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Week in Review: Markets tread water on soft data, earnings

For the week ended 24 April 2015

  • China’s central bank cuts reserve requirement
  • Eurozone manufacturing slows
  • US durable goods data disappoint
  • Teva bids $40 billion for rival Mylan
  • Deutsche Bank fined $2.5 billion

China’s central bank cut bank reserves again in an effort to stimulate lending and growth during a week of soft global data. Uncertainty over Greece’s negotiations with creditors cast a shadow over markets. US economic reports were weak overall, with manufacturing growth slowing and durable goods orders falling.

With roughly one-third of S&P 500 companies reporting first-quarter earnings so far, 71% have exceeded lowered expectations. However, profits were weakened by the strong US dollar, which gained 23% during the year ended 31 March. Only 44% of companies have topped revenue forecasts.

For the week, global stocks were mixed. However, the Nasdaq Composite Index set an all-time high, surpassing the mark set in March 2000. The yield on the US 10-year note rose above 1.9%. Crude oil prices extended their substantial gains of recent weeks.

US and global economic news

China’s central bank cuts reserve requirements
The People’s Bank of China cut its reserve ratio requirement by 1 percentage point to 18.5%, the largest such move in its history. The action injects liquidity in response to weakening first-quarter Chinese growth, disappointing trade data and heightened deflation fears. The PBOC has also cut interest rates twice since November. The HSBC flash manufacturing purchasing managers’ index for China fell to 49.2 in April from 49.6 in March.

Eurozone manufacturing slows in April
The Markit Composite purchasing managers’ index for the eurozone fell to 53.5 from 54.0 in March, when it reached an 11-month high. The data confirmed ongoing expansion but fell shy of rising expectations caused by the European Central Bank’s quantitative easing stimulus program.

German sentiment hurt by Greek uncertainty
German investor confidence fell unexpectedly, hurt by uncertainty over Greece’s debt crisis. The Center for European Economic Research (ZEW) reported that its index of investor and analyst expectations fell to 53.3 in April from 54.8 in March. The Deutsche Bundesbank, Germany’s central bank, said German economic growth is likely weaker than predicted. 

US core durable goods orders shrink for seventh month
Orders for non-military capital goods excluding aircraft, a proxy for business equipment spending plans, fell 0.5% in March, the seventh straight month of declines. Overall durable goods orders rose 4.0%, driven by a 31% rise in bookings for non-military aircraft and a 5.4% increase in automobile orders.

US housing data mixed
US existing home sales rose 6.1% in March to a seasonally adjusted annual rate of 5.19 million, the highest level in 18 months, while new US single-family home sales had their largest drop in the same time period, declining 11.4% to an annual rate of 481,000 units. However, sales of newly built homes rose 19.4% from a year earlier.

US jobless claims rise to 295,000
Initial claims for US unemployment benefits rose 1,000 to 295,000 for the week ended 18 April. The four-week moving average climbed 1,750 to 284,500. Continuing claims rose 50,000 to 2.33 million for the week ended 11 April.

US and global corporate news

Drugmaker Teva bids $40 billion for rival Mylan
Generic drug maker Teva Pharmaceutical Industries made an unsolicited $40 billion bid for rival Mylan, which had made an offer to buy Perrigo. Mylan has said it isn’t interested in a deal. To discourage a hostile takeover, Mylan has adopted a poison-pill defense that triggers the sale of discounted stock to dilute share value.

Deutsche Bank fined $2.5 billion for rate rigging
Deutsche Bank was fined a record $2.5 billion by US and UK regulators, and its London subsidiary pleaded guilty to manipulating the London Interbank Offered Rate (LIBOR) and Euribor. Fines imposed on global banking giants in the seven-year investigation now total $8.5 billion.

Morgan Stanley profit jumps 60%
Investment bank Morgan Stanley posted a much-stronger-than-expected profit increase, driven by higher bond- and equity-trading revenue, which rose 33%. Morgan Stanley is shifting its focus more toward wealth management to free up capital and comply with tougher regulatory requirements.

Facebook growth slows, mobile use expands
Social network giant Facebook reported a 42% increase in first-quarter revenue from a year ago, falling short of expectations. However, the industry leader reported that almost three-quarters of its ad revenue came from mobile devices and most of its 1.44 billion users accessed its website via cellphones and other mobile devices in the first quarter.

Google revenue rises 12%, misses expectations
Search giant Google’s first-quarter revenue and earnings grew but fell short of expectations, hurt by the strong US dollar and slower growth. Revenue rose 12% from a year earlier. However, excluding the impact of currency changes, it rose 17%. The number of “paid clicks” on ads rose, but the average price of online ads — “cost per click” — fell 7%, as more people access Google's services on mobile devices with lower ad rates.

Caterpillar posts profitable quarter, gloomier outlook ahead
Construction and mining equipment maker Caterpillar reported stronger-than-expected quarterly earnings. However, sales fell and its outlook for the rest of 2015 was weaker, hurt by Chinese economic weakness, US economic uncertainty and lower oil prices eroding demand in oil-producing countries.

The week ahead

  • Pfizer and UPS report their quarterly earnings on Tuesday, 28 April.
  • The S&P/Case-Shiller Home Price Indices are released on Tuesday, 28 April.
  • The first-quarter US gross domestic product is reported on Wednesday, 29 April.
  • The US Federal Reserve makes a policy announcement on Wednesday, 29 April.
  • The Institute for Supply Management’s manufacturing index and the University of Michigan Consumer Sentiment Index are reported on Friday, 1 May.

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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