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FactSet StreetAccount Summary - US Weekly Recap: Dow (0.38%), S&P (0.40%), Nasdaq (0.71%), Russell 2000 (0.38%)

Jun 26, 2015
Overview:
  • US equities finished mostly lower this week. There were a number of different dynamics in play, but seemingly little change in the macro backdrop. Greek headlines drove some of the volatility. A Saturday Eurogroup meeting is now seen as the last chance for an agreement to extend the current bailout program. There was no spillover from another sharp selloff in China stocks. This week saw a resumption of the backup in Treasury yields. Fedspeak was a bit more hawkish, but did not really have much impact on policy expectations. While the economic calendar was not a big directional driver for stocks, there were some upside surprises, particularly surrounding housing. The M&A theme continued to be cited as supportive for sentiment, even amid a more difficult regulatory backdrop. The corporate calendar drove some of the more notable movers this week with May quarter results out of the tech and consumer spaces getting most of the attention. Washington was another area of interest as the Supreme Court upheld the legality of federal healthcare subsidies and the Senate passed fast-track trade legislation. There were a lot of moving parts when it came to sector performance. Utilities, materials, industrials and tech all came under pressure. Telecom, consumer discretionary and healthcare finished higher.
Greek endgame may be near (for now):
  • The Greek saga dragged on this week, even driving some volatility in US equities despite the extent to which spillover effects had been muted. There was a notable pickup in optimism surrounding deal prospects early in the week after Athens submitted a new list of reform proposals. However, that was short-lived as the focus shifted back to some widely discussed sticking points. These included creditor calls for more aggressive pension reform, higher value-added taxes and lower defense spending. Creditors also expressed concern about the extent to which Athens had shifted the adjustment burden to tax hikes. At the same time, the Greek government continued to push back against pension cuts and reiterated its mandate that any deal include debt relief. The lack of progress left a Eurogroup meeting this Saturday as the final chance to reach an agreement on an extension of the current bailout program before it expires on Tuesday. It still seems as if consensus expectations revolve around a last-minute deal, though there were also reports about how some creditors are readying plans to “ring fence” Greece to dampen any contagion. The FT said such plans not surprisingly include capital controls, and even humanitarian aid.
No spillover from China selloff:
  • While Greece remained the big macro story, another big selloff in China stocks also received a lot of attention. Despite a nice bounce early in the week, the Shanghai Composite still lost nearly 6.5%, leaving it down ~19% in just the last two weeks. When it came to the latest downdraft, many of the usual suspects were in focus. These included a tighter liquidity backdrop, a continued crackdown on margin financing and valuation concerns. There also seemed to be some dampened expectations for another RRR or benchmark rate cut from the PBoC over the near term. In addition, Morgan Stanley was out with a cautious call on Friday, noting that this is probably not a dip to buy and pointing out that a case can be made that the cycle high for the A-share markets was set earlier this month. A Bloomberg article also discussed how the lack of more explicit support for stocks from the state media suggests that Beijing is willing to live with greater market volatility. However, spillover effects for global risk assets (including Asian markets leveraged to China) seemed to be just as limited as they were during the 65% rally from late January to the 12-June peak. This dynamic was chalked up to the extent to which economic fundamentals have taken a backseat to reforms and other China-specific issues as the big directional drivers for stocks.
Backup in Treasury yields resumes:
  • This week saw some renewed weakness in Treasuries, though there did not seem to be a specific driver behind the backup in yields. While some better sentiment surrounding the prospects for a Greek deal weighed early in the week, there was little support from the heightened uncertainty going into the weekend. There continued to be some focus on the rotation out of bonds. The latest “Flow Show” report from BofA Merrill Lynch showed that government bond funds saw their ninth straight week of outflows, the longest streak since January 2013. While liftoff expectations have been one of several drivers of this trend, this week’s Fedpseak did not seem to have much impact on policy expectations. Fed Governor Powell said he sees a 50-50 chance of liftoff at the September meeting. In line with last week’s comments from San Francisco Fed President Williams, another FOMC voter this year, he added that he is currently forecasting two 25 bp rate increases in 2015. However, he also pointed out that a December move is even more uncertain. In the prior week, Treasuries were underpinned by the takeaways from the SEP that showed five officials now looking for just 25 bp worth of tightening this year, up from one in March.
Good week for housing:
  • Housing was the standout on the economic calendar this week. Existing home sales increased 5.1% m/m to a 5.35M saar in May. This was the highest level since the 5.44M in November 2009 ahead of the expiration of the first-time homebuyer tax credit. There was also some positive sentiment surrounding the fact that first-time buyers accounted for 32% of the transactions last month, the highest level since 2012. This seemed to fit with a WSJ article this week that discussed how low-down-payment buyers are starting to return to the housing market. New home sales increased 2.2% m/m to a 546K saar in May. This was ahead of the 525K consensus and marked the highest level in more than seven years. The earnings calendar was another driver of the outperformance of homebuilder stocks this week. LEN +6.9% beat across the board for its key Q2, including on the widely scrutinized gross margin metric (though it was down y/y). In addition, the company reiterated its gross margin outlook, while better-than-expected 18% y/y order growth was another widely cited positive. The company also had some upbeat commentary on the housing market, noting support from higher wages and employment, along with reasonable affordability levels, supply shortages and favorable monthly payment comparisons to rentals.
M&A theme still a positive:
  • While not a broader market directional driver this week, the M&A theme continued to be cited as a positive for sentiment. An FT article noted that the surge in M&A activity is taking over from share buybacks (though sell-side commentary continued to highlight expectations for strong buyback support) as the driving force behind US equities. In terms of this week’s highlights, managed care remained in focus. CI +8.2% rejected a ~$47.5B takeover offer from ANTM (0.2%). There were also reports that AET +4.8% is closing in on a deal to acquire HUM (3.4%). The ag chemicals group also received some attention as POT +3.5% expressed interest in acquiring German rival K+S. In the pipeline space, WMB +18.2% announced it would look at strategic alternatives after receiving an unsolicited $48B all-stock takeover bid from ETE (4.7%). Regulatory concerns did get some attention this week as a federal judge issued a preliminary injunction blocking SYY’s +2.7% $3.5B acquisition of US Foods. While the Street was not surprised by the news and the stock was supported by hopes for a leveraged recap, the ruling did exacerbate the scrutiny surrounding the proposed consolidation in the office supply space between SPLS (2%) and ODP (2.6%).
Mixed takeaways from May quarter reporters:
  • The earnings calendar drove some notable movers this week. MU (18.2%) came under outsized pressure after August quarter guidance came in much weaker than already depressed expectations. Along with soft PC demand and continued DRAM pricing weakness, the company highlighted an increase in cost-per-bit with an accelerated mix shift toward mobile and servers. ACN +2% was a standout in tech on the back of another beat and raise. Analysts talked up the fairly broad-based strength across verticals. NKE +3% beat on both the top- and bottom-line for its fiscal Q4. Key positives included double-digit growth in North America, Western Europe and China, better-than-expected 13% currency neutral futures growth and gross margin upside from higher ASPs and DTC mix. FINL +7.1% was another standout following its earnings beat on better 5.5% comp growth that was largely driven by pricing. BBBY +0.5% held up fairly well this week considering the lackluster sentiment surrounding its fiscal Q1 EPS miss, softer Q2 guidance and continued concerns about gross margin pressures. In the chemicals space, MON (6.6%) posted better fiscal Q3 earnings, but upside was largely driven by a non-recurring royalty payment and implied August quarter guidance came in well below the Street.
Utilities sector the worst performer:
  • The utilities sector resumed its underperformance following last week’s last reprieve. The materials sector was bogged down by a selloff in containerboard names like KS (11.2%), PKG (7.8%) and IP (5.7%) on weaker West Coast pricing. The bulk of the precious and industrial metals stocks also underperformed. Weakness in the industrials sector was fairly broad based. The rail group was down nearly 4% as estimates continued to trend lower on volume weakness. Truckers also sold off sharply with MRTN (5.2%), YRCW (4.4%), R (4.7%) and WERN (4.3%) some of the big decliners. Wolfe Research was out with some cautious comments, noting material changes in TL and LTL capacity and pricing expectations in its latest survey. Multis and machinery underperformed, though ag equipment names bucked the trend with AGCO +6.9%, DE +4.2% and CNHI +2.8%. Higher grain prices, sell-side upgrades and deal speculation were cited as supportive. Tech underperformed. The semis were a big drag with the SOX (3.5%). Sell-side commentary/ratings changes also weighed on security names with FEYE (8.9%) the big decliner. Negative PC sentiment continued to weigh on HDD names WDC (7.2%) and STX (6.2%).
Telecom, consumer discretionary and healthcare finish higher:
  • Telecom was the best performer this week. Upside was largely driven by T +3.2%, which benefited from three sell-side upgrades this week. Some of the positive commentary revolved around the benefits from its DTV acquisition. In consumer discretionary, homebuilders outperformed with XHB +1.3% underpinned by the economic and earnings calendars. Restaurants were mixed, though better earnings and a REIT spinoff announcement boosted DRI +5.9%, while a franchisee acquisition helped EAT +1.9%. Retail was another relative bright spot with XRT +0.9%. Most media names fared well with cable plays CVC +3.4% and CMCSA +1.3% among the bigger gainers. While M&A headlines in managed care were largely supportive for healthcare, the bigger tailwind came from the rally in hospital stocks. CYH +13.3%, THC +9.8% and HCA +8.8% were boosted by the Supreme Court’s ruling in King v. Burwell, upholding federal healthcare subsidies. Some of the upside in healthcare this week seemed to be capped by the weakness in biotech with IBB (1.3%) A Bloomberg article noted that the demand for put options relative to calls on the iShares Nasdaq Biotech ETF has risen to the highest level in three years.
Sector Performance (vs S&P 500):
  • Outperformers: Telecom +1.16%, Consumer Disc. +0.47%, Healthcare +0.30%, Financials (0.09%), Energy (0.12%)
  • Underperformers: Utilities (2.42%), Materials (1.85%), Industrials (1.19%), Tech (1.02%), Consumer Spls. (0.63%) 
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