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FactSet StreetAccount Summary - US Weekly Recap: Dow +3.84%, S&P +3.03%, Nasdaq +2.36%, Russell 2000 +3.44%

Feb 6, 2015

Overview:

  • US equities finished sharply higher this week with the S&P 500 posting its biggest gain since 19-Dec. There were no meaningful catalysts behind the run-up. Some support was attributed to a big bounce in oil, which may have provided a bit of reprieve for heightened global demand and disinflation concerns. This dynamic was also one of the drivers of a big backup in Treasury yields. Earnings sentiment seemed to improve following the past few weeks in which FX and energy headwinds dominated the discussion. There was also some renewed attention on the M&A and corporate actions tailwind. There were some mixed takeaways from the economic calendar, though payrolls surprised to the upside again and newsflow surrounding the auto and housing markets was upbeat. Greece continued to dominate the macro headlines despite the extent to which contagion surrounding Syriza’s anti-austerity push remained limited. While not a specific directional driver for US stocks, the global policy easing trend continued to get a lot of attention. Telecom was the best performing sector this week with help from M&A. Energy was another standout with the jump in oil. Financials were a big beneficiary of the backup in rates, though this drove the weakness in the utilities sector.

Big bounce for oil:

  • Oil rallied sharply this week with WTI crude gaining 7.2%. This was the biggest weekly increase since February 2011. Even with a nearly 9% pullback on Wednesday, it ended the week up almost 20% from the 29-Jan low. Brent settled 9.1% higher. While the recent wave of 2015 capex cuts from the majors was cited as a positive, the bigger tailwind was chalked up to falling US oil rig counts. On Friday, Baker Hughes reported that the US oil rig count fell 83 to 1,140, the lowest level since December 2011 and down nearly 30% since October. However, there was a lot of skepticism about the read-through for production. BofA Merrill Lynch pointed out that there have yet to be meaningful rig count declines at the key Bakken, Eagle Ford and Permian plays. It also said that given the low and lagged sensitivity of supply to price, a much bigger price decline is necessary to curtail production and balance the market. Similarly, Morgan Stanley highlighted the fact that much of the drop in the oil rig count has come in low-yield vertical/directional rigs. Citi noted that the oil story is much more complicated than a single data series and still bearish given that US crude production continues to rise and inventories continue to balloon. The inventory dynamic remained in focus as the EIA reported that crude oil supplies ended last week at their highest level in about 80 years.

Key earnings metrics improve:

  • There seemed to be a bit less angst about earnings season this week. This may have simply been a function of the better overall sentiment surrounding equities. However, FX and energy headwinds have been so widely discussed at this point and have already driven a meaningful reset in 1H expectations. In addition, the US economic recovery continues to gain traction, while the Street is looking for further margin expansion. This week also saw some further improvement in a number of key earnings season metrics. According to FactSet, the blended growth rate for Q4 S&P 500 EPS now stands at 3.0%, ahead of the 1.7% expected at the end of the quarter and the 2.1% at the end of the prior week. The blended revenue growth rate is now 1.6%, up from 1.1% on 31-Dec. Of the 323 S&P 500 companies that have now reported, 78% have beat consensus EPS expectations, ahead of the 74% four-quarter average. At 59%, the revenue beat rate is largely in line with the recent trend. In the aggregate, companies are reporting earnings that are 4.0% ahead of expectations. While this is still below the 4.2% average surprise rate over the last four quarters, it marks a meaningful improvement from the negative readings seen just a few weeks ago. Companies are reporting revenues that are 1.6% ahead of expectations, above the four-quarter average of 0.7%.

M&A, corporate actions drive big gains:

  • There seemed to be some renewed focus on the M&A and corporate actions tailwind that received so much attention in 2014. In line with one of the more positive takeaways from last year's activity, this week saw a number of instances in which the share price of the acquiring company rallied on the deal news. In the pharma sector, PFE +6.1% said it would acquire HSP +37.8% in an all-cash deal with an EV of $17B. Consolidation in the office supply space continued as SPLS (2.8%) announced a deal to acquire ODP +24.7% for $6.3B in cash and stock. FTR +18.1% helped drive some of the outperformance in telecom with its deal to purchase select wireline and Internet operations from VZ +7.9% for over $10.5B. SJM +9.6% was one of the best performers in consumer staples with its $5.8B cash and stock deal for Big Heart Pet Brands. TROX +3.3% was helped by its $1.64B purchase of FMC’s +7.3% soda-ash unit. In the aerospace & defense electronics group, the Street seemed positive on the strategic merits of HRS’s +13.5% planned $4.75B acquisition of XLS +41%. In addition, BLL +11.5% was another big gainer after confirming that it is in talks to acquire Rexam PLC. There were also some notable corporate actions related movers this week. GRA +15.6% announced plans to spin-off its construction products and packaging businesses into a new entity.

Mixed economic data, but some key bright spots:

  • There were some mixed takeaways from the economic calendar this week. However, recovery sentiment remained intact as nonfarm payrolls jumped 257K in January, ahead of consensus expectations of ~230K. In addition, the net upward revision to November and December totaled 147K, leaving the three month average at 336K. The unemployment rate rose one-tenth to 5.7%, though the participation rate was up two-tenths to 62.9%. Average hourly earnings increased 0.5% following an unexpected 0.2% decline in December. The monthly increase was the largest since November 2008 and pushed the y/y rate up to 2.2% from 1.7%. January also marked another strong month for the auto sector. Light vehicle sales were up over 9% y/y to a 16.6M saar, in line to slightly ahead of consensus estimates in the 16.3-16.6M range. Analysts were positive on the mix shift towards light trucks and SUVs, along with strong pricing and restrained incentives. Some of the credit went to low gas prices. This followed commentary from the credit card names late last week that lower gas prices have not provided a tailwind for consumer spending. The housing market was cited as another positive, while the WSJ pointed out that some of the biggest public homebuilders have said new home sales picked up during the second half of January.

Greece, monetary policy grab macro headlines:

  • Greece dominated the macro scene this week, though there seemed to be a lot more noise than news surrounding a situation that has not driven any notable contagion. Focus early in the week revolved around the more conciliatory tone from Syriza, which scrapped its call for a debt writedown and instead proposed swapping debt for growth-linked bonds. However, the plan was a non-starter for Europe, which continued to push for Athens to honor its structural reform commitments and request an extension of the current bailout program (and on Friday set a 16-Feb deadline). The ECB also took a hardline stance with an earlier-than-expected suspension of Greek government debt as collateral at its funding operations. However, it pointed out that Greek banks could address funding needs via emergency liquidity assistance (ELA) and provided an additional cushion of nearly €10B. The other big macro theme this week was the continued policy easing from foreign central banks. China announced its first system-wide reserve requirement ratio (RRR) cut since May 2012. However, the impact was muted as economists argued more needs to be done to address growth, liquidity and disinflation headwinds and the central bank pushed back against expectations the move marked the start of an easing cycle. This week also saw a sooner-than-expected rate cut from the RBA.

Energy, financials lead market higher:

  • Energy was underpinned by the rally in oil. Strength was broad based. The higher-beta coal names saw the biggest gains. E&Ps and oil services were next in line with the EPX +10% and OSX +8.3%. COP +7.2% and CVX +6.9% led the majors higher. Several refiners also benefited from the wider spread between Brent and WTI. Financials rallied as the rate-sensitive names took advantage of the big backup in bond yields. The banking group posted its biggest weekly gain in nearly three years with the BKX +6.9%. The industrial metals led the materials sector higher, while the chemicals group also outperformed. There were a number of bright spots in consumer growth, including the builders, auto names and media/cable/sat group. The industrials sector was largely in line with pockets of strength in machinery names such as AGCO +12.8%, ETN +11%, TEX +10.4% and MTW +9.8%. A number of the multis beat the tape, while railroads and truckers countered some of the pullback in the airlines. Healthcare lagged despite the M&A tailwind. Biotech was weaker with the BTK (2.7%). Hep C pricing concerns surrounding GILD (7%) drove some of the scrutiny. Disappointing guidance from MRK (2.5%) was another overhang. Utilities was the only sector to finish lower for the week, with the pullback attributed to better risk sentiment and the higher rate environment.

Sector Performance (vs S&P 500):

  • Outperformers: Telecom +6.95%, Energy +5.38%, Financials +4.81%, Materials +4.68%, Consumer Disc. +4.23%
  • Underperformers: Utilities (3.73%), Healthcare +0.69%, Consumer Spls. +2.22%, Tech +2.49%, Industrials +3.02%

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