From Briefing.com: Weekly Recap - Week ending 14-Oct-16The month of October has gotten off to a rough start for the stock market. This week produced another losing week for the major indices. The Russell 2000 fared the worst with a 2.0% decline while the Dow Jones Industrial Average fared the best, relatively speaking, with a 0.6% decline. The S&P 500 was down 1.0%.
There was a familiar undercurrent driving things, too, as the losses flowed in the face of a strengthening dollar and rising long-term rates.
The US Dollar Index increased 1.5% this week to 98.09, benefiting mostly at the expense of a weaker euro, a weaker yen, and a weaker British pound. The greenback's strength was partly a function of safe-haven flows and partly a function of interest-rate differentials.
The latter stemmed from ongoing musings from Federal Reserve officials that a rate hike is likely to happen sooner rather than later (i.e. before the end of the year) and a trade balance report out of China that included a 10% year-over-year decline in exports in September.
The release of the minutes from the September 20-21 FOMC did nothing to dispel the rate-hike notion and neither did a batch of economic data out of the U.S. this week that featured the lowest four-week moving average for initial claims since November 3, 1973, reassuring retail sales activity for September, and an improving trend in producer price inflation.
Strikingly, the yield on the 10-yr note climbed six basis points this week to 1.80% and has now risen 20 basis points since the end of September.
The strength in the dollar and the increase in long-term rates had the combined effect of raising earnings concerns for U.S. multinational companies and triggering general valuation concerns for a market trading already with a stretched valuation.
At the same time, it has been regarded as problematic for emerging market economies as a stronger dollar makes it more challenging to repay dollar-denominated debt and higher rates in the U.S. encourage capital flight. The iShares MSCI Emerging Markets ETF (EEM 36.86) fell 2.2% this week.
Other areas that one might have thought would have fallen with the jump in rates did not. Specifically, this week's best-performing sectors were the utilities (+1.3%), real estate (+1.2%), telecom services (+0.7%), and consumer staples (+0.04%) sectors -- all of which have benefited in the past as long-term rates have come down on the basis that they offer more attractive dividend yields.
This week, however, it appeared that the so-called "yield play" took a backseat to some traditional defensive positioning in the stock market as most of these areas tend to exhibit relative strength in trying times due to their earnings dependability and relatively low volatility.
It would be remiss not to add that, even with this week's gains, all four sectors are among the market's worst performers this month, sporting losses that range from 1.7% to 4.1% versus a 1.6% decline for the S&P 500.
The health care sector, also known as a defensive outlet, didn't enjoy any such accolades this week. In fact, it was the worst-performing sector for the week with a loss of 3.3%, which left it down 3.5% in October.
Its underperformance was driven by a weak biotechnology group, which was sent reeling by a disconcerting revenue warning for the third and fourth quarters from Illumina (ILMN 138.00), a company that provides sequencing and array-based solutions for genetic analysis.
Shares of Illumina plunged 25% this week and acted as a major drag on the iShares Nasdaq Biotechnology ETF (IBB 266.08), which declined 6.3%.
There was some chatter during the week that the health care sector's difficulties were also a byproduct of political concerns. Those concerns emanated from polls showing Hillary Clinton as the presidential frontrunner following last weekend's debate and GOP infighting that fostered a belief Democrats could have a shot at winning a majority in both Houses of Congress.
Mrs. Clinton has been very vocal about reining in unjustified drug price increases, and presumably she would have a better chance of doing so with Democrats controlling a majority in both the Senate and House of Representatives.
There will be another presidential debate this coming Wednesday.
Something that won't be coming next Wednesday -- or any day now -- is Samsung's Galaxy Note 7. The South Korean company announced this week that it is permanently discontinuing production and sales of the smartphone due to safety issues surrounding overheating and battery fires.
That news undercut a number of suppliers, which showed up in part in the 3.3% decline in the Philadelphia Semiconductor Index. Samsung's pain, though, was quite clearly seen as Apple's (AAPL 117.63) likely market share gain. In a down week for the market, Apple's stock rose 3.1%, meaning things could have been worse for the broader market had its most heavily-weighted stock not outperformed in the manner that it did.
The week that just concluded also marked the official start to the third quarter earnings reporting period. Reports from Alcoa (AA 26.44), JPMorgan Chase (JPM 67.52), Citigroup (C 48.61), and Wells Fargo (WFC 44.71) were the featured reports of the week.
None of those companies missed consensus earnings estimates; in fact, the banks all beat expectations while Alcoa was in-line. Nonetheless, they failed to produce a bullish response.
The main issue with Alcoa is that it provided disappointing revenue guidance for each of its Arconic segments. The aforementioned banks, meanwhile, saw enthusiasm for their reasonably good quarterly results tempered by the understanding that each reported a year-over-year decline in net income and concerns about a potential slowdown in commercial lending activity.
Bank of America (BAC ) will get the reporting activity started next week, which will also featured results from Dow components IBM (IBM 154.45), Goldman Sachs (GS 170.52), Johnson & Johnson (JNJ 117.56), UnitedHealth (UNH 133.92), Intel (INTC 37.45), American Express (AXP 60.15), Travelers (TRV 115.08), Verizon (VZ 50.28), Microsoft (MSFT 57.42), General Electric (GE 28.89), and McDonald's (MCD 114.09).
It's going to be a busy week indeed. The earnings news, and particularly the guidance, will be watched closely along with the trading mannerisms of the U.S. dollar and long-term rates, which led to a somewhat ill-mannered stock market this week.
Index Started Week Ended Week Change % Change YTD %
DJIA 18240.49 18138.38 -102.11 -0.6 4.1
Nasdaq 5292.40 5214.16 -78.24 -1.5 4.1
S&P 500 2153.74 2132.98 -20.76 -1.0 4.4
Russell 2000 1236.56 1212.41 -24.15 -2.0 6.7
5:01 pm Qualcomm files actions against Meizu in the United States, Germany and France (QCOM) : These actions include filing a complaint with the United States International Trade Commission (ITC), filing a patent infringement action in Germany with the Mannheim Regional Court, and initiating an infringement-seizure action in France to obtain evidence for a possible future infringement action there. Previously, in June 2016, Qualcomm filed multiple actions against Meizu in China related to licensing terms and patent infringement.
4:17 pm Closing Market Summary: Indices Walk Back Gains Despite Upbeat Bank Earnings (:WRAPX) :
The stock market ended a downbeat week on a tepid note as an opening rally on Friday ultimately fizzled out. The Dow Jones Industrial Average (+0.2%) finished ahead of the S&P 500 (+0.02) and the Nasdaq Composite (+0.02). The three indices finished the week lower between 0.6% and 1.5%.
Equity indices rallied at the start of the session as positive inflation data out of China, a string of better-than-expected expected quarterly reports, and upbeat domestic data boosted investor sentiment.
The three catalysts also helped solidify the rate hike picture as above-consensus inflation data stood in contrast to persistently low inflation readings. The Producer Price Index (:PPI) came in slightly ahead of estimates as PPI rose 0.3% in September (Briefing.com consensus +0.2%). Meanwhile, core PPI ticked higher by 0.2% (Briefing.com consensus +0.1%). The two readings are up a respective 0.7% and 1.2% on a year-over-year basis.
According to the CME's Fed Watch Tool, the probability of a rate hike at the December meeting has increased to 69.2% from 61.7% at the end of September. The firming rate hike picture also helped move the dollar and long-term rates higher.
The U.S. Dollar Index (98.11, +0.59, +0.60%) strengthened throughout today's session, which in turn weighed on dollar-denominated oil prices ($50.32/bbl, -$0.08, -0.2%).
The early rally reversed stating around 10:20 a.m. ET and coincided with some strengthening in the dollar, a reversal in oil, and fading gains in the financial sector (+0.5%), which had been up as much as 1.5% following some better than expected earnings results from JPMorgan Chase (JPM 67.52, -0.22), Citigroup (C 48.61, +0.14), and Wells Fargo (WFC 44.71, -0.04).
Rising treasury yields also worked to thwart the early rally. Higher-yielding sectors -- utilities (-0.6%), real estate (-0.3%), and telecom services (-0.2%) -- found it difficult to make any headway and general valuation concerns percolated with the jump in rates.
The yield on the benchmark 10-yr note rose six basis points to 1.80% as the boost in producer price inflation, the stronger than expected inflation report out of China, and waning price momentum unsettled investors.
The S&P 500 (+0.02%) finished basically flat, surrendering just about all of an initial 0.8% gain.
Five sectors finished in the green with financials (+0.5%), technology (+0.5%), and materials (+0.4%) staging the largest moves on a percentage basis.
The financial sector (+0.5%) outperformed in the wake of positive economic data, a steepening in the yield curve, and a string of above consensus quarterly reports.
Citigroup (C 48.61, +0.14, +0.3%), Well Fargo (WFC 44.71, -0.04), and JPMorgan Chase (JPM 67.52, -0.22, -0.3%) each beat analysts' estimates for the quarter. The three were up between 1.7% and 3.1% at the onset, but were unable to hold onto the bulk of those early gains as concerns about a potential slowdown in commercial lending reportedly tempered investors' enthusiasm.
In the technology sector (+0.5%), Salesforce.com (CRM 74.27, +3.64) finished higher by 5.2% after the Financial Times reported that the company is no longer interested in acquiring Twitter (TWTR 16.88, -0.91). Chipmakers also outperformed in the group as the PHLX Semiconductor Index (+0.8%) narrowed its weekly loss to 3.3%.
Department store names underperformed in the discretionary sector (UNCHF) after JPMorgan cut quarterly estimates for Macy's (M 35.57, -1.27, 3.3%) and Kohl's (KSS 43.64, -1.44, -3.2%). The broader SPDR S&P Retail ETF (XRT 43.12, -0.09) also finished on a negative note.
Today's trading volume fell came in below the recent average of 862 million as 785 million shares changed hands at the NYSE floor.
Today's economic data included the PPI Report for September, the Retail Sales Report for September, Business Inventories for August, and the initial reading of the University of Michigan Consumer Sentiment Index for October:
The Producer Price Index (:PPI) for September showed a 0.3% increase in final demand prices (Briefing.com consensus +0.2%), led by a 0.7% jump in the index for final demand goods.
Excluding food and energy, the index for final demand was up 0.2% (Briefing.com consensus +0.1%).
Total retail sales increased 0.6% in September while sales, excluding autos, rose 0.5%. Both results were in-line with the Briefing.com consensus estimates.
Total business inventories increased 0.2% in August (Briefing.com consensus +0.1%) after being unchanged in July.
Sales were also up 0.2% after declining a downwardly revised 0.3% (from -0.2%) in July.
The University of Michigan's Index of Consumer Sentiment dropped to 87.9 in the preliminary reading for October (Briefing.com consensus 92.4) from the final reading of 91.2 for September. The October reading is the second lowest level in the past two years.For more on these economic releases, be sure to visit Briefing.com's Economic Calendar page.
Monday's economic data will include the 8:30 a.m. ET release of October Empire Manufacturing (Briefing.com consensus 2.0). The Industrial Production (Briefing.com consensus 0.2%) and Capacity Utilization (Briefing.com consensus 75.6%) report for September will be released at 9:15 a.m. ET.
Stocks closed out the week with modest gains, as all three major US indices pared opening advances to ultimately end modestly above flat lines. Leading the advance, the Dow Jones Industrial Average added 39.44 points (+0.22%) to 18138.38. The S&P 500 was up less than a point (+0.02%) to 2132.98, and the Nasdaq Composite also gained less than a point (+0.02%) to 5214.16. This week's moves take the three indices +4.1%, +4.4% and +4.2% YTD, respectively.
Equity indices rallied at the start of the session as positive inflation data out of China, a string of better-than-expected expected quarterly reports, and upbeat domestic data boosted investor sentiment.
The three catalysts also helped solidify the rate hike picture as above-consensus inflation data stood in contrast to persistently low inflation readings. The Producer Price Index (PPI) came in slightly ahead of estimates as PPI rose 0.3% in September. Meanwhile, core PPI ticked higher by 0.2%. The two readings are up a respective 0.7% and 1.2% on a year-over-year basis.
According to the CME's Fed Watch Tool, the probability of a rate hike at the December meeting has increased to 69.2% from 61.7% at the end of September. The firming rate hike picture also helped move the dollar and long-term rates higher.
The U.S. Dollar Index (98.11, +0.59, +0.60%) strengthened throughout today's session, which in turn weighed on dollar-denominated oil prices ($50.32/bbl, -$0.08, -0.2%).
The early rally reversed stating around 10:20 a.m. ET and coincided with some strengthening in the dollar, a reversal in oil, and fading gains in the financial sector (+0.5%), which had been up as much as 1.5% following some better than expected earnings results from JPMorgan Chase (JPM 67.52, -0.22 -0.32%), Citigroup (C 48.61, +0.14 +0.29%), and Wells Fargo (WFC 44.71, -0.04 -0.09%).
As it were, the Technology (XLK 47.37, +0.18 +0.38%) sector was one of the better performers today, edged out only by Financials. Component HP (HPQ 14.48, -0.67 -4.42%) was the weakest name today following the announcement of FY17 guidance and a restructuring plan in addition to certain shareholder return programs. Other sectors as measured by the S&P closed Friday XLFS +0.82%, XLF +0.52%, XLB +0.32%, XLI +0.21%, IYZ +0.03%, XLP +0.02%, XLRE -0.06%, XLY -0.11%, XLE -0.43%, XLU -0.65%, XLV -0.67% with Healthcare posting the worst losses and Financials edging out Tech for the top spot.
In the S&P 500 Information Technology (796.07, +3.68 +0.46%) sector, trading was in positive territory, yet failed to clear the $800-level. Component Salesforce.com (CRM 74.27, +3.64 +5.15%) was the best performer today as the stock was the subject of a Financial Times report which suggested the company has ruled out making a bid for Twitter (TWTR 16.88, -0.91 -5.12%). Other names in the space which edged higher today included xxx.
Other notable news items among sector components:
HP (HPQ) announced a restructuring plan and FY17 guidance. The company sees FY17 adjusted EPS of $1.55-1.65 with cash flow from operations of about $2.8 to $3.1 billion in fiscal 2017. Also, with about $0.5 billion in net capital expenditures, HPQ sees free cash flow in the range of $2.3 to $2.6 billion for fiscal 2017. The company also raised the quarterly dividend to $0.1327 from $0.124 per share, and increased the share repurchase program by $3 billion. HPQ further announced the exit of about 3,000-4,000 employees between fiscal 2017 and fiscal 2019. The restructuring plan is expected to generate gross annual run rate savings of about $200-300 million beginning in fiscal 2020. In connection with said plan, HPQ anticipates incurring about $350-500 million in restructuring and other charges related to labor and non-labor actions.
Twitter (TWTR) shares fell today as the Financial Times reported that possible suitor Salesforce.com (CRM) had ruled out making a bid for the company.
Arbor Networks Inc., the security division of NETSCOUT (NTCT 28.55, +0.36 +1.28%), in conjunction with Jigsaw, an incubator within Alphabet (GOOG 778.53, +0.34 +0.04%), Google's parent company, announced an enhanced version of the Digital Attack Map.
According to Reuters, Microsoft (MSFT 57.42, +0.50 +0.88%) has filed for EU approval of its pending merger with LinkedIn (LNKD 190.74, +0.18 +0.09%).
First Solar (FSLR 39.47, +0.79 +2.04%) named Alexander Bradley as full-time CFO effective October 24.
MercadoLibre (MELI 167.04, -1.42 -0.84%) priced its upsized offering of 7.1 million shares of its common stock offered by existing stockholder eBay (EBAY 31.89, +0.38 +1.21%) at $168 per share.
Elsewhere in the tech space:
Aerohive Networks (HIVE 5.54, -0.09 -1.60%) guided Q3 revenue of $40 million, below stated guidance of $46-50 million. Expects net loss per share of $0.07-0.06 compared to previous guidance of a loss between $0.07-0.01.
Advanced Micro (AMD 6.75, +0.26 +4.01%) announced a collaboration with Alibaba Group (BABA 101.85, -0.30 -0.29%).
TerraForm Global (GLBL 3.75, +0.08 +2.18%) elected two independent directors, Mark Lerdal and Fred Boyle, to the Board of Directors effective immediately.
Digital Ally (DGLY 5.67, +0.26 +4.81%) announces 'favorable' ruling in lawsuit against Taser (TASR 22.77, +0.68 +3.08%) who has filed a motion to dismiss the antitrust claims in the lawsuit that is still pending.
Samsung (SSNLF 1425.00, flat) updated guidance due to Galaxy Note7 discontinuation: estimates mid-3 trillion won negative impact for Q4 2016 and Q1 2017 related to discontinuation.
VMware (VMW 72.98, -0.05 -0.07%) and Amazon.com's (AMZN 823.06, -6.22 -0.75%) cloud computing arm, Amazon Web Services, confirmed a strategic alliance.
MGT Capital Investments (MGT 2.40, +0.29 +14.01%) announced the commercial release of its first network security product, Sentinel.
In reaction to quarterly results:
Infosys (INFY 15.66, -0.99 -5.95%) reported better than expected Q2 EPS of INR15.77 per share. Revenues were up 10.7% compared to a year ago to INR173.1 billion. INFY lowered FY17 revenue guidance to +8-9% in USD terms, prior guidance translated to +10.0-11.5% growth.
Analyst actions:
LVLT was upgraded to Overweight from Neutral at JP Morgan,
NTDOY was upgraded to Buy from Neutral at Nomura,
TSM was upgraded to Sector Weight at Pacific Crest,
PHI was upgraded to Buy from Hold at HSBC;
HIVE was downgraded to Neutral from Buy at Buckingham Research and to Hold from Buy at Wunderlich; ATVI and TTWO were initiated with Outperform ratings at Oppenheimer,
IPHI was initiated with a Market Perform at Cowen,
HPE was initiated with an Underperform at CLSA,
TASR was initiated with an Outperform at Imperial Capital,
RPD was initiated with an Outperform at RBC Capital Mkts,
MIME was initiated with an Overweight at JP Morgan,
JD was initiated with a Buy at Stifel,
SEDG was initiated with a Sell at Axiom Capital,
NTNX was initiated with a Sell at Summit Redstone
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