We estimate the combined entity is trading on >30% discount to fair value, given uncertainty over the transaction. Our deep dive analysis of rulings on recent deals suggests hurdles are not insurmountable and highlights three areas that could ease concerns.
* Current valuations suggest >30% discount to fair value for LSE-DB1.
Given political and regulatory uncertainties, plus the likely EU move to a phase 2 investigation, the shares are pricing in substantial risk to the proposed merger. Even on conservative assumptions (no revenue growth, no change in organisational or capital structure and management cost save targets only), the combined entity is trading on an implied ~15x year 1 (FY17) earnings, vs. larger and less diversified global peers on ~20x. We are EW on both names
given the binary nature and lack of visibility on approval, but the risk-reward of the combined entity is potentially attractive.
* Analysis of recent deals suggests regulatory hurdles could be surmountable.
Leaving aside political risks, an assessment by revenue line item highlights listed derivatives trading and post trade clearing (OTC & listed) plus CSD services as areas where competition could be perceived as restricted
by the merger. We analyse UK and EU documents related to recent transactions (DB1-NYSE, LSE-LCH and ICE-NYSE) and see three areas that could ease regulatory concerns on the deal: (1) the EU commission takes into account upcoming regulation and its potential impact, which on balance is likely to drive more competition; (2) open access provisions could alleviate what the EU commission previously highlighted as barriers to entry in derivatives and; (3) the risks around monopoly behaviour in OTC clearing could be overstated, with the OFT suggesting LCH would be unable to implement discriminatory price rises. Scope for asset disposables could also
address regulatory concerns.
* We resume coverage on LSE and DB1 at Equal-weight.
The proposed merger is likely to be the primary driver of both share prices in the next 6-12 months, and visibility is limited. Looking at the stocks individually, we see potential overhangs if the deal does not go ahead pending clarity on management strategy, particularly at LSE.
* On fundamentals, LSE looks relatively better placed vs. peers
given (i) structural growth (e.g. post trade and information services); (ii) our view that it can over-deliver on cost saves: (iii) M&A and balance sheet optionality and; (iv) better relative positioning for regulatory change. Our FY16-18 earnings are slightly ahead of consensus. For DB1, the longer-term fundamentals are more challenged, we think, despite the current cyclical support. Our estimates are slightly below consensus, which already bake in the upper end of company targets. Our top picks are Tullett Prebon and Euronext, where we see scope for positive earnings revisions from management action to drive shareholder value.
Dow-0.13%% S&P-0.02% Nasdaq+0.14% Russell-0.12%
US Market closed near the flat line. Materials(-1.1%), financial (-0.6%) and industrial (-0.2%) sectors underperformed. countercyclical utilities (+1.1%) led telecom services (+0.5%) and consumer staples (+0.3%) outperformed. WTI crude ended its day lower by 0.2% ($49.44/bbl) after briefly topping the $50.00/bbl price level. HP+6.9% on numbers. BABA bounced back +3.7% after yest. Volume were below average @ 772mil shares. US After Hours VEEV +9%, ULTA +8%, SPLK -5%, GME -8%, PANW -10% following earnings/guidance, TTNP+6.4% on FDA approval. Asian Markerts are mixed on Friday, with most indices off their opening highs. Macro has been headlined by (more) reports Japan Prime Minister Abe will delay next year’s increase in the consumption tax by two years. Chief Cabinet Secretary Suga responded by noting that an appropriate decision will be made an appropriate time. Markets have shown muted reaction to the latest developments. Also out earlier, Japan CPI data showed a second straight month of deflation. Greater Chinese markets are little changed in lackluster trade. There is some focus on a PBoC analysis, which appeared to signal the central bank leaning to a more cautious policy stance. Other discussions have highlighted Chinese pushback over the latest US measures against its steel exports and the Ministry of Finance said there was scope for the government to increase borrowing. Data also showed a marked slowdown in Chinese industrial profits.
Nikkei +0.30% Hang Seng +0.20% CSI -0.05% Shanghai -0.01%
Eur$ 1.1190 CNH 6.5646 CNY 6.5585 JPY 109.77 GBP 1.4670 CHF 0.9897 RUB$ 65.8880 WTI $49.07 (-0.83%)
S&P+0.04% EuroStoxx+0.06% Dax +0.11% SMI +0.33%
Macro :
- Gundlach Says Yellen Speech to Be Dovish as Treasury Bid Soars
- Whether Trump or Clinton, Anxiety Creeps Into U.S. Stock Outlook
Keep an eye on :
- ANIM IM : Creval to Sell Up to 2% of Anima Via Accelerated Bookbuilding
- AREVA FP : Areva Says ‘Door Remains Open’ to Negotiate W/ TVO on ERP: AFP
- AV/ LN : Aviva CEO Says Brexit Would Hurt Stocks, Pound, Pensions
- BPE IM : Pop. Emilia, Atlante Fund May Bid for Veneto Banca: Messaggero
- CGM FP : Cegedim 1Q Revenue EU106.2m Up 4.8% Y/y; Sees Stable ’16 Ebitda
- COFB BB : Cofinimmo Buys Brussels Office for EU31m, Sees Up to 7.5% Yield
- COOR SS : Cinven Aims to Sell 12.6% Coor Stake in Accelerated Bookbuild
- DL NA : Delta Lloyd on Track to Net Cap. Generation of Up to EU250m/Year
- EDF FP : EDF French Workers’ Cmte Set to Vote Against Hinkley Plant: FT
- EDF FP : EdF Wants 17% Stake in Greece’s Public Power, Kathimerini Says
- ELIOR FP : Elior Group Results H1 2015-2016: a Good Start to the Fiscal Year and Objectives for the Full Twelve Months Confirmed
- ELIOR FP : Elior to Buy U.S. Food Service Provider Preferred Meals
- FON FP : Foncia Gets 4 Bids; Blackstone, PSP Among Bidders, Echos Says
- GAS SM : Gas Natural comments on receipt of notice from a group led by the Co's former Chairman and CEO of its intention to nominate six candidates to Board
- ICAD FP : Icade Starts Exclusive Talks to Sell Service Companies
- KCR1V FH : Zoomlion Drops Terex Bid After Failing to Agree to Terms
- LPE FP : Laurent-Perrier FY Net EU25.2m; Est. EU25.4m
- MDLZ US : Mondelez Call Buyer Positioned for Upside After 2Q Earnings
- PHIA NA : Philips Sets Lighting IPO Price at EU20-Share
- SIE GY : Long Siemens vs GE Relative Pair Trade Recommended by JPMorgan
- VALE US : Vale Said to Weigh Sale of Copper Stake, Fertilizer Business
- VRX US : Valeant Rejected Takeover Approach From Takeda, TPG: WSJ
- VOW3 GY : Volkswagen Considers Building Own Battery Factory: Handelsblatt
Asian Market Update: G7 communique notes rising downside risks, calls for restraint from FX war; Japan remains in deflation despite negative rates
***Economic Data***
- (CN) CHINA APR INDUSTRIAL PROFITS Y/Y: +4.2% V +11.1% PRIOR; YTD: 6.5% v 7.4% prior
- (JP) JAPAN MAY TOKYO CPI YOY: -0.5% (4th straight decline, 3-year low) V -0.5%E; CPI EX-FRESH FOOD YOY: -0.5% (5th straight decline, 3-year low) V -0.4%E
- (JP) JAPAN APR NATIONAL CPI Y/Y: -0.3% V -0.4%E; CPI EX FRESH FOOD (CORE) Y/Y: -0.3% (2nd straight decline) V -0.4%E
- (UK) MAY GFK CONSUMER CONFIDENCE: -1 V -4E (2nd straight decline)
***Index Snapshot (as of 04:00 GMT)***
- Nikkei225 +0.4%, S&P/ASX +0.6%, Kospi +0.3%, Shanghai Composite -0.3%, Hang Seng -0.3%, Jun S&P500 flat at 2,090
***Commodities/Fixed Income***
- June gold -0.3% at $1,216/oz, July crude oil -0.7% at $49.12/brl, Jul copper +0.4% at $2.11/lb
- (CN) PBOC SETS YUAN MID POINT AT 6.5490 V 6.5552 PRIOR; 2nd straight firmer setting
- (CN) PBOC to inject CNY95B in 7-day reverse repos; Injects net CNY70B this week v CNY50B injected in prior week
- (NZ) New Zealand sells NZ$150M in Apr 2033 bonds, avg yield 2.882%
- (JP) BOJ offers to buy ¥60B in inflation-linked JGBs, ¥240B in JGBs with 10-25 yr maturity, ¥160B in JGBs with maturity over 25-yr, and ¥2.0T in T-bills
- (AU) Australia MoF (AOFM) sells A$1.0B in 2.75% 2019 Bonds; avg yield: 1.62%; bid-to-cover: 3.01x
***Market Focal Points/FX***
- Asian equity markets are mixed heading into the weekend, with some added cautiousness observed ahead of remarks from Fed Chair Yellen in US Friday session. Traders are increasingly anticipating dovish overtones to overshadow some rather hawkish remarks from her colleagues in recent days, with Fed Funds futures contract probability of a June rate hike pulling back to mid-20s from mid-30s pct. Shanghai Composite is underperforming following disappointing industrial profits data, while Nikkei is on the rise thanks to another soft Japan inflation dataset renewing speculation of a BOJ move. In FX, USD/JPY rose over 40pips from the lows to test 110 level, AUD/USD was a in 20pip range above 0.7315, and NZD/USD fell some 40pips below 0.6730 early on and then traded in that range for the duration of the session.
- Negative interest rates have supported Japan economy since the start of the year, and yet Japan inflation keeps trending in the wrong direction. April national core CPI fell for 2nd straight day and May Tokyo slid deeper into the red. Another soft patch in the wake of Kumamoto earthquake is widely anticipated to produce a contraction in the economy in Q2, as local press continues to speculate that Japan govt will have to postpone the 2nd round of sales tax increase. Today's report suggested the delay could be as long as 2 years, and the formal announcement could come in days. Govt spokesperson however has yet again denied the rumor of a change in plans for sales tax hikes. Late in the day, there was a report that PM Abe will meet with Fin Min Aso - proponent of staying on schedule with tax hike - to explain the decision to delay.
- Communique from the G7 meeting in Tokyo brushed in broad strokes, noting downside risks to global economy. G7 vowed to stand ready with a coordinated response to economic conditions, but at the same time conceded that policy will be custom made according to each nation's conditions. G7 leaders spoke out against disorderly FX moves, though also called for refrain from competitive devaluation. There was little mention of the US-Japan tensions at the Fin Min meetings last week where the two sides disagreed over what is a disorderly move in the currency market. Brexit and excess steel capacity were also mentioned among risks facing the top economic powers.
- Early-session comments from New Zealand Fin Min English produced a ripple in the currency market when he said that he talked with RBNZ about an MOU on macro-prudential tools. Recall the last RBNZ financial stability report did not unveil any new policies to curb housing inflation, which would have allowed the central bank move leeway to cut rates. NZD rallied on that release and today's mention produced an opposite downside NZD response. English also said the govt can consider tax cuts and debt reduction in its policy options, as the finance ministry explained some of the assumptions of yesterday's annual budget.
***Equities***
US equities / ADRs:
- ULTA: Reports Q1 $1.45 v $1.29e, R$1.07B v $1.03Be; +8.3% afterhours
- VRX: Said to receive a bid from Takeda and TPG; Offer was rejected earlier this year before the company hired a new CEO - financial press; +6.0% afterhours
- DECK: Reports Q4 $0.11 adj v $0.06e, R$378.6M v $363Me; -2.5% afterhours
- WDC: Cuts Q4 $0.65-0.70 v $0.78e, raises Rev $3.35-3.45B v $3.00Be (prior $1.00-1.10, R$2.5-2.7B); reflects ownership of SanDisk; -2.6% afterhours
- SPLK: Reports Q1 -$0.02 v -$0.02e, R$186.0M v $175Me; -6.8% afterhours
- GME: Reports Q1 $0.66 v $0.61e, R$1.97B v $1.95Be; Guides Q2 $0.23-0.30 v $0.34e, SSS -7% to 4%; -8.3% afterhours
- PANW: Reports Q3 $0.42 v $0.42e, R$345.8M v $339Me; -9.9% afterhours
- YHOO: Verizon said to work with BofA on a bid for Yahoo assets - financial press
Notable movers:
- Toshiba 6502.JP: JPMorgan Chase and Co Raised 6502.JP to Overweight from Neutral, price target: $330-update; +10.2%
- ASE +10%, SPIL +6.3; ASE agrees to merge with SPIL through new holding company
- 2353.TW: Yuanta Securities Raised 2353.TW to Buy from Hold; +6.8%
- SYR.AU: Exec: production to ramp up in 2017 - AGM comments; +4.5%
- 18880.KR: Strength attributed to reports of becoming a supplier for Tesla's Model 3 - financial press; +3.5%
- Lenovo 992.HK: Reports Q4 Net profit $180M v $185Me, Rev $9.13B v $11.3B y/y; -3.2%
- 7312.JP: KKR may offer support to Takata; proposing to take ~60% stake; -6.5%
- 322.HK: Reports Q1 Net $58M v $107M y/y, R$2.10B v $2.32B y/y; -9.7%
Activist William Ackman, Valeant Investor, Tries Life as an Inside Man
After firing Valeant’s CEO, the investor has been defending the embattled drug company from outside critics
Valeant Pharmaceuticals International Inc. Chief Executive Michael Pearson was wrestling with a lot of problems in mid-March, but activist investor William Ackman wasn’t one of them.
The two men had remained allies even after the drug company’s slumping stock had dropped 51% on a single day, March 15. Mr. Ackman, a big Valeant investor, demanded to talk with the company’s directors. He insisted bankruptcy was a possibility and sought a board seat. He also told the board Mr. Pearson was the right person to turn around the company.
Within three days, Mr. Ackman had changed his mind, and the board got behind him. On March 20, with the board’s blessing, he phoned Mr. Pearson and fired him. The next morning, Mr. Ackman joined the board.
As an activist shareholder, Mr. Ackman makes his living tilting his spear at companies to agitate for change. After firing Mr. Pearson and pushing his way onto Valeant’s board, he now finds himself on the other side, defending a company under attack by dubious investors and others.
As recently as last August, Valeant ranked as the most valuable holding of his hedge fund, Pershing Square Capital Management LP. His stake was worth about $5 billion. Mounting questions about its drug pricing, growth strategies, debt and accounting drove the stock down 90%, leaving Mr. Ackman’s reputation as a shrewd investor as much on the line as the company’s future.
In his first few months as a company insider, Mr. Ackman secured backing from J.P. Morgan Chase & Co. Chief Executive James Dimon and other banks to avert defaults on Valeant’s bank debts. He wooed a new chief executive officer, Joseph Papa, wresting him from rival Perrigo Co. And he and his fellow board members spurned a takeover approach for the whole company from Japanese drug maker Takeda Pharmaceutica l Co. and private-equity firm TPG.
Early investor feedback was encouraging. Shares rose 7% on March 21, after Valeant announced Mr. Pearson was leaving and Mr. Ackman was joining the board, then 15% over the next two days. The stock rose another 8% after The Wall Street Journal reported the pending hiring of Mr. Papa. Mr. Ackman seemed to be putting a floor on the stock.
Since then, the outlook has grown cloudier, despite Mr. Ackman’s broad pronouncements about Valeant on Capitol Hill, on television and within the boardroom. Valeant shares now trade at about $27, around the same price as when Mr. Ackman joined the board.
This account of Mr. Ackman’s attempt to turn Valeant around is based on interviews with people with direct knowledge of the events as well as emails and other documents from a Senate investigation into Valeant’s drug pricing.
Former Valeant CEO Michael Pearson, shown at a Senate hearing in April, found out he was out of a job in phone call from William Ackman.
Former Valeant CEO Michael Pearson, shown at a Senate hearing in April, found out he was out of a job in phone call from William Ackman.PHOTO: JONATHAN ERNST/REUTERS
Mr. Ackman’s interest in Valeant began in early 2014 when a business-school friend introduced him to Mr. Pearson at a drug-industry conference. The company, based in Laval, Quebec, had won over investors with its creed that big drug companies spend too much on research and that the best way to grow was through mergers.
Mr. Ackman expressed admiration for Mr. Pearson’s relentless focus on boosting shareholder returns. The two men shared an appetite for deals. Mr. Ackman publicly lauded Mr. Pearson’s stock-heavy pay package as a potent incentive for growth and stock-price gains.
The two first worked together on an unusual joint bid to acquire Allergan Inc., the maker of Botox, with Mr. Ackman’s Pershing Square buying a substantial stake in Allergan and Valeant putting in a small portion. In the end, Allergan sold itself to Actavis PLC, which took the name Allergan PLC. Pershing Square and Valeant pocketed $2.6 billion on the Allergan stake.
Early last year, Pershing Square bought a stake in Valeant. Though Mr. Ackman typically picks companies he thinks need a shake-up, he selected Valeant as an admirer, not an agitator.
In February of last year, Valeant dramatically increased the price of two cardiac-care drugs. Two months later, it raised the prices of another pair of drugs used to treat a disease causing a copper buildup in the body, by as much as 5,700%. Hospital and doctor outrage over the cardiac-care increases triggered a political backlash that led last summer to Senate and other investigations of Valeant’s pricing practices.
A bigger hit to the stock came in late October when a short seller alleged that Valeant had secretly been using a mail-order pharmacy, Philidor Rx Services LLC, to inflate Valeant’s revenues. The stock fell 19% in a day, and Valeant said it would conduct an investigation. Philidor said it behaved properly.
In public, Mr. Ackman remained Valeant’s cheerleader. As the stock dropped, Pershing Square bought another two million shares. Mr. Ackman appeared in photographs at the post where Valeant is traded on the New York Stock Exchange.
Privately, he harbored doubts. In an Oct. 27 email to Mr. Pearson and other company officials, Mr. Ackman urged Mr. Pearson to hold a conference call to answer questions from investors and the media. “The torpedoes are in the water and the sharks are circling,” he wrote. “They will kill the company.”
Mr. Pearson was admitted to the hospital with severe pneumonia in the final days of last year, and he didn’t return to work until late February. In between, the company disclosed it would likely revise its financial statements because of $58 million in revenue related to Philidor.
When Mr. Pearson returned, Mr. Ackman sent him an email thanking him for his efforts. He also requested a board seat for one of his most trusted advisers, Pershing Square Vice Chairman Stephen Fraidin, which he got.
Negative guidance during a Valeant investor call on the morning of March 15, a Tuesday, sent the stock into a slide that sliced the company’s market value in half. That night, at 10:55 p.m., Mr. Ackman sent an email to Mr. Pearson. “Which directors should I speak to” about joining the board, he asked.
Chairman Robert Ingram invited him to make his case on Thursday about joining the board. There, Mr. Ackman expressed confidence in Mr. Pearson. He also tried to shake the board into action, asserting that bankruptcy was no longer a remote risk.
He passed on a rumor that Valeant’s largest investor, investment firm Ruane, Cunniff & Goldfarb Inc., was selling its position. (That turned out not to be true, though the firm did sell some shares.) If that news came out on Monday morning, Mr. Ackman said, the stock would plunge to the single digits. The bonds would start trading at 60 cents on the dollar, and Valeant would need to negotiate with investor funds known to be tough. They’ll send us into bankruptcy, he warned.
The board agreed to make him a director, starting that Monday.
That weekend, a special board committee reviewing the mail-order pharmacy Philidor told the board and Mr. Ackman that the performance-based environment at the top of Valeant was a problem, and it offered more details about Philidor.
Separately, Pershing Square staffers who were camped out at Valeant’s office had concluded that some employees were growing disenchanted with Mr. Pearson’s leadership.
Mr. Ackman figured he had a narrow shot at saving the company. He changed his mind about leaving Mr. Pearson in charge.
Two Valeant directors from activist firm ValueAct Capital Management LP already had been recommending to the board that Mr. Pearson be replaced. That Sunday morning the board decided to do that, and asked Mr. Ackman to make the call.
Mr. Ackman phoned Mr. Pearson and broke the news. Mr. Pearson agreed to help with a transition.
The following morning, Valeant announced the leadership and board changes, including the addition of Mr. Ackman. It also said the internal review had found problems with the culture and the tone at the top, but that no further financial restatements were expected.
The news release described a “performance-based environment at the company,” where achieving targets “was a key performance expectation.” The culture, it said, may have contributed to the accounting problems. It said Valeant would file its annual report in time to avoid default. The stock rose.
Mr. Ackman talked up the company in an April 6 conference call with his own fund’s investors. “We expect a fairly rapid recovery in the stock price, on the basis of restoring confidence in the business,” he said. “There’s enormous upside.”
Mr. Pearson gave Valeant’s board two suggestions for the new CEO. Mr. Papa at Perrigo was one of them.
Mr. Ingram, the board chairman, got a call one day from Mr. Papa, who wanted to know whether some Valeant assets were available to buy. Mr. Ingram countered: Would Mr. Papa be interested in becoming CEO?
Mr. Ackman invited Mr. Papa to his Midtown Manhattan office on a Saturday morning for a three-hour chat. Mr. Ackman talked up what he called the historic nature of the turnaround task ahead. He told Mr. Papa, who is 60 years old, that he could spend a few more years toiling at Perrigo and then retire, but that Valeant offered a new challenge, one that could make him a fortune.
Another selling point: Mr. Papa lived near Valeant’s New Jersey offices, but he had been commuting for a decade to Perrigo’s offices in Michigan.
Late last month, two days after the board announced Mr. Papa’s hiring, Mr. Ackman testified at a Senate hearing about the company’s drug-pricing practices. He was grilled about how much he knew about the company’s price increases.
“I regret that we did not do more due diligence on pricing at Valeant, I mean, for sure,” Mr. Ackman said.
He told senators that the drugs whose prices had increased represented a small portion of Valeant’s business. Susan Collins, a Maine Republican, challenged the assertion, pointing to data that show the four drugs under discussion exceeded 20% of Valeant’s net income in January and February—a figure the company says is earnings before interest, taxes, depreciation and amortization.
Asked what policy changes he would recommend on drug pricing, Mr. Ackman responded: “I think we can make it easy by just giving a 30% blanket price reduction” on the cardiac-care drugs, a move that would expand on Valeant’s 30% rebate program for some buyers. He said he had just texted Valeant’s chairman asking for a phone call the next day to discuss the issue and his recommendation.
Mr. Ackman hadn’t previously floated that idea before the board. More than two weeks later, Valeant announced that it was expanding its rebate program but not as much as Mr. Ackman had suggested.
At the hearing, Mr. Ackman also told senators that “a lot of the board is going to turn over,” though decisions on directors weren’t yet final.
Two days later, Valeant announced that Mr. Papa and three others would join the board.
The board had wanted a doctor who could help with relationships in its core dermatology segment. Mr. Ackman suggested Amy Wechsler, a Valeant consultant, dermatologist and psychiatrist focused on the connection between skin and stress.
She has been an adviser to beauty-products giant Chanel, has appeared on the “Today” show and the “Dr. Oz Show,” and is author of the book: “The Mind-Beauty Connection: 9 Days to Less Stress, Gorgeous Skin, and a Whole New You.” Mr. Ackman has been a patient.
After Hours Summary: VEEV +9%, ULTA +8%, SPLK -5%, GME -8%, PANW -10% following earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: VEEV +8.5%, ULTA +8.3%
Companies trading higher in after hours in reaction to news: TTNP +6.4% (receives FDA approval for Probuphine for the maintenance treatment of opioid addiction), VNDA +5.5% (announces FDA approval of Co's sNDA for Fanapt), ETE +2.2% (files Affirmative Defenses and Counterclaim in the lawsuit brought by The Williams Companies (WMB) in the Delaware Court of Chancery)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: PANW -10%, GME -7.5%, SPLK -5.3%
Companies trading lower in after hours in reaction to news: UNXL -18.3% (commences a public offering of newly issued shares of common stock and warrants to purchase shares of common stock in an underwritten public offering), AVIR -9.4% (voluntarily decides to delay further enrollment in the Phase 2a trial of BTA585 for the treatment of RSV infections being conducted in the U.K.)
Closing Market Summary: Averages End Flat with Oil and Data in FocusThe stock market ended a quiet Thursday affair on a flat note as the S&P 500 (UNCH) bounced around a narrow seven-point range. Focal points for today's action included a modest downtick in oil, weakness in the dollar, and the underperformance of the heavyweight financial (-0.6%) and industrial (-0.2%) sectors. The Nasdaq Composite (+0.1%) finished ahead of the benchmark index (UNCH) and the Dow Jones Industrial Average (-0.1%).
The major averages began their day on a higher note, establishing a session high within the first 15 minutes of trade. However, equities moved lower in lockstep with oil as the energy component moved off its best level of the day. The broader market continued to see choppy action as the heavyweight financial sector (-0.6%) weighed.
Equities also saw pressure from positive readings of April Durable Goods Orders (+3.4%; consensus +0.6%) and weekly Initial Claims (268k; consensus 275k). The Durable Goods reading supports a view that there will be a pick-up in economic activity in the second quarter. This conforms to recent hawkish views expressed by members of the FOMC. Furthermore, the positive employment figure adds to the argument that labor data supports a hike.
The benchmark index ended its day flat with six sectors trading in the green. In front of the pack, countercyclical utilities (+1.1%) led telecom services (+0.5%) and consumer staples (+0.3%). On the flipside, materials (-1.1%), financials (-0.6%), and energy (-0.4%) underperformed. Additionally, WTI crude ended its day lower by 0.2% ($49.44/bbl) after briefly topping the $50.00/bbl price level.
Rate-sensitive utilities (+1.1%) and telecom services (+0.5%) rebounded as the Treasury complex experienced a healthy bid. The Treasury complex ended its day higher with the yield on the 10-yr note slipping four basis points to 1.83%. For the week, utilities and telecom services have gained a respective 0.9% and 1.0%, rounding out the weekly board.
In the technology space (+0.2%), HP (HPQ 13.04, +0.84) gained 6.9% after reporting a bottom-line beat and raising its full-year earning guidance above analysts' estimates. Alibaba (BABA 78.35, +2.76) jumped 3.7% as it rebounded from yesterday's news that the company is being investigated by the SEC for potential violations of securities law. Separately, the high-beta chipmakers outperformed, evidenced by the 0.3% gain in the PHLX Semiconductor Index.
Retail names ended on a mixed note as Costco (COST 149.71, +5.17), Dollar General (DG 88.01, +3.88), and Dollar Tree (DLTR 88.37, +10.01) each gained on positive quarterly reports. Conversely, Signet Jewelers (SIG 97.00, -11.37) tumbled 10.5% after the company missed same store sales figures.
The financial sector (-0.6%) fell prey to profit taking as money center banks and investment brokerages trimmed their recent gains. Citigroup (C 46.11, -0.83) fell 1.8%, but still shows an uptick of 2.7% on a weekly basis. This compares to a gain of 1.9% in the broader sector over that period.
The U.S. Dollar Index (95.16, -0.19) ended modestly lower as the euro and the yen finished with gains against the greenback. The euro/dollar pair finished higher by 0.3% (1.1191) while the dollar lost 0.4% against the yen (109.75).
Today's participation was below the recent average as fewer than 772 million shares changed hands on the NYSE floor.
Today's economic data included weekly initial claims, April Durable Goods Orders, and Pending Home Sales for April:
- Initial claims for the week ending May 21 were 268,000 (consensus 275,000), a decrease of 10,000 from the prior week.
- There were no special factors influencing initial claims. They held below 300,000 for the 64th consecutive week, which is the longest streak since 1973.
- The four-week moving average for initial claims increased by 2,750 to 278,500.
- Continuing claims for the week ending May 14 jumped by 10,000 to 2.163 million.
- The four-week moving average for continuing claims climbed by 8,500 to 2.151 million.
- Altogether the claims data remains in the Fed's favor when it comes to contemplating a rate hike at the June meeting.
- The Durable Goods Orders report for April was a real eye-opener. It indicated durable goods orders jumped 3.4% in April (consensus +0.6%).
- This followed an upwardly revised 1.9% increase in March (from +0.8%).
- Excluding transportation, orders were up 0.4% (consensus +0.5%) and were revised for March to show a 0.1% increase versus a previously reported 0.2% decline.
- In brief, the headline surprise from the report was certainly inspiring at first blush, yet there are still some bothersome trends below the surface that suggest the manufacturing sector isn't exactly operating in a high gear.
- The load in April was carried by transportation equipment, which saw an 8.9% jump in new orders led by a 64.9% increase in new orders for nondefense aircraft and parts.
- Capital goods orders, in turn, were up a robust 7.2% after a 7.5% increase in March.
- Machinery orders were a disappointment, declining 1.9% after declining 0.8% in March.
- The other disappointment was the drop in business spending, as reflected in the 0.8% decline in new orders for nondefense capital goods excluding aircraft.
- That followed on the heels of a 0.1% decline in March and a 2.1% decline in February.
- Shipments of nondefense capital goods excluding aircraft were up 0.3%, so that will be a positive input for Q2 GDP forecasts.
- Pending Home Sales for April climbed 5.1% while the consensus expected an uptick of 0.6%. Meanwhile, the March reading was revised to 1.6% from 1.4%.
Tomorrow's economic data will include the second estimate of Q1 GDP (consensus 0.9%) and the second estimate of the Q1 GDP Deflator (consensus 0.7%), which will both cross the wires at 8:30 ET. Capping off the week, the final reading of the May University of Michigan Sentiment Index (consensus 95.5) will cross the wires at 10:00 ET.
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