January 25, 2015 Vol. 1
Week in Review
Stocks move back into positive territory for the month
Stocks broke a string of three weekly declines and ended solidly higher, driven by positive news from overseas. After being closed on Monday for the Martin Luther King, Jr. holiday, markets gathered momentum throughout most of the week. However, declines in materials and telecoms stocks weighed on the large-cap Standard & Poor’s 500 Index and Dow Jones Industrial Average late Friday.
The technology-heavy Nasdaq Composite ended the week on a strong note, helping it outperform other benchmarks. The small-cap Russell 2000 Index lagged and remained firmly in negative territory for the year to date. Despite their underperformance against larger-cap companies in 2014, small-caps could continue to underperform, as valuations for the asset class remain near historic highs.
ECB’s QE plans drive shift in sentiment…
Even as earnings reporting season was in full swing, investor sentiment appeared to be driven in large part by non -domestic macroeconomic concerns.
Reports of a European Central Bank (ECB) quantitative easing (QE) program of buying long-term bonds in order to lower borrowing costs and spur growth and inflation seemed to foster improved sentiment early in the week.
U.S. and other global markets rallied on Thursday, when the ECB announced a program that was in fact much larger than what many investors had anticipated. London-based sovereign credit analysts note that while the size of the program is roughly in line with the Fed’s recent QE efforts, it should have a larger effect on the European bond market given the smaller amount of bonds available.
…but also drives up dollar, threatening overseas profits for U.S. multinationals
Analysts also expect the program to have a significant effect on the value of the euro relative to the U.S. dollar. Indeed, following the announcement, the dollar reached its highest level against a basket of other currencies since late 2003. While the strong dollar has some positive effects for the U.S. economy, it also threatens the profits of U.S. businesses earning revenues overseas.
Earnings down for financial sector, but individual opportunities remain
Threats to overseas revenues and declining oil prices have already weighed considerably on earnings expectations. Analytical and database firm FactSet now estimates that overall earnings for the S&P 500 will grow by only 0.25% in the fourth quarter of 2014. Profit expectations have declined significantly for financials firms, along with energy companies. Some better-than-expected bank earnings reported Thursday helped fuel the market’s rally, however.
ECB announces purchases of sovereign debt
U.S. Treasury yields finished the holiday-shortened week close to unchanged. The yield on the 10-year U.S. Treasury note rose early in the week but reversed course after the European Central Bank (ECB) announced a more forceful quantitative easing program on Thursday. Beginning in March, the ECB will expand its asset purchases to include eurozone sovereign debt, buying €60 billion (about $67 billion) per month of bonds through at least September 2016 to inject a larger-than-expected total of more than €1 trillion into the eurozone economy. Eurozone government bonds rallied to record-low yields after the ECB announcement, with 10-year German sovereign debt yielding 0.45% on Thursday.
Canada surprises with a rate cut
North of the border, the Bank of Canada surprised markets on Wednesday by cutting its benchmark overnight lending rate by 0.25 percentage points to 0.75%. The Canadian central bank said that it made the change, its first rate cut since April 2009, because falling oil prices will weigh on the country’s growth and inflation.
Uptick in geopolitical worries in emerging markets
Emerging markets bonds overall were little changed for the week despite an escalation in the conflict between Russia and Ukraine as well as turmoil in the Middle East after the prime minister and president of Yemen resigned. The death of Saudi Arabia’s King Abdullah triggered some uncertainty about the country’s oil production policy going forward. Ukrainian debt continues to struggle, although some concerns have eased amid speculation that the country will be able to extend its bond maturities. In Latin America, Brazil raised its benchmark lending rate by 0.50 percentage points to 12.25% in an effort to contain above-target inflation.
Light issuance of investment-grade corporate bonds
Investment-grade corporate debt fell, although longer-maturity bonds performed better than short-term issues. Debt issued by U.S. financial companies turned in a strong performance as the supply of new bonds from the industry appeared to be tapering off. The overall new issue calendar was lighter than usual, which helped provide some support for investment-grade corporates in the secondary market.
Weekly Gainers $
Weekly Losers $
Economic Events
Sectors
Industry Chart
The top Industry within the Technology Sector this week is $DJUSWC…Mobile Telecommunications
The top performer in this industry was SBAC.
Currencies
A brief view of the world currencies.
This Week’s Notable Earnings with a Float Short minimum 10%
Top 20 Percentage Float Short
This week’s expected IPO’s
Potential Option Trades
Potential Stock Plays
This Report was brought to you by:
Team”MCGP”
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