From Briefing.com: Weekly Recap - Week ending 07-Oct-16A lot happened in the last week, yet one thing that didn't happen was the S&P 500 breaking out of its trading range. That will have to wait for another time.
When that time comes is anyone's best guess. For the time being, the market seems to be finding it difficult to know what to think. That is leading to some erratic trading behavior, which is sapping investor conviction and leading to the tight trading range.
The week that just concluded featured three down days for the S&P 500 and two up days. The net change was a loss of approximately 15 points or 0.7%.
Notably, the biggest losers for the week were sectors that had previously been big winners. That included the utilities, telecom services, and real estate sectors. Those areas, popularly known as "yield plays" in a low-yielding world, were down between 3.0% and 5.0% for the week, as some crowded positioning in those names got a little less crowded with long-term interest rates pushing higher.
The yield on the benchmark 10-yr note climbed as high as 1.76% from last Friday's settlement of 1.60% before ending the week at 1.72%. That move mirrored moves seen in other sovereign bond markets as investors once again butted up against the view that central banks are hitting their policy limits in terms of their asset purchase programs.
That angst was fed by a Bloomberg report earlier in the week that suggested an unofficial consensus among ECB officials has been reached for discussing how, and when, to taper the bank's asset purchase program. That report, which was refuted later in the week to no avail by ECB Vice President Constancio, created a tizzy on Tuesday that upset the capital markets along with rate-hike talk from Fed officials.
There was already a nervous tone that had carried over from Monday when it was learned the UK plans to invoke Article 50 by the end of March 2017. Doing so will get the ball rolling on its divorce from the European Union.
That news catalyzed a drop in the British pound to a 31-year low, which looked like chump change by the time Friday rolled around and the pound dropped as much as 6% in a move that some considered to be a "flash crash" amid illiquid market conditions. A good portion of that loss was recouped in almost no time, yet the inability of the pound to reclaim all that was lost left the impression that there was some true selling that took place related to concern about the Brexit, which was heightened by some tough talk on the matter from French President Hollande.
If not for the September employment report, the trading action in the British pound would have dominated the market conversation on Friday. Instead, it was the employment data that took command as it seemed to solidify the case for a rate hike from the Fed by the end of the year.
That notion was underpinned by an understanding that nonfarm payrolls increased by 156,000, average hourly earnings growth was up 2.6% year-over-year (and near a seven-year high), and a bump in the unemployment rate to 5.0% was fueled by a jump in the labor force participation rate (a reflection of budding confidence in job prospects).
According to the CME's FedWatch Tool, the probability of a rate hike at the December FOMC meeting increased to 69.5% on Friday from 63.4% on Thursday.
The economic data this week overall generally supported the view of Fed officials calling for a rate hike sooner rather than later. The ISM Index on Monday tipped backed into expansion territory, jumping from 49.4 in August to 51.5 in September, the ISM Non-Manufacturing reading of 51.7 was the highest since last October, and the four-week moving average of 253,500 for weekly initial claims was the lowest since December 8, 1973.
Fittingly, a curve steepening trade took root, with the back end of the Treasury curve bearing the brunt of selling interest. That steepening, which bodes well for the earnings prospects for banks, contributed to a noticeable measure of relative strength in the bank stocks.
The SPDR S&P Bank ETF (KBE) increased 2.5% for the week, trading right through the headline volatility pertaining to Deutsche Bank's (DB) capital position and Wells Fargo's (WFC) fraudulent account openings. The S&P 500 financial sector for its part ended the week 1.5% higher.
The next best-performing sector was the energy sector, which was basically unchanged for the week despite oil prices eclipsing $50.00 per barrel at one point before settling the week up 2.7% at $49.55 per barrel.
A strengthening dollar acted as a headwind on the dollar-denominated commodity space, which featured a sharp sell-off in precious metal prices that was also a byproduct of crowded long positions being unwound and rising interest rates. For the week, gold prices fell 4.4% to $1258.60/troy ounce while silver prices declined 8.5% to $17.58/troy ounce.
Speaking of headwinds, Hurricane Matthew made headlines all week as it barreled toward the east coast of Florida as a Category 4 hurricane. It lost some steam fortunately as it moved northward, yet as a downgraded Category 2 storm it is still causing havoc for coastal areas in the southeast as of this writing and is expected to continue to do so through the weekend.
The next presidential debate on Sunday will certainly be a talking point -- and maybe a trading point -- come Monday morning. However, the path of long-term rates, the behavior of currency markets, and the third quarter earnings reporting period, which kicks up next week, should create plenty of trading interest on their own account.
As a reminder, the Treasury market will be closed Monday for Columbus Day while the stock market will be open for a full day of trading.
Index Started Week Ended Week Change % Change YTD %
DJIA 18308.15 18240.49 -67.66 -0.4 4.7
Nasdaq 5312.00 5292.40 -19.60 -0.4 5.7
S&P 500 2168.27 2153.74 -14.53 -0.7 5.4
Russell 2000 1251.65 1236.56 -15.09 -1.2 8.9
4:16 pm Closing Market Summary: Stocks End Flat with Rates and Employment Data in Focus (:WRAPX) :
The stock market finished a range bound week on a relatively flat note as investors pored over the Employment Situation Report for September. Interest rate volatility remained at the forefront as participants assessed an evolving fed funds rate hike picture and further Brexit shocks from across the pond. The Nasdaq Composite (-0.3%) settled in-line with the S&P 500 (-0.3%) and slightly behind the Dow Jones Industrial Average (-0.2%).
Long-term interest rates struggled for direction as a mixed reading from the September employment report shifted the U.S. rate hike outlook. Headline nonfarm payrolls increased by 156,000 (Briefing.com consensus 176k) while August's reading was revised to 167,000 from 151,000. Furthermore, average hourly earnings increased by 0.2% (Briefing.com consensus +0.2%), which could pave the way to an increase in inflation expectations. Average hourly earnings growth also registered the largest year-over-year increase in several years.
The fed funds futures market responded by discounting the odds of a November rate hike and improving the outlook for a December hike. The implied probability of an interest rate hike at the December meeting increased to 69.5% from 63.4% in the prior session. Rate hike odds also improved as participants assessed remarks from Cleveland Fed President Mester (an FOMC voter) and Fed Vice Chair Fischer. President Mester stated that the employment report appeared consistent with her expectations while Mr. Fischer called the reading a "Goldilocks number."
The benchmark index finished in the middle of its trading range, testing technical resistance near the 2155 price level. Nine sectors ended in the red with materials (-1.8%), industrials (-1.2%), and consumer discretionary (-0.4%) acting as notable laggards. On the flipside, financials (+0.1%) and health care (+0.1%) settled in positive territory.
In the heavyweight industrials sector (-1.2%), Honeywell (HON 106.94, -8.67) tumbled 7.5% after projections for its third and fourth quarter fell short of analyst estimates. Meanwhile, Dow component United Technologies (UTX 100.58, -1.50) finished at the bottom of the price-weighted average as it moved lower in sympathy with the name. The broader sector declined 1.4% this week, which compares to a loss of 0.7% in the benchmark index.
The Dow Jones Transportation Average (-0.9%) displayed relative weakness as airlines trimmed their weekly advance. The U.S. Global Jets ETF (JETS 23.09, -0.35) declined by 1.5%, erasing its weekly gain.
In the consumer discretionary space (-0.4%), retail names outperformed, evidenced by the 0.1% loss in the SPDR S&P Retail ETF (XRT 43.85, -0.03). In the ETF, Gap (GPS 26.25, +3.47) displayed relative strength after comparable store sales for September came in better than feared. The stock was also upgraded to "Hold" from "Sell" at Deutsche Bank. The discretionary space finished the week lower by 0.4%.
Property and casualty insurers led in the financial sector (+0.1%) as Dow component Travelers (TRV 114.53, +1.35) jumped 1.2%. The sub-group rebounded after Hurricane Matthew avoided a direct hit to Florida's east coast last evening. Banking names also continued their recent winning streak as the SPDR S&P Bank ETF (KBE 34.22, +0.03) extended its weekly gain to 2.1%. The broader sector advanced 1.5% this week.
Treasuries ended on a mostly higher note as the long end of the curve underperformed. The yield on the 2-yr note slipped two basis points (0.83%) while the yield on the 10-yr note declined one basis point (1.73%). The spread between the 2-yr and 10-yr note has expanded to 90 basis points from 83 basis points last Friday.
Today's participation was above the recent average as more than 929 million shares changed hands at the NYSE floor.
Today's economic data included the Employment Situation Report for September, the Wholesale Inventory Report for August, and Consumer Credit for August:
Nonfarm payrolls increased by 156,000 (Briefing.com consensus 176,000). Job gains have averaged 178,000 per month so far this year versus an average of 229,000 per month in 2015. August nonfarm payrolls revised to 167,000 from 151,000 July nonfarm payrolls revised to 252,000 from 275,000 Private sector payrolls increased by 167,000 (Briefing.com consensus 171,000) August private sector payrolls revised to 144,000 from 126,000
July private sector payrolls revised to 221,000 from 225,000
Unemployment rate was 5.0% (Briefing.com consensus 4.9%) versus 4.9% in August
Persons unemployed for 27 weeks or more accounted for 24.9% of the unemployed versus 26.1% in August
September average hourly earnings were up 0.2% (Briefing.com consensus +0.2%) after being up 0.1% in August Over the last 12 months, average hourly earnings have risen 2.6% versus 2.4% for the 12-month period ending in August
The average workweek was up 0.1 to 34.4 hours (Briefing.com consensus 34.4)
September manufacturing workweek was up 0.1 hour to 40.7 hours
Factory overtime was unchanged at 3.3 hours
The labor force participation rate was 62.9% versus 62.8% in AugustWholesale inventories declined 0.2% month-over-month in August (Briefing.com consensus -0.1%) following a downwardly revised 0.1% decline (from 0.0%) in June.
Wholesale sales were up 0.7% on the heels of a downwardly revised 0.6% decline (from -0.4%) in July.
Total outstanding consumer credit increased by $25.8 billion in August (Briefing.com consensus $18.0 billion) after increasing an upwardly revised $17.8 billion (from $17.7 billion) in July.
For more on these economic releases, be sure to visit Briefing.com's Economic Calendar page.
There is no economic data of note scheduled to be released on Monday.
The stock market was on the defensive today as participants evaluated an Employment Situation Report for September that seemed likely to have the Federal Reserve on track for a December rate hike. Other factors impacting today's trade included rising long-term rates and relative weakness in the heavily-weighted materials (-1.9%) sector.
Equities stumbled at the start of the session as participants weighed the potential rate hike implications of the September employment report. The report showed solid job growth and also contained some encouraging news on average hourly earnings growth. Headline nonfarm payrolls rose by 156,000 while average hourly earnings increased by 0.2%. The Fed will be particularly interested in average hourly earnings as the 2.6% year-over-year increase is close to the highest it has been over the last seven years.
The fed funds futures market responded by further discounting the odds of an interest rate hike at the November meeting and increasing the probability of a hike in December. The implied probability of an interest rate hike in December has increased to 65.9% from 63.4% in the prior session. Fed funds futures have also enjoyed some jawboning from Cleveland Fed President Mester (an FOMC voter) and Fed Vice Chair Fischer. President Mester indicated that the September employment report was consistent with her expectations while Mr. Fischer called the reading a "Goldilocks number."
Market data today included the consumer credit report which shower total outstanding consumer credit increased by $25.8 billion in August after increasing an upwardly revised $17.8 billion (from $17.7 billion) in July. The key takeaway from the report is that consumer credit -- both revolving and nonrevolving -- continues to expand, which is a supportive element for the U.S. economy. In addition to nonfarm payrolls, private sector payrolls increased by 167,000 and the unemployment rate was 5.0% versus 4.9% in August. Also, the labor force participation rate was 62.9% versus 62.8% in August, and wholesale inventories declined 0.2% month-over-month in August following a downwardly revised 0.1% decline (from 0.0%) in June.
The first week of October, and the fourth quarter, ended lower, but off intraday lows. Weakness following the jobs report took the Dow Jones Industrial Average 113 points down at one point, but the index recovered to close the day -28.01 points (-0.15%) to 18240.49. The worst performing index today was the S&P 500, which lost 7.03 points (-0.33%) to 2153.74, and the Nasdaq Composite finished in between the two, shedding 14.45 points (-0.27%) to 5292.40. This week's moves take the three major US indices +4.7%, +5.4% and +5.7% YTD, respectively.
Middle of the pack as far as S&P sectors go, once again, was the Technology (XLK 47.62, -0.13 -0.27%) sector. Component First Solar (FSLR 37.58, -2.17 -5.46%) was the worst performer today as the stock was downgraded in the premarket session to a Neutral rating from a Buy at Goldman. Other sectors as measured by the S&P ended Friday XLFS +0.06%, XLV -0.07%, XLF -0.10%, XLU -0.13%, XLRE -0.26%, XLP -0.27%, IYZ -0.41%, XLY -0.45%, XLE -0.58%, XLI -1.29%, XLB -1.86% as all but Financial Services lagged.
In the S&P 500 Information Technology (800.80, -1.87 -0.23%) sector, trading was lower all session, but ended off intraday lows and held above the $800-level. Component Oracle (ORCL 38.71, -0.01 -0.03%) ended just lower as the stock was volatile today following the extension of the tender offer for the acquisition of NetSuite (N 105.19, -4.10 -3.75%). Other names in the space which held onto modest weakness through the close included GPN -3.76%, ADS -2.39%, ACN -2.13%, CTSH -1.68%, EBAY -1.59%, TSS -1.50%, CSRA -1.47%, TEL -1.34%, INTU -1.28%.
Other notable news items among sector components:
Oracle (ORCL) extended the expiration of its tender offer for the acquisition of NetSuite (N) to Friday, November 4, 2016. This will be the final extension that ORCL is obligated to make under the merger agreement. In the event that a majority of N's unaffiliated shareholders do not tender sufficient shares to reach the minimum tender condition, ORCL will respect the will of N's unaffiliated shareholders and terminate its proposed acquisition. American Stock Transfer & Trust Company LLC, the depositary for the tender offer, has indicated that as of 12:00 Midnight, Eastern time, at the end of October 6, 2016, about 4,568,498 unaffiliated Shares, or 11.2% of the total unaffiliated Shares, and 45,084,266 total Shares, or 55.3% of the total Shares issued and outstanding, have been tendered into and not properly withdrawn from the tender offer. Both figures include 293,328 Shares tendered pursuant to the guaranteed delivery procedures set forth in the Offer to Purchase.
Yahoo! (YHOO 43.22, -0.46 -1.05%) ticked lower in following a NYPost report that Verizon (VZ 49.92, -0.34 -0.68%) was seeking to have its purchase price for YHOO lowered amid its recent privacy hiccups.
Parkervision (PRKR 4.27, +0.07 +1.67%) filed a patent infringement complaint against Apple (AAPL 114.06, +0.17 +0.15%) in Germany; the accused products include the iPhone 6, iPhone 6s, and the iPad Air 2.
Elsewhere in the tech space:
The FCC released new reforms for data centers to promote investment in the business data services market. Specifically, Chairman Tom Wheeler announced small business would pay lower prices for high-capacity data and voice connections regarded as special access lines.
GoDaddy's (GDDY 35.48, +0.38 +1.08%) Chief Accounting Officer Matthew Kelpy resigned effective Sept. 30, and will serve as principal accounting office through Dec. 31, 2016.
Arris (ARRS 29.65, +1.88 +6.77%) entered into a Warrant and Registration Rights Agreement with Charter Communications (CHTR 266.97, -1.20 -0.45%) pursuant to which Charter may purchase up to 6 million of ARRS's ordinary shares.
Acacia Communications (ACIA 100.00, -9.42 -8.61%) priced a public offering of 4.5 million shares of its common stock at $100 per share.
Angie's List (ANGI 9.15, -0.42 -4.39%) announced that, effective yesterday, Thomas Evans was elected Chairman of the Board, replacing John Chuang, who resigned from his position as director and Chairman, effective October 3, 2016. In addition, ANGI announced Steven Kapner, director, has stepped down from the Board, also effective on October 3, 2016. In connection with the resignations, the Board has been reduced in size to 10 members from 12.
Vodafone (VOD 28.21, -0.34 -1.19%) India has acquired spectrum in all its key telecom circles in the spectrum auction for a total cost of INR 202.8 billion (2.74 billion). The new spectrum significantly enhances the coverage, capacity and speed of Vodafone India's 4G data services in its key circles, complementing existing high-quality 2G and 3G voice and data capabilities.
Avnet's (AVT 42.59, +0.01 +0.02%) deal to acquire Premier Farnell was cleared by the EU.
Analyst actions:
RUN was upgraded to Buy from Neutral at Goldman,
VSLR was upgraded to Neutral from Sell at Goldman,
KLAC was upgraded to Buy from Hold at Needham;
SEDG was downgraded to Sell from Neutral at Goldman,
FSLR was downgraded to Neutral from Buy at Goldman;
AMD was initiated with an Equal Weight at Barclays,
ZG was initiated with a Buy at Needham,
FISV was initiated with a Hold at Cantor Fitzgerald,
FIS was initiated with a Buy at Cantor Fitzgerald,
TERP was initiated with a Hold at Deutsche Bank,
FLIR was initiated with a Buy at Seaport Global Securities,
PTC was initiated with a Buy at Brean Capital
