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FactSet StreetAccount Summary - US Weekly Recap: Dow (1.27%), S&P (1.24%), Nasdaq (1.48%), Russell 2000 (0.76%)

Jan 16, 2015

Overview:

  • The major US equities indexes finished lower for a third straight week. Volatility remained elevated across asset classes. Aside from Thursday’s shock decision by the Swiss National Bank to scrap its minimum exchange rate, it continued to be a challenge to fit a narrative to the heightened uncertainty. A lot of this still revolved around the notion that the fundamental backdrop has not really changed in recent weeks. However, there continued to be worries about the signaling effects for global demand from oil, other key parts of the commodity complex and government bonds. The lack of cushion from a US recovery momentum theme that took a few hits this week seemed to be another overhang. A lackluster start to Q4 earnings season was also cited as an excuse, particularly given that the scrutiny largely revolved around banks and homebuilders. While still at the margins, there seemed to be a further pickup in worries both about the limits of central bank support and their ability to normalize monetary policy. However, the continued ramp in expectations for a sovereign QE announcement from the ECB next week helped drive a rally in European shares. Defensive pockets of the market outperformed with utilities and telecom the standouts. Financials fared the worst.

Swiss National Bank exacerbates volatility:

  • The big story this week was outside of US stocks as the Swiss National Bank shocked the markets by announcing the removal of the EUR/CHF 1.20 floor. It also cut the rate on sight deposit account balances by 50 bp to (0.75%). The SNB highlighted the decreased overvaluation of the Swiss franc and noted that the cap had served its purpose by helping to protect the economy and giving exporters sufficient time to adjust their business models. It also pointed to international developments and the fact that maintaining the floor was not sustainable or sensible in the long run. These comments played into already elevated expectations for a sovereign QE announcement from the ECB next week. The Swiss franc rallied ~30% vs the euro in the wake of the news, while EUR/CHF ended the week just below parity, down ~17%. Swiss stocks sold off, finishing down ~13.3% for the week with exporters leading the move lower. The dislocations drove a flurry of contagion concerns with reports of tens to hundreds of millions of dollars in trading losses at big banks, pain in the macro hedge fund community, a $225M capital hole at FXCM, the largest retail FX brokerage in the US and Asia, and insolvency at UK retail broker Alpari.

Commodity signaling concerns continue to weigh:

  • One of the bigger headwinds this week continued to revolve around concerns that the magnitude of the selloff in oil is signaling a softer global growth backdrop. Such concerns seemed to find some additional support as copper, which is perceived as the most economically sensitive commodity, came under further pressure. It fell 6.2%, the most in three years. While fundamental drivers were largely absent, the World Bank did downgrade its global growth forecast for 2015 and 2016. It also noted that the risks to the recovery are significant and tilted to the downside, even with the 0.5% tailwind from the oil decline. However, while economists and Fed officials have widely talked up this support for the US economy, there has also been a good deal of focus on the negative spillover effects. This gets back to the extent to which shale oil has helped to drive job and wage/income growth, as well as the role it has played in the credit cycle. The Fed’s Beige Book highlighted hiring freezes and layoffs at energy firms, along with decreased demand for oilfield services. Capital spending cuts continued to get a lot of attention, as did the earnings drag. Deutsche Bank noted that S&P 500 EPS faces almost $8 of annual growth headwind at current prices.

US recovery momentum theme dented…sort of:

  • There was no offset for growth concerns this week from the US recovery outperformance theme. A lot of this had to do with disappointing retail sales data. Headline retail sales fell 0.9% m/m in December, worse than expectations for a 0.1% decline. This was the worst reading since last January, when weather helped drive a 1.3% contraction. In addition, the core control category fell 0.4% on broad-based softness, while the Street was looking for a 0.4% increase. While the data weighed on risk sentiment, there was also plenty of skepticism about the read-throughs for the US consumer and broader recovery traction. Some of the focus was on the complicated seasonal adjustment and the still-solid 3.8% annualized growth in core retail sales in Q4. In addition, consumer sentiment rose to its highest level in January since 2004, with Goldman Sachs pointing out that the improvement since the summer has coincided with falling gas prices. Support for retailers from lower gas and energy prices, as well as traction in the labor market, also formed part of the upbeat takeaways out of the ICR Conference this week. This followed a number of better-than-expected holiday updates in the prior week.

Earnings season off to lackluster start:

  • The start of Q4 earnings season seemed to be an overhang on sentiment this week, despite some recent thoughts that it may be largely de-risked with energy and FX headwinds so widely hyped. A lot of this had to do with the fact that the scrutiny revolved around two key areas of interest for the market, banking and housing. It was a tough week for the money-center banks. BAC (9.4%), C (6.2%) and JPM (5.8%) all missed consensus EPS estimates. The bulk of the concerns revolved around sluggish top-line trends. Another big issue was the outlook for further NIM pressure from the depressed rate environment. Worries about the impact of macro volatility on FICC revenues and the potential for a slowdown in reserve releases were also mentioned. Regional bank earnings received a better reception on Friday, though dampened expectations played a role. Homebuilders sold off sharply following results from KBH (24.5%) and LEN (7.7%). Gross margin guidance was the big area of disappointment, along with somewhat more cautious commentary on demand and pricing trends in select markets. However, there were also thoughts the magnitude of the pullback was more about recent outperformance and crowded trades than a notable reset of housing recovery sentiment.

Policy fears:

  • Despite the run-up in European stocks this week on the continued ramp in expectations for a sovereign QE announcement from the ECB next Thursday, policy fears still seemed to get a bit more traction. The dislocations triggered by the Swiss National Bank’s decision to scrap the minimum exchange rate highlighted the extent to which central bank intervention has influenced the markets and the complications that arise on even the initial moves toward policy normalization. This was the big takeaway from the taper tantrum. Now, the issue seems to be that while the market is pushing back on liftoff expectations amid concerns about slower global growth, sluggish wage trends, plunging oil prices, and geopolitical risks, the Fed is reportedly still comfortable with a mid-2015 tightening. Several Fed officials have recently blessed this timeframe, albeit with some caveats. In addition, a Reuters article chalked up the Fed’s liftoff confidence to forecasts for oil to provide a tailwind for the economy and only have a transitory impact on inflation. It added that the Fed has even put a positive spin on the decline in inflation expectations, citing increased conviction that prices will not spiral out of control.

Defensive sectors outperform:

  • Defensive sectors outperformed this week. The utilities sector fared the best. Telecom was another standout. RLECs FTR +5.2% and WIN +3.9% were upgraded at BofA Merrill Lynch. Consumer staples also finished higher. Select food and tobacco names led the move. HSY +4% was helped by two sell-side upgrades this week. Healthcare finished higher despite a selloff in the hospital names (SCOTUS overhang). Biotech outperformed with the BTK +2.3%, while pharma also fared well with the DRG +1.4%. Materials were down with the tape. While precious metals stocks rallied with the GDX +7% boosted by the risk aversion surrounding the SNB move, worries about the signaling effects from commodity weakness drove a sharp selloff in industrial metals. Steel and copper names like AKS (24.8%) and FCX (18%) were hit the hardest. Retail weighed on consumer growth despite the better commentary surrounding the ICR Conference. TIF (14.6%) and BBY (8.1%) underperformed following their updates. Homebuilders also sold off sharply. There did not seem to be anything specific behind the underperformance in tech, though several hardware names, including AAPL (5.4%), came under pressure. Financials fared the worst as rate and earnings headwinds hit the banks with the BKX (4%).

Sector Performance:

  • Outperformers: Utilities +2.62%, Telecom +1.90%, Consumer Spls. +0.31%, Healthcare +0.17%, Materials (1.16%)
  • Underperformers: Financials (2.68%), Tech (2.48%), Consumer Disc. (1.69%), Energy (1.51%), Industrials (1.32%)

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