Weekly Market Update: The Reflation Trade Exhales Into Year End
The last week of trading saw a mixed global reaction to the year's end. The FTSE managed to reach new all-time highs and closed the week up 1.4%, while the Shanghai and Hang Seng also finished up on the week. The US instead had a hard time during the last four sessions of the year as profit taking and pension fund rebalancing, in a high vacation period, took its toll. Trading volumes have reflected the absenteeism with average volumes on the NYSE at 35% below the 3 month average. For the week, after getting to within 20 points of the 20,000 milestone the DJIA lost 0.8%, while the Nasdaq dropped 1.5%, and the S&P500 fell 1.1%, causing the S&P to fall just short of a double digit percentage gain on the year.
US Treasury yields have declined as investors bought low-risk fixed income assets, sending 10-Year Treasury yields to a 2-week low. However, going short continues to be the smart-money play. As the market continues to short sell Treasuries, Repo rates for some specific bonds have become extremely expensive, reaching negative yields on many parts of the curve.
The US dollar reached new highs not seen for 14 years against various currencies before retracing to lower prices on Friday. Against the Euro, at one point the US dollar had lost 1.6%. Various FX brokers reported a lack of liquidity during Asian trading hours causing automatic orders to be set off. As price continued to move higher, stop loss orders to cover shorts were sparked, increasing the upward momentum.
China has had a hard week defending its currency against further devaluation, as the Yuan is set to finish the year with its biggest 1-year decline since 1994. The government has said it will redesign the Yuan currency basket to include another 11 currencies in an attempt to water down the effect of the US dollar and camouflage the ongoing capital outflows.
The Italian government eventually did need to step in to save the oldest banking institution in the world, Monte dei Paschi, mainly to avoid the NPL crisis of Italian lenders from spreading any further. The lender was unable to find private backing to re-capitalize and was given an estimate of €8.8 billion of funding by the ECB. The Italian central bank has said it sees the cost of saving Paschi at €6.6 billion, lower than the ECB estimate, but higher than the €5 billion sought by Paschi initially.
In a slow corporate news week, a few headlines stood out. On Tuesday, Amazon reported over 1 billion items shipped with Prime this holiday season worldwide, noting their Echo Dot was the best-selling, most gifted item on Amazon.com. It was reported on Wednesday that Kate Spade was mulling a sale, and analysts noted that Coach and Michael Kors both have adequate cash to fund a potential acquisition. And on Friday, Nikkei estimated that Apple would reduce its iPhone production by 10% in Q1 due to sluggish sales, sending shares of some Apple suppliers lower to end the week.
MON 12/26
6502.JP: May take an extraordinary loss of ¥100B ($860M) on US nuclear ops - Nikkei
*(JP) JAPAN NOV NATIONAL CPI Y/Y: 0.5% V 0.5%E (2nd straight rise); CPI EX FRESH FOOD (CORE) Y/Y: -0.4% V -0.3%E
TUE 12/27
*(US) DEC RICHMOND FED MANUFACTURING INDEX: 8 V 5E
*(US) DEC CONSUMER CONFIDENCE: 113.7 V 108.5E (highest since Aug 2001)
WEDS 12/28
*(UK) NOV BBA LOANS FOR HOUSE PURCHASE: 40.7K V 41.4KE
(US) Association of American Railroads weekly rail traffic report for week ending Dec 24th: 496.6K carloads and intermodal units, +27% y/y
(CN) China Commerce Ministry (MOFCOM) Spokesperson Shen: More concerned about future Fed rate hikes; Expect to see slower growth in auto sales in 2017
KATE: Reportedly considering sale of the company; has hired advisers to contact potential buyers - press
THURS 12/29
*(EU) EURO ZONE NOV M3 MONEY SUPPLY Y/Y: 4.8% V 4.4%E
*(US) INITIAL JOBLESS CLAIMS: 265K V 265KE; CONTINUING CLAIMS: 2.10M V 2.03ME
FRI 12/30
(RU) Russia President Putin refutes earlier reports that Russia will expel diplomats in retaliation; will consider Trump's actions on any measures
(US) DEC CHICAGO PURCHASING MANAGER: 54.6 V 56.8E
AAPL: May reduce iPhone production by 10% in Q1 due to sluggish sales - Nikkei
Closing Market Summary: 2016 Ends on Lower Note
The stock market spent the final session of the year in a steady retreat. The S&P 500 lost 0.5%, narrowing its 2016 gain to 9.5%. The Nasdaq (-0.9%) underperformed, trimming this year's advance to 7.5%.
The bulk of the day saw below-average trading volume, but there was a surge of activity into the close, likely associated with end-of-month and end-of-quarter flows from large investors. As a result, more than a billion shares changed hands at the NYSE floor.
Today's pullback brought the S&P 500 back into the middle of its post-election range with nine out of eleven sectors finishing in the red. Heavily-weighted technology (-1.0%) and consumer discretionary (-0.9%) spent the day at the bottom of the leaderboard, dragging most other sectors down.
In the technology sector, Apple (AAPL 115.85, -0.88) started on a soft note, extending its loss to 0.8% after Nikkei Asian Review reported that the company's first-quarter iPhone production will be 10.0% down year-over-year, according to data from suppliers. Accordingly, Apple suppliers like Cirrus Logic (CRUS 56.54, -1.47), Skyworks (SWKS 74.66, -1.90), Qualcomm (QCOM 65.20, -0.84), and Qorvo (QRVO 52.73, -0.88) lost between 1.6% and 2.5%, while the PHLX Semiconductor Index fell 1.6%, narrowing its 2016 gain to 36.6%.
The consumer discretionary sector (-0.9%) spent the day alongside technology due to broad-based weakness. Homebuilders retreated, sending the iShares Dow Jones US Home Construction ETF (ITB 27.48, -0.25) lower by 0.9%, while automakers Ford (F 12.13, -0.10) and General Motors (GM 34.84, -0.30) saw comparable losses. As for retailers, the SPDR S&P Retail ETF (XRT 44.07, -0.18) lost 0.4%.
Elsewhere on the cyclical side, materials (-0.7%) also finished behind the broader market while other decliners saw slimmer losses. On the upside, real estate (+0.9%) and financials (+0.2%) resisted the overall pressure with the financial sector edging up to end the year higher by 20.1%. Thanks to today's effort, the real estate sector ended the year just above its flat line (+0.01%)
Only one group—health care (-0.4%)—finished the year in negative territory, losing 4.4%. Biotechnology contributed to the decline as the iShares Nasdaq Biotechnology ETF (IBB 265.38, -1.73) surrendered 0.7% on Friday, ending the year lower by 21.6%.
Treasuries ended the abbreviated session on a higher note. The 10-yr yield slipped three basis points to 2.44%, ending 20 basis points below its mid-December high.
The U.S. Dollar Index (102.28, -0.38) shed 0.4% to lock in its second consecutive decline, but still ended the year just below a 14-year high. It is possible that market participants got an early taste of the strong dollar's impact on the manufacturing sector as the December Chicago PMI declined to 54.6 from 57.6 in November. The drop was paced by New Orders, which fell to 56.5 from 63.2 in November. To be fair, the overall index pulled back from levels not seen since January 2015 and over half of the respondents to a special question pertaining to the 2017 outlook said they expected their business to prosper, aided by tax reforms and deregulation.
Bond and equity markets will be closed on Monday and Tuesday's economic data will be limited to the 10:00 ET release of November Construction Spending (consensus 0.5%) and December ISM Index (consensus 53.6).
Happy New Year!
- Russell 2000 +19.5% YTD
- Dow Jones Industrial Average +13.4% YTD
- S&P 500 +9.5% YTD
- Nasdaq Composite +7.5% YTD
Old-Line Companies Like Wal-Mart and GM Acquire Taste for Tech Startups
Silicon Valley upstarts are courted by retail, manufacturing companies seeking new growth
In late 2015, a commuter-shuttle startup caught the attention of Ford Motor Co.executive John Casesa, who runs global strategy for the auto maker. The startup, called Chariot, was growing fast and had an interesting crowdsourced reservation model, a staffer told him, suggesting a meeting.
One year and a $65 million deal later, the San Francisco van service is owned by the Detroit giant—part of an acquisition-fueled push into new areas as an uncertain and perhaps driverless future looms.
“We are in an era in our industry where M&A will be a frequently used instrument,” Mr. Casesa said.
For much of the past half-century, U.S. corporations in industries from manufacturing to retail generally eschewed Silicon Valley startups, instead choosing to build their own new products or buy established companies.
But a combination of factors—fear of seeing business disrupted, struggles to find new growth, changes that require new skills—are leading more of these companies to hunt for tech deals.
In recent months, a burst of old-line companies have swallowed tech upstarts, including Wal-Mart Stores Inc.’s $3.3 billion purchase of web-discount retailer Jet.com Inc., General Motors Co.’s more than $1 billion acquisition of self-driving tech company Cruise Automation and Unilever PLC’s $1 billion purchase of online razor seller Dollar Shave Club.
Nontech companies spent nearly $10 billion buying venture-backed U.S. startups this year, nearly double the amount last year and the highest total in at least five years, according to PitchBook.
Venture-capital investors and analysts expect a flurry of deals in 2017, particularly given that funding is harder to come by in the private and public markets.
Good software is “becoming the oxygen” for established companies, said Barry Jaruzelski, a principal at PricewaterhouseCoopers LLP who focuses on research and development and technology. “People are saying, ‘I need to acquire.’ ”
The result is that Silicon Valley conferences, networking events and office buildings are gradually being infiltrated by the old guard of retail, manufacturing, insurance and other traditional sectors.
ENLARGE
New venture-capital arms of large corporations seem to sprout up every few months, enabling their executives to mingle and hunt for partnerships and acquisitions. Entrants this year include Campbell Soup Co., Kellogg Co., JetBlue Airways Corp. and Airbus Group SE, the last two located in Silicon Valley.
Rich Wong, a partner at Accel Partners, an investor in Jet.com, said that until recently potential buyers for startups were generally confined to giants in the tech space, like Oracle Corp. and Microsoft Corp.—so much so that traditional companies in a startup’s sector didn’t come up as candidates.
Accel Partners recently counseled the founders of its invested startups to become more familiar with these older companies, an apparent gesture to the disdain startup founders often express about their corporate counterparts.
But these generally cautious corporate buyers face a dilemma: Startups typically carry high valuations that are largely a product of excitement around their growth potential. That makes them extremely expensive based on traditional metrics like revenue—and therefore inherently risky bets that can be tough for shareholders to stomach.
Wal-Mart has a market capitalization about 65 times that of what it paid for Jet.com, and it has roughly $480 billion in revenue compared with what it said was $1 billion in annualized revenue for Jet.com.
But Wal-Mart is facing ever-more competition from Amazon.com and other retailers, and executives at the company have said Jet.com will allow them to expand their e-commerce at a much faster rate.
For these older companies buying startups, “generally speaking, you are overpaying for assets right now,” said Jason Gere, a consumer-products analyst at KeyBanc Capital Markets. The deals often are a bet on the future as they try to connect with a younger generation, he said. “They’re hoping that what they’re doing is creating another avenue for growth.”
Another option is to write smaller checks, making earlier bets on young companies like Ford did with Chariot in September.
Scotts Miracle-Gro Co., the 148-year-old lawn-products company based outside Columbus, Ohio, wanted more tech-focused products and gadgets to help with lawn care, but quickly realized it would have to look outside its ranks for help, said Peter Supron, the company’s chief of staff.
“To the best of our knowledge, we don’t have an electrical engineer doing electrical engineering in the company,” he said.
After charting out the lawn-care startup landscape and many flights to Southern California—where many are located—Scotts bought two startups this month. One, called Blossom, helps make a digitally connected sprinkler system, and the other, PlantLink, makes sensors that tell gardeners when to water. Both are small acquisitions—under $10 million, Mr. Supron said—but they saved Scotts the headache of building products on its own.
“These startups can get there faster and cheaper than us,” he said.
Nestlé Turns to New CEO to Boost Health Push
Health-care veteran Ulf Mark Schneider takes reins as company works to boost its medical-foods business
After decades of trying to push into healthier foods, Nestlé SA is elevating a new chief executive—plucked straight from the health-care industry—to kick its effort into higher gear.
Ulf Mark Schneider, 51 years old, takes the reins at Nestlé on Jan. 1. He spent the past 13 years heading German health-care giant Fresenius SE, which runs hospitals, makes medical equipment and supplies drugs and nutritional products.
Nestlé, the world’s largest packaged-food company by revenue, is tapping that experience as it works to reinvigorate its drive to diversify away from the slower-growing food and beverage products—like Stouffer’s frozen TV dinners, KitKat chocolate bars and Nescafé instant coffee—that have long been its mainstay.
PepsiCo Inc., General Mills Inc., Kraft Heinz Co. and others have pumped money into creating healthier products, or reformulating existing ones to make them less bad for you, with mixed results. So has Nestlé, but the company has simultaneously taken a more radical path: For years, it has also been investing in a bevy of health-care firms in an effort to profit from the intersection of food and pharmaceuticals.
ENLARGE
Nestlé, which declined to comment for this article, also declined to make Mr. Schneider available to comment.
In September, Nestlé agreed to buy a British maker of a device to treat dysphagia, a swallowing disorder. Earlier in the year, it teamed up with a U.S. biotech to develop products aimed at restoring bacterial balance in the digestive system. It is also expanding aggressively into “medical foods,” intended to help prevent, treat or manage conditions like metabolism issues, cancer and obesity.
The effort has stretched back decades—Nestlé made its first health-care-nutrition investment in 1986—but it has gained more prominence in recent years. In 2010, Nestlé promised to “be a pioneer in the new industry that we are helping to shape in the space between a fast-moving consumer-goods company and a pharma company.” It created a separate health-science division the next year and since has made a series of acquisitions aimed at beefing it up. But so far, these haven’t delivered significant sales increases.
Last year, Nestlé health-science revenue was about 2 billion Swiss francs ($1.95 billion), or just 2.25% of overall revenue. The unit absorbed Nestlé’s prior health-care-nutrition business, which had sales of 1.6 billion francs in 2009, but is distinct from the much-larger general nutrition business.
ENLARGE
Despite an array of bets in fields like oncology and depression, the health-science unit has no blockbuster products. Its biggest revenue generator is Boost, a flavored protein drink, rather than any of its disease-focused products, according to a person familiar with the matter.
Critics have said Nestlé doesn’t disclose enough about the business and its trajectory. “This is something of a black box to us,” said RBC Capital Markets analyst James Edwardes Jones.
Shares of Nestlé have declined 1.7% so far this year.
Nestlé’s elevation of a health-care veteran, in Mr. Schneider, could help. He will take direct control of Nestlé’s health-sciences and skin-health units.
His financial record at Fresenius—before becoming CEO, he was CFO of its medical-care business—also could help Nestlé win over investors long accustomed to poor communication by management and thin margins.
Nestlé recently warned it would miss its own sales-growth target for the fourth straight year.
The company’s earnings-before-interest-and-tax margin is forecast to rise by just 0.57 percentage points between fiscal 2016 and 2018, compared with estimates of 4.58% for Kraft Heinz, 2.43% for Mondelez International Inc. and 1.56% for Kellogg Co., according to Jefferies LLC.
Investors hope this will change under Mr. Schneider who at Fresenius was known for his deal making and cost-cutting. Fresenius shares rose 1,246% during his CEO tenure. He is credited with boosting revenue through geographic expansion and a number of big acquisitions. Mr. Schneider “really knows the details and can communicate and explain it all in an easy-to-understand way,” said Marcus Luttgen, a portfolio manager at Alecta Pension Insurance Mutual, which holds shares in Fresenius and Nestlé.
Mr. Schneider has been working at the company since September learning the ropes. He is the youngest pick for the top job in 50 years and the first outsider CEO since 1922.
Mr. Schneider has already been suggesting new cost-savings initiatives, according to a person familiar with the plans, and pushing to accelerate existing cost-cutting measures—like centralizing companywide purchasing.
But Mr. Schneider lacks experience dealing with food and beverages, still Nestlé’s biggest businesses. He will be stepping up to manage a company significantly bigger than his old firm, with almost twice as many markets. Nestlé has 335,000 employees and sells products in 189 countries, compared with Fresenius’s 220,000 employees and operations in 100 countries.
“Nestlé has some material structural growth problems on things like U.S. prepared meals, ice cream, coffee and confectionery that have manifested themselves in its consistent guidance misses,” said Jefferies analyst Martin Deboo. Mr. Schneider, he said, will jump-start growth only by “moving the needle on brands like Nescafé and Maggi, not by repositioning Nestlé as a health company.”
Economists expect euro to fall to dollar parity in 2017
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Respondents in FT poll confident on eurozone but fear for Trump policies
The euro is on course to hit parity with the dollar for the first time in more than 14 years, helping the eurozone maintain its recovery by making exports more competitive, according to a Financial Times poll of economists.
More than two-thirds of the 28 experts polled said the dollar would attain the same value as the euro during the course of the year, buoyed by higher US interest rates, in accordance with president-elect Donald Trump’s plans to shift from monetary to fiscal stimulus.
The economists expressed relative confidence that after a year of upsets — including Mr Trump’s election and Britain’s vote to leave the EU — the eurozone would avoid major shocks.
But they also worried about Mr Trump’s policies once in office and what they saw as low-probability, high-risk, possibilities, such as a victory for the far-right Marine Le Pen in France’s presidential elections next year.
The single currency traded at $1.05 on Thursday evening — far below its 2008 peak of $1.5979. It has not fallen to $1 or below since December 2002, the year euro notes and coins were introduced.
While some EU countries, such as Italy, have cheered on the euro’s fall in value, precisely because of its impact on exports, the currency’s recent weakness and the low interest rate policy that underpins it, is much more controversial in Germany, the eurozone’s economic powerhouse.
Throughout 2016, the single currency has lost 4 per cent against the dollar, with many market participants expecting further weakness as US interest rates head upwards.
Most economists polled said the US central bank would raise rates at least twice next year after a 25 basis point increase this month.
“Higher rates in the US will raise the attractiveness of European exports and help the ECB’s goal of achieving higher inflation,” said Danae Kyriakopoulou, head of research at Omfif, a forum for central bankers. “But they risk causing problems to emerging markets with vulnerable external balances.”
By contrast with Mr Trump’s plans for a big infrastructure spending plan to boost the economy, the eurozone is likely to still rely on the European Central Bank, which the economists believed would keep to existing plans to roll out its landmark quantitative easing package.
More than three-quarters of those polled said the ECB would stick to its plan to buy €780bn in mostly government bonds to lift growth and inflation. The central bank is now buying €80bn worth of bonds a month, but, in accordance with a decision this month, will trim that figure to €60bn from March.
“The ECB is likely to play it safe, but the risk of a policy mistake has increased slightly following the December 2016 decision to scale down the pace of QE,” said Frederik Ducrozet, economist at Pictet Wealth Management.
On average, economists expected eurozone growth of 1.47 per cent and inflation of 1.26 per cent next year. Twenty-six of 28 respondents said the recovery would outlast 2017.
“The weak euro, expansionary monetary policy and the absence of fiscal consolidation will be supportive [of the eurozone’s recovery],” said Peter Bofinger, a professor at the University of Würzburg.
However, those polled acknowledged threats from the uncertain political climate and the problems of Italian banks.
“Italy is today the most fragile economy in the eurozone with low potential growth, one of the highest public debt levels, a high stock of non-performing loans and a weak banking sector,” said Laurence Boone, chief economist at Axa Group. “As well as an institutional framework which makes reforms difficult to get through.”
Highlighting another possible disruptive factor, almost 43 per cent of those polled said they expected a hard Brexit — a clean break between the UK and the EU — with just 14 per cent expecting a soft Brexit.
While most did not expect to see a win for Ms Le Pen in next year’s French election, many said if she did prevail it would weigh on the economy by fuelling the climate of uncertainty. Some said it would trigger an existential crisis for the euro.
“By raising the possibility of ‘Frexit’, Le Pen will naturally lead to an intensification of political uncertainty not just in France but across the region as a whole, and at the minimum dampen euro area investment and consumer spending in the short term,” said Chris Williamson, chief business economist at IHS Markit.
Some expressed concern over whether Mr Trump would follow through on his incendiary campaign rhetoric with policies to match. “[The impact of a Trump presidency] is ambiguous,” said John Llewellyn, a partner at Llewellyn Consulting. “The dollar’s strength would be positive for the eurozone’s economy. But protectionism, global uncertainty and financial volatility would not be.”
A few European telecom/communication network names are trading higher: MBT +2.2%, ERIC +2.1%, VOD +0.7%
Select financial related names showing strength: DB +1.7%, SAN +1.2%, HSBC +0.9%, RBS +0.7%, PUK +0.5%, UBS+0.3%, CS +0.3%, ING +0.2%, BAC +0.6%
Select large pharma names are trading higher: MYL +2% (launched generic version of Janssen's Concerta tablets), SNY +1.4%, SHPG +1.4%
Metals/mining names trading higher: GFI +2.2%, MT +1.9%, AUY +1.7%, RIO +1.5%, AG +0.9%, AU +0.7%
Other news:
- MRNS +25% (thinly traded and ticking higher after the FDA granted orphan designation for ganaxolone for the treatment of Fragile X Syndrome)
- CO +16.1% (ticking higher; Golden Meditech Holdings enters into a sale and purchase agreement with Nanjing Yingpeng Huikang Medical Industry Investment Partnership regarding the disposal of their entire equity stake in the co which represents 65.4% equity interest in CCBC on a fully diluted basis, for total cash consideration of RMB 5.764 bln)
- ANY +11.8% (continued strength),
- KOOL +4% (following 35%+ move higher in Thursday)
- ALV +2.4% (ahead of CES conference -- plans to reveal 'Learning Intelligent Vehicle')
- IHG +2.2%, LUX +1.5%, SNN +0.9% (still checking)
- NVDA +1.6% and AMD +1.5% (after recouping Thursday's early losses and closing near highs)
- ICON +1.3% (Sharper Image brand to ThreeSixty Group for $100 mln in cash),
- MBLY +1.2% (continued strength; also Mobileye N.V. and Lucid MOtors announce collaboration to enable autonomous driving capability on Lucid vehicles),
- X +1.1% (announces third-party iron ore pellet sales agreements)
Analyst comments:
- CEMP +5.8% (rebounding -- was upgraded to Equal-Weight from Underweight at Morgan Stanley)
- TSLA +0.6% (named Top 2017 Pick at at Robert W. Baird)
- YNDX +0.2% (ticking higher; initiated with a Outperform and $26 at Credit Suisse)
M&A related:
- CAB -7.1% (Cabela's & Bass Pro receive request for second request from the Federal Trade Commission relating to their pending merger)
Other news:
- INNL -49.7% (received FDA Refusal to File letter for XARACOLL - its product candidate for postsurgical pain treatment; downgraded to Neutral from Buy at Janney; downgraded to Mkt Perform at FBR & Co; downgraded to Mkt Perform from Mkt Outperform at JMP Securities),
- GEVO -8.5% (announces 1-for-20 reverse stock split),
- DKS -0.2% (light volume - CAB sympathy)