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FactSet StreetAccount Summary - US Weekly Recap: Dow +1.11%, S&P +0.91%, Nasdaq +2.60%, Russell 2000 +0.53%

Aug 28, 2015
Overview:
  • The major US equity indexes ended higher in extremely volatile trading this week, while sector performance was mixed. A sharp selloff early in the week was chalked up to some of the usual suspects, particularly the continued concerns about the spillover effects of China’s growth slowdown and yuan devaluation and uncertainty surrounding Fed liftoff timing. Valuation and crowded long were also mentioned as overhangs, while additional blame went to liquidity constraints, trading halts and heavy selling from systematic investors (which may not be done).
  • The biggest two-day rally in the S&P 500 on Wednesday and Thursday was largely a function of signs of capitulation and deeply oversold conditions. However, some better economic data and a flurry of upbeat sell-side commentary and ratings upgrades also seemed supportive. A number of growth-sensitive commodities also rallied sharply late in the week, with oil leading the way. A short squeeze was cited as the most likely driver of the move.
  • Despite the outsized moves in both directions, there were relatively few incremental macro developments this week. A barrage of Fed commentary only added to policy uncertainty, while there were some conflicting headlines surrounding China. Corporate news had little impact on sentiment, though there were some higher-profile M&A headlines. Sector performance was mixed. Energy, tech and consumer discretionary fared the best, while utilities sold off sharply.
China overhang gets more complicated:
  • China remained under outsized scrutiny this week with several moving pieces. The lack of a weekend RRR cut was cited as one of the drivers of Monday’s selloff in global equities. However, there was no reprieve from Tuesday’s decision (after markets closed in China) to cut the benchmark interest and deposit rate by 25 bp each to 4.60% and 1.75%, respectively, and also lower the reserve requirement ratio for banks by 50 bp to 18.0% (targeted banks saw even bigger cuts). Given the pervasive negative sentiment surrounding China, the rate cuts seemed to initially exacerbate worries about the growth slowdown. In addition, they put some focus on the need to boost liquidity to offset the impact of intervention to support the yuan. This dynamic led to reports that China had recently sold more than $100B worth of US Treasuries. The other big story in China this week revolved around intervention. Early in the week, there was widespread speculation that Beijing had decided to move to the sidelines of the stock market and instead focus more on monetary and fiscal support measures. However, a 5.3% bounce on Thursday was chalked up to late-day intervention, with state fund support also rumored as a driver behind Friday’s 4.8% gain.
Heavy technical selling:
  • There were a number of factors cited for the selling pressure in stocks on Monday and late Tuesday that spilled over from last week. These included worries about China’s growth slowdown and yuan devaluation, persistent emerging weakness, signaling effects from the commodity selloff, lackluster earnings growth, stretched valuations, crowded long positions and Fed liftoff timing uncertainty. However, JPMorgan noted on Thursday that much of the trading early in the week was related to option gamma hedging and conducted by systematic investors that do not focus on market fundamentals. The firm estimated that cumulative selling pressure from options hedging during the market rout was ~$100B. It added that it expects volatility to persist should the S&P 500 stay in the 1850-2000 range. It also said that it expects these trend followers to continue selling equities over the coming days and weeks, negatively impacting the market. It pointed out that combined selling could amount to $150B-$300B over the next several weeks and in the current environment of low liquidity, could even cause a market crash such as the one seen at the US market open on Monday.
Risk-off flurry sets stage for oversold bounce:
  • The extent of the risk-off trade early in the week was further evidenced by the flow data that hit late Thursday/early Friday. BofA Merrill Lynch’s weekly “Flow Show” report noted that equity funds saw $19B of redemptions on Tuesday, the second largest since 2007 (when daily EPFR data became available). In addition, weekly outflows totaled $25.9B, the largest on record (data goes back to 2002). Beleaguered emerging markets saw $10.5B of outflows this week, the largest since January 2008, while $12.3B left US funds, the most in 16 weeks. Signs of capitulation and oversold conditions received a lot of attention as the week progressed, setting the stage for the biggest two-day rally in the S&P 500 on Wednesday and Thursday since March 2009. Gavekal Capital pointed out that the S&P 500 had suffered back-to-back declines of 3%+ (last Friday and Monday) for only the ninth time since 1985 (five of those came in the fall of 2008). In addition, the S&P 500 experienced its biggest intraday reversal to the downside on Tuesday since October 2008. Bespoke Investment Group noted that the index ended more than four standard deviations below its 50-day moving average for a third straight session that day, something that had not happened since 1940.
Street comes to market’s defense:
  • One of the factors cited as ultimately supportive for the mid-week equity recovery was the flurry of upbeat commentary from sell-side strategists and analysts. Goldman Sachs highlighted expectations for an 11% run-up in the S&P 500 to 2,100 by year end. JPMorgan noted it views a deep correction as unlikely and said the selloff represented an opportunity to buy the dips. Deutsche Bank shifted its tactical call in the wake of the selloff and argued that the next 5%+ move in the S&P 500 is to the upside. At the analyst level, Citi came out positive on the semi space. There were a number of upgrades in the banking sector. BAC +1.6% saw five upgrades this week. Bernstein also upgraded several regional banks. Tech names ROVI +8.1%, AAPL +7.1%, CIEN +5.4% AMZN +4.8% and GOOG +2.9% all outperformed this week with help from positive ratings changes. RBC reiterated its outperform and raised its price target on NFLX +13.2%. In healthcare, Goldman Sachs upgraded BSX +4.4% and BCR +3.1%. NOV +11.9% was a standout in energy with a partial tailwind from a JPMorgan upgrade. In the consumer space, NKE +5.3% was underpinned by two upgrades.
Liftoff timing remains uncertain:
  • Early selling pressure this week put the focus back on the risks of a later liftoff. Barclays pushed back its liftoff estimate from September to March of next year. In addition, NY Fed President Dudley, widely seen as one of the most influential members of the FOMC, said that the case for a rate hike at next month’s meeting looks “less compelling” than it did several weeks ago. However, the potential for a September move came back into focus with the stronger durable goods orders and revised Q2 GDP data. The bounce in equities also helped. A late-week flurry of commentary surrounding the Kansas City Fed’s annual symposium in Jackson Hole added to the uncertainty. There was a lot of focus on Vice Chair Fischer (who will speak on inflation Saturday). He told CNBC that it is “too early to tell” regarding the likelihood of a September rate hike. He noted that market volatility does affect the timing of a decision to raise rates, though he also said that the direct impact of China’s economic downturn is relatively small. Like a number of other Fed officials, he pointed out that the policy outlook will remain data dependent over the next couple a weeks (the big focus will be on August payrolls next Friday), a dynamic many think will exacerbate near-term volatility.
Corporate headlines take a backseat:
  • While corporate newsflow did drive some notable moves this week, it was still overshadowed by the volatility in stocks. There were some high-profile M&A headlines despite the heightened risk aversion. Consolidation in oil services continues as SLB % announced plans to acquire CAM +% for $12.7B in cash and stock. EMC (0.4%) lagged even though Re/Code reported that the company’s board is warming up to the idea of a downstream merger with VMW (8.1%). MON +0.9% was a standout after it decided to scrap its pursuit of a merger with SYT (11.3%). Healthcare remained in focus as the FT reported that ABT (2.4%) was lining up a ~$25B cash and stock takeover bid for STJ +6.8%. The former denied the report, while the latter did not comment. ARIA +49.2% rallied sharply on Friday after Bloomberg said it is in talks to be acquired by BXLT (3.3%). POM (14.9%) came under pressure after the DC Public Service Commission rejected its proposed acquisition by EXC (4.9%). FCX +9.6% was a notable gainer this week after it announced plans to cut spending and copper production, while some additional support came on Friday after Carl Icahn disclosed an 8.5% stake.
Mixed earnings takeaways:
  • Earnings takeaways were fairly mixed and expectations going into the print continued to play a big role in performance. In specialty apparel, ANF +16.6% was helped by a sequential comp improvement. EXPR +17.5% was underpinned by improved merchandise assortment and dampened promotional activity. ARO (22%) sold off on concerns about continued traffic and merchandising challenges. Elsewhere in retail, BBY +19.2% rallied after a big Q2 beat on better comps and margin expansion. Lingering profitability headwinds from the West Coast ports dispute weighed on WSM (9%). In tech, AVGO +14.5% was a bright spot in what has been a largely disappointing Q2 earnings season for semis. Strong bookings trends and customer metrics, along with favorable execution in a difficult macro and competitive environment drove the outperformance in NMBL +7.2%. WDAY +1.2% managed to shake off some early weakness Thursday that followed its disappointing billings guidance. Management put the blame on shorter billings duration (which some analysts argued was more optical than structural) and greater seasonality. ADSK (8.2%) was bogged down by a softer Q2 revenue performance and weaker net sub adds.
Energy leads market higher:
  • Energy was the big gainer this week thanks to a huge bounce in oil on Thursday and Friday that left WTI crude up 12% for the week. There was no specific driver behind the oil rally, though a short squeeze seemed to get the most attention. M&A in the oil services sector was also cited as supportive. Tech was another standout with help from the strength in the semi space with the SOX +6.1%. Consumer discretionary outperformed with pockets of strength in retail, apparel/accessories and auto names. The materials sector finished higher with the bulk of the industrial metals names seeing outsized gains over the latter part of the week with the bounce in global equities and some of the underlying commodities. Upside was limited by the weakness in the precious metals group. The industrials sector finished higher, but lagged the tape. Equipment rental plays outperformed, as did some of the other names in the machinery group. Airlines and multis were mixed. Financials underperformed as banks lagged with the BKX (0.3%) despite sell-side upgrade activity. Regionals tended to see the bigger declines. The utilities sector sold off sharply despite the heightened risk aversion early in the week.
Sector Performance:
  • Outperformers: Energy +3.65%, Tech +3.09%, Consumer Disc. +1.65%
  • Underperformers: Utilities (4.35%), Financials (0.52%), Consumer Spls. (0.32%), Telecom (0.24%), Healthcare +0.20%, Industrials +0.52%, Materials +0.87%
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