturing gauge disappoints
The Caixin Media/Markit preliminary manufacturing purchasing managers index fell from 49.4 in June to 48.2 in July, the lowest level in 15 months. The report points to continued slowdown in China’s economy and puts pressure on its government and central bank to introduce additional stimulus measures. In response to this news, Asian stocks fell and the Australian dollar tumbled to a six-year low.

Japan’s export volume flat, value rises 9.5% in June
The value of Japan’s exports rose 9.5% in June from a year earlier, but volumes were unchanged. Foreign demand for Japanese goods remained flat despite the yen’s weakness. Japan’s imports fell 2.9%, creating a ¥69 billion ($556 million) trade deficit. Separately, the International Monetary Fund warned that unless Japan addresses its debt through spending cuts and more realistic budget forecasts, its debt could climb to three times the size of its economy by 2030.

US existing home sales soar, new home sales decline
In June, US home resales hit their highest point since February 2007. Existing home sales rose 3.2% to an annual rate of 5.49 million units. Sales were 9.6% higher than a year earlier. In contrast, new single-family home sales fell 6.8% in June to a seasonally adjusted annual rate of 482,000, a seven-month low. However, sales were 18.1% higher than in June 2014.

US existing home prices reach record high
The median price of US existing homes sold in June reached a record $236,400. The median June sales price was 6.5% higher than a year earlier, according to the National Association of Realtors. But factoring in inflation, prices are 20% below where they were in 2006, when the previous record of $230,400 was set.

Weekly US jobless claims plunge to lowest level since 1973
Initial jobless claims tumbled 26,000 to 255,000 for the week ended 18 July, the lowest level since November 1973. The steep weekly drop may reflect reporting inconsistencies related to summer shutdowns for retooling at auto plants. The four-week moving average fell 4,000 to 278,500. Continuing claims dropped 9,000 to 2.21 million for the week ended 11 July.

US and global corporate news

Apple posts strong gains but disappoints
Technology giant Apple reported strong — but not strong enough — gains in sales and profit for its fiscal third quarter. Though Apple posted a 38% rise in profit, and sales surged 33%, results fell short of analyst estimates. Sales of iPhones jumped 35% to 47.5 million units, shy of the 50 million that analysts had forecast. MacIntosh computer sales rose 9% while global PC shipments fell 9.5%.

Microsoft posts $3.2 billion loss
Microsoft reported a $3.2 billion loss for its fiscal fourth quarter. Weakness in its corporate software division was offset somewhat by strength in consumer technology, including sales of Surface tablets and Xbox game consoles. The large loss resulted from $8.4 billion in charges and layoffs in the firm’s troubled mobile phone operations, acquired from Nokia in 2014. Excluding the Nokia charges, Microsoft’s earnings beat analyst estimates.

Amazon swings to profit on sales surge
Amazon recorded an unexpected profit, driven by a 25.5% rise in North American sales compared with a year ago. Cloud-computing revenue and growth in the company’s Prime subscription service contributed to results. Amazon also forecast higher third-quarter revenue.

Morgan Stanley earnings beat expectations
Morgan Stanley beat earnings expectations on a 32% increase in trading revenue, in contrast with Wall Street rival Goldman Sachs’ trading revenue, which fell 5%. Morgan Stanley’s overall revenue rose 13%.

Anthem to buy Cigna for $48.4 billion
Health insurer Anthem has agreed to buy rival Cigna for $48.4 billion, potentially creating the largest US health insurer. The deal calls for Anthem to pay $188 per share in cash and stock for Cigna, a 22% premium above Cigna’s closing price of $154.36 on Thursday. The price was bumped up from $184 per share offered in late June.

Lockheed Martin to buy Sikorsky Aircraft for $9 billion
Lockheed Martin plans to buy Sikorsky Aircraft, the helicopter unit of United Technologies, for $9 billion. The deal locks in Lockheed, already the Pentagon’s number one supplier, as the dominant company in US weapons making and opens new foreign markets.

The week ahead

  • Germany’s Ifo survey is released on Monday, 27 July.
  • US durable goods orders are reported on Monday, 27 July.
  • The US Federal Reserve holds its policy meeting Tuesday–Wednesday, 28–29 July.
  • European Union economic sentiment is reported Thursday, 30 July.
  • US GDP is reported on Thursday, 30 July.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

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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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