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Week in Review: Tech selloff causes widespread stock slide

For the week ended 11 April 2014

A reversal of direction in high-flying technology and biotechnology stocks led US and European stock benchmarks into a broad downturn. Results were more mixed in Asia. Risk-averse investors sought safety in US Treasury securities. The yield on the 10-year US Treasury note fell from 2.72% to around 2.61% during the week.

Disappointing data from China and Japan contributed to broad investor unease. China’s exports and imports both fell significantly from a year earlier. However, the 2013 figures were unreliable because of distortions in reporting. Japan’s machinery orders fell sharply in February, as businesses anticipate a slowdown in response to an April sales tax increase.

US Federal Reserve minutes released Wednesday set a more dovish tone regarding raising interest rates, and the latest report on initial jobless claims from the US Department of Labor pointed to a seven-year low in initial jobless benefits claims.

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US and global economic news

Fed meeting minutes reveal go-slow approach to raising rates
Based on minutes from its policy-setting meeting of 18 – 19 March, the Fed is less intent on raising interest rates than had been thought in recent weeks. The Fed’s meeting minutes soothed investor fears, revealing more dovish sentiments than had been expected. As a result, stocks rose broadly Wednesday, and the market changed its expected date of the Fed’s first interest rate increase to October 2016 from August 2016. 

US initial jobless claims dip to seven-year low of 300,000
In a strong sign of US labor market recovery, the number of Americans filing new claims for unemployment benefits fell to a seven-year low in the week ended 5 April. The weekly tally fell 32,000 to a seasonally adjusted 300,000, the lowest level since May 2007. The four-week moving average of claims eased 4,750 to 316,250. The number of continuing jobless benefit claims tumbled by 62,000 to 2,776,000, its lowest level since January 2008. 

US consumer sentiment hits nine-month high
US consumer sentiment rose in April to its highest level since last July. The preliminary reading of the Thomson Reuters/University of Michigan index of consumer sentiment rose to 82.6 from its final March reading of 80.0. 

China’s trade volume falls, officials hint at lower growth
China’s imports fell by 11.3% in March from a year earlier, while exports declined by 6.6%, resulting in a trade surplus of $7.71 billion. The significant across-the-board declines are yet another signal that China’s growth has tapered over recent years. However, the data were distorted by over-invoicing that occurred in 2013 as a way for some businesses to skirt tight government capital controls. Perhaps more significant are reports that senior government officials are hinting that China will miss its target of 7.5% economic growth this year. It would be the first time since 1998 that China has missed its growth target. China reports its preliminary first quarter GDP Tuesday, 15 April. 

Japan’s machinery orders slip
Japan’s core machinery orders fell 8.8% in February from January, a sign that businesses expect tepid economic growth after the country’s sales tax increases at the beginning of April. Core orders rose 10.8% from a year earlier. The International Monetary Fund predicts that Japan’s economic growth will ease to 1.4% this year from 1.5% in 2013. 

IMF trims global growth forecast
The International Monetary Fund lowered its overall forecast for global economic growth for 2014. The revised estimate is for 3.6% economic expansion, down from 3.7% forecast in January. The revision includes a less optimistic assessment for Russia, Brazil and Japan and a more robust view of growth in the UK and German economies. The IMF retained its 2.8% forecast for US growth. It downgraded Russia’s growth forecast by 0.6 percentage point to 1.3%, Brazil by 0.5 percentage point to 1.8% and Japan by 0.3 percentage point to 1.4%. It added 0.2 percentage point to its forecast for German growth and 0.4% to its assessment of expansion in the United Kingdom. 

ECB reportedly considering quantitative easing
The European Central Bank has so far not introduced any fresh quantitative easing to ward off deflation, but it is increasingly expected to. ECB Vice President Vitor Constancio indicated that the central bank is looking at various scenarios, which could include buying private assets. April inflation data could weigh on the ECB’s decision. 

BOE holding steady as UK economy grows
The Bank of England took no action on its monetary policy on Thursday, nor is it expected to change policy in the coming months. The BOE’s Monetary Policy Committee agreed to leave its benchmark interest rate at 0.5% and its bond portfolio at £375 billion ($629.74 billion). The IMF forecasts that the UK economy will grow 2.9% in 2014. The rate of inflation, 1.7% in February, is expected to remain below the BOE’s 2.0% target throughout this year. 

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US and global corporate news

JPMorgan misses earnings estimate; Wells Fargo profits grow
The US banking industry is expected to report lower earnings this quarter as a result of less favorable financial markets, including weaker fixed-income trading revenue. JPMorgan Chase, the first large US bank to post quarterly earnings, missed analyst estimates, with its earnings down 19% from a year earlier. Weak fixed-income trading results and a sharp drop in mortgage revenue hurt results. Wells Fargo posted a 14% increase in first-quarter profit, with fairly stable revenue despite a 28% drop in mortgage originations from the previous quarter. Wells Fargo’s mortgage servicing business helped soften the impact. The bank also reported a 41% increase in profits from its wealth, brokerage and retirement business. 

Lafarge and Holcim to create construction materials giant
Construction materials giants Lafarge of France and Holcim of Switzerland are seeking to merge. The new firm, LafargeHolcim, would be an industry colossus, with annual sales of almost $43 billion and a $50 billion market capitalization. LafargeHolcim would have significant operations in developed and emerging markets, including Germany, France, Brazil and India. The companies plan to sell assets, primarily in Europe, that generate close to $7 billion in annual revenue. 

Alcoa swings to loss but beats expectations
Aluminum maker Alcoa swung to a loss as it booked restructuring charges and experienced a larger-than-expected drop in revenue. However, its adjusted earnings beat expectations. Alcoa has been held back by slumping raw aluminum prices caused by global oversupply. Its revenue fell 6.5% because of a drop in prices. 

Toyota recalls 6.4 million vehicles
Toyota Motor is recalling 6.39 million vehicles in five separate recalls. The move could damage its reputation for quality control. The recall follows a recent announcement that Toyota will pay a $1.2 billion criminal penalty over safety problems related to the unintended acceleration of some vehicles. The recalls involve 27 vehicle models, including the RAV4, Corolla, Highlander, Matrix and Yaris. The recalls were prompted by defects in seat rails, air bag cables, engine starters, steering column brackets and windshield wiper motors. 

The week ahead

  • The European Union reports its industrial production on Monday, 14 April.
  • China reports its GDP, industrial production and retail sales on Tuesday, 15 April.
  • The US Federal Reserve releases its Beige Book on Wednesday, 16 April.
  • IBM, Google and Bank of America report their quarterly earnings on Wednesday, 16 April.
  • Goldman Sachs, Morgan Stanley and General Electric report their quarterly earnings on Thursday, 17 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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