Friday, December 26, 2014

Market Week Wrap-up A "Green" Christmas
Fri, 26 Dec 2014 16:08 PM EST

The holiday-shortened week was marked by a few more milestones as the S&P500 reached fresh all-time highs and the Dow Jones Industrial Average topped 18,000 for the first time with the Santa Claus rally in full effect. US final Q3 GDP came in at a blazing hot 5.0%, cementing feelings of good cheer, which was not in any way dampened by New Home Sales missing estimates for the third month in a row. With a strong Q3 boding well for consumer spending during the holiday season (Spendingpulse estimated Black Friday through Christmas Eve retail sales rose 5.5% y/y), the greenback maintained its firm tone against other major currencies. European markets were for the most part closed for the back half of the week, but not before posting more lackluster data. France Q3 GDP was in-line with expectations at 0.4% y/y, and Euro Zone consumer confidence was slightly better than expected but still firmly in negative territory. The DJIA has now risen for seven straight sessions, its longest winning streak since March 2013, gaining 1.4% on the week, while the S&P500 and Nasdaq each rose 0.9%.

The obsessive focus on the price of oil finally relaxed this week as WTI futures stabilized in the mid-$50's range and Brent hovered around the $60/barrel mark. Warm Christmas weather across much of the US and a lower than expected draw in the weekly natural gas inventory data led to natty gas being the big mover in the energy complex. After the data, natural gas futures tested $3.00, a two-year low.

In deal news, we saw the all too convoluted Caesars saga come to a head as CACQ confirmed it was to be acquired by CZR. This follows report last week that CZR was moving forward with a bankruptcy filing for one of its operating units after failing to come to agreements with some creditors. The Dollar store showdown (FDO, DG, DLTR) was pushed out another month with shareholder votes now scheduled for late January. Consolidation in the telecom sector was also put on ice as the FCC requested additional time to review upwards of 30 thousand documents related to the Time Warner/Comcast deal. After a brief hiatus, tax inversion talk resumed with Stryker speculated to be preparing a bid for Smith and Nephew in the coming weeks. This followed reports in late November that Stryker was said to be considering a bid as the 6 month standstill mandated by UK takeover laws was nearing its end.

Gilead was hit by new competition concerns. Following the FDA approval of ABBV's Viekira Pak as a treatment for Hepatitis C late last week, reports indicated that Express Scripts could drop Gilead's rival treatment which has faced heavy criticism for its high price. This combination led to a sharp sell off in GILD's stock early in the week from $108 to $82, with one analyst going so far as to say the move by ESRX could lead to a permanent shift in power away from drug developers and towards PBMs and insurance carriers. Gilead share rebounded late in the week on an RBC note calling for the company to take advantage of the lower share price and growing FCF to conduct large scale share buybacks.

The family of mortgage and housing firms helmed by William Erbey (OCN, ASPS, AAMC, RESI) absorbed a blow on Monday as Ocwen disclosed the settlement with the NY Department of Financial Services amounting to a $150M penalty. Notably, along with the financial repercussions, Chairman Erbey was forced to resign from all of the firms he oversaw and in which he was a large investor. Ocwen shares took a 30% haircut after the settlement was announcement, and the other stocks in the family all suffered double digit percentage losses as well.

In the FX market, the USD was consolidating from multi-year highs as the theme of central bank divergence continued to aid the greenback. On Tuesday, The EUR/USD fell to its lowest level since Aug 2012 below 1.22 before consolidation. The continued hope for full-blown ECB sovereign QE continued to push bond yields lower. The Spanish 10-year yield posted a new record low below 1.68% while Italy dipped back below the 2% level. The British pound softened after UK Final Q3 GDP year over year reading was revised lower (2.6% vs. 3.0% prelim) and the nation's current account registered its largest deficit on record. GBP/USD approached the 1.5535 level after the data release on Tuesday, hitting its lowest level since September 2013.

The Russian Ruble currency continued to stabilize as dealers noted that lower oil prices also meant a boost for most economies. The Ruble firmed on 4 of the 5 sessions during the week as the Russian Central Bank held consultations with various key exporters on hard currency revenue sales. Mid-week the Russian finance ministry felt confident enough to declare the currency crisis over, though the currency is still more than 30% weaker than it was a just a few weeks ago.

The Shanghai Composite ended the week up 1.6%, above 3150, despite a two-day slide below the psychological 3000 mark. Much of the mainland market buoyancy has been attributed to expectations for the PBoC to remain committed to a steady easing campaign as the pace of economic expansion continues to slow. In fact, the central bank's latest quarterly survey saw over 90% of bankers anticipating a "somewhat loose" policy stance in the next quarter, and nearly half of respondents expect the economy to be "relatively cool" - up about 6 percent from the prior quarter. However, the likelihood of merely cosmetic changes in policy also remains high. On Friday, the government reportedly offered a temporary waiver of requirement for banks to set aside reserves for certain deposits, and the PBoC's director of research also hinted that overall monetary policy is appropriate as money supply growth remains over 10%.

A wide set of economic data out of Japan offered few hints of a thaw from the country's technical recession. November industrial output fell on a sequential basis for the 3rd consecutive month, spoiling expectations of a rebound, even though the economy ministry remained upbeat that growth would resume in December and January. Nationwide core CPI for November also slowed to an 8-month low of 2.7%, while adjusted for the consumption tax that figure was an even more dire 0.7% - down from 0.9% in October and well below the 2% BOJ target. Despite the troubling data, BOJ Governor Kuroda remained resolute in his expectation of the inflation target being achieved in due timeframe, noting firms are increasingly more active with capital investment and private consumption is improving steadily.