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StreetAccount Summary - US Weekly Recap: Dow (1.28%), S&P (0.99%), Nasdaq (1.28%), Russell 2000 (1.02%)

Apr 17, 2015

Overview:

  • US equities finished mostly lower this week with the damage coming on Friday via a global risk-off trade that lacked a clear fundamental driver. However, this dynamic did seem to fit with some heightened focus on crowded trades and accompanying valuation issues.While US economic data continued to largely disappoint, Q1 headwinds have been widely hashed out already. In addition, market expectations for liftoff have already been pushed back, while a flurry of Fedspeak highlighted the complications surrounding policy normalization.Despite all the anticipation surrounding a pickup in earnings activity, high-profile themes played out largely as expected and reaction to results and guidance often seemed to be more a function of positioning and sentiment. The corporate actions tailwind was in play again this week, though was not a directional driver for the broader market. Greece continued to get a lot of attention as funding concerns ratcheted higher. However, contagion remained fairly limited for the better part of the week. The rally in China stocks continued as weak data further boosted policy support expectations, though news of an effort to boost short-selling and crack down on margin lending came after stocks there closed on Friday. Energy was the best performing sector this week as oil rallied sharply again. Industrials fared the worst. 

No great explanation for Friday selloff:

  • Aselloff in US and European markets on Friday lacked a clear fundamental driver. Some of the blame went to an overnight outage of Bloomberg terminals. There was also a good deal of focus on China’s move to increase the shares available for short-selling and tighten rules on margin lending. Elevated Greek funding concerns were cited as another overhang, despite the lack of any meaningful new developments. The latter two dynamics were somewhat interesting from the perspective that they fit with a recent pickup in focus on increasingly crowded trades. In terms of China, the Shanghai Composite ended 6.3% higher, marking its sixth straight weekly gain. The index has finished higher in nine of the last ten weeks, jumping nearly 40%. The rally has been driven by a combination of policy support expectations and a piling in of retail investors using margin. According to the Shanghai Stock Exchange, margin account balances stood at a record $190B as of Thursday. When it comes to Europe, there has been some concern about “Grexit” complacency given the outsized focus on the policy divergence trade. The latest BofA Merrill Lynch Global Fund Manager Survey showed that while the net overweight in Eurozone equities fell to 46% from 60%, it remained 1.3 standard deviations above the long-term average. 

Oil rebound continues:

  • In line with some reversal of crowded trades, oil extended its rebound, rallying for a fifth straight week. WTI crude ended the week up 7.9% at $55.74 a barrel, while Brent gained 7.6% to finish at $63.45 a barrel. The former has jumped more than 25% in just the last month. A good chunk of this week’s gains seemed to be chalked up to increased signs of slowing US production. The EIA forecast that production from the fastest-growing US shale plays is set to fall ~45K bpd m/m in May, marking the first monthly decline in over four years. In addition, the industrial production report revealed that oil and gas well drilling production was down 17.7% in March, marking the six consecutive month of decline. Deutsche Bank pointed out that this was nearly identical to the prior month’s 17.4% drop. It added that compared to a year ago, oil and gas well production is down 36.6%, with declines having meaningfully accelerated over the past six months. The firm said that there have only been two other times when production fell by more over a six-month period, one of which was near the height of the financial crisis between November 2009 and May 2009. 

US data continues to disappoint:

  • The trend of mostly softer US economic data continued this week. March retail sales rose 0.9%, snapping a three-month losing streak, though the Street was expecting a bigger 1.1% increase with some weather reprieve. In addition, the key core control group, which feeds into GDP, rose just 0.3%, below the 0.5% consensus and following a downwardly revised 0.2% contraction in February. Housing starts rose 2% m/m in March to a 926K saar following a big decline in February, well below the SA consensus of 1.04M. Permits fell 5.7% m/m, the biggest decline since last May. The manufacturing slowdown was also in focus. Industrial production was down 0.6% m/m in March, the biggest decline since August 2012. Utilities (warmer weather) and mining (oil) were the big drags, while when excluding motor vehicles, manufacturing production slipped 0.1%. The Empire manufacturing index fell to (1.2) in April from +6.9 in March, below the +7.0 consensus. Key underlying components such as new orders, employment and the workweek were all in contraction. While the Philly Fed index improved to a slightly better 7.5 in April from 5.0 in March, the forward-looking new orders index fell to its lowest level in nearly two years. 

Fedspeak highlights policy uncertainty:

  • A barrage of Fedspeak (particularly on Thursday) highlighted the heightened uncertainty surrounding the early stages of the policy normalization process amid the growth slowdown. However, with the market already pushing out liftoff expectations, commentary did not have any notable impact on market sentiment. Fed Vice Chair remained vague on liftoff timing, though he reiterated that a move is likely this year. He also highlighted some traction in terms of wage increases and said inflation is moving closer to the Fed’s 2% target. Atlanta Fed President Lockhart (voter) seemed a bit more dovish, noting that he would prefer a later liftoff date. Richmond Fed President Lacker once again highlighted the risks of waiting too long to raise rates. Perhaps more interestingly, he also said that it would not be an embarrassment for the Fed to revert to ZIRP after tightening. St. Louis Fed President Bullard (non-voter) expressed similar sentiment. Cleveland Fed President Mester reiterated her preference for a near-term tightening, though she did concede that data first needs to show that the economy has regained momentum. Boston Fed President Rosengren (non-voter) maintained that economic conditions do not warrant a rate hike. 

Few surprises from earnings calendar:

  • With most high-profile themes already understood, there did not seem to be many surprises from this week’s pickup in earnings activity. In terms of some of the highlights, depressed expectations helped drive favorable post-earnings moves in names like SLB +4.2%, INTC +1.7% and FAST 1.3%. Subscriber momentum and content cycle leverage drove the rally in NFLX +25.7%. A worse-than-feared guidance reset hit SNDK (5.2%). As expected, better trading proved to be an earnings tailwind for several big banks, with JPM +1.9% a standout. USB (3%) seemed to take the biggest hit from the trend of lighter fee income. Negative preannouncements continued to be met with selling pressure. NSC (5.4%) was the latest rail name to highlight weaker coal volumes. Oil and gas headwinds were partly to blame for PCP (5.6%) guiding Q1 EPS ~9% below the Street. However, HCA (0.3%) guided above the Street on better volume and payer trends. While the news drove some concerns in managed care about an uptick in utilization, they were subsequently dampened by a beat and raise from UNH (0.2%). A revenue miss partly driven by FX and lower corporate spending hit AXP (2.9%). 

Energy outperforms, industrials fare the worst:

  • Energy was the only sector to finish higher, advancing more than 1.5% for a third straight week on the continued rebound in oil. The materials sector held up better on the back of select pockets of strength in industrial metals (some of which came from short-covering). FCX +13% and CLF +8.6% were among the big gainers. Precious metals stocks were higher with the GDX +1.4%. The financials sector was also a relative outperformer with some help from the money center and investment banks. Healthcare was down with the tape with some cushion from the hospitals. Tech lagged on fairly broad-based weakness. Semis underperformed with the SOX (1.8%). Some of the higher-beta software names also came under pressure. Nothing really stood out in terms of the weakness in consumer discretionary this week. The oil move and crowded positioning may have been a factor. Some of the focus was on the weakness in the retail ETF, RTH (3.2%). The industrials sector was the worst performer, though both macro and company-specific dynamics were at work. Distributors, machinery, energy leveraged multis and E&Cs outperformed. Rails, aerospace and defense and parcel/logistics lagged. GE (4.4%) was a drag on the sector following its ~14.3% rally last week on the GE Capital asset sale news. 

Sector Performance (vs S&P 500):

  • Outperformers: Energy +2.13%, Materials (0.11%), Financials (0.49%) 
  • Underperformers: Industrials (2.22%), Consumer Disc. (1.85%), Tech (1.54%), Consumer Spls. (1.06%), Healthcare (1.03%), Telecom (1.00%)
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