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FactSet StreetAccount Summary - US Weekly Recap: Dow (0.54%), S&P (0.65%), Nasdaq (0.48%), Russell (1.09%)

Jan 9, 2015

Overview:

  • US equities finished mostly lower in extremely volatile trading this week. It was a challenge to put a narrative to the price action as meaningful moves in both directions lacked conviction and the fundamental backdrop remained little changed. One of the bigger concerns revolved around the signaling effects for global demand from the continued selling pressure in oil and strength in government bonds. At the same time however, oil-specific supply issues continued to get the bulk of the attention. In addition, the US recovery outperformance theme remained largely intact and there were even signs of support from lower energy prices. Developments surrounding the global policy divergence theme also seemed complicated to sort through. ECB sovereign QE expectations continued to ramp ahead of the 22-Jan policy meeting. However, this dynamic provided a further boost for the dollar, exacerbating the scrutiny on oil. It also played into worries about earnings headwinds, the vulnerability of crowded carry trades and the pickup in disinflation/deflation fears. The latter dynamic was relevant for the Fed. While the December FOMC minutes fit with the mid-2015 (to slightly later) liftoff story, there was also more speculation it may not be able to tighten this year. This week’s sector performance offered little additional color on market sentiment, though defensive pockets did fare better.

Oil signaling debate heats up: 

  • It was another very difficult week for oil with Brent crude losing 11% and settling just above the $50 a barrel level (which it breached this week). The lack of any meaningful catalysts and extent of the selling pressure drove a further pickup in worries that the move is signaling a much weaker-than-expected global demand backdrop, particularly with the accompanying strength in government bonds. Such extrapolation was cited as the big headwind on risk assets, though it was not a one-way trade. This fit with what still seems to be the consensus view that what is going on in oil is much more about supply. This remained a key theme in both sell-side commentary and the press. Some of the focus shifted to headlines about the contango structure and buildup in floating storage. There were also more reports about the Saudis and its Gulf allies in OPEC rejecting production cuts. In addition, BofA Merrill Lynch pointed out that non-OPEC supply cuts will not come easy in the short-term, as operating cash costs sit below $40 a barrel. It added that production guidance continues to point up in 2015 for most listed companies. MKM Partners also noted that weakness in crude does not appear to be driven by the US business cycle, highlighting how confidence remains near cycle highs and claims remain near cycle lows. 

US recovery outperformance theme intact:

  • Despite some pickup in global demand and disinflation/deflation concerns this week, the US recovery outperformance theme remained largely intact. The labor market was in focus as December nonfarm payrolls rose 252K. The two prior months saw a net upward revision of 50K, leaving the average monthly gain for 2014 at 246K, up from 194K in 2013. The three-month average now stands at 289K. In addition, the unemployment rate declined to 5.6% from 5.8%, leaving it down over a full point for the year (though the participation decline helped). While wages were a big disappointment, a handful of better holiday updates out of retail did help to put some focus on the favorable spillover effects for the consumer from the decline in energy prices. There were a few other bright spots this week. December light vehicle sales were up ~6.5% y/y to a 16.8M SAAR, leaving full-year sales volumes up 6% in 2014 at 16.5M, the highest in eight years. There was also some better sentiment surrounding housing. The FHA announced that it will reduce annual mortgage insurance premiums by 50 bp to 0.85%. It estimated that under the new premium structure, 2M borrowers will save an average of $900 annually over the next three years if they refinance or purchase a home.

ECB QE expectations ramp higher:

  • This week saw a further ramp in expectations for sovereign QE from the ECB, with more sell-side calls for some kind of announcement at the 22-Jan policy meeting. There were several developments that received attention. One was the larger-than-expected 0.2% y/y decline in Eurozone headline CPI in December. Another was the seeming push for external policy support (particularly in Europe) in the December FOMC minutes. In addition, there were several reports highlighting the asset purchase program options currently under consideration. A Bloomberg report on Friday said that the ECB staff recently presented policy makers with models for buying up to €500B of investment-grade (BBB- or better) assets. Program sizes below that level were also presented, as were monthly targets. Separately, Reuters said that one of the more credible options could revolve around a dual approach under which both the ECB and national central banks would purchase debt, sharing the risks. The reports fit with recent speculation that some compromise surrounding the shape of the program could help to secure German support. However, there were also concerns that a more watered-down QE could undermine confidence in the weaker member countries.

Inflation a liftoff complication:

  • The December FOMC minutes generated a fairly muted reaction in the markets as takeaways were in line with Yellen’s press conference last month. As had been previously telegraphed, the minutes downplayed the impact of the oil selloff and stronger dollar on inflation. They also suggested that the tightening cycle could commence with core rates near current levels as long as the Fed was fairly confident inflation would move back toward 2% over time. However, there seemed to be more pushback (including from Fed doves) this week against the perceived confidence that the headwinds on inflation will be transitory. Part of this was likely a function of another round of selling pressure in oil, strength in the dollar and unexpected 0.2% m/m decline in December average hourly earnings that left the y/y rate of increase at just 1.7%, the lowest since October 2012. A few more higher-profile commentators discussed the possibility that the Fed may not be able to tighten this year. Goldman Sachs said that risks to its already below consensus forecasts for core PCE inflation of 1.3% and a September liftoff are tilted to the lower and later side. It pointed out that lower oil prices and a stronger dollar are likely to outweigh the reduction in labor market slack, potentially driving core PCE inflation as low as 1% and shifting liftoff to 2016.

Energy stocks hit, defensives outperform:

  • The energy sector was the worst performer this week with another selloff in oil and as analysts continued to slash estimates and lower ratings. E&Ps and drillers fared the worst. Financials underperformed as the rate environment and lackluster sentiment surrounding the upcoming Q4 earnings season weighed on the banking group with the BKX (5.2%). The machinery space was a big drag on the industrials sector with worries about the signaling effects from the oil selloff and a batch of sell-side downgrades. Rental equipment names HEES (23%) and URI (13.8%) were some of the big decliners, along with TEX (13%), OSK (11%) and JOY (6%). Consumer discretionary lagged despite a few notable pockets of strength in retail (largely on holiday updates), including JCP +25.8%, and a rally in the homebuilders on the FHA premium cut. Most steel names sold off sharply with AKS (9.6%) and X (7.6%). It was a fairly uneventful week in tech (despite CES), though AAPL +2.5% drove some of the relative outperformance. The consumer staples sector rallied on broad-based strength. Discounters like WMT +4% seemed to benefit from the oil tailwind. Healthcare fared the best. Biotech had a good week with the BTK +2.5%. Several firms were out positive on the group and Hep C newsflow helped GILD +7.7%. Upgrades boosted BSX +10.8% and MRK +9.4%.

Sector Performance (vs S&P 500):

  • Outperformers: Healthcare +2.28%, Consumer Spls. +1.65%, Utilities (0.18%), Tech (0.19%), Materials (0.57%)
  • Underperformers: Energy (3.60%), Financials (2.42%), Industrials (2.03%), Telecom (1.15%), Consumer Disc. (1.10%)

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