WSJ : Goldman Sachs Has Started Giving Away Its Most Valuable Software

Goldman Sachs Has Started Giving Away Its Most Valuable Software

The bank’s new gambit: deploy its technology to win more business from clients

From the kitchen table in his Upper West Side brownstone, Michael Dubno recently scratched out from memory the blueprint for the modern Goldman Sachs Group Inc.
The sketches, dashed out on a yellow legal pad, more or less match what Mr. Dubno drew on a white board 25 years ago, in a dusty corner office on the fifth floor of Goldman’s old downtown headquarters: a schematic for a software database that would help the investment bank make billions of dollars in well-timed trades, and sidestep billions more in losses.

Called Securities DataBase, or SecDB, the system remains Goldman’s prime tool for measuring risk and analyzing the prices of securities, and it calculates 23 billion prices across 2.8 million positions daily. It has played a crucial role in many of the seminal moments of the firm’s recent history, including its controversial trading just ahead of the financial crisis.

Goldman had guarded it closely, resisting offers from rivals such as Deutsche Bank AG to license the database. One former partner recalls huddling with Gary Cohn, one of Goldman’s top executives, a decade ago to ponder what a licensing deal would be worth. Mr. Cohn told his colleagues he wouldn’t do it for $1 billion. For $5 billion? Maybe, he said, according to the former partner.

“It was such a competitive advantage,” Mr. Cohn, who was promoted to president in 2006, said recently.

There is perhaps no better sign of the changes that have engulfed Wall Street than this: Goldman has recently started giving clients the tools that made it a trading powerhouse, for free.

The firm’s motives aren’t altruistic; rather, many of the edges that once made Goldman’s traders feared and admired have been blunted. New rules have limited banks’ trading risks, and made it costly to hold large inventories of stocks and bonds on their books. And electronic trading has squeezed margins, dimming the clamor of trading floors across Wall Street.


“Regulation has dulled that advantage,” said Peter Carr, a former Morgan Stanley executive who teaches at New York University.

Traders and executives tap into SecDB to inform how to price securities, and how the value of those assets may change with a twist on the dial on any one of thousands of potential variables. That information can be used to analyze potential trades—and then to monitor the risks posed by those positions.

What made it the envy of Wall Street, though, was its ability to scale up to include new classes of securities, new trading desks, even whole businesses. And the data it harnessed was all in one place. Megamergers left rivals with a hodgepodge of different systems and different factions of employees loyal to each of them. Goldman avoided big acquisitions, evading issues that would slow its ability to track risks.

Thus, Goldman’s new gambit: Deploy its technology to win more business from clients. Many of those tools are being offered in the form of web-based applications that customers can customize and operate on their own.

“It’s the content, tools and analytics we’ve been working on for decades, and we’re putting it in the hands of clients,” said R. Martin Chavez, Goldman’s chief information officer.

Some investors and clients harbor doubts that Goldman can pivot so sharply.

“I’m not sure their core competency is being a tech company,” said Jason Brady, chief executive of Thornburg Investment Management, which manages $55 billion and trades with Goldman. “So it’s a shift, and I’m not sure I want that to be their role.”

The trick for Goldman will be to win over clients like Jeffrey Young, who co-heads an investing unit within Ramius LLC, a New York money manager.

A Goldman saleswoman introduced Mr. Young to a Marquee app during a choppy period in the markets, when he needed regular updates on the bespoke derivatives he had bought from Goldman.

“They’re trying to be more proactive—instead of just saying ‘we need to satisfy what the client wants,’ they’re saying ‘let’s make sure they’re as happy as possible,’” he said. “They’re more open with a lot of their intellectual property.”

Goldman is seeking its niche in a crowded field. BlackRock Inc. offers its own risk-management system, called Aladdin, and Bloomberg LP’s terminals remain a ubiquitous presence on trading floors.

Mr. Chavez is an alumnus of J. Aron, the commodities trading arm where many of Goldman’s leaders, including Chairman and Chief Executive Lloyd Blankfein and his top deputy, Mr. Cohn, got their start.

Inside Goldman, J. Aron was a backwater. While the firm’s stock traders were doted on by waiters with trays of cocktail shrimp, J. Aron’s offices featured ragged furniture and spittoons.

SecDB’s run within Goldman began when Marc Spilker, a currency-options trader, sought a pricing database with the flexibility to add new derivatives. He turned to Armen Avanessians, a former Bell Labs engineer Mr. Blankfein had hired and the man one Goldman alum referred to, somewhat affectionately, as the “Darth Vader” of the strategists, or strats—a team of engineers J. Aron had begun to assemble to work on computer models.

The task fell to Mr. Dubno, a college dropout and former videogame developer who had come to Goldman to work for famed economist Fischer Black. Two other engineers, Glenn Gribble and Kevin Lundeen, soon followed. Mr. Avanessians hired Mr. Chavez in 1993 to extend SecDB to J. Aron’s commodities desk.

Even by J. Aron’s standards, Messrs. Dubno, Gribble and Lundeen stood out. They destroyed nearly all of their office’s ceiling tiles tossing a volleyball around the room, and blasted rock music. When their next-door neighbor complained, the firm fitted the office with soundproofing insulation, Mr. Dubno said.

The SecDB system received an early test in 1998, when hedge fund Long-Term Capital Management nearly collapsed. Goldman used the database to help analyze its exposure, an episode that helped raise SecDB’s profile within the firm, according to people familiar with the matter.

Over time, SecDB spread to other parts of J. Aron and, ultimately, the entire firm. As Mr. Blankfein rose up the ranks, he insisted that SecDB and the strategists join him.

By the time the housing market boomed, SecDB had reached Goldman’s firmwide risk and finance departments. “Thank goodness we did that when we did,” recalled Robert Berry, who heads Goldman’s market-risk team.

As the prices on securities tied to subprime mortgages began to decline in late 2006, Mr. Berry and other executives plotted out how the firm’s positions performed against its models. They could soon tell something wasn’t right.

Goldman made some profitable bets against the housing market and, in some instances, began reducing exposure to other counterparties, even as many of their peers and clients remained bullish (later, the firm’s moves were roundly criticized as evidence it put its own interests above its customers’).

Goldman marked down the value of its mortgage bonds, a step that led to a bitter fight over collateral with insurer American International Group Inc., Mr. Cohn said. The dispute helped trigger AIG’s massive bailout by the U.S. government.

Mr. Chavez left Goldman in the late 1990s, eventually founding a Silicon Valley startup he sold in 2004. While running that company, Mr. Chavez filed an application for a patent on a system some Goldman partners found similar to SecDB. They were incensed that Mr. Chavez had failed to credit Goldman, and brought it to Mr. Cohn’s attention, people familiar with the matter said.

Goldman sent Mr. Chavez “a nasty letter,” one person said. Mr. Cohn, though, declined to authorize a lawsuit. When Mr. Chavez sold his startup, Mr. Cohn persuaded him to rejoin Goldman.

Goldman elevated Mr. Chavez to CIO in 2013. The flagship in his strategy is Marquee, a series of applications that allows clients to tap into SecDB and other systems.

One app called Simon offers a platform for independent brokers to customize and buy structured notes. Another, Athena, allows Goldman’s corporate clients to execute their stock-buyback programs.

The firm’s engineers are also building a data warehouse that will store all of the information produced internally in one location, a so-called “data lake” that is Goldman’s answer to the “customer analytics” movements that have revolutionized industries ranging from advertising to retailing.

“Goldman still has a strategy, and the next wave of competitive challenges,” said Mr. Dubno, who left the firm in 2005. “And Marty has made a few moves on the chessboard.”

>>> US Early premarket gappers

Early premarket gappers
Gapping up: AAOI +20.5%, GVP +11.7%, XTLB +9.4%, PGNX +8.8%, CMG +5.8%, WDC +5.5%, MBUU +4.2%, HQY +4.1%, VRX +2.4%, MYL +2.1%, CS +1.6%,TWTR +1.4%, OAS +1.3%, RDS.A +1.1%, NOK +1%, COP +1%, SCWX +1%, TOT +0.7%

Gapping down: SIGM -12%, HDS -9.5%, SMLP -7.7%, CASY -7.4%, CTLT -7.2%, SFM -6.8%, PLAY -6.5%, HMY -3.9%, AMD -3.7%, OLLI -2.3%, BHP -2.3%, BBL-2.2%, MUX -2.2%, KR -2.1%, LYG -1.9%, RIO -1.8%, SHPG -1.6%, CPE -1.5%, RBS -1.5%, MT -1.4%, BCS -1.4%, SNN -1.3%, CLCD -0.9%, NAV -0.9%, CCL-0.8%, GOLD -0.8%, DB -0.8%, EXEL -0.7%, HSBC -0.7%

>>> What to look at today - 7th of September 2016

Dow +0.25% S&P +0.30% Nasdaq +0.50% Russell+0.12%
US Market Closed higher after weaker ISM and lower expectation of Fed Rate hike. The broader market settled near its best level of the day with seven sectors ending in the green. The defensively-oriented telecom services (+0.9%) and utilities (+1.1%) sectors followed energy (+1.5%) on the top of the board. Conversely, financials (-0.2%) and industrials (-0.3%) led the downside. WTI crude ended its pit session higher by 1.0% ($44.85/bbl; +$0.46). Volume were in line with average at 835mil shares. US After Hours AAOI +20% on raised guidance, CMG +7% on Pershing stake news... CASY -7%, PLAY -7% following earnings/guidance. Asian equity markets are mixed, with modest gains in Korea and Shanghai overshadowed by a larger decline in Nikkei225. Sankei report stated that the BOJ policy board has 3 camps going into the decision - those who support more asset purchases, those who favor deeper negative rates, and those who oppose any further easing - with Gov Kuroda on the side of negative rates. Separately, former BOJ official Momma forecast that the central bank will not expand policy stimulus in September given the steady economic fundamentals. Fed's Williams spoke in Reno, reiterating his support for a rate hike sooner and more gradually rather than later and potentially more rapidly. Williams warned that waiting too long could allow imbalances to grow, adding that economy is on track to achieve Fed's inflation and employment objectives.

Nikkei -0.57% Hang Seng -0.20% CSI +0.35% Shanghai +0.43%

Eur$ 1.1256 CNH 6.6746 CNY 6.6680 JPY 101.43 GBP 1.3414 CHF 0.9686 RUB$ 64.4682 WTI$ 45.11 (+0.62%)

S&P +0.05% EuroStoxx +0.39% Dax +0.31% SMI +0.17%

Macro :
- French Would Elect Macron Over Hollande as President, Poll Finds
- Market Upside Is Possible Amid Fed Uncertainty: Edgehill Letter

Keep an eye on :
- ARCM SS : Arcam CEO Says More Bids Could Come, Dagens Industri Reports
- ATL IM : Atlantia Says Autostrade July-Aug. Traffic in Italy Up 2.9%
- COFB BB : Cofinimmo Sells EU213.9m Convertibles, Buys Back EU166.5m Notes
- FCC SM : FCC Said to Further Push Plan to Open Set-Top Box Market: WSJ
- ITP FP : Interparfums 1H Net Falls 7% to EU13.0m on Tax Provision
- LHA GY : Lufthansa Won’t Touch Brussels Airlines Brand for 2 Years: VRT
- UG FP : PSA Looking to Set Up Factory in Asean Region, CEO Tavares Says
- SYNN VX : Syngenta Says Ramsay to Retire; Patrick Named CFO
- UCG IM : UniCredit Will Likely Raise Capital, Renzi Says: Les Echos
- UCG IM : UniCredit Seeks Non-Binding Pioneer Bids by Sept.20: Messaggero
- VIV FP : Spotify Said to Mull Limiting Free Music Streaming: FT
- VOLVB SS : Autoliv/Volvo JV Clear Positive for Autoliv, Berenberg Says
- VOW3 GY : Bosch Warned VW in 2008 About Illegal Software: NDR, WDR, SZ
- VOW3 GY : VW Will Stick to Diesel-Car Technology, CEO Says
- VOW3 GY : VW Said in Advanced Talks With Jianghuai on Electric Vehicles
- WDI GY : Wirecard Growth Momentum Accelerating, Bankhaus Lampe Says
- WPG LN : Group Placing Upsized to 350m Shares, Terms Show (Range 282p/285p)

>>> Europe : Brokers Upgrades & Downgrades - 7th of September 20

>>> Up
*ATLAS COPCO RAISED TO OVERWEIGHT VS EQUALWEIGHT: MORGAN STANLEY
*AVIVA RAISED TO BUY VS NEUTRAL AT UBS
*EDP RENOVAVEIS RAISED TO NEUTRAL VS SELL AT GOLDMAN
*ENEL RAISED TO BUY, ADDED TO CONVICTION LIST AT GOLDMAN
*IBERDOLA RAISED TO OVERWEIGHT AT MORGAN STANLEY
*NN GROUP RAISED TO BUY VS HOLD AT KEPLER CHEUVREUX
*STANDARD LIFE RAISED TO OUTPERFORM AT BERNSTEIN
*SSE RAISED TO MARKET PERFORM VS UNDERPERFORM AT BERNSTEIN
*SWEDISH MATCH RAISED TO OUTPERFORM VS NEUTRAL AT EXANE
*WEIR RAISED TO OVERWEIGHT VS EQUALWEIGHT AT MORGAN STANLEY

>>> Down
*ARCAM CUT TO HOLD AT NORDEA
*BARCLAYS CUT TO HOLD AT SANTANDER
*CENTRICA CUT TO SELL AT GOLDMAN
*EDF CUT TO SELL VS NEUTRAL AT GOLDMAN
*ENDESA CUT TO SELL VS NEUTRAL AT GOLDMAN
*ENGIE CUT TO NEUTRAL VS BUY AT GOLDMAN
*E.ON CUT TO NEUTRAL VS BUY AT GOLDMAN
*FERROVIAL CUT TO SECTOR PERFORM AT RBC CAPITAL
*MAXIM INTEGRATED CUT TO SECTOR PERFORM AT RBC CAPITAL
*NATIONAL GRID CUT TO MARKET PERFORM VS OUTPERFORM AT BERNSTEIN
*NESTE CUT TO SELL AT NORDEA
*RECKITT BENCKISER CUT TO NEUTRAL VS OUTPERFORM AT EXANE
*RICHEMONT CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
*ROLLS-ROYCE HOLDINGS CUT TO ’UNDERPERFORM’ AT EXANE BNP PARIBAS
*SWATCH CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
*SIEMENS CUT TO NEUTRAL VS BUY AT UBS
*SLM SOLUTIONS CUT TO HOLD VS BUY AT HSBC

>>> PT Change


>>> Initiation
*BARRICK GOLD RATED NEW SELL AT BERENBERG; PT $15.2
*COCA-COLA EUROPEAN PARTNERS RATED NEW BUY AT CITI, PT EU41
*FORTUM RATED NEW SELL AT GOLDMAN; PT EU12.5
*GOLDCORP RATED NEW HOLD AT BERENBERG; PT $16.5
*JUNGHEINRICH RATED NEW NEUTRAL AT CITI, PT EU31
*KINROSS GOLD RATED NEW HOLD AT BERENBERG; PT $4.6
*KION GROUP RATED NEW BUY AT CITI, PT EU64
*NESTLE RESUMED AT MARKET PERFORM AT BERNSTEIN; PT CHF80, WAS PREVIOUSLY RATED OUTPERFORM AT BERNSTEIN
*POLYMETAL INTERNATIONAL RATED NEW BUY AT BERENBERG; PT 1,200P
*RANDGOLD RESOURCES RATED NEW HOLD AT BERENBERG; PT 7,190P
*SSE RATED NEW NEUTRAL AT GOLDMAN; PT 1,603P

>>> Call
>> Stock
*ENERGIAS DE PORTUGAL EXITS CONVICTION SELL LIST AT GOLDMAN, *ENERGIAS DE PORTUGAL STILL RATED SELL AT GOLDMAN

>>> Asian Update

Asia Mid-Session Market Update: Nikkei, USD/JPY sink after soft US ISM Services and rumors of uncertainty at the BOJ


***Economic Data***
- (AU) AUSTRALIA Q2 GDP Q/Q: 0.5% (1-year low) V 0.6%E; Y/Y: 3.3% (2-year high) V 3.3%E
- (AU) AUSTRALIA AUG AIG PERFORMANCE OF CONSTRUCTION INDEX: 46.6 V 51.6 PRIOR (1st contraction in 3 months)
- (NZ) NEW ZEALAND Q2 MANUFACTURING ACTIVITY Q/Q: +2.2% V -2.0% PRIOR; VOLUME Q/Q: +2.8% V -1.2% PRIOR
- (JP) JAPAN AUG OFFICIAL RESERVE ASSETS: $1.26T v $1.26T PRIOR

***Index Snapshot (as of 03:30 GMT)***
- Nikkei225 -0.7%, S&P/ASX +0.2%, Kospi +0.3%, Shanghai Composite +0.4%, Hang Seng -0.1%, Sep S&P500 +0.1% at 2,185

***Commodities/Fixed Income***
- Dec gold +0.2% at $1,356/oz, Oct crude oil +0.7% at $45.12/brl, Dec copper +0.8% at $2.11/lb
- GLD: SPDR Gold Trust ETF daily holdings rise to 952.1 tonnes from 937.9; first rise since Aug 22nd
- SLV: iShares Silver Trust ETF daily holdings rise to 11,246 tonnes from 11,184 tonnes prior; multi-year high
- USD/CNY: (CN) PBOC SETS YUAN MID POINT AT 6.6555 V 6.6676 PRIOR; strongest Yuan setting since Aug 26th
- (CN) PBOC to inject CNY20B in 7-day reverse repos and CNY10B in 14-day reverse repos
- (JP) BOJ offers to buy ¥430B in 5-10yr JGBs, ¥200B in 10-25yr JGBs and ¥120B in JGBs with maturity over 25-yr
- JGB: Japan Finance Ministry (MoF) said to issue ¥400B more in 40-yr JGBs in FY16/17 than planned - Nikkei
- (AU) Australia MoF (AOFM) sells A$1.0B in 4.75% 2027 Bonds; avg yield 1.892%; bid-to-cover 1.59x

***Market Focal Points/FX***
- Asian equity markets are mixed, with modest gains in Korea and Shanghai overshadowed by a larger decline in Nikkei225. Friday's soft non-farm payrolls report had rattled the case for a September FOMC hike, but today's 6-year low print in US Services ISM may have delivered a decisive blow, with Fed funds futures now pricing in less than a 20% chance of a move this month. Probability of a hike before the end of the year is still seen around 50%. US rate expectations are particularly visible in the USD/JPY pair, which fell more than 100pips to ¥102 after ISM and has since extended its drop to a low of ¥101.20 in Asia. In other FX majors, AUD/USD saw its low around 0.7650 after a mixed Australia GDP report, while NZD/USD pushed out to a 15-month high of 0.7435 on USD weakness and another price increase in Fonterra dairy auction. Gold was up over 2% in US hours on broad USD weakness, helping related mining shares in Australia.

- Uncertainty pertaining to the upcoming Bank of Japan meeting and its planned review of policy parameters continued to play out in press speculation. Early in the session, a Sankei report stated that the BOJ policy board has 3 camps going into the decision - those who support more asset purchases, those who favor deeper negative rates, and those who oppose any further easing - with Gov Kuroda on the side of negative rates. Separately, former BOJ official Momma forecast that the central bank will not expand policy stimulus in September given the steady economic fundamentals.

- Notable economic data points were limited to Australia, where Q2 GDP hit a 1-year low on sequential basis but a 2-year high y/y. Final Consumption component edged up to +0.8% v +0.7% prior, income rose to +0.6% v +0.2% prior, and trade terms component spiked up to +2.3% v -1.9% prior. Treasurer Morrison reflected that household consumption growth mirrored that of global economy, while still warning the country has a problem with low earnings growth. Earlier, Aug Construction PMI fell into contraction for the first time in 3 months, while a local press report forecast property prices in top cities falling as much as 15-20% in the next 2 years.

- Fed's Williams spoke in Reno, reiterating his support for a rate hike sooner and more gradually rather than later and potentially more rapidly. Williams warned that waiting too long could allow imbalances to grow, adding that economy is on track to achieve Fed's inflation and employment objectives.

***Equities***
US equities / ADRs:
- CMG: Pershing Square discloses new 9.9% stake; intends to engage in discussions with management - 13D filing; +6.3% afterhours
- AMGN: Loses ruling in Neulasta patent case; judge says Apotex's biosimilar does not infringe Amgen patent on the chemotherapy drug - press; -1.4% afterhours
- PLAY: Reports Q2 $0.50 v $0.44e, R$244.3M v $244Me; -6.6% afterhours
- CASY: Reports Q1 $1.70 v $1.79e, R$1.97B v $2.0Be; -7.4% afterhours

Notable movers by sector:
- Consumer discretionary: Recruit Holdings Co 6098.JP +3.0% (to be added to Nikkei 300)
- Industrials: Asahi Kasei Corp 3407.JP -3.2% (Aug result); Qube Logistics QUB.AU +1.2% (UBS raised to Buy); Hanjin Shipping Co 117930.KR +9.0% (wins order protection); Sumitomo Chemical Co 4005.JP -1.3% (may increase battery production)
- Technology: Rakuten Inc 4755.JP +6.0% (to be added to Nikkei 225); Otsuka Corp 4768.JP +0.8% (Mitsubishi raised to Overweight)
- Materials: Saracen Mineral Holdings SAR.AU +13.3% (drilling result); Resolute Mining RSG.AU +6.4% (affirms guidance); Other gold miners also rise on higher gold prices: NCM.AU +3.7%, EVN.AU +7.6%
- Telecom: NTT DoCoMo Inc 9437.JP -0.6% (to cut costs)
- Utilities: China Longyuan Power Group 916.HK +3.5% (Aug result)

>>> US After Hours Summary: AAOI +20% on raised guidance, CMG +7% on P


After Hours Summary: AAOI +20% on raised guidance, CMG +7% on Pershing stake news... CASY -7%, PLAY -7% following earnings/guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: AAOI +20.3%, (raises Q3 guidance), HQY +1.9%, SCWX +1%,

Companies trading higher in after hours in reaction to news: GVP +11.7% (receives contracts to provide updates to nuclear site simulator platforms for customers in the UK and Japan; two projects add over $6 mln to its backlog and include options that could grow backlog significantly further), PGNX +8.8% and VRX +1.9%  (Valeant Pharma and Progenics announce the U.S. commercial launch Of FDA-approved Relistor Tablets; poster presentations to highlight RELISTOR tablets during PAINWeek in Las Vegas, on September 6-10), CMG +6.6% (Pershing Square discloses 9.9% active stake, intends to engage in discussions with management and the Board), FNSR +1.4% (AAOI sympathy), EXEL +0.6% (announces outcome from first planned interim analysis of the Phase 3 CELESTIAl trial of cabozantinib in patients with advanced hepatocellular carcinoma; IDMC determined that the study should continue without modifications), CLCD +0.3% (continued strength after 120%+ move higher today)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: CASY -7.4%, PLAY -6.7%

Companies trading lower in after hours in reaction to news: AMD -4% (files mixed securities shelf offering for an undisclosed amount; to commence concurrent public offerings of ~$600 mln of its common stock and $450 mln aggregate principal amount of its convertible senior notes due 2026), SMLP -3.1% (commences an underwritten public offering of 5,500,000 common units), OLLI -2.5% (files common stock shelf offering for an undisclosed amount; announced that affiliates of CCMP Capital Advisors intend to offer 13,725,798 shares of common stock in an underwritten public offering), CPE -2% (to acquire certain undeveloped acreage & producing oil and gas properties for total consideration of $327 mln in cash, provides Howard County operational update; commences 23 mln common stock offering in connection w/ the previously announced Plymouth Acquisition), CTLT -1.1% (announced the launch of 19 mln share common stock secondary public offering by selling stockholders), NVDA -0.6% (files mixed securities shelf offering)

>>> US Close Dow +0.25% S&P +0.30% Nasdaq +0.50% Russell+0.12%


Closing Market Summary: Stocks Rise on Lowered Rate Hike Expectations

The stock market began an abbreviated week on a higher note as a weaker-than-expected reading of the ISM Non-Manufacturing Index for August led investors to dial back rate hike expectations for the year. The Nasdaq Composite (+0.5%) finished the day slightly ahead of the S&P 500 (+0.3%) and the Dow Jones Industrial Average (+0.3%).

The ISM Non-Manufacturing Index for August was a big disappointment, dropping to 51.4 (consensus 54.7) from 55.5 in July. The August reading was the lowest reading for this index since February 2010. The key takeaway from the report is that it appears as if both the manufacturing sector and the non-manufacturing sector experienced a noticeable slowing of activity in August.

The added takeaway is that the slowdown seen on both sides of the economy will likely leave the Fed reluctant to raise the fed funds rate at its September meeting. Recall that it was shown last week that the ISM Manufacturing Index dropped to 49.9 from 52.6 in July. A number below 50.0 denotes a general contraction in manufacturing activity. The U.S. Dollar Index (94.85,-0.99, -1.03%), fed funds futures, and the economically-sensitive financial sector (-0.1%) fell in response while Treasuries and defensively-oriented telecom services (+0.9%) and utilities (+1.1%) enjoyed a bid.

The benchmark index erased its opening loss by midday as heavily-weighted health care (+0.4%) and technology (+0.5%) demonstrated relative strength. The broader market settled near its best level of the day with seven sectors ending in the green. The defensively-oriented telecom services (+0.9%) and utilities (+1.1%) sectors followed energy (+1.5%) on the top of the board. Conversely, financials (-0.2%) and industrials (-0.3%) led the downside.

The commodity-sensitive energy space (+1.5%) demonstrated relative strength amid a string of M&A news and a rebound in dollar-denominated oil. EOG Resources (EOG 94.83, +5.92) rallied 6.7% after announcing a deal to merge with Yates Petroleum. The deal to merge is valued at approximately $2.5 billion. Spectra Energy (SE 41.00, +4.85) surged 13.4% after announcing a stock-for-stock merger with Enbridge (ENB 43.06, +2.07). For its part, WTI crude ended its pit session higher by 1.0% ($44.85/bbl; +$0.46).

In the technology sector (+0.5%), Facebook (FB 129.73, +3.22) outperformed, notching a fresh all-time high (129.94). Conversely, top-weighted Apple (AAPL 107.68, -0.05) ended lower by 0.1% ahead of tomorrow's special event. The company is expected to introduce the iPhone 7 at 13:00 ET. The PHLX Semiconductor Index (-0.2%) underperformed as iPhone suppliers weighed. Skyworks (SWKS 73.01, -1.61) and Qorvo (QRVO 56.02, -1.58) rounded out the price-weighted index.

The health care space (+0.4%) finished ahead of the broader market as biotechnology outperformed. In the group, Gilead Sciences (GILD 77.88, +0.99) jumped 1.3% after being upgraded to "Buy" from "Hold" at Jefferies. Separately, health care plan names underperformed with Cigna (CI 127.58, -0.60) losing 0.5% after reaffirming its full-year adjusted net income guidance.

The financial sector (-0.2%) underperformed amid diminishing rate hike expectations for the year and a downturn in Treasury yields. The fed funds futures market estimates the implied probability of a rate hike at the September meeting at 18.0%, falling from the prior session's estimate of 21.0%. Money center banks and life insurance names underperformed with Prudential (PRU 78.59, -0.90) and Wells Fargo (WFC 49.99, -0.56) declining 1.1% apiece. 

Treasuries ended on a higher note with yields dropping through the curve. The yield on the 2-yr note ended lower by seven basis points (0.72%) while the yield on the 10-yr note settled lower by seven basis points (1.54%).

Today's participation was above the recent average as more than 835 million shares changed hands on the NYSE floor.

Today's economic data was limited to ISM Services for August: 

  • The ISM Non-Manufacturing Index for August was a big disappointment, dropping to 51.4 (consensus 54.7) from 55.5 in July.
    • This was the lowest reading for this index since February 2010.

Tomorrow's economic data will include the 7:00 ET release of the weekly MBA Mortgage Index. Separately, the Job Openings and Labor Turnover Survey for July and the Fed's Beige Book for September will cross the wires at 10:00 ET and 14:00 ET, respectively.