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FactSet StreetAccount Summary - US Weekly Recap: Dow +0.17%, S&P (0.01%), Nasdaq (0.23%), Russell 2000 +0.30%

Jul 10, 2015
Overview:
  • US equities finished mixed in volatile trading this week. Volatility was largely macro driven with China and Greece dominating the headlines. In China, the focus revolved around another flurry of measures to stem the selloff in stocks, credibility concerns surrounding the policy response and the debate about the economic spillover effects. In Greece, worries about an exit from the euro ramped higher following a decisive rejection of the creditors’ bailout proposal in Sunday’s referendum. However, there was a marked shift in sentiment as the week progressed as Athens announced a new reform plan that set the stage for a weekend deal. Despite all the talk about heightened risk aversion this week, equities saw big inflows, bonds continued to see outflows, gold once again failed to attract any notable safe-haven interest and Treasury yields ended higher. The latter dynamic was partly a function of skepticism that neither Greece nor China will likely have much impact on Fed policy. There were few notable developments surrounding the US. However, there were some thoughts that a low bar for a Q2 earnings season that really gets underway next week could offer a favorable setup for the market. Defensive leaning sectors largely outperformed, while a number of cyclical plays came under pressure.
China selloff grabs the spotlight:
  • China was the big macro story this week as authorities unveiled a flurry of measures to stem the recent selling pressure in stocks. Amid a good deal of volatility, this effort finally gained some traction on Thursday and Friday and the Shanghai Composite ended up 5.2% for the week after falling ~25% over the three prior weeks. Some of the higher-profile announcements included a freeze on IPOs, a CNY120B market stabilization fund financed by a group of 21 brokerages, a six-month ban on selling by major shareholders, directors and senior management, PBoC liquidity support for the state-owned margin finance company, sovereign wealth fund buying commitments and a number of different measures to ease margin requirements. Despite the late-week recovery, there was a good deal of discussion about the fallout from the recent volatility. There seemed to be some mixed thoughts about the potential spillover effects for consumption and the broader financial system. However, the social stability dynamic was a meaningful concern given the outsized participation of retail investors in the market. There was also a good deal of worry about a loss of confidence in Beijing’s policy response mechanism and the potential setback for its structural reform push.
China selloff hits commodities:
  • One of the bigger concerns surrounding the recent selloff in China was the resultant pressure on the commodity complex, particularly the industrial metals. Copper was off ~3.5% this week after hitting its lowest level in six years on Wednesday. This triggered worries about the spillover effects for both the domestic and global economy, which in turn put some renewed focus on deflation risks. However, there were also thoughts such fears were overdone. One of the biggest drivers of the skepticism revolved around the fact that the neither the selloff nor the preceding surge in China stocks was driven by any shift in the assessment of economic fundamentals. In addition, some economists pointed out that data has actually turned a bit more positive over the last month or so. There was also a good deal of focus on forced selling in commodities stemming from the extent to which they have played a role in loan collateralization. Finally, China largely took a backseat when it came to a 7.4% decline in WTI crude this week. Instead, the focus was on the recent uptick in the US oil rig count, a ramp in OPEC production and the prospects (though still shaky) for a near-term nuclear agreement with Iran.
Roller coaster week for Greece:
  • There was a meaningful pickup in concerns about a Greek exit from the Eurozone after Greek voters decisively rejected a creditors’ bailout proposal in Sunday’s referendum. However, the prospects for a new deal improved fairly quickly, starting with the resignation of Finance Minister Varoufakis and the unified negotiating stance of the Greek government. In addition, the government met a midnight Thursday deadline to submit a package of new measures for creditors to review before a Saturday Eurogroup meeting and an EU leaders’ summit on Sunday (deemed the final deadline for a deal). Sentiment surrounding the submission was fairly upbeat, a dynamic evidenced by a meaningful global risk-on trade Friday. In exchange for €53.5B from the ESM to cover loan obligations for three years, a review of primary surplus targets and a reprofiling of long-term debt, Athens said it would implement a €35B reform program that moved much closer to creditors’ demands. The program included pension savings, a phase-out of a controversial supplementary payment for poorer pensioners, a 200 bp increase in the corporate tax rate, defense spending cuts, VAT increases, privatizations, an overhaul of the collective bargaining system and an opening up of certain markets.
Risk aversion not supported by flows, safe-haven plays:
  • Despite all the talk about the heightened risk aversion in the markets as of late, this was not supported by the flow data. The latest “Flow Show” report from BofA Merrill Lynch put equity fund inflows at $25.4B this week, the strongest since December 2014. It pointed out that China saw a record $13B of inflows, largely concentrated in A-share ETFs. Grexit worries were not enough to prevent an eighth straight week of inflows to European equities, while the US attracted $10.7B, the largest week of inflows since March. Once again, gold failed to attract any notable flight-to-quality interest. It ended down 0.5%, finishing lower for a third straight week. The Japanese yen, another safe-haven destination, only finished slightly firmer against the dollar this week. A Nikkei article attributed the lack of momentum in the yen to the relative stability surrounding the policy divergence theme. It also pointed out that the options market is showing that concerns about yen strength are at their lowest level so far this year. Finally, despite a big rally early in the week, Treasury yields ended mostly higher.
Fedspeak suggests not much has changed:
  • There was little direction from this week’s developments surrounding the Fed. On Wednesday, San Francisco Fed President Williams, a voting member who is widely seen as a centrist, noted that he continues to expect liftoff in 2015. He also reiterated his forecast for two rate increases before the end of the year. In addition, he largely downplayed the tail risk surrounding a potential Greek exit from the Eurozone and said that Chinese officials should be able to implement the appropriate measures to address the downside risks to growth. This somewhat contrasted with the concerns about both Greece and China highlighted in the June FOMC minutes. In her comments on Friday, Fed Chair did not seem worried about macro risks. She only briefly mentioned Greece and did not touch on the recent developments in China. She also reiterated that she expects it will be appropriate to raise rates sometime later this year. While Yellen argued that the unemployment rate probably does not fully capture the slack in the labor market, she did note that there are some tentative hints of a pickup in wage gains that may indicate that the central bank’s full employment mandate is coming closer into view.
Low bar for Q2 earnings?:
  • Q2 earnings season unofficially kicked off this week, though next week brings many more high-profile reporters. According to FactSet, Q2 S&P 500 earnings are expected to decline 4.4% y/y. This would mark the first y/y contraction since Q3 of 2012. A WSJ article this week discussed how many investors are confident that results will clear the low bar analysts have set for the quarter, providing support for stocks amid heightened concerns over valuations and macro/geopolitical headwinds. It also pointed out that a number of transitory headwinds on earnings have started to either fade or reverse. It highlighted the better sentiment surrounding the US consumer as another positive. However, some of the preannouncement activity and sell-side previews this week also fit with concerns that when it comes to certain themes, expectations have not been sufficiently reset. A negative preannouncement from AMD (22.5%) exacerbated the scrutiny surrounding PC weakness. In addition, DOV (6.7%) reduced its full-year guidance again, citing continued weak fundamentals in the North American oil and gas markets and generally weaker capital spending in retail refrigeration and certain industrial end markets.
Defensive sectors outperform, some key cyclicals lag:
  • The defensive leaning consumer staples sector was the best performer this week. Drug store, beverage and tobacco names were the standouts. WBA +8.5% fared particularly well following its beat and raise. The utilities sector outperformed for a second straight week. Healthcare beat the tape as pharma rallied with the DRG +2%. Consumer discretionary was underpinned by the strength in retail with XRT +1.2%, along with some fairly broad-based gains in restaurants and homebuilders. However, a number of other cyclical pockets of the market underperformed. The materials sector was hit by a selloff in the industrial metals group. AKS (14.9%), CLF (14.5%), FCX (9%) and VALE (7.2%) were some of the big decliners. A sharp selloff in crude drove the pullback in energy. Some positive sell-side commentary failed to help the oil service sector with the OSX (2.9%). Semis weighed on tech with the SOX (3.9%) hit by concerns about PC and server weakness. Hardware names also underperformed. The machinery group was the big drag on industrials. China/commodity concerns drove the weakness in the likes of JOY (10.1%), OSK (4%), TEX (3.4%) and CAT (2.6%). While rates ended mostly higher this week, banks still lagged with the BKX (0.8%).
Sector Performance (vs the S&P 500):
  • Outperformers: Consumer Spls. +2.02%, Utilities +1.67%, Consumer Disc. +0.53%, Healthcare +0.51%
  • Underperformers: Materials (1.64%), Telecom (1.54%), Energy (1.47%), Tech (0.84%), Industrials (0.21%), Financials (0.02%)
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