The Candy Crush Saga

As you may have heard this week, King Digital Entertainment, the designer of the ultra-popular mobile game ‘Candy Crush’, officially began as a publicly traded company. The company, listed as KING on the New York Stock Exchange, issued 22.2 million shares at a price of $22.50 on Tuesday, giving the IPO an initial value of 499.50 million dollars. After its first day of trading, the company’s share was down 15.6%, far from the 72.7% Twitter’s gain as you can see it on the graph below. As some of the sell-side analysts would say, not such a royal IPO.


(Source: SIX Financial Information, from WSJ)

Is the bearish trend going to continue in the coming weeks?

To begin with, unlike some of its internet-based friends valued over 1 billion US Dollars without making a single dime (Twitter, Snapchat, Pinterest…), KING has generated an annual revenue of $1.89bn (profit of $568mio) despite offering games to players for free (more than 1000% growth compared to the ‘shy’ $164mio revenue in 2012). For instance, Twitter, which was launched in 2006, managed to raise $1.82bn in its IPO last year (November 7) by selling 70 million shares at $26 a share. They are now trading at 47.3 after reaching a high of 73.3 on December 26th 2013, which still represents a 81.9% increase. However, if we have a look at the Income Statement, we can see that Twitter hasn’t recorded a profit for at least the past four years with net losses that came in at $67m in 2010, $164m in 2011, $79.4m in 2012 (its first public financial statement) and $645.3m in 2013 .

Secondly, our thoughts about the company were: ‘is it going to be all about Candy Crush or there are other projects coming?’ The most popular game (Candy Crush Saga), which was created in March 2011 and has managed to catch people’s attention to become an addictive time-waster especially in a tube journey, generated 78% of KING company’s revenue for the last three months of 2013 and approximately has a 100-million user each day. Like most of the game companies, the profits come from a minority of users who buy extra-lives, ‘super-power’ and other add-ons.

But according to his last interview this week, chief executive Riccardo Zacconi who has led King since its start in 2003 seemed really confident about the company’s future. He emphasized that the company’s strategy is to continue to build a portfolio of games and a network of players, and not just ‘find another megahit like Candy Crush’.

We keep a bullish view in the medium term as we believe that KING inherited from the market’s bearish sentiment on the Tech stocks. The heavy-tech NASDAQ composite index was down 2.8% from last Friday’s close to 4,155.759, with Facebook, Twitter and Zynga all down by 10.8%, 7.1% and 10.7%.

Quick chart review: As you can see it in the graph below, the stock continued to plummet after its 15.6% daily loss on Tuesday and ended the week at 18.08 (which represents a 19.7% decrease). It found support below the 18.00 level after it reached a low of 17.62 on Friday.


(Source: Bloomberg)

FOMC meeting: the impacts

As expected, the Fed reduced the asset purchase programme by another $10bn in April to $55bn, adding $25bn of agency MBS and $30bn of LT Treasuries to its holdings every month. The surprise though came from the upward revision to the Fed funds rate, which is expected to increase to 1% or more by the end of 2015 (up from 0.75%) and to 2.25% by the end of 2016 (up from 1.75%). US interest rates increased sharply after the statement, pushing the value of the US Dollar higher (US Dollar index was up 60 pts to 80.10).

In addition, US policymakers lowered the 2014 GDP growth range to 2.8% – 3.0% (from 2.8% – 3.2% in December) and are targeting a 6.1% – 6.3% jobless rate by the end of this year (see the details below). With the unemployment rate standing close to the 6.5-pecent threshold (6.7% in February), Janet Yellen announced during her first conference as a Fed chair that the central bank would shift to a more qualitative approach and will consider a ‘wide range’ of variables instead of relying mainly on the unemployment rate.

(Source: Federal Reserve website)

Now let’s review the impacts of the Fed funds rate forecast change. Firstly, as you can see it on the chart below, the 10-year US yield increase by 10 bps to 2.77%, sending Gold to end-of-February lows (trading at 1,328 after the statement).

(Source: Reuters)

The FOMC meeting also put the Euro under pressure, a currency that has remained resilient in the middle of this Risk-ON / Risk-OFF market driven by Russian-Ukrainian tensions and the weakening Chinese Yuan episode. EURUSD, which had been traded around the 1.3900 level (1.3850 – 1.3960 range) for the past couple of weeks, was pushed back towards 1.3800 (1.3810 after the statement), frustrating the bulls (who were expecting 1.4000) and easing ECB concerns about a ‘strong exchange rate’.


(Source: Reuters)

Eventually, Cable broke its 1.6545 support and found support slightly above the 1.6500 level. As you can see it on the chart below, the plunge in the 2-year UK-US spread (purple line) from 31.5 bps to 22.5 bps pushed the pair (orange) to mid-Feb levels. The 2-year spread has been one of the major drivers of Cable since Carney adopted the forward guidance in August last year. As unemployment rate has decreased faster than expected and is now standing close to the 7-percent threshold (7.2% in the three months to January), traders have been speculating on a rate hike in the first quarter of 2015. However, some MPC members put the British pound under pressure stating that a ‘strong exchange rate’ could weigh on the BoE’s decision to start tightening. With policymakers’ recent comments and an annual inflation at its lowest level since 2009 (1.9% YoY in January), the market is now pricing in a BoE action in the second quarter of 2015.


(Source: Reuters) 

UK Budget: In the early afternoon, the Chancellor of the Exchequer Osborne presented the new budget and as expected, it contained a few surprises in the aggregate numbers of the deficit path (real news was the incentives for savers, which we are not going to cover in this article). As the UK economy is expected to accelerate this year (2.7% according to the Office for Budget Responsibility – OBR), the deficit is expected to decrease gradually in the following years and switch to a small surplus of 0.2% in 2018/19 according to the OBR.

Quick Review on the Aussie (ahead of the employment figures)

As we mentioned it in our last post (here), Australian fundamentals surprised traders last week and pushed the Aussie higher against most of the currencies. AUDUSD broke its 100-day MA at 0.9080 last Thursday and hit a 3-month high at 0.9133 on Friday before it ended the week below the 0.9100, helped by the better-than-expected employment reports in the US (Non-Farm payrolls came in at 175K in February vs. 149K cons.).

Below, there is a chart that we like to watch quite a bit every morning at the office: the AUDJPY spot rate (black bar) overlaid with the S&P500 index (red line). By simply looking at this chart, it gives me an idea of the Asian session and tells me if it is worth reading what went on overnight. As you can see it on the chart below, the Aussie was up 4.5% last week, sending the US equity market to new highs (S&P500 was up 2.5%, and hit a record high of 1,878 on Friday).

(Source: Reuters)

However, Chinese’s figures over the weekend scared the carry traders and brought back the AUDJPY below the 94.00 level after its (almost) 5% increase. China’s exports unexpectedly fell 18% YoY in February, swinging the trade balance into a deficit of $23bn (vs. $32bn surplus in January). In addition, the annual inflation rate declined to 2.0%, its lowest level in 13 months.

We believe that the bounce we saw on the Aussie may have offered new short entries, as gains were expected to be limited by traders. Even if the RBA has kept its cash rate steady at a historical low of 2.5% since August last year and rising inflation rate has dashed rate cut hopes in the short term, policymakers were clearly not comfortable with the ‘Aussie recovery’ we saw last fall (September-November). Therefore, the Australian dollar is sort of capped on the topside, which gives traders good opportunities to start shorting the pair as soon as it comes close to the 0.9150-0.9200 area.

(Source: Reuters)

The market is now getting prepared for Australian employment data early tomorrow. A 15K increase in employment is expected, however the market seemed to have been a way too ‘optimistic’ in recent months.  As a reminder, the Australian economy lost 3,700 jobs in January, pushing the unemployment rate from 5.8% to 6%, its highest level in a decade.  The pair is now trading below the 0.9000 level, and the next support stands at 0.8900 on the downside. The pair will probably test it before the release of the figures overnight, and if we don’t see some really strong fundamentals tomorrow, AUDUSD could be sent back to the 0.8800 in the short term.

We are still bearish in the long term, as weakening signs of its main trading partner China will push Glenn Stevens to go for another rate cut session (Q2-Q3). In addition, with the Fed tapering this year and the board expected to start raising rates in mid-2015, the 10-year AU-US yield spread will continue to narrow and put the Aussie under pressure. The graph below (daily period) shows the 10-year spread (in purple) overlaid with the AUDUSD spot rate (in orange). Our MT target on AUDUSD stands at 0.8500, a level we saw back in the summer 2010.

(Source: Reuters)

Quick weekly review ahead of the Non-Farm Payrolls…

After tensions eased in Ukraine and China in the beginning of the week, risk appetite was back with AUDJPY up 4% since its low reached on Monday at 90.00. It helped the stock market recovered, with S&P500 and Eurostoxx 50 up by 2.5% and 3%.

Australian fundamentals also surprised traders: Q4 2013 GDP printed above consensus at 0.8% QoQ (vs 0.7% expected), January Trade Balance came in at 1.43bn AUD smashing expectations of 270mio AUD (exports went up 3.7% while imports rose 0.82%) and retail sales surged to 1.2% MoM in January (vs. 0.5% estimates) from a revised 0.7%. The pair broke its 100-day MA at 0.9080 to trade at 0.9112 in the late afternoon before coming back below the 0.9100 level. On the Asian side, the Yen dropped to a five-week low against the greenback (up 1.8% to reach a high of 103.16) after GPIF (world’s largest holder of JGBs) advisory panel announced that the fund ‘doesn’t need a domestic bond focus’ given quickening inflation.

As expected, the Bank of England kept its Official Bank rate steady at its record low of 0.5% (five years now) in order to help the UK economy on to a full recovery (UK grew by 1.8% in 2013, fastest pace in 6 year). Policymakers also announced that the central will reinvest GBP 8.2bn on a bond that it bought in its QE operations that was set to mature on March 14. As you can see it on the chart below (30-min period), Cable eased after the announcement until it found support at around 1.6685, then the pair surged for the rest of the (London) trading session. The gains were capped slightly above its ST resistance at 1.6760 and GBPUSD is now back in its 1.6660 – 1.6760 range. Poor US data tomorrow could bring the pair back above the 1.6800 level; the strong resistance on the topside stands at 1.6825 (Feb 17th high).

(Source: Reuters)

The big mover today was the Euro of course as Draghi ‘disappointed’ the market. He left the refi rate unchanged at 0.25% and gave a quite optimistic conference in the afternoon, which we believe pushed the single currency above the 1.3800 level against the greenback (EURUSD rose 120 pips approx. during the press conference to 1.3850). According to the ECB, the unemployment is stabilizing and the downside inflation risks ‘remain limited’. Policymakers also raised their growth forecast for the Euro area by 0.1% to 1.2% for the year 2014 and are expecting a 1.8% inflation rate in 2016 (still concerned about the inflation rate for 2014, revised lower to 1.0%).

Having said that, we are now wondering if we could see a turning point tomorrow ahead of (or straight after) the US employment data. Yesterday, ADP reported that the US private employers added ‘only’ 139K jobs in February (vs. 160K expected) with January’s print revised lower to 125K (from 175K), and we saw that non-manufacturing PMI fell to a four-year low to 51.6 (from 54.0 in January and vs 53.0 cons.) with the employment index contracting for the first time in two years (from 56.4 to 47.5). we saw this chart (below) yesterday in a research which we find interesting; it shows the employment index (in orange) from the ISM non-mfg survey overlaid with the NFP data (in purple). Some economists already revised down their estimates for tomorrow even if 150K (market’s expectations) is a disappointing figure for the US economy.  A weaker-than-expected figure will definitely reverse the trend on USDJPY and could potentially impact this week’s ‘market effort’.

(Source: Reuters)

Bank of Canada Preview – USDCAD

Even if most of the fundamentals and economic news have been overshadowed by Eastern European tensions, we would like to make a quick preview ahead of the Bank of Canada meeting tomorrow. As we reported in our last update on Canada (here) in mid-January this year, the Canadian dollar has remained under pressure against the greenback in the middle of this QE-Taper scenario. A series of poor fundamentals (widening current account deficit, declining housing market …) combined with low inflation expectations at the last meeting back in January (BoC Governor Stephen Poloz announced he was concerned about ‘low inflation’) and bearish CAD-investors helped us reached our medium term target at 1.1200 (USDCAD) on January 31st.

However, a few ‘surprises’ in the month of February helped the Loonie to recover and for the past couple of weeks, USDCAD has been trading around the 1.1100 level within a tight range of 140 pips (see chart below, 1.1040 – 1.1180). We saw that the economy expanded more that expected in the final three months of last year (2.9% QoQ vs cons. 2.5%) and the inflation rate jumped unexpectedly to 1.5% in January, up from 1.2% the previous month and closer to the BoC 2-percent target.

Therefore, both of the macroeconomic data reduced the likelihood of an interest rate cut for tomorrow’s meeting. We still expect a dovish/neutral tone from Governor Poloz, which could potentially push the Canadian dollar higher against the greenback  in the short term. As we said, the next support on the downside stands at 1.1040; a break could then spur a move back towards 1.0910 (low reached on Feb 17th). In that case, I would then see this support as a new buying opportunity.

(Source: Reuters)