Weekly Market Update: Tough Year for Investors Goes Out on a Cheerless Note
The week started off on a sour note as Chinese stocks tumbled on Monday after the latest industrial profits data declined for the sixth straight month. US data was mostly disappointing as well, with key regional readings in Chicago and Dallas dropping sharply. The 2-, 5-, and 7-year treasury auctions all showed poor results and dragged yields higher for the week. Crude oil prices dripped lower again and continued to exert influence on broader markets. US stocks alternated red and green in the post-holiday week as the S&P flipped back and forth from positive to negative on the year. For the week, the DJIA was down 0.7%, and the Nasdaq and S&P500 each lost 0.8%. For the year, the DJIA fell 2.2%, the Nasdaq gained 5.7%, and the S&P500 slipped 0.7%, its first losing year since 2011.
Early in the week, China reported November Industrial Profits at -1.4% y/y, its sixth straight decline. At the same time Japan announced its first decline in m/m retail sales in four months and first m/m drop in industrial production in three months. The poor economic data continued in the US as the Dallas Fed Manufacturing reading hit its lowest mark in seven months and the Chicago Purchasing Managers Index tumbled to its lowest in over five years. The Chicago PMI number was particularly disappointing because it showed big declines new orders, order backlogs and the employment index. The 42.9 reading for December was the seventh reading of the Chicago PMI this year that was below 50, indicating contraction. Weekly initial jobless claims were also disappointing, registering the highest number since July, though this may be attributable to holiday week volatility. On a brighter note, the December US Consumer Confidence reading beat expectations and showed a rise in the perception that job opportunities are "plentiful."
Interest rate futures fell hard on Tuesday following a very disappointing 5-year treasury auction. The 2-year yield reached its highest level since early 2010 to above 1.10%, the 5-year yield hit its high of the year above 1.79%, and the 30-year fell 2 points, putting the yield above 3.04%. The 2- and 7-year auctions that bookended the 5-year sale were also weak, perhaps attributable to the slow holiday week. Treasuries pared losses on Thursday after the higher than expected jobless claims. For the year, the 2/10-year yield spread narrowed to its smallest since 2008 as the treasury curve flattened: the 2-year yield jumped 38 basis points, while the 10-year yield was up only 8 basis points during 2015.
With relatively few corporate or macro developments during the week, broader markets were pushed around again by activity in the energy market. Saudi Arabia's 2016 budget plan showed that weak oil prices are hurting its fiscal situation, but despite that the energy ministry affirmed it would hold steady on its production policy. WTI and Brent crude are now trading in lockstep and each lost nearly 3% during the week, ending 2015 down by over 30% on top of last year's steep losses. That kept downward pressure on energy equities despite some bargain hunters picking through the wreckage. Cold weather finally swept across most of the US, helping natural gas achieve a sharp rebound this week, gaining more than 12%.
In the FX market, the dollar strengthened against the euro, emblematic of the year's move. For the week, EUR/USD peaked at just under 1.10 and ended around 1.086. For 2015, the euro fell 10.3% against the dollar, while the greenback gained a more modest 0.5% against the yen, though that was the fourth straight year the USD/JPY has risen.
On the M&A front, Carl Icahn won the bidding war for Pep Boys, cinching a deal at $18.50/share, valuing the auto service company at about $1 billion. Bridgestone said it would not go around again with another counteroffer. Media General shares lifted on Thursday on a report that Nexstar had raised the funds it needs to pursue a planned takeover offer. Another report said that Liberty Global and Vodafone may soon resume merger discussions, which could ultimately lead to a £140 billion deal.
Closing Market Summary: 2015 Ends on Defensive NoteThe stock market ended its last session of the year under broad-based selling pressure, which pushed the S&P 500 (-0.9%) into negative territory for the year (-0.7%). This represented the first year-to-date loss for the benchmark index since 2008. The benchmark index outperformed the Nasdaq (-1.2%) today as the technology sector paced today's retreat. On the year though, the Nasdaq outperformed with a year-to-date return of 5.7%. Unsurprisingly, it was a quiet end to the year with fewer than 740 million shares changing hands at the NYSE floor.
The major averages slipped at the beginning of their day as pressure in oil helped to dampen futures trading. Oil prices fell through pre-market trading, but they eventually rebounded to their overnight levels. Oil rallied during the afternoon before settling near the $37.13/bbl price level with a 1.5% gain.
In sectors, energy (+0.3%), industrials (-0.7%), materials (-0.8%), and financials (-0.9%) lead, while technology (-1.4%), utilities (-1.1%), and consumer staples (-1.1%) rounded out the leaderboard. It is interesting to note, that only two cyclical sectors posted gains in 2015. The top-weighted technology sector gained 4.3% while the consumer discretionary space (-1.0%) rallied 8.4%. On the other side, energy ended the year down 23.6% while materials surrendered 10.0%. Both sectors responded to year-long weakness in commodities, which was highlighted by a 32.2% plunge in crude oil.
Looking at the energy space, Dow component Chevron (CVX 89.96, -0.13) struggled to keep pace with the broader sector while pipeline companies outperformed. Kinder Morgan (KMI 14.92, +0.38) advanced 2.6% following the developments in oil. To be fair though, pipeline companies also benefited from the strong performance of natural gas, which spiked 6.0% to $2.34/MMbtu following a bullish inventory reading.
In the heavily-weighted technology sector, large-cap constituents Apple (AAPL 105.26, -2.06), Alphabet (GOOGL 778.01, -12.29), and Facebook (FB 104.66, -1.56) saw increased pressure as the three underperformed the broader sector with performances 1.9%, 1.6%, and 1.5% respectively. For the year Apple lost 4.6% while Alphabet soared 46.6% and Facebook surged 33.8%.
Treasuries ended their abbreviated session on their highs with the 10-yr yield slipping three basis points to 2.27%.
The stock market will be closed tomorrow in observation of New Years Day.
It was a relatively quiet day on the economic front with data being limited to Chicago PMI and Initial and Continuing Claims:
- The Chicago Purchasing Managers Index fell to 42.9 (consensus 50.1) from November's 48.7.
- Initial claims increased by 20,000 in the week ending December 26 to 287,000 (consensus 270,000).
- No special factors influenced this jump which pushed the four week average up 4,500 to 272,500.
- Continuing claims for the week ending December 19th increased by 3,000 to 2.198 million (consensus 2.213 million)
- This moved the four week average higher by 9,250 to 2.220 million.
Monday's data will be limited to the 10:00 ET release of November Construction spending report (consensus 0.8%) and the December ISM Index (consensus 49.0).
- Nasdaq +5.7% YTD
- S&P 500 -0.7% YTD
- Dow Jones -2.2% YTD
- Russell 2000 -5.9% YTD
Early premarket gappers
Gapping up: PSTI +21.2%, CMRX +9%, ANFI +8%, CHLN +7.4%, LBTYA +3.9%, PERI +3.8%, MEG +2.3%, VOD +1.8%, LPSN +1.7%, TASR +1.1%, TSLA +0.8%, BP +0.6%, BT +0.5%
Gapping down: SBGL -3.5%, CYTR -3.3%, MSTX -2.8%, MEMP -1.7%, BHP -1.5%, NGG -1.5%, BBL -1.4%
Gapping down: SBGL -3.5%, CYTR -3.3%, MSTX -2.8%, MEMP -1.7%, BHP -1.5%, NGG -1.5%, BBL -1.4%
Insider Trading Weekly Summary: notable purchases- PSEC CEO and COO bought a ~$22.7 mln stake, ATU CEO, CFO and EVP bought 235K shares, CMRX Director bought an ~$887K stake; notable sales- PANW Director sold a ~$19.5 mln stake, SLG CEO sold ~69K shares
Buyers:
-
Prospect Capital (PSEC) CEO and COO bought 3,190,424 shares at $6.78-7.38 worth ~$22.7 mln
- Actuant (ATU) CEO, CFO and EVP bought 235K shares at $22.97-24.44 worth ~$5.6 mln
- Angie's List (ANGI) 10% owner, TCS Capital Mgmt bought 98,124 shares at $9.11-9.49 worth ~$918K
- Chimerix (CMRX) Director bought 125K shares at $6.92-7.21 worth ~$887K
Sellers:
- Palo Alto Networks (PANW) Director sold 110,700 shares at $175-177.66 worth ~$19.5 mln
- SL Green Rlty (SLG) CEO sold 69,356 shares at $110.01-111.16 worth ~$7.7 mln
-
Hawaiian Holdings (HA) Director sold 157,870 shares at $37.15-37.40 worth ~$5.9 mln
- Nuance Communications (NUAN) CEO sold 150K shares at $20.15-20.35 worth ~$3.0 mln
China President Xi: Reiterates pledge to stabilize growth and promote reform - New Year's speech - China will not be absent from international affairs
Reinsurers hit by falling renewal prices
Reinsurers are facing further pressure after the December contract renewal season delivered another year of falling prices — the fourth in succession.
Prices for property catastrophe reinsurance in the UK fell by between 10 per cent and 15 per cent. In continental Europe prices fell by between 5 per cent and 12.5 per cent on a like-for-like basis, according to broker Willis, while in the US prices were down by between 2.5 per cent and 7.5 per cent. Just over half of the reinsurance market renews in December, with the rest in April, June and July.
“There was some hope in the middle of the year that pricing reductions would begin to ease but those hopes have largely been dashed and rates have continued to fall,” said James Vickers, chairman of Willis Re International.
The price declines are partly driven by the primary insurers that buy reinsurance, who are facing falling rates themselves. “Primary insurers have been asking reinsurers to help them by reducing costs and widening the coverage,” said Mr Vickers.
Other factors pushing rates down include an influx of capital into the sector from sources such as insurance-linked securities, and an absence of large property catastrophe losses. According to preliminary data from Swiss Re, there were $32bn of insured catastrophe losses in 2015, down 11 per cent on 2014 and about half the level of the $62bn 10-year average.
The floods affecting large parts of the UK are not thought to be widespread enough to have a significant affect on reinsurance pricing.
The falling prices, combined with low investment returns, are taking their toll on reinsurers’ profitability. According to an index compiled by Willis, underlying returns on equity (excluding the effect of reserve releases) in the reinsurance industry fell from 7.8 per cent in the first half of 2014 to 5.1 per cent in the first half of 2015. Many of the quoted reinsurers target ROEs in the low to mid teens.
Changes in the insurance-linked security market could help to keep returns low. While initial investors in ILS targeted double-digit returns, newcomers such as pension funds are not so demanding. “It is long-term money,” said Mr Vickers, “they want stable long-term returns but they are not dissuaded by a 5 per cent return.”
In recent years, reinsurers’ reported profits have been bolstered by reserve releases from previous years. That trend is expected to continue in the results for 2015, allowing the reinsurers to report decent results despite the falling prices.
“The pips are squeaking but they are not yet prepared to walk away from things,” said Mr Vickers. “Some reinsurers have got to start reporting very bad results for the game to begin to stop.”