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FactSet StreetAccount Summary - US Weekly Recap: Dow +1.84%, S&P +2.41%, Nasdaq +4.25%, Russell 2000 +1.20%

Jul 17, 2015
Overview:
  • US equities finished sharply higher this week with the S&P 500 posting its biggest increase since late March. Dampened fears surrounding a near-term Greek exit from the Eurozone were a key driver of the pickup in global risk sentiment. While somewhat on the backburner, another bounce in China stocks and better June activity data also seemed to provide some support. The earnings calendar was cited as another tailwind, though low expectations seemed to play a big role. This week’s Fedspeak had little influence on equities as Fed Chair Yellen stuck to the recent FOMC mantra and reiterated that the Fed is likely to raise rates sometime before the end of the year. Along with the favorable developments surrounding Greece, this helped to put some renewed focus back on the policy divergence theme, driving the strength in the dollar. However, Treasuries ended mixed for the week with the curve flattening. Retail sales and regional manufacturing data disappointed, while commodities also came under pressure. One of the big overhangs on oil came from the nuclear agreement with Iran. Healthcare M&A and shareholder activism continued to get a lot of headlines. Tech and financials were the best performing sectors, while energy and materials both finished lower.
Greek reprieve:
  • Following contentious and protracted talks last weekend, Grexit risk receded (at least for now) early Monday on the back of a last-minute agreement to begin negotiations on a third bailout program expected to total €82B to €86B and cover Greece’s financing needs for three years. It is also set to include €10B to €25B to recapitalize the Greek banking system. The big takeaway from the agreement revolved around the extent to which Athens was forced to concede to creditor demands. One particular area of focus was the requirement for Greece to transfer state assets to a fund that will monetize them through privatizations and other exit strategies with the goal of generating €50B. However, only 25% of the proceeds will be used for investment. As a prerequisite to commence deal talks, the Greek parliament was forced to pass key legislation on Wednesday, including pension and tax reform. This exposed the dissension in the ruling Syriza party, forcing Prime Minister Tsipras to rely on opposition support and fueling speculation about fresh elections before the end of the year. However, passage did facilitate a €900M ELA increase unveiled by ECB President Draghi on Thursday, while EU finance ministers also reached a deal on a ~€7B interim financing package.
China bounce continues:
  • It was another very volatile week for China stocks, though the Shanghai Composite ended up just over 2% following a 5% bounce in the prior week. There was no specific catalyst for this week’s upside. A lot of the credit went to the perceived traction surrounding a recent flurry of measures to stem the selling pressure. The extent of the support really seemed to sink in on Friday. Bloomberg reported that up to $483B has been made available to the China Securities Finance Corp., the state-owned margin lender, to help support the market. In addition, the FT pointed out that a big chunk (~$209B) has come from China’s leading state-owned banks. However, this also exacerbated worries about underlying stability. While not cited as a big directional driver for stocks, there still seemed to be some semblance of reprieve for a recent ramp in growth fears from better-than-expected Q2 GDP and June monetary, trade and activity data. The muted impact was partly chalked up to skepticism about the validity of the data, a theme that has been in play for a while now. In response to such concerns, the NBS said that GDP had not been overstated, nor had the deflator been understated. Instead, it argued that the data pointed to stabilization from fiscal and monetary policy support measures.
Did sentiment get too negative?:
  • The magnitude of this week’s rally in global risk assets fit with thoughts that sentiment had become overly negative despite the seemingly muted contagion risks surrounding Greece and China. Bulls in the latest Investors Intelligence slipped to 43.7% from 44.8% in the prior week, the lowest since October 2014 following a nearly 10% pullback for some indexes. The correction camp ticked up just over a point to 40.7%, also a level not seen since October 2014. There was also some attention on the latest BofA Merrill Lynch Global Fund Manager Survey. It showed that cash levels jumped to 5.5% (representing a contrarian buy signal), the highest since December 2008 and prior to that, 2001. In addition, the highest net percentage of investors have taken out protection against an equity decline over the next three months since February 2008. The survey also showed that the Risk & Liquidity indicator fell to a three-year low of 37, down from a high of 46 just three months ago. Flow data largely supported the recent pickup in sentiment. US, European and Japanese stocks attracted more capital, while high yield ETFs and mutual funds saw their biggest inflows since early April.
Earnings sentiment picks up as results clear low bar:
  • Better earnings sentiment was cited as another supportive factor for stocks this week. According to FactSet, the blended growth rate for Q2 S&P 500 EPS improved to (3.7%) from (4.4%) last week and (4.5%) at the end of the quarter. Of the 61 companies that have now reported results for Q2, 72% have beat consensus earnings estimates, largely in line with the five-year average. However, nothing in the latest batch of results suggested any notable change from a macro perspective. This remained evident in the sluggish top-line backdrop. While the blended revenue growth rate improved to (4.0%) from the (4.5%) expected at the end of the quarter, it remained on track for the first back-to-back quarterly decline since Q2 and Q3 of 2009. In addition, margin support from expense control and depressed expectations continued to be some of the more common drivers of post-earnings outperformance. A number of high-profile headwinds also remained in focus. These included the slower global growth environment, the fallout from low energy prices, weak capital spending trends and the strength of the dollar.
Notable earnings movers:
  • One of the highlights this week was the upbeat sentiment surrounding bank earnings despite the lack of any notable surprises. Money center names BAC +8.4%, C +7.7% and JPM +3.2% outperformed. However, CMA (4.6%) was hit by a reserve boost for its oil and gas exposure. GOOG +26.9% was a big gainer in the Internet group with the focus on better expense discipline. Strong subscriber growth boosted NFLX +18%. EBAY +6.3% was another standout as core Marketplaces growth accelerated from Q1 and momentum in Payments continued. In semis, results and guidance from INTC +1% were better than feared, though there continued to be some skepticism. FCS (9.7%) reported a big miss, noting weaker demand from some mobile (Samsung) and appliance customers. PM +4.5% boosted tobacco as price/mix drove an earnings beat and better guidance commentary. In the rail space, better pricing and cost control helped offset volume headwinds at CSX +0.2%, while KSU +4.3% fared significantly better. Among the multi-industrials, both GE +3.7% and HON +3.1% beat. In managed care, UNH +1.4% was out with a beat and raise, but bogged down by an MLR miss. In the chemicals group, CYT (5.2%), SHW (4.4%) and (CE (3.7%) all came under outsized pressure following their results.
Fedspeak has little impact:
  • There was relatively little impact on equities from this week’s Fedspeak, though it did fit with some renewed focus on the policy divergence theme, helping to drive the strength in the dollar. In her semi-annual monetary policy testimony to Congress, Fed Chair Yellen largely stuck to her recent script. She reiterated that if the economy continues to progress as expected, it will likely be appropriate for the Fed to raise rates before the end of the year. However, she also stressed that policy will remain accommodative for some after liftoff given the likely gradual pace of normalization. Yellen pointed out that the labor market continues to trend in the right direction, highlighting noticeable declines in long-term unemployment and those working part-time for economic reasons. She noted that while there have been some tentative signs of wage growth, they have been relatively subdued and consistent with the lingering slack in the labor market. However, she remained upbeat on the overall US economy. Once again, she said that the transitory headwinds that hit Q1 are staring to abate. She also said that low oil prices and a continued improvement in the labor market should help boost consumer spending.
More healthcare M&A, shareholder activism:
  • A few of the higher-profile themes that have been in the market for a while now drove some notable moves this week. The healthcare sector remained the focal point in the M&A frenzy as CELG +% announced a deal to acquire RCPT +% for $7.2B in cash. The Street was upbeat on the strategic rationale behind the deal, highlighting the diversification away from Revlimid and the potential for RCPT’s key drug Ozanimod, which is expected to launch in 2018 for treatment of multiple sclerosis and in 2019 for ulcerative colitis. The favorable sentiment surrounding the deal provided a tailwind for another notable trend in the market, the outperformance of biotech. With this week’s gains, the BTK +6.2% is now up ~29% on the year. The shareholder activism dynamic was also in the headlines this week at CNBC’s Delivering Alpha Conference. M +8.8% was a standout after Jeff Smith of Starboard Value presented the name as his fund’s top idea. He said that the stock is worth $125 a share (nearly double the level it traded at before the comments), highlighting the $21B in trapped owned real estate value.
Tech and financials lead market higher, while energy and materials lag:
  • Tech was the standout this week as the favorable earnings takeaways from the Internet group and some strength in AAPL +5.1% offset the more sluggish tone in the semi space with the SOX +1.2%. In financials, it was all about the positive sentiment surrounding bank earnings with the BKX +3.2%. Healthcare was strong, but still lagged the tape. M&A provided further support for biotech. Tobacco was a key upside driver in consumer staples. Nothing really stood out in consumer discretionary, though retail lagged with XRT +0.7%. Retail sales unexpectedly fell 0.3% m/m in June. The industrials sector was up over 1%, but still trailed the tape. There seemed to be a number of moving pieces as most of the major groups put in a mixed performance. The materials sector underperformed as the better global risk backdrop (and iron ore production cuts from some of the global miners) failed to stem the negative sentiment surrounding the industrial metals. Precious metals stocks also sold off sharply with GDX (7.9%). Gold hit a five-year low on Friday. Energy was the worst performer this week. WTI crude fell 3.5%, while Brent was down 3.2%.
Sector Performance (vs S&P 500):
  • Outperformers: Tech +5.26%, Financials +3.01%
  • Underperformers: Energy (1.19%), Materials (0.14%), Utilities +0.85%, Telecom +1.35%, Industrials +1.49%, Consumer Spls. +1.88%, Consumer Disc. +1.94%, Healthcare +2.23%
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