Copper is still cheap, despite its surging price
Supply restrictions will be hard to unpick as global demand ramps up
The copper bells are ringing to warn us we are in the late cycle when metals prices have their sudden and unexpected upward moves. Unexpected, that is, for central bank macroeconomists, supply-chain-stretched manufacturers and off-the-shelf investment algos.
This is not just a China story, or unsustainable speculative demand. Speculative interest in copper futures is quite low, particularly considering that the price of the metal is up more than 60 per cent over the past two years. Mining companies’ managers still have a battered-child syndrome after the 2015-2016 pause in Chinese import growth.
There is little exuberance, rational or irrational. Despite their large cash hoards and cash flows, none of the major companies is proposing to shoot a rocket loaded with copper into the asteroid belt, or even invest enough to maintain production.
So world copper production dropped more than 2.5 per cent last year, as declining ore grades and labour strikes more than offset the output of new mines or expanded production at existing mines. This was mostly because of declines in ore grades and delays in commissioning new capacity.
A macroeconomist at a central bank would tell you that, with the price a little above $7,100 a tonne, and the world marginal cost of production around $5,000 a tonne, there should be a wave of new investment in copper capacity. And there would be, if the engineering, economics and politics of the copper industry were anything like those of the American unconventional oil and gas business.
They are not. As Paul Gait of Bernstein Research in London says: “There are hundreds of thousands of oil wells in the world, but there are only about 700 copper mines. The 20 largest mines provide half of the total supply. That means that the supply response is not at all a continuous function.”
‘You have to either go to Africa or go underground’ to get new copper sources
Paul Gait
The lead time on building a new mine, or even a plant to extract copper from mine tailings, is much longer than required for most oilfields. Copper has been the object of exploration for a very long time, and the easily accessed, high-grade oil bodies were discovered decades ago. Miners have extracted copper from thinner and thinner ore grades with more capital and technology. That is becoming near impossible to accomplish with the currently mined ore bodies in politically stable areas.
As Mr Gait says: “You have to either go to Africa or go underground” to get new copper sources. Going underground means sinking shafts a thousand meters down to blast and burrow out huge caves to acquire the ore. The time from investment decision to production is measured in decades, assuming the environmental permitting problems can be overcome. This assumes the mining engineers and skilled workers can be found.
In the past few weeks miners have found out more implications of what going to Africa can mean. The Democratic Republic of Congo has announced its intention to impose retroactive increases in royalties and taxes, despite its apparent contractual commitments.
The companies have protested, and there will be long negotiations and litigation. The ores in the DRC and elsewhere in Africa are an order of magnitude richer than can be found in more predictable places. They have just too much political risk, though, to attract more money.
The real fun in the copper world this year, however, will be in Chile, the source for about 6m tonnes of the world’s 20m tonnes of annual production. There are labour disputes at mines comprising more than three-quarters of Chile’s capacity. If just a fraction of those 6m tonnes — say 1m tonnes — were to be taken offline because of strikes, the resulting price movement would be very educational.
Chilean miners, not to mention their union leadership, know all about the lack of spare capacity in the world. There would be no obvious way to make up for such a production shortfall quickly.
There is a lack of awareness of how copper-intensive a shift away from fossil fuel energy will be. Transmission grids need more copper for renewable generation. Electric vehicles require more copper than diesel or gas vehicles.
Factory and office workers in hot countries need air conditioning to work efficiently, which also requires more copper. All the myriad little electric motors we take for granted need copper. Ammunition for war uses a lot of copper.
Yet copper has not been a political or financial issue in recent years. Metal mining is dirty and distant. The technology can be improved and capital added, but slowly. The smart people who might have done that went into software engineering or media studies.
The first reaction of consumers, manufacturers and politicians will be to accept the copper price increases that will be created by the tight supply conditions.
It will take a lot of demand destruction to match a stagnant, choppy and depleting supply. That will happen later in the cycle than rises in rates and declines in equity prices. Copper and copper companies are cheap and interesting.
Where Volatility Goes to Die
Greed, intrigue, and death are the stuff of detective novels, but there’s plenty in the more mundane mystery of two very different exchange-traded products that were at the center of the great volatility blowup on Monday.
As the Standard’s & Poor’s 500 index fell 4% on Monday, giving back this year’s gains in a single day, implied volatility—as measured by Cboe Volatility Index, or VIX, which tends to rise as stocks decline—spiked 115%, to 38. That was bad news for anyone betting that volatility would stay low, but worse news for investors in exchange-traded products that shorted volatility.
After the market’s close on Monday, the two largest— the VelocityShares Daily Inverse VIX Futures Short Term exchange-traded note (ticker: XIV) and the ProShares Short VIX Short-Term Futures exchange-traded fund (SVXY)—each fell about 90%, shedding around $3 billion in value.
The ETN, a debt obligation underwritten by Credit Suisse, was killed, but the ProShares ETF survived. But how that happened is shrouded in mystery.
These are complicated products. Robert E. Whaley, credited as the originator of the VIX, sighs when asked about the volatility ETP fiasco. The Vanderbilt University professor has warned for years that volatility ETPs—long, inverse, and leveraged—were flawed in structure. The constant trading of futures is an expense that drags on performance. “Volatility products lose money consistently over time, because they are based on futures contracts,” Whaley says. “Yet retail investors continue to buy and hold them.” Add the complexity of shorting those futures and these become even more costly and require closer attention.
BUT EVEN A SOPHISTICATED trader, making a one-day bet on volatility staying low, would have run into trouble on Monday.
Shorting volatility was easy money in a market with extremely low volatility. The VelocityShares ETN and the ProShares ETF each gained more than 180% last year. Flows followed performance, assets ballooned into the billions, and the futures market started to distort. Strong demand led to contango, a situation in which longer-dated futures are more expensive than shorter-term ones. That’s a problem for products that then have to buy high and sell low as futures contracts expire, says Matt Hougan, CEO of Inside ETFs. “Contango hurts long-volatility products, but the inverse ones had great performance,” Hougan says. “Trouble is when volatility goes up 100%.”
To fully understand what transpired on Monday night, one must understand a crucial difference between an ETN and an ETF. An ETN is debt; the underwriter must repay the note in the amount the index has returned. In the case of the VelocityShares ETN, Credit Suisse’s promise was to deliver the opposite return of the VIX. The ProShares ETF, however, actually owns the VIX futures.
So when the VelocityShares ETN fell more than 80%, it triggered a poison pill clause in its prospectus that would protect Credit Suisse from losing more than what the ETN is worth and give it the right to kill it. On Tuesday morning, the firm did just that and announced that the last day of trading for the ETN is Feb. 20. This is called an “event acceleration” because ETNs mature like bonds and can be called. Credit Suisse will pay investors a cash payment equal to the closing indicative value of the ETN at the close on Feb. 21.
While many are scrutinizing the death of this volatility ETN, it isn’t unique. A Barclays ETN died in similar fashion under similar circumstances, notes Mike Venuto, an ETF industry veteran and chief investment officer of Toroso Investments.
THE REAL MYSTERY is how the ProShares ETF survived the night—and how the value of its underlying futures contracts more than doubled between 4 p.m. on Monday night and Tuesday morning. The only ones who know are ProShares and its prime broker, probably Jane Street Capital. Both firms declined to comment.
The ETF’s indicative value—calculated every 15 seconds based on the last sales price of an ETF’s underlying securities—was roughly $4 around 4 p.m. on Monday, says Stuart Barton, a portfolio manager at Invest in Vol. “Any intelligent person with the publicly available holdings information would’ve been confused,” says Barton. “How could anyone make sense of something that was $4 to recover to $11 overnight?”
Futures prices settle daily at 4:15 p.m., and ETPs typically rebalance to match their index in the 15 minutes before then. On Monday, in that 15-minute window, March-dated VIX futures jumped by 50%. Rebalancing then could have meant death for the ProShares ETF, because it would have pushed futures prices up even more, which they’d then have to buy. “ProShares lost less money than they should have,” says Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors.
It’s possible the ETF survived—and its indicative value rose—because it didn’t rebalance in that window and instead waited for prices to fall, Chintawongvanich speculates. Since our detective caps are in place, we’ll note that no one can say how and when the ETF purchased futures, and ProShares won’t comment. It also didn’t publish the ETF’s net asset value or its holdings in time for premarket trading at 4 a.m. on Tuesday—a requirement of NYSE Arca, the exchange on which the ProShares ETF is listed. As a result, NYSE halted trading, citing in a filing, “volatility in pricing” and a NAV that “was not publicly available.” Trading resumed at 11:35 a.m. on Tuesday.
WE DEDUCE that ProShares took a calculated risk that futures prices would fall, and held off rebalancing. If so, that risk paid off—though it could have ended poorly (for investors as well as the fund) if futures prices went even higher after the settlement period. All this raises the question as to what ProShares priorities should be: Hew to its index? Limit its effect on the futures market? Or to simply survive?
In a two-sentence statement issued on Tuesday morning, ProShares said that the ETF “was consistent with its objective and reflected the changes in the level of its underlying index” and that the firm will “continue to manage the fund as usual.” It’s worth noting that the fund’s prospectus says it does not need to hew strictly to the index, so holding off on rebalancing wouldn’t violate any rules—but it would certainly depart from convention.
There’s a lot to sift through, but the main lesson is this: Be wary of volatility ETPs. Yet investors have already poured another $500 million into the ProShares ETF in the days after the largest ETN keeled over, according to data provider XTF. Why is another mystery.
Seat Belts Fastened: Volatility Ahead
For 15 months, from the 2016 election of President Donald Trump until recently, the stock market was a smooth, one-way trade: up 34%, with nary a significant pullback. A turn on the Brooklyn Cyclone it was not.
“Investors were in love with the economy, earnings growth, and the tax bill,” says Bob Doll, the chief equity strategist at Nuveen Asset Management. “It was a beautiful thing.”
That beautiful ride is now over.
A fast and vertiginous drop in February points to a material change in investor psychology, to cautious from enthusiastic. Where previously rising interest rates were acceptable because of strong global growth, now investors are focused on the potential inflationary threat from such growth.
The underlying concern is that rising prices could cause the Federal Reserve to tighten monetary policy faster than the market is anticipating. There is also a new unknown factor: Fed chair Jerome Powell, who was sworn in Feb. 5.
“Easy money created a safety net for stocks,” says Ernest Cecilia, chief investment officer at Bryn Mawr Trust. “That long period of time has certainly changed.”
The road ahead isn’t yet clear, and there are reasons to think the bull can continue to run. This time, however, trading is expected to be choppier, and investors more nervous than they have been for two years.
“It will be a tug of war,” says Keith Lerner, the chief market strategist at SunTrust Advisory Services, “a battle between fear and greed…Those who missed out want to get in, but those sitting on gains will want to sell,” he says.
With February’s swift stock market correction, volatility has arrived and will probably stay awhile. The downturn last week ended a streak of 404 trading days without a 5% drop in stock prices from the previous high—the longest such streak in market history.
The last correction came in February 2016, when stocks dropped 15%. Investors then fretted that Chinese economic growth might be slowing, which turned out to be a false alarm. Long term, the latest nose dive might yet become just a bull speed bump, but there’s already been plenty of pain.
The Standard & Poor’s 500 index closed on Friday at 2619.55, rallying 1.5% on the day, but down 5.2% for the week. At Thursday’s close, stocks were down more than 10% from their previous all-time high—the traditional definition of a correction—of 2873, set Jan. 26. Down 2% the market is already below the previous year end—a position it was never in during 2017.
The index briefly broke below its 200-day moving average on Friday, a negative sign, but immediately bounced higher and managed to close above the moving average.
Does this mean a bear is in sight after nearly a decade in hibernation? Bear markets, a 20% drop from the highs, are typically caused by recessions. Yet anxiety about further losses has intensified, despite little evidence of any economic contraction in the offing.
An upturn in stock market participation by individual investors—typically latecomers in a bull market—also concerns some veteran market watchers.
And some think that the market is in the process of altering its view on the relative merits of stocks versus bonds. The stock plunge is the symptom and the disease is that there’s been a fundamental sentiment shift about rising rates, says Michael O’Rourke, the chief market strategist at Jones Trading.
“For years, people have said stocks are cheaper than bonds, but now yields are going higher,” he says. “Bonds are getting cheaper and will compete with stocks.” (Bond prices move inversely to yields.) The key metric that stocks are cheaper than bonds will reprice, O’Rourke predicts.
On Friday, yields on the U.S. 10-year Treasury note finished at 2.83%, significantly higher than the 2.41% at year-end 2017. That yield surge in such a short period of time was faster than the stock market could handle, Nuveen’s Doll says. On Feb. 2, when the stock market correction began, the spark was news from the Department of Labor that January’s hourly wage rise was 2.9%, the biggest year-over-year rise since June 2009, when the last recession ended. That released the market’s inflation demons.
As yields approached 3% that day, a level not seen since 2014, “investors took that 2.9% wage number and ran with it,” Cecilia of Bryn Mawr Trust says.
As the market was being whipsawed, the Fed—heretofore seen as supporting riskier assets like stocks with former chair Janet Yellen’s accommodative stance for years—has abruptly become something of a question mark. Powell’s tenure began on the worst day of the correction so far. Markets aren’t familiar enough with him yet, though he’s been a Fed governor since May 2012.
THE MARKET IS TESTING the new chair, says Lerner of SunTrust. “People think he will continue Yellen’s gradual rise in rate policy, and this market drop suggests he will have to,” he says.
While Powell himself hasn’t commented yet, and perhaps won’t do so early on, other Fed officials last week did reiterate the central bank’s plan of raising rates gradually. Investors expect the Fed to increase the federal-funds rate by three moves of 0.25 percentage point, to 2.00 to 2.25% by year end. On Tuesday, James Bullard, the president of the St. Louis Fed and a member of the Federal Open Market Committee, said he didn’t think the strong U.S. labor market meant higher inflation was imminent.
As it stands, sentiment weakness is unlikely to kill the bull market, but it is a less favorable environment for equities short-term. If you had to pick the time when the market’s attitude changed, it would probably be when the Dow Jones Industrial Average gapped down some 800 points in the matter of about 10 minutes midafternoon last Monday. At one point, the Dow was down nearly 1,600 points, the largest intraday point drop in history. You could almost hear the gasp on Wall Street.
While much of the plunge was blamed on automated and machine trading, not all of it was. Once arguably too complacent about inflation, investors are now clearly affected by growing uncertainty about rising bond yields.
As yields approached 3% that day, a level not seen since 2014, “investors took that 2.9% wage number and ran with it,” Cecilia of Bryn Mawr Trust says.
As the market was being whipsawed, the Fed—heretofore seen as supporting riskier assets like stocks with former chair Janet Yellen’s accommodative stance for years—has abruptly become something of a question mark. Powell’s tenure began on the worst day of the correction so far. Markets aren’t familiar enough with him yet, though he’s been a Fed governor since May 2012.
THE MARKET IS TESTING the new chair, says Lerner of SunTrust. “People think he will continue Yellen’s gradual rise in rate policy, and this market drop suggests he will have to,” he says.
While Powell himself hasn’t commented yet, and perhaps won’t do so early on, other Fed officials last week did reiterate the central bank’s plan of raising rates gradually. Investors expect the Fed to increase the federal-funds rate by three moves of 0.25 percentage point, to 2.00 to 2.25% by year end. On Tuesday, James Bullard, the president of the St. Louis Fed and a member of the Federal Open Market Committee, said he didn’t think the strong U.S. labor market meant higher inflation was imminent.
As it stands, sentiment weakness is unlikely to kill the bull market, but it is a less favorable environment for equities short-term. If you had to pick the time when the market’s attitude changed, it would probably be when the Dow Jones Industrial Average gapped down some 800 points in the matter of about 10 minutes midafternoon last Monday. At one point, the Dow was down nearly 1,600 points, the largest intraday point drop in history. You could almost hear the gasp on Wall Street.
While much of the plunge was blamed on automated and machine trading, not all of it was. Once arguably too complacent about inflation, investors are now clearly affected by growing uncertainty about rising bond yields.
“Herd mentality had stocks overreacting too—and ignoring the contradictions,” he says. Stronger economic growth (implied by the wage rise) is good for earnings, and equities—unlike bonds—are a hedge against inflation. “If you believe that bond yields are rising on inflation, that’s when you run to stocks,” he says.
Indeed, there are powerful fundamentals driving the bull higher. Stronger global synchronized economic growth along with the weaker dollar should help drive profits at many of the companies in the S&P 500. Last month, for example, the International Monetary Fund raised its estimate for global growth to 3.9% from 3.7%. Earnings per share—even before the recent tax changes—have risen at rates not seen for years.
If there is a silver lining to this correction, it is that stocks are much cheaper than they were just a few days ago. The S&P 500 index’s valuation has dropped sharply. S&P 500 earnings per share are expected to jump 17% in 2018, to $156.88 from an estimated $132.40 last year. In 2019, a further 10% rise to $172.67 is anticipated by analysts. Consequently, the market’s price/earnings ratio has dropped to 16.7 times forward earnings—the lowest since one year ago—from 18.8 times at January’s high.
Nuveen’s Doll expects the market P/E to be lower on Dec. 31 than it was on Jan. 1, which would be the first time in six years that the P/E declined in the course of the year, he adds. He looks for the S&P 500 index to finish around 2800 this year, for a total return of 6% to 7% when all is said and done.
Some bullish strategists suggest the correction is actually a positive long-term development for the bull market.
“It isn’t the beginning of the end, but a normal correction in a long upward move,” opines Chris Gaffney, president of world markets at EverBank. Rates are low, global growth is good, and earnings are better than expected, says Gaffney, who expects a choppy market with an upward bias. Interest rates are the biggest risk, but the Fed will raise gradually and a 3% yield on the 10-year Treasury isn’t the end of the world for stocks, though it could pressure dividend shares, he says.
WHAT MATTERS, says another bull, Jim McDonald, chief investment strategist at Northern Trust, isn’t the number of rate increases but the environment when they are raised. There have been instances in the past when a bull market didn’t blink at a Fed rate increase of three percentage points and another that was brought down by the same amount of hikes.
Moreover, he adds, mini-meltdowns like the one seen last week “will help extend the bull cycle,” he says. It restrains the stock market euphoria, something the Fed is likely to have concerns about, he adds.
McDonald isn’t fazed by the 2.9% wage number: “You need to see wage gains above 4% to see an impact on inflation.” There’s been a lot of media attention given to the wage boosts and bonuses seen at some big U.S. companies, but “we are making a bet that in general managements haven’t lost their cost discipline,” he says.
While market bulls remain uncowed in their enthusiasm, they also acknowledge the market wounds aren’t superficial, and that volatility isn’t going away soon. Bear markets are typically born of recessions and the evidence for that is slim, they say.
The caveat to the bullish view is, unsurprisingly, inflation. Jason Pride, director of investment strategy at Glenmede, says that if the Fed were to increase rates four or five times this year, instead of the expected three, it would pressure stock values. And exogenous geopolitical events could take on added meaning in the current environment, Pride says.
And here’s an interesting twist. A look at the CME Fed futures market shows that market’s view of a third rate increase in December has dropped to a 44% probability on Friday from nearly 58% on Jan. 26, the day the market hit its all-time high, according to Bloomberg. Fed futures have had a good track record of correctly predicting Fed rate changes over the past few years. The stock market’s selloff makes a third rate hike less certain, given the tightening in financial conditions from lower stock prices and higher bond yields.
Caveats are more important when the market’s valuation isn’t cheap on a historical basis, as is the case now. The higher the valuation, the lower the bar for risks and uncertainty that could elicit a market reaction. Before Feb. 2, few observers would have predicted a monthly wage increase would be the instigator of a correction.
INVESTOR WORRIES about inflation and yields are the paramount issues, but the destruction of investor complacency caused by February’s plunge might allow other back-burner issues—like the U.S. midterm elections in November or Chinese economic growth—to be viewed as more worrisome than they had been previously.
Ned Davis, senior investment strategist at Ned Davis Research Group, contends that when you get parabolic rises in stock prices—as in January—the market cracks can form more quickly. Easy monetary policy makes overvalued markets manageable. But when the Fed starts raising rates it can start to bite. Whether the next rally makes a new high or not is “very important,” Davis adds.
Previous to the correction, what was a positive development for Main Street—rising wages, low inflation, falling unemployment—was also promising for Wall Street. It meant, for example, that consumers enjoyed increasing income and with that a rising capacity to buy more of the things that Corporate America produced.
The turbulent reaction in the market, however, suggests the convergence of interests will be tested regularly this year.
“What might be good for Main Street, might not be good for Wall Street—if the Federal Reserve ends up tightening more quickly than investors expect,” SunTrust’s Lerner says.
One thing is clear: Interest rates are going up, not just in the U.S. but around the world. Although investors were well aware of this for over 12 months, it began to hurt only recently. From here on in, it is likely to become a bumpier market, with pockets of downdrafts—perhaps like the one that kicked off this month, perhaps even worse—before the bull resumes.
The threat of a bear market remains relatively low, but the one-way ride is over.
Europe’s Stock Selloff: From Overdue to Overdone
U.S. stocks plummeted 5.2% last week, and European markets held up only slightly better. The Stoxx Europe 600 index gave up 5%, cutting its 12-month gain to about 1%. Strategists pinned the drop in part on the need for a healthy correction after the run-up of the past few months, and on rising bond yields, which ticked up on signs of impending inflation. The higher yields lured money out of equities.
Market bulls aren’t throwing in the towel yet. “We may have moved from being ‘overdue’ for a pullback to approaching ‘overdone,’ ” Mark Haefele, the Zurich-based global chief investment officer for UBS Wealth Management, wrote in a note to clients. Recent equity selling has resembled “generic ‘risk off’ behavior,” Steven Andrew, a London-based multi-asset fund manager at M&G Investments, said in an email to Barron’s, adding that “from a fundamental standpoint, little seems to have changed. Our predisposition would be to add equity exposure.”
Don’t bank on big changes in European Central Bank policy, other strategists suggested. At its January meeting, the ECB made no changes to interest rates, kept its forward guidance in place, and reiterated that a bond-buying program is intended to run until the end of September, or beyond, if necessary. Meanwhile, the Bank of England said on Thursday that British interest rates might rise sooner than previously expected, as the BOE made no changes to monetary policy. But analysts emphasized that the central bank’s moves will depend on how the United Kingdom’s departure from the European Union unfolds.
“One of the reasons given to explain the selloff has been a shift in expectations regarding inflation and what this means for central-bank policy,” HSBC’s multi-asset strategy team wrote in a note. But there is “little reason for the ECB to change the asset-purchase program or its guidance at this stage,” added the team, led by Pierre Blanchet.
HSBC advises caution. Euro-zone stocks are at risk because they’re typically weak performers during broad corrections, and companies have experienced a hit to earnings due to the strengthening euro, Blanchet and his colleagues wrote.
WHEN THE GOING GETS TOUGH, the prudent get defensive. Hence, the appeal of consumer-staples stocks. The sector has proved resilient even as the broad market slumps, and several stocks have particular appeal.
Henkel (ticker: HEN3.Germany), Unilever (UL), and Reckitt Benckiser Group (RB.UK) look good to a team of Berenberg analysts who cover companies producing packaged foods, household items, and personal-care products. The team names them as its top picks, and wrote in a recent note that all three offer a “mixture of attractive relative valuation, organic growth acceleration, margin expansion, and M&A [merger and acquisition potential], while showing agility in their business models.”
Unilever and Henkel trade around 18 times forward-year estimated earnings, below the Consumer Staples Select Sector SPDR (XLP) fund’s multiple of 20, while Reckitt’s forward price/earnings ratio matches that popular U.S. fund’s multiple. Each stock scores a Buy rating from Berenberg, which has price targets that imply a rally of more than 20%.
Henkel, whose products include All and Persil ProClean laundry detergents, Dial soap, and Right Guard deodorant, has “shown that it can turn around challenged businesses (e.g., professional hair care) and scale up where needed (e.g., U.S. laundry and hair care),” wrote Berenberg’s James Targett, Rosie Edwards, and their colleagues.
More than half of the German company’s sales come from its adhesives business. That unit ought to repeat last year’s 5% organic growth due to an expanding global economy, new end markets, and other factors, the bank reckons.
Anglo-Dutch giant Unilever, whose shares trade in the U.K. (ULVR.UK) and Amsterdam (UNA.Netherlands) as well as New York, is “taking the biggest steps in the industry to increase the agility of its business model, reduce costs, embrace digital and e-commerce, and future-proof its portfolio,” Berenberg’s team notes.
The parent company for Lipton tea and Dove soap had a “dampened market reaction” to its earnings report this month because of a softening in pricing and vague guidance on margins and stock buybacks, but the fourth quarter looked strong overall.
Reckitt looks poised to return to growth after troubles last year due to a massive cyberattack, a South Korean boycott, and other problems that don’t appear structural, according to the Berenberg analysts. The parent company for Lysol wipes and Durex condoms has generated headlines this month because of its interest in Pfizer’s (PFE) consumer health-care business. The possibility of a deal has spooked some investors, but Morgan Stanley analysts see brands such as Advil that “would complement RB’s portfolio.”
They say a deal might not be done with a “vanilla” acquisition structure. They are more bullish than other analyst teams, according to FactSet, with a price target on Reckitt of 9,000 pence ($125), implying a rally of more than 40%.
Closing Market Summary: Ending On a Positive NoteU.S. equities reclaimed a nice chunk of their losses for the week on Friday in another volatile trading session. The S&P 500 gained 1.5%, while the Dow Jones Industrial Average and the Nasdaq Composite advanced 1.4% apiece. The small-cap Russell 2000 also rallied, climbing 1.0%.
The S&P 500 covered a wide range of about 105 points--up 2.2% at its high and down 1.9% at its low.
Stocks opened in positive territory, but began moving lower shortly thereafter. The market hit negative territory in the late morning, but the retreat came to a halt as the S&P 500 approached its 200-day simple moving average (2539), which it had not tested since right before the 2016 presidential election.
The S&P 500 dipped slightly below that key technical level, which served as a springboard for renewed buying efforts which culminated in a late rally that left equities at their session highs.
The defense of the 200-day simple moving average proved to be a silver lining for investors, who endured an otherwise terrible week. The S&P 500, the Dow, and the Nasdaq lost a little more than 5.0% apiece this week and now trade roughly 9% below the record highs they hit on January 26.
10 of 11 sectors finished Friday in the green as advancing issues outnumbered declining issues 1.4 to 1 at the New York Stock Exchange.
The top-weighted technology (+2.5%) and financials (+1.9%) sectors were relatively strong throughout the session, settling near the top of the sector standings.
Within the tech space, NVIDIA (NVDA 232.08, +14.56) jumped 6.7% after blowing past Q4 earnings and revenue estimates and raising its guidance for the first quarter.
On the downside, the energy sector (-0.4%) finished at the bottom of the sector standings as the price of crude oil declined for the sixth session in a row. West Texas Intermediate crude futures tumbled 3.1% to $59.23 per barrel--their lowest level since the end of December.
In Washington, Congress passed a budget deal early Friday morning, but not before shutting down the government for a few hours--the previous spending deal ran out at midnight. The deal will increase spending caps and raise defense and non-defense spending by approximately $160 billion and $130 billion, respectively.
The bill will also provide an additional $90 billion for disaster aid and extend the debt ceiling until 2019.
In the bond market, U.S. Treasuries ended the week on a higher note, with shorter-dated issues showing relative strength. The yield on the 2-yr Treasury note declined seven basis points to 2.06%, while the benchmark 10-yr yield slipped two basis points to 2.83%. Yields move inversely to prices.
Friday's economic data was limited to December Wholesale Inventories, which increased 0.4% month-over-month (consensus +0.2%). The key takeaway from the report was that the sales increase outpaced the inventory increase by a sizable margin. That is a step in the right direction for wholesalers trying to regain some pricing power.
On Monday, investors will receive just one piece of data--the January Treasury Budget--which will be released at 2:00 PM ET.
- Nasdaq Composite: -0.4% YTD
- S&P 500: -2.0% YTD
- Dow Jones Industrial Average: -2.1% YTD
- Russell 2000: -3.8% YTD
