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FactSet StreetAccount Summary - US Weekly Recap: Dow +1.66%, S&P +1.70%, Nasdaq +2.23%, Russell 2000 +0.73%

Apr 10, 2015

Overview:

  • US equities finished higher this week. Trading was generally quiet, with the S&P 500 moving within relatively tight ranges. The week began with markets digesting last Friday's release of weaker March payrolls. Some Federal Reserve officials subsequently downplayed the significance of the data, but overall reaction to Fedspeak and the FOMC March minutes seemed to indicate a lack of clarity in the outlook for the economy and liftoff timing. Apart from the minutes, there was little of note on the US economic calendar. Treasury yields and the dollar moved higher, recovering from the previous week's declines. US equities continued to underperform European and Asian markets, although there was some talk of US stocks showing resiliency despite the dollar's strengthening. Other themes in focus included lower expectations for Q1 earnings season, valuation concerns and signs of increasing corporate wage pressures. Notably, it was a busy week of M&A activity and corporate news, which drove some outsized moves. There was little progress surrounding Greece, although market impact seemed limited. Oil prices were stronger, despite some volatility. Corporate activity helped industrials and healthcare outperform, while energy was boosted by oil. The defensive telecom and utilities were notable laggards, along with financials. 

Fedspeak in focus:

  • With little economic data on the calendar, most attention was on Fedspeak. Following last Friday's weaker March payrolls number of +126K versus a +245K consensus, the dollar initially sold off and Treasury yields fell sharply. However, over the course of this week the dollar rebounded to its strongest levels against the euro since before the 18-Mar FOMC meeting, while Treasury yields largely rose back to the levels from before the jobs report. Some Fedspeak subsequently downplayed the significance of the data. There were mixed takeaways from commentary from the NY Fed's Dudley and Governor Powell. While neither official is regarded as hawkish, both mentioned the possibility of a June liftoff. However, both officials also noted that timing would be data dependent, while Dudley added that liftoff could be delayed due to a slowing economy. Powell also noted that hidden slack in the labor market justified a gradual approach to rate hikes. Recall that on 27-Mar Fed Chair Yellen also said that the pace of tightening would be gradual. Takeaways generally noted that there were no major surprises in the FOMC minutes, which showed officials split on liftoff timing and the economic outlook. Some officials called for June liftoff, while others warned that lower energy prices and a stronger dollar would weigh on inflation. 

US equities extend underperformance versus Europe, Asia:

  • While US equities made gains on the week, European and Asian markets continued this year's strong outperformance. The S&P is up ~2% ytd, while the European STOXX 600 is up ~21% and the Shanghai Composite is up ~25%. There has been some downbeat sentiment surrounding the start of Q1 earnings season, with more negative preannouncements this week. In the multis group DOV (0.4%) and PNR (1.6%) lowered guidance, citing factors such as FX headwinds, weakness in the energy industry and slower global capital spending. There was a mixed reaction to Q1 earnings from AA +0.1%, with downstream weakness cited as a concern among some analysts. According to FactSet (see Earnings Insight report) y/y earnings for the S&P 500 are projected to decline by 4.8% for Q1 2015. If the index reports a y/y decline for the quarter, it will be the first time since Q3 2012, when earnings fell 1%. FactSet added that 85 companies have issued negative EPS guidance for Q1 and 16 companies have issued positive guidance. The pace of earnings releases will pick up next week, with banks in focus. 

Busy week of corporate newsflow:

  • There was plenty of corporate news, notably the decision by GE +14.3% to sell most of its GE Capital assets, beginning with the sale of real estate assets in transactions valued at $26.5B. This year's brisk pace of M&A activity continued. Royal Dutch Shell made a recommended offer for BG Group in deal worth ~£47B. Some press reaction discussed the possibility of a sharp increase in M&A activity in the energy sector given lower oil prices. In healthcare, MYL +20.9% made a proposal to acquire PRGO +21.3% for ~$28.9B. There was also some talk that PFE +3.1% may enter a bid for MYL. Elsewhere, FDX +4.9% reached agreement on all-cash offer for TNT Express in a $4.8B deal. Some reaction to the move noted that it could be sign of US companies taking advantage of the strong dollar and European recovery. In tech, it was reported that INTC +3.6% dropped talks to purchase ALTR +3.3% after ALTR was not willing to accept the price offer. The WSJ, citing Dealogic, noted that at the current pace, M&A volume for the full year would be the second biggest on record at more than $3.7T. It added that 15 proposed or announced deals this year are valued at more than ~$10B. 

More talk of wage increases:

  • Wage increases continued to remain an area of focus following more corporate commentary on the issue. BBBY (4.4%) noted on its earnings call that it would be rising wages to attract and retain workers, while AET (%) CEO Mark Bertolini said he expected a groundswell of wage increases for lowest-paid employees at large US companies. AET said in January that it would increase its hourly minimum wage. Recall that several other major companies have announced wage increases for its lowest paid workers this year, notably WMT (0.1%), TJX (1.1%), TGT +1.1% and MCD +2.1%. There has been discussion that the wage hikes are a sign of a tightening labor market as companies are stepping up efforts to retain workers. Also, the CEO of DPZ (0.5%) said that the company may have to increase wages as it has been having difficulty finding workers due to a tighter market. Note that while y/y wage growth remained relatively low 2.1% y/y, a stronger-than-expected 0.3% m/m increase in average hourly earnings was a relative brightspot in the March employment report. 

Energy, industrials among best performers:

  • The outperformance in energy was driven by gains in oil prices. After declining last week, oil prices seemed to get a boost from easing concerns about the ability of Iran to ramp-up supplies if a nuclear deal is reached. Saudi Arabia's increase in prices for crude sales to Asia was also cited as a tailwind, and a possible sign of increasing demand. Despite a midweek pullback attributed to bearish API and DoE inventory data, prices made gains on Thursday and Friday. WTI and Brent both closed ~5% higher on the week. Integrated and E&P names generally made strong gains, with APA +10.4%, OXY +5.2% and COP +5.3% among the standouts. However, refiners underperformed as the Brent-WTI spread narrowed. SUN (3.1%) was a notable laggard. Industrials was boosted by the rally in GE, which offset underperformance from PNR and DOV following their negative preannouncements. Machinery names generally outperformed, notably CAT +2.9%. Transports were in line overall. The stronger oil prices may have been a factor in the outperformance of rail names and mixed performance among airlines. UNP +4% and DAL +2.3% were respective standouts. 

Defensive sectors among laggards:

  • The defensive utilities and telecom sectors were among the worst performers. There was little company-specific news among the groups, with this week's rebound in Treasury yields a likely contributor to the weakness. Recall that both sectors were among the better performers last week as yields declined. Financials also lagged, with regional banks and insurers the primary sources of weakness. There was no specific catalyst behind the sluggish performance. Money centers fared better, with JPM +2% leading gains. Note that there has been some positive commentary about tailwinds for money centers ahead of next week's earnings reports, with improved trading results a focus. Consumer discretionary finished slightly below the tape. Retail was mixed, with department stores generally faring better. However, there was negative reaction to earnings from BBBY (4.4%), while ZUMZ (9%), BKE (4.2%), GPS (3.3%) and COST (1.3%) were among the underperformers after reporting March comps. Homebuilders were mostly lower, with no apparent catalyst, while autos were stronger. Tech was largely in line, with semis a standout. Healthcare outperformed, helped by M&A activity in pharma and strength across biotech and hospitals. 

Sector Performance (vs S&P 500):

  • Outperformers: Industrials +3.28%, Energy +3.09%, Healthcare +2.89%, Tech +1.88% 
  • Underperformers: Telecom (0.63%), Financials +0.12%, Utilities +0.20%, Consumer Spls. +0.94%, Consumer Disc. +1.28%, Materials +1.49%
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