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FactSet StreetAccount Summary - US Weekly Recap: Dow +0.28%, S&P +0.06%, Nasdaq (0.34%), Russell 2000 +0.32%

Jun 12, 2015
Overview:
  • The major US equity indexes ended narrowly mixed this week, while seven of the ten S&P 500 sectors finished higher. Some of the bigger stories this week continued to revolve around a lack of conviction in both directions and a waiting game for a pickup in equity market volatility. There was relatively little change in the macro backdrop as firmer retail sales data kept the focus on a September liftoff. However, there was still some scrutiny on the quality of the reflation theme behind the recent backup in global bond yields. There were also some concerns that the move could dampen the recovery. There was a meaningful pickup in headline volatility surrounding Greece this week, with spillover effects more pronounced than has been the case for the better part of the ongoing saga. One of the other big macro stories revolved around the strength in the yen on comments from BoJ Governor Kuroda, though there were no notable implications for US stocks. Sector performance was mixed, fitting with some focus on dampened correlations. While banks remained the big beneficiary of the higher rate environment, other cyclical pockets of the market, including transportation stocks, lagged. It was a quieter week in terms of M&A. Corporate actions and shareholder activism headlines continued to get a lot of attention.
Lack of conviction:
  • There continued to be a lack of conviction in moves in both directions this week. Bloomberg touched on a related dynamic, noting that the S&P 500 is trading in its smallest range since at least 1995, with the 2015 low only 6.5% below its year-to-date high. It added that stocks in the S&P 500 have moved in an average range of 18% from highs to lows, also the tightest in two decades. The limited direction this week seemed to fit with the waiting game ahead of next week’s FOMC announcements, where the market is hoping to get more clarity on liftoff timing. It also fit with the recent focus on the extent to which equities have been fairly resilient amid concerns about the potential risk-off implications from the selloff in bonds. However, sell-side strategists continued to point out that the move has not been sufficient to derail stocks. Credit Suisse noted that 10-year Treasury yields would have to rise above 2.8% just to return equity valuations to neutral against bonds. However, another Bloomberg article highlighted how investors are increasingly looking for volatility to spill over to equities. It pointed out that they are building hedges against equities swings to levels not seen in eight months. It added the last time calls were in such favor, the volatility gauge hit its highest level in three years and the S&P 500 fell 9.8%.
Reflation theme gains momentum, scrutiny:
  • The recent backup in global bond yields dominated the headlines again this week. Firmer data and a post-OPEC meeting rebound in oil helped to put more attention on the reflation trade. There was also a high-profile article in the Telegraph that highlighted how the markets missed clear warning signs from surging monetary aggregates in Europe and the US. However, the reflation theme also attracted more scrutiny. The FT discussed how bond strategists have been skeptical about a decisive reversal in disinflation trends. It also noted that in Europe, five-year inflation expectations five years out are still below levels from late last year. It added that the selloff in Eurozone bonds, which has been the key driver of the weakness in global bonds, has been more of a function of a retreat from extreme and overcrowded positioning surrounding the start of the ECB’s QE. A Reuters article also noted how higher Treasury yields could derail a fragile US recovery, providing another complication for Fed monetary policy. The housing market was mentioned as a particular area of concern as mortgage rates pushed above 4%, hitting the highest level since last October. Worries about unwarranted tightening from higher yields, policy traps and repo constraints all helped to drive strong demand at this week’s Treasury auctions.
Greek headlines even more volatile:
  • Headline volatility surrounding Greece ramped ever higher this week. In addition, there were more notable spillover effects in both directions despite the extent to which contagion from the long-running saga has been limited. Early in the week, the focus revolved around Greece’s disdain for a recent creditor proposal that some had framed as an ultimatum. In addition, a counter-proposal from Athens was quickly dismissed as inadequate. Sentiment improved a bit as the week progressed. Some of this seemed to be a function of reports highlighting discussions about a bailout extension. On Wednesday, a rally in both Eurozone and US equities was partly chalked up to a report that Germany could sign off on a plan to get bailout funds flow again by allowing Athens to stagger its reform implementation (however, Berlin dismissed this report). Support also came from the ECB’s decision to increase ELA for Greek banks by €2.3B. Headlines deteriorated over the latter part of the week as the IMF noted that key differences remain (and said it walked away from technical negotiations), Greece continued resist pension reform and a Reuters report highlighted creditor pessimism about reaching a deal by the end of June and formal contingency planning for a Greek default.
Banks outperform, tech, transports lag:
  • The financials sector was a standout this week as banking stocks continued to outperform with the BKX +1.6%. While Treasury yields ended the week unchanged to a bit lower, the group remained the big beneficiary of the higher rate environment. Morgan Stanley noted that one of the takeaways from its Financials Conference was that large-cap banks are now the most preferred area in financials. It also said that banks expect to drop most of the benefits from rate hikes to the bottom line. In addition, Goldman Sachs recommended investors overweight financials, citing the sector’s outperformance in a rising rate and accelerating growth environment. The strength in the banks provided some credibility for the reflation theme discussed above, though some other cyclical pockets of the market struggled. Tech, which was also recommended as an overweight by Goldman, was one of the worst performers. Semis lagged with the SOX (1.7%). Weak PC trends (and the spillover effects) continued to get some attention. The transportation group was another underperformer with airlines like LUV (5.8%), JBLU (4.7%), DAL (4.1%), AAL (2.4%) and UAL (2.3%) the big decliners. While pricing and capacity concerns have been the recent overhangs on the group, Q2 PRASM guidance updates this week put the focus on softer domestic trends.
Quieter week of M&A headlines, corporate actions, activism in focus:
  • Things quieted down a bit from an M&A perspective this week. However, ATML +6.2% jumped on reports it is exploring a sale. HLS +8.1% was underpinned by its $730M acquisition of Reliant Hospital Partners. FCAU +1.7% continued to be rebuffed in its effort to find a consolidation partner. HCC +34.7% agreed to be acquired by Tokio Marine for $7.5B. There were also some smaller deals in the foods space involving WWAV +2.4% and CPB +0.4%. On the corporate actions front, NFLX +4.4% shareholders approved a meaningful increase in the number of shares the company is authorized to issue in a key step toward an expected stock split. JCI +0.3% announced that it is exploring strategic options for the separation of its Automotive business. BOBE +3.8% was a standout after unveiling plans to monetize its real-estate holdings. PRU +1.1% announced a new $1B buyback authorization, while TGT +0.3% expanded its buyback to $10B from $5B and increased its quarterly dividend by 7.7%. Activism was also in focus this week with much of the attention on CTXS +8.5%. Elliott Management disclosed a 7.1% stake in the company and called for a number of operational and strategic changes.
Sector Performance (vs S&P 500):
  • Outperformers: Financials +0.99%, Consumer Spls. +0.81%, Materials +0.37%, Industrials +0.20%, Telecom +0.17%, Healthcare +0.10%
  • Underperformers: Energy (0.93%), Tech (0.73%), Utilities (0.50%), Consumer Disc. +0.04%
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