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FactSet StreetAccount Summary - US Weekly Recap: Dow (0.60%), S&P (0.86%), Nasdaq (1.13%), Russell 2000 +1.20%

Mar 13, 2015

Overview:

  • US equities were lower this week as the S&P 500 suffered its third straight decline. The macro story continued to revolve around the policy divergence theme with the start of the ECB’s QE program. This dynamic drove a further rally in Eurozone stocks and bonds, but seemed to be an overhang on US equity sentiment as another bout of dollar strength exacerbated intertwined concerns surrounding earnings headwinds and valuation. However, ahead of next week’s FOMC meeting, there was little spillover effect on the Fed liftoff debate from the dollar rally, another softer-than-expected retail sales report and a renewed wave of selling pressure on oil. While there were few high-profile earnings reports, corporate newsflow drove some of the more notable price action. Additional M&A headlines surrounding pharma/biotech helped the healthcare sector put in the best performance this week. The banking group fared well on the back of the capital return announcements that followed the second phase of the Fed’s stress test results. Intel’s preannouncement contributed to the already negative sentiment surrounding the PC space, helping drive the underperformance in tech. The energy sector put in the worst performance this week as oil fell nearly 10%. 

ECB’s QE program starts off with a bang:

  • The ECB kicked off its quantitative easing program this week. Despite the extent of the anticipation, Eurozone stocks and bonds continued to rally, while the euro came under pressure. Equities remained underpinned by favorable flow dynamics, rising for a sixth straight week. While ECB officials again downplayed concerns about their ability to source a sufficient quantity of paper to drive meaningful balance sheet expansion, the scarcity dynamic received a lot of attention in the press. There was also some focus on the likelihood that with European investors reluctant to sell, the ECB may have to rely more on foreign holders who own roughly a third the market. This may have helped to explain some of the outsized weakness in the euro, which fell more than 3% against the dollar to end the week just below the $1.05 level, the worst in 12 years. In addition, as was the case with the oil price plunge, the latest round of euro weakness elicited a wave of increasingly negative sell-side forecast revisions. Goldman Sachs said it now expects the euro to fall to parity against the dollar in the next six months, down from its previous $1.12 target. It also lowered its end-2016 and end-2017 targets to $0.85 and $0.80, respectively, from $1.00 and $0.90. 

Dollar strength an overhang on equity sentiment:

  • Helped by the selloff in the euro, along with the continued trend of surprise easing moves from foreign central banks, the dollar index rallied ~2.5% this week. This seemed to be the big overhang on US equity sentiment given worries about the negative impact on revenues and earnings. The headwind from dollar strength was one of the higher-profile themes during Q4 earnings season, with companies from a broad range of industries noting that below consensus guidance could be impacted by further appreciation. This week saw another batch of sell-side estimate cuts due to FX. Deutsche Bank took down its numbers on the auto parts sector to reflect the euro at $1.05, down from its prior $1.15 input. Janney highlighted some FX exposure concerns for a number of specialty retailers. Credit Suisse cut its numbers on the packaged foods space. Barclays noted the latest move toward parity could have a more fundamental impact on IT hardware. In addition, the WSJ reported that the latest quarterly Duke University/CFO Magazine Global Business Outlook Survey found that around two-thirds of firms with at least 25% of their total sales overseas highlighted a negative impact from the dollar’s strength. 

Liftoff timing still uncertain:

  • The policy divergence theme continued to largely revolve around Europe with the start of the ECB’s QE program, though the Fed was not far from the headlines ahead of next week’s FOMC meeting. While it is likely to remove the “patient” forward guidance language from the policy statement, the market does not seem to be expecting much additional insight into liftoff timing given the flexibility dynamic recently highlighted by Fed Chair Yellen. This week’s developments also seemed to have relatively impact on an extremely nuanced timing debate that has the consensus still slightly favoring a June move over September. While there was a lot of discussion about the complications from dollar strength and foreign central bank easing, that seemed to be more relevant for the policy normalization path than the initial tightening move. In addition, a third straight monthly decline in February retail sales came with caveats, particularly some impact from cold and snowy weather. Another big selloff in oil was also largely ignored. While other central banks have been forced to ease to counter the disinflationary pressure from oil, the Fed has repeatedly highlighted the drag as transitory and talked up the benefits for the broader recovery. 

Quiet on earnings calendar, but plenty of corporate news:

  • It was a fairly quiet week on the earnings calendar, though there was some higher-profile corporate newsflow. The banking group was a relative outperformer with the BKX +0.6% as capital return announcements following the second phase of the Fed stress tests seemed a bit better in the aggregate (and removed an overhang). AAPL (2.4%) lagged the tape as details on its Watch functionality were largely in line with expectations. INTC (6.8%) was another drag on tech after it cut its Q1 revenue guidance by nearly 7% on weaker-than-expected demand for desktop PCs and lower inventory levels across the PC supply chain. QCOM (4%) was unable to take advantage of a well-received $15B buyback authorization and 14% dividend increase. GM +3.3% updated its capital allocation plan and announced a $5B buyback to help avoid a proxy fight with an activist shareholder. PLCE +8.9% and BK +4.2% were other activist targets in focus this week. M&A remained the big theme in pharma/biotech as ENDP +0.3% offered a rival $175 a share cash-and-stock bid for SLXP +7%. There was also speculation this week that MYL +7.8% could be a takeover target for TEVA +6.4%. 

Energy leads market lower on oil selloff:

  • The energy sector was the worst performer this week, suffering its biggest pullback since early January. Over the last four weeks, the sector has fallen nearly 10%. The latest downturn was fairly broad based, though the oil services group seemed to fare the worst with the OSX (6.7%). E&Ps also came underperformed with the EPX (3.5%). The drag this week came from a nearly 10% decline in WTI crude to a six-week low of $44.84 a barrel, just $0.40 above the six-year low seen in late January. Some of the selloff was attributed to concerns about growing stockpiles at the key Cushing commercial storage hub. A big chunk of the damage came on Friday when crude lost nearly 5% on the back of the IEA’s monthly report. It noted that the recent stability in the oil market looks precarious as rebalancing has yet to run its course. In line with concerns expressed by sell-side analysts, it said that while the declining US rig count has provided some reprieve for prices, there have been no signs that production is slowing down. It pointed out that non-OPEC supply was estimated to be up 270K bpd m/m in February, led by higher NA output. 

Tech another laggard, while healthcare, financials outperform:

  • Tech was the second-worst performer this week. The INTC guidance weighed on the PC space, particularly HDD names like STX (5.5%) and WDC (5.2%). EMC (6%) essentially confirmed at its analyst day it would not spin-off its stake in VMW (4.7%). The stock was also downgraded at Wells Fargo. Consumer staples was another laggard with FX headwinds in focus. Beverage and HPC names were among the worst performers. Both the industrial and precious metals weighed on the materials sector Iron ore weakness remained in focus as CLF (21.2%), BHP (9.7%) and VALE (9.4%) all came under pressure. The industrials sector held up a bit better with some help from the strength in airlines like JBLU +5.5%, DAL +3.9% and AAL +2.6%. Oil weakness and guidance updates drove the rally. Consumer growth was another relative outperformer. Earnings out of the retail space helped with BONT +19.4%, EXPR +17.4%, URBN +15.3% and ANN +11.2%. Financials finished higher thanks to the banks. MS +2.3%, PNC +2.1%, RF +1.5% and C +0.9% were some of the big stress test winners. Healthcare put in the best performance this week. M&A got most of the attention. Biotech was a standout with the BTK +1.8%. Managed care was mostly higher with HUM +4.2% and AET +3.4%. 

Sector Performance (vs S&P 500):

  • Outperformers: Healthcare +0.46%, Financials +0.40%, Utilities +0.15%, Consumer Disc. (0.34%), Telecom (0.58%), Industrials (0.73%) 
  • Underperformers: Energy (2.82%), Tech (2.39%), Materials (1.29%), Consumer Spls. (1.27%)
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