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FactSet StreetAccount Summary - US Weekly Recap: Dow (0.90%), S&P (0.69%), Nasdaq (0.03%), Russell 2000 +1.16%

Jun 5, 2015

Overview:

  • US equities finished mostly lower this week. The big story seemed to be the fairly limited directional implications for the broader market from a meaningful backup in Treasury yields. Weakness in Treasuries was driven by both pressure from Eurozone bonds and better US economic data. The latter was particularly in focus late in the week with the stronger May employment report. May vehicle sales, an improvement in last month's ISM manufacturing index and an upside surprise in April construction spending were also cited as supportive for recovery sentiment. Rate trades drove some of the more notable sector moves as financials outperformed and utilities sold off. It was a quieter week in terms of corporate news. There did not seem to be much new from a macro or industry perspective out of this week’s sell-side conferences. The earnings calendar was a non-factor. M&A headlines remained prevalent, though some pockets of the market like semis and managed care that had been recent beneficiaries of deal announcements and speculation underperformed. It was another week of both significant Greek headline volatility and limited contagion. A continued rally in China stocks also had limited impact on global risk sentiment. As expected, OPEC left output unchanged at Friday’s meeting. 

Treasury weakness not a big overhang on stocks:

  • The backup in Treasury yields resumed this week. Following the stronger-than-expected employment report on Friday, the yield on the 10-year note traded just above 2.44% at one point, its highest level since October. There were several other factors behind this week’s move, including the latest wave of selling pressure in Eurozone bonds. Weakness there was chalked up to a combination of firmer preliminary May inflation data, comments from ECB President Draghi that the market will have to get used to volatility and technical dynamics surrounding still-crowded QE trades. Despite concerns about the broader risk-off implications from the global bond selloff, the spillover effects for US equities were fairly muted. Some of the reprieve may have been a function of the largely unchanged expectations surrounding the policy normalization path. While key data firmed this week, there continued to be concerns about the quality of the recovery. This sentiment was highlighted in the latest batch of Fedspeak, including comments Friday from NY Fed President Dudley. While Dudley echoed Fed Chair Yellen’s recent remarks about the likelihood of a 2015 liftoff, he also highlighted some doubts about both growth and a continued improvement in the labor market. He specifically noted that the rate path will likely be “shallow”. 

Key data come in stronger:

  • While there were some mixed takeaways from the economic calendar this week, several key data points came in stronger than expected. Nonfarm payrolls increased 280K last month, ahead of consensus expectations for a 225K gain. The unemployment rate ticked up to 5.5% from 5.4%, though this was driven by an increase in the participation rate. In addition, average hourly earnings increased a better-than-expected 0.3% m/m. This pushed the y/y rate of increase up a tenth to 2.3%. While still lackluster, it was the highest level since October 2009. The auto sector also helped recovery sentiment, particularly amid concerns about a sluggish consumer spending backdrop. Light vehicle sales accelerated to a 17.7-17.8M SAAR last month from 16.5M in April and 16.7M in the year-earlier period, ahead of the 17.3M consensus. This marked the highest level since July 2005. The Street remained positive on the mix shift to higher-margin pickups and SUVs. There was also some semblance of reprieve for manufacturing this week as the ISM manufacturing index improved to 52.8 in May from a nearly two-year low of 51.5 in April, ahead of the 52.0 consensus. Underlying details and respondent commentary were fairly positive. In addition, construction spending increased 2.2% in April vs consensus expectations for an 0.8% gain. There were also favorable revisions to prior months. 

Rate trades drive notable sector moves:

  • The backup in interest rates was the big driver of some of the more notable sector moves this week. Financials fared the best as banks rallied with the BKX +2.8%. ZION +10.3% led the move higher with help from its well-received restructuring announcement. RF +4.3%, BAC +4.2%, C+4% and KEY +3.6% were some of the other notable gainers. Despite the directional influence of the yield backup, analysts have pointed out that the move is being driven by multiple expansion rather than upward EPS revisions. Deutsche Bank noted that one of the industry takeaways from its Global Financial Services this week was a more conservative outlook on the tightening cycle. Other pockets of the sector leveraged to rising rates such as online brokers and life insurance stocks also posted outsized gains. However, REITs lagged with RWR (2.4%). The utilities sector also sold off sharply, suffering its biggest weekly pullback in three months despite the extent to which sentiment surrounding the sector has already been depressed. Last month’s BofA Global Fund Manager Survey showed the biggest underweight position in utilities since February 2014. Rates also received some of the blame for the weakness in the consumer staples. Tobacco names were among the worst performers with RAI (6%), MO (5.8%) and PM (4.1%). 

More M&A headlines, but some groups lose momentum:

  • There was more attention surrounding the ongoing M&A theme this week. The FT noted that according to Dealogic, US-focused M&A totaled a record $243B in May, surpassing $226B in the same month in 2007 and $213B in January 2000. Semis were back in the headlines as ALTR +5.3% agreed to be acquired by INTC (7.6%) in a widely expected deal valued at $16.7B. While the Street seemed mostly comfortable with the strategic rationale, there were concerns surrounding valuation. Despite M&A speculation surrounding other semi names such as ATML +6.1% and SNDK +0.4%, the group was a notable underperformer this week with the SOX (2.6%). Managed care was mostly weaker following a big run-up last Friday on reports that HUM (0.1%) had received takeover interest and is now exploring a potential sale. The pullback came despite some upbeat sell-side commentary regarding the attractiveness of a deal for potential acquirers such as ANTM (3%), CI (0.9%) and AET (0.9%), as well as the potential for a transaction to spur further consolidation in the group. In terms of some of the other higher-profile deal-related developments this week, the WSJ noted that DISH +6.7% and TMUS +3.4% are in preliminary merger talks. Reuters also highlighted some heightened antitrust concerns on the part of SYT (3%) regarding a tie-up with MON (2.7%). 

Greek drama, China rally, weak yen, unchanged OPEC:

  • There were no signs of a near-term resolution for Greece as Athens pushed back against pension reform and higher VAT rates in a creditor proposal. It also decided to skip Friday’s €300M payment due to the IMF in favor of bundling a total of ~€1.6B worth of payments at the end of the month. China stocks were extremely volatile this week, though the path of least resistance remained to the upside as the Shanghai Composite rallied another 8.9% despite a further crackdown on margin financing and a flurry of IPOs. The mainland press continued to defend the market, while the policy support dynamic continued as the PBoC extended more than CNY1T in Pledged Supplementary Lending (PSL) to select banks. The yen weakened for a third straight week, while there did not seem to be anything in commentary from Japanese officials that the currency was out of line with fundamentals. A Nikkei article even noted that government officials told investors in mid-May that the yen could weaken to ¥130 against the dollar by year-end. Oil sold off this week with Brent and WTI crude down 3.4% and 1.9%, respectively. The OPEC decision to leave output unchanged was widely expected, though there were also a number of reports highlighting the resilience of US shale production, expected supply from Iran and Iraq and pressure on the physical market from an unwinding of profitable storage trades. 

Sector Performance (vs S&P 500):

  • Outperformers: Financials +0.77%, Consumer Disc. +0.22%, Industrials +0.05% 
  • Underperformers: Utilities (4.11%), Consumer Spls. (2.56%), Telecom (2.36%), Materials (1.23%), Energy (0.97%), Tech (0.92%), Healthcare (0.85%
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