Weekly Market Update: Robust Labor Report Fuels Fed Liftoff Expectations
US equities eked out their sixth week of gains as the October jobs report outperformed and earnings season entered the home stretch. After the anemic Q3 GDP report and September's weak job growth, there were real concerns the Fed would not be able to deliver an initial rate hike this year. The October jobs report dispelled the notion. In Europe, there were real concerns about the very weak September German industrial production report, while in China PMI numbers remained pretty poor. By Friday the US Dollar Index reached a new 7-month high, and the benchmark 10-year yield backed up 18 basis points to surpass 2.3% for the first time since July. For the week, the DJIA gained 1.4%, the S&P500 gained 1% and the Nasdaq advanced 1.8%.
A month ago, the September US jobs report was a big bust, with the low headline nonfarm number and significant revision lower to the August payrolls figure raising real questions about the state of the US economy, not to mention the viability of Fed pledges for a 2015 rate liftoff. Friday's October jobs report reversed sentiment about the US jobs market. The nonfarm figure absolutely crushed expectations (+271K v 185Ke) and pulled the three-month nonfarm average to +187K, which is just modestly below the +206K average for the year to date. The annualized unemployment rate fell to 5.0% (the lowest level since May 2008) from 5.1% in September, while underemployment dropped below 10% for the first time since 2008. Meanwhile, the civilian labor force participation rate remains stuck at 62.4%.
The case for a December Fed rate hike looks pretty strong after the October jobs report. Fed fund futures had been gradually creeping up heading into the data, and in the aftermath of the NFP report the contract showed traders believe there is a 70% chance of a 25 basis point hike at the December FOMC meeting. In speeches this week, Chair Yellen said December was a live meeting and Vice Chair Fischer more or less dismissed the argument that inflation was too low to begin raising rates. Moderate FOMC voter Lockhart made the case for rate hikes, while hawk Bullard started talking about the debate that would surround the second round of rate hikes. Even the dove Evans all but made the case for a hike in a CNBC interview after the jobs data, saying conditions "could be ripe" for a rate increase and that he goes into each meeting with an open mind.
Bank of England rate hike expectations are headed in the opposite direction. UK treasury yields tumbled after the BoE signaled in its quarterly inflation report that it would delay raising interest rates due to a more cautious outlook on inflation and growth. Analysts suggested that the details of the inflation report mean the BoE had delayed rate hikes by as much as 10 to 12 months, to late 2016. The minutes for the previous BoE policy meeting came out at the same time, and confirmed that McCafferty was the only MPC member to vote for a rise in interest rates. The 10-year benchmark gilt yield lost as much as five bps to trade 1.967% on Thursday, however the yield was back up as high as 2.049% on Friday after the jobs report.
PMI data out of China last weekend showed little improvement, with two key measures seeing their eighth month of contraction. The official October manufacturing PMI missed expectations for breakeven, remaining on par with last month at 49.8, while the official Services PMI hit a three-year low of 53.1. The SME-oriented Caixin final September manufacturing PMI remained in contraction as well, although it continues to creep a bit closer to growth. China Premier Li again stepped away from the 7% GDP target, mentioning at least twice that the potential for 6.5% annual GDP growth through 2020 would help China accomplish its economic agenda.
After dropping to around $42 last week, front-month WTI crude futures marched higher to retake the $48 handle on Tuesday and Wednesday. The strength couldn't last after both the API and DoE crude inventories turned in another week of sizable builds. Then an unnamed OPEC official was said to have commented there would be no deal to cut the cartel's production at the meeting in December, assuming non-OPEC countries do not move to cut their own production. Finally, on Friday President Obama said the government would reject the Keystone XL pipeline, citing a preference for clean energy efforts and projecting the pipeline would not have generated much economic growth. WTI closed out the week around $44.30 and Brent ended up back around $47.
Valeant's shares fell below the lows seen in October when details of the Philidor pricing scandal were leaked out. VRX plummeted 16% on Thursday and dipped below $80 a share for the first time in more than two years after the WSJ chronicled investor Bill Ackman's response to the fallout over the last few weeks. The WSJ piece suggested Ackman wavered in his support of Valeant CEO Pearson, though he later issued a statement in support of Pearson, as did the Valeant board. The biotech wreckage spread to other names as they released new data this week. Bluebird Bio shares tanked after analysts were unimpressed with new abstracts for its experimental sickle cell disease treatment, and Incyte shares were tripped up on Friday upon release of some early stage cancer data that might indicate limited uses for a new cancer drug under development.
Tech darlings Facebook and Tesla surged after their third-quarter earnings reports, and Facebook shares moved to a new all-time high above $110/share. Facebook's top- and bottom-line results exceeded targets, while both monthly and daily active users rose by double digits. A horde of analysts upgraded price targets on the name and made very positive comments. Shares of Tesla sustained double digit percentage gains after earnings, even though top- and bottom-line results merely met expectations. Investors were heartened by projected Q4 deliveries at a better than expected at 17-19K, although the company slightly narrowed its FY deliveries guidance to 50-52K. On its call, the firm said it aspired to be cash flow positive by the first quarter of 2016. Regarding the new Model X, Tesla said it would achieve steady state production capacity during the first quarter of 2016.
Media names were under pressure after reporting third-quarter results. Time Warner saw strong earnings, while 21st Century Fox missed revenue targets. CBS did quite well, and Disney saw revenue growth across its main business lines. However, it was Time Warner that upset the space, offering a surprise initial FY16 earnings forecast on the company's conference call that was well below expectations. Multiple analysts cut their outlooks on Time Warner, and shares of the name lost around 9% on the week.
The two successor companies of Hewlett-Packard began trading on Monday morning. Shares of HP, Inc. are trading under the old HPQ ticker, while Hewlett Packard Enterprise is trading under ticker HPE on the NYSE. HP, Inc. will focus on personal computers and printers, while Hewlett Packard Enterprise will sell commercial computers systems, software and tech services.
In M&A news, Visa reached a deal to acquire former subsidiary Visa Europe for €16.5 billion ($18.2 billion) in cash and stock, with the potential for an additional payment of up to €4.7 billion. Shire said it would buy Dyax for about $5.9 billion, or $37.30/share, representing a 35.5% premium to Dyax's closing stock price on Friday. Dyax shareholders may also get an additional contingent value right worth $4.00/share if Dyax's DX-2930 drug is approved. AstraZenica snapped up ZS Pharma for $90/share in cash, for a total deal valued around $2.7 billion. Youku Tudou, the so-called YouTube of China, agreed to be acquired by Alibaba for $27.60/ADS in an all cash deal valuing the firm around $4.4 billion. Alibaba already owned one-fifth of the firm.
Closing Market Summary: Stocks End Upbeat Week on Flat Note
The S&P 500 could not avoid its third consecutive decline on Friday as rising rate hike expectations weighed on equities. To be fair, the benchmark index missed a green close by 0.74 points while the Dow (+0.3%) and Nasdaq Composite (+0.4%) erased their opening losses.Equities stumbled at the start after the October Employment report easily surpassed expectations, thus increasing the likelihood of a fed funds rate hike at the December policy meeting to 69.8% from yesterday's 58.1%. Specifically, October nonfarm payrolls came in at 271,000 while the consensus expected a reading of 181,000. Also of note, hourly earnings rose 0.4% while the consensus expected an uptick of 0.2%.
Once the report crossed the wires, investors rushed into the greenback while Treasuries and equity futures retreated. The Dollar Index (99.14, +1.21) held its ground to end the day higher by 1.2% near levels last seen in mid-April. As for Treasuries, the 10-yr note finished near its low with the benchmark yield rising ten basis points to 2.33%, representing the highest settlement since late July.
Similar to Treasuries, equities slumped in immediate reaction to the report, but unlike Treasuries, the stock market staged a rebound off its opening lows. Six sectors ended the day with losses while financials (+1.1%) and technology (+0.4%) outperformed throughout the day, helping the market return into the neighborhood of its flat line by the closing bell.
The financial sector rallied due to the rising probability of a December rate hike, extending this week's gain to 2.5%, which put the sector ahead of its peers. Meanwhile, the top-weighted tech space spent the day near its flat line with broad strength in the chipmaker space overshadowing a mixed performance from large cap sector components. To that point, the PHLX Semiconductor Index surged 2.6% with Skyworks (SWKS 85.99, +5.71) and NVIDIA (NVDA 31.55, +3.84) soaring 7.1% and 13.9%, respectively, in reaction to better than expected results.
On the downside, countercyclical sectors faced the most aggressive selling with consumer staples (-1.1%), telecom services (-0.7%), and utilities (-3.6%) ending at the bottom of the leaderboard. That being said, the energy sector (-0.4%) also finished among the laggards despite showing considerable strength earlier this week. The growth-sensitive group narrowed its weekly gain to 1.1% while crude oil surrendered 2.0% on Friday, ending the week lower by 4.8% at $44.29/bbl.
Today's participation was well ahead of average with more than 975 million shares changing hands at the NYSE floor.
Taking another look at today's employment data:
- Nonfarm payrolls increased by 271,000 ( consensus 181,000)
- September nonfarm payrolls revised to 137,000 from 142,000
- Private sector payrolls increased by 268,000 ( consensus 160,000)
- September private sector payrolls revised to 149,000 from 118,000
- Unemployment rate slipped to 5.0% (consensus 5.1%) from 5.1% in September
- The U6 unemployment rate, which accounts for the total unemployed plus persons marginally attached to the labor force and the underemployed, was 9.8% versus 10.0% in September
- Average hourly earnings increased 0.4% (Consensus 0.2%) after being unchanged in September
- Over the last 12 months, average hourly earnings have risen 2.5% versus 2.3% in September, representing the highest year-over-year rate since July 2009
- The labor force participation rate held at 62.4% for the second month in a row
On a separate note, the Consumer Credit report for September showed an increase of $28.90 billion while the consensus expected growth of $18.00 billion. It is worth noting that the September reading represented the biggest jump in non-revolving credit since July 2011.
Monday's session will be free of economic data.
- Nasdaq Composite +8.5% YTD
- S&P 500 +1.8% YTD
- Dow Jones Industrial Average +0.3% YTD
- Russell 2000 -0.4% YTD
* We are downgrading our rating to Underperform with a new €80 target price (vs €70) following the recent share rally (3m +35%) for three reasons:
(1) Even with a c5% EPS upgrade to 2015 and 2016 forecasts, on 23x 2016 PER valuations look stretched given modest M-T growth,
(2) In the face of adverse FX movements there is little clarity as to how Adidas will achieve flat margin guidance in 2016,
(3) We believe it is increasingly likely that the replacement for CEO Herbert Hainer will be an internal appointment,
and the perception of a near-term change in strategy and execution is much reduced.
Julius Baer: grinning and bearing it
Asia is vital to the wealth manager’s revenue growth. It is right not to hold back
The mood music is hardly auspicious. China’s economic growth is slowing, the renminbi devaluation and emerging market turmoil are still raw. Yet on the day that luxury goods group Richemont reported lower watch sales to retailers in Asia, another Swiss company that plies its trade in that well-heeled arena — wealth manager Julius Baer — boldly talked of expansion in China.
It is right to be bold. The bank’s boss, Boris Collardi, is merely bucking a gloomy narrative. The latent promise in China and Asian markets is not lost on him or his rivals. Much bigger Swiss wealth manager UBS is well-established in Asia’s growth markets. Credit Suisse wants to boost its share there. It is no surprise that Mr Collardi tells Bloomberg he is up for direct stakes or further partnerships in China.
Is three a crowd, or is there room for the Swiss trio? Julius Baer thinks there is: in-house figures point to the wealth of rich clients in China rising to $8.25tn by 2020, from $4.8tn this year. Its investors seem to agree: as a pure-play wealth manager it trades on more than 4 times tangible book value (wealth manager-cum-investment bank UBS is on 1.5 times). Shares in emerging market fund managers such as Aberdeen Asset Management and Ashmore may have sold off, but Julius Baer’s have weathered both the sell-off and the Swiss franc shock better.
Last month the bank said the market turbulence had not had a “meaningful impact” on its Asian franchise. Clients domiciled in Asia, which Julius Baer calls its “second home”, still account for almost a quarter of total AUM.
Julius Baer can be more agile than its big rivals. Its acquisition of Merrill Lynch’s non-US wealth management business has strengthened its Asian toehold. And it has enough capital wiggle room for bolt-on deals — or a bigger payout. Faced with so-so growth in developed markets, Asia is vital to Julius Baer’s revenue growth. It is right not to hold back