The Week in Review for the week ending July 27, 2012
Markets responded positively to European Central Bank president Mario Draghi’s assertion that the ECB would do whatever it takes to preserve the euro. However, Germany’s Bundesbank reiterated its opposition to further ECB government bond purchases.
The UK economy contracted sharply in the second quarter and Moody’s Investors Service lowered its outlook for Germany’s AAA rated debt to negative because of its increased liabilities in the event of bailouts of Spain and Italy.
The US capped a mixed bag of economic data with a report of modest second-quarter economic growth. As corporations report their quarterly earnings, it is now clear that the eurozone crisis and global economic slowdown are squeezing corporate profits to a degree.
At the same time, 72% of the 290 S&P 500 companies reporting results have beaten analysts’ estimates, according to Bloomberg.
Amid this environment the DJIA was up 2.0%, the S&P 500 was up 1.7%, the Russell 2000 was up 0.6%, the Global Dow Ex-US was up 1.0% and crude oil fell -1.9%.
The chance of Spain needing a full-fledged financial bailout, even after recently securing a €100 billion rescue for its banks, loomed larger this week as two of its regional governments –– Valencia and Catalonia –– asked the country’s government for financial help. Several other regions may follow. Spain’s economic output contracted 0.4% in the second quarter from the first quarter and is on track to shrink 1.5% this year, according to the Bank of Spain.
The eurozone composite purchasing managers’ index (PMI), which measures both services and manufacturing output, remained at 46.4 in July, its sixth consecutive month of contraction. A reading below 50 indicates less output than the month before. With a recession defined as two straight quarters of economic contraction, this is seen as a significant indicator.
Germany’s composite PMI fell to 47.3, its lowest reading in more than three years, from 48.1 in June. France’s economy also contracted, with its PMI rising to 48.0 from 47.3.
The UK economy contracted 0.7% in the second quarter, according to the country’s Office for National Statistics, after its gross domestic product fell 0.3% and 0.4% in the two previous quarters.
The ratio of debt to gross domestic product for the 17 eurozone nations rose to 88.2% in the first quarter from 87.3% in the final quarter of 2011, according to Eurostat, the European Union’s statistics agency. Greece had the highest level of debt to GDP, at 132.4%, followed by Italy at 123.3.
German business confidence fell for the third month in a row in July, according to the Ifo monthly indicator of business confidence. However, German consumer confidence rose marginally, helped by a low level of unemployment and rising wages. It remains uncertain whether domestic consumers can bolster Europe’s largest economy in the face of slowing demand for exports elsewhere in the eurozone.
US economic growth slowed as expected in the second quarter. The initial gross domestic product report from the US Department of Commerce indicated a 1.5% annual rate of economic growth in the US for the quarter, down from upwardly revised 2.0% and 4.1% growth rates in the two previous quarters.
US home prices rose in the second quarter from the year-earlier period for the first time since 2007, according to data from real estate firm Zillow, and home prices rose for the fourth straight month in May, according to the Federal Housing Finance Agency. However, demand for new US homes dropped 8.4% in June from May, the US Commerce Department reported.
Initial claims for unemployment benefits fell by 35,000 to 353,000 for the week ended July 21, and the four-week moving average fell to 367,250, its lowest level since March 31.
Orders for durable goods rose by 1.6% in June, but demand was much weaker except for strong demand for civilian and defense aircraft. China’s manufacturing activity declined in July for the ninth straight month, but the reading of the HSBC China Manufacturing Purchasing Managers Index reached 49.5, its highest level in five months. South Korea’s economy grew in the second quarter, but at a slower pace than expected. Although South Korea’s exports to Europe have been hurt by weakness there, the country is expected to benefit from Chinese economic stimulus in the coming months.
Apple was partly a victim of its own success in the second quarter of 2012, as its quarterly sales and net income fell short of Wall Street analysts’ estimates for just the second time in almost a decade. One reason was a decision by many customers to delay upgrading their iPhone until a new model is introduced this fall. Weakness in the struggling European economy was also a factor. Overall, Apple’s sales rose more than 22% from a year earlier, and its profit rose almost 21% from the same quarter last year.
South Korea’s Samsung Electronics, the world’s largest technology firm by revenue, reported a record profit in the second quarter, up 48% from a year earlier. Samsung widened its lead over Apple in the high-margin smartphone market, and grew its market share to 34.6%, doubling Apple’s 17.8% share as it benefited from robust sales of its ultra-thin LED monitors.
McDonald’s had stronger-than-expected sales in the second quarter, but its earnings fell 4.5% as same-store sales growth slowed. McDonald’s has outpaced its industry rivals in recent years because of its efficient operations and increasingly diverse menus, but the global economic slowdown and increased US competition hurt results in the most recent quarter. Profit margins were also squeezed by the strengthening US dollar.
AT&T’s second-quarter earnings grew by 8.7% from a year earlier. Its profit margins widened as customer turnover decreased.
Caterpillar’s second-quarter profits climbed 67%, driven by strong sales of construction machinery in the US and rising global demand for mining equipment. However, the leading global manufacturer of bulldozers, excavators and other construction machines needed those strengths to override weakening sales in Europe, China and Brazil. Caterpillar’s revenue rose 22% as its operating margin widened substantially.
Amazon.com reported sharply lower profits despite a 29% increase in revenue, with its very thin profit margins posing a problem. Both profit and revenue were below analysts’ estimates for the second quarter.
Popular social network Facebook continued to struggle, reporting a fifth-straight quarter of declining revenue growth. Soaring costs and slowing growth caused the company to swing to a second-quarter loss. Second-quarter revenue was up 32% from a year ago, its slowest pace of sales growth in more than a year. The rise of smartphone access to Facebook, which means users view fewer ads, is curbing revenue while employee compensation via stock shares has climbed.
Exxon Mobil’s second-quarter earnings soared 49% on one-time gains related to a restructuring in Japan and tax-related items. Exxon Mobil’s profit from exploration and production fell as production slowed.