Market Monitoring – 31 Mar 2014

Edited by Vani Rao

US Stock Markets Pares Gains, Braces for Earnings Season

Nasdaq sees its worst weekly decline on Biotech Slide

The US stock market finished a cautious week on a modestly higher note for the week ended March 28, 2014. The stock market pared most of its gains on Friday, March 28, after an early morning rally on the back of positive consumer spending data petered out by mid-afternoon.

MMM pic 1

The S&P 500 ended the day 8.58 points, or 0.46% higher, at 1,857.62, recording a 0.5% loss for the week. With only one trading session left this month, the benchmark index is set to finish March roughly where it started.

The Dow Jones Industrial Average closed up 58.83 points, or 0.36% higher, at 16,323.06 and is 0.1% higher for the week.

The Nasdaq Composite finished the day up 4.53 points, or 0.11%, at 4,155.76. The tech-heavy index was down 2.8% for the week, its worst performance since October 2012.

MMM pic 2Stocks rose as the largely positive data came a day after economic reports showed that US jobless claims fell to the lowest level since late November last week. Moreover, the US Department of Commerce revised upwards the US GDP fourth-quarter rate to 2.6% from the earlier forecast of 2.4%.

MMM pic 3Later in the session, profit taking kicked in and trimmed gains, as investors flocked to the sidelines to await the release of first-quarter earnings releases in early April.

The continued weakness in biotech pressured the Healthcare sector (-0.40%), while other heavily-weighted groups ended mixed with respect to the broader market. Industrials (+0.74%) outperformed while financials (+0.39%) lagged.

Also noteworthy is that the Energy sector (+1.24%) outperformed for the second day in a row, bringing its weekly gains to 2.5%.

On the counter-cyclical side, all four sectors ended behind the broader market. The Telecom services (-0.07%) sector posted a modest loss while Consumer Staples (+0.37%) and Utilities (+0.17%) registered gains.

Movers & Shakers

Restoration Hardware Holdings Ltd. (NYSE:RH) shares rallied by nearly 12.73% on Friday, March 28, 2014, after the high-end home furnishings store beat analyst expectations and reported increasing sales growth. Forward looking statements were also positive as the firm looks to expand and transform its retail stores in 2014, according to Chairman and Chief Executive Gary Friedman.

Shares in CBS Outdoor Americas Inc. (NYSE:CBSO) climbed 5.36% in its first trading session on the NYSE. Trading started at $28 a share. The billboard company is demerging from media giant CBS Corp.

Shares of 2U Inc. (NASDAQ:TWOU) added 7.54% on Friday. The cloud-based education platform geared toward non-profit universities and priced its IPO at $13 a share, at the high end of its range of $11 to $13.

Decliners

Red Hat Inc. (NYSE:RHT) meanwhile, saw its stock close 6.95% lower, after the company’s financial guidance for the current fiscal year came in short of analysts’ expectations. Red Hat shares fell after the open-source software provider offered disappointing guidance for fiscal year 2015.

BlackBerry Ltd. (NASDAQ:BBRY) shares declined by 7.07% posted a quarterly operating loss that was much lesser than analysts had feared. The company, however, missed revenue expectations as its cash positioned worsened.

PG&E Corp. (NYSE:PCG) shares lost 4.01%. The utility said late Thursday that it expects the Federal government to file criminal charges against it over the fatal 2010 San Bruno, California, natural-gas transmission pipeline blast.

Futures

Currency

The US dollar finished lower against the GBP on Friday, March 28, 2014, amid rising prospects of sooner-than-expected economic recovery in the UK, coupled with the economic stimulus in China that boosted the demand for the GBP. For more details, please access the full report.

Oil & Gas

WTI crude gained 2.22%, or $2.21 a barrel, during the week ended March 28, 2014. The light, sweet crude prices rose for second consecutive week due to the political standoff between Russia and the West as well as improved US economic data. For more details, please access the full report.

Treasury yields rose as stocks gained and yields of intermediate-dated notes nearing two-month highs. Analysts and traders expect debt instruments to continue to underperform against longer-term bonds. Two-year, three-year, five-year and seven-year notes have underperformed since Federal Reserve Chair Janet Yellen said last week that the central bank could raise interest rates six months after its bond-buying program ends, suggesting a potential rate hike as early as spring 2015. Five-year notes fell 6/32 to yield 1.74%. Ten-year notes were down 14/32 to yield 2.72%. Thirty-year bonds declined 25/32, yielding 3.55%.

Spot gold turned higher after touching six-week lows of below $1,300 an ounce, but marked its second straight weekly decline as an improving US economic outlook lifted the dollar and bolstered the risk appetite among consumers. Spot gold fell to its lowest since February 12, 2014, at $1,285.34 an ounce in earlier dealings, before rebounding to trade up 0.14% at $1,292.41. April gold futures fell 0.13% to $1,293.00 an ounce.

Economic Front

US consumer spending rises, but sentiment slips

US consumers stepped up spending a bit in February as their incomes increased for a second straight month, offering hope that the economy was regaining its footing after being slammed by an unusually cold winter. Data from the US Commerce Department took the sting out of a separate report that showed consumer sentiment dipped in March. Economists said that they expected household morale to perk up with warmer weather in the spring. Consumer spending rose 0.3% last month after a downwardly revised gain of 0.2% in January. The Thomson Reuters/University of Michigan’s consumer sentiment index dipped to 80.0 in March from 81.6 in February. It was little changed from a preliminary reading earlier this month. Separately, income rose 0.3% last month after rising by the same margin in January.

Top News

The higher they rise, the harder they fall

Biotechnology stocks have been among the hottest sectors in the stock market for the last two years, with the S&P 500 Biotechnology Index rising 74% in 2013 and 38% in 2012. That momentum stopped dead in March 2014. The S&P 500 Biotechnology Index is down 12% this month alone, erasing the sector’s gains in January and February.

Traders and analysts blamed the reason on last Friday’s letter from Democrat members on the House’s Energy and Commerce Committee, requesting a briefing from biotech bellwether Gilead Sciences (NASDAQ:GILD) on the high prices of a new Hepatitis C drug.

A bigger question is whether a herd of “generalist” investors, who buy shares across many industries rather than focusing solely on biotech, have piled on biotech shares over the years and are now reaping profits. Market participants who follow the biotech industry say that some of these investors may be less up-to-date on the science, market risks, and trading dynamics of the highly specialized biotech sector. “We think the generalist money is sitting on a lot of profit and is ‘getting spooked’ because of ‘government’ starting to raise questions about drug pricing,” Royal Bank of Canada says.

US wants at least $1 billion from drugmakers who delay generics

The US Federal Trade Commission has sought a settlement of $1 billion or more from pharmaceutical companies that it has sued for delaying the sale of cheaper medicines after patents on brand-name drugs may have expired, an FTC official told a legal conference. The antitrust agency alleges that the way drugmakers settle patent-related lawsuits hurts consumers by making drugs more expensive. Defendants in the lawsuits include Solvay Pharmaceuticals, owned by AbbVie (NYSE:ABBV); Actavis plc (NYSE:ACT); Paddock Laboratories, part of Perrigo Co; Par Pharmaceutical Companies (NYSE:PRX); and Cephalon, owned by Teva Pharmaceutical Industries Ltd. (NYSE:TEVA).

Coming up in the Next Week

Economic Releases

The market’s outlook this coming week rests largely on economic figures – key surveys on manufacturing and the services sector, monthly auto sales, and the biggest economic indicator, the jobs report. Data next week will likely show winter’s icy grip on the economy slipping. The US Labor Department is expected to report on Friday, April 4, 2014, that non-farm payrolls increased 195,000 after rising 175,000 in February. The unemployment rate is expected to have dipped to 6.6% from 6.7% in February. Data on Tuesday, April 1, 2014, is expected to show automobile sales rising in February after witnessing lacklustre growth in recent months. Also on Tuesday April 1, 2014, the Institute for Supply Management (ISM) is likely to report that its national factory activity index increased to 54.0 in March from 53.2 in February.

Upcoming IPOs

Chinese education company Tarena International is expected to raise as much as $153 million in its initial public offering on Thursday, April 3, 2014, valuing the company at about $507 million. The company, which has trained more than 130,000 students, offers a platform for distance education, classroom-based tutoring and online learning modules, mainly in IT subjects. Tarena, which counts Goldman Sachs Group (NYSE:GS) as one of its stockholders, posted a 63% jump in revenue to $92.8 million for 2013.

Five9, a provider of cloud software for customer care centers, is expected to raise as much as $110 million in its initial public offering on Friday, April 4, 2014, valuing the company at about $507 million. Five9, which has more than 2,000 clients, manages customer interactions through the email, social media, and mobile platforms.

Other Major Events

General Motors (NYSE:GM) Chief Executive Mary Barra is scheduled to testify on Tuesday to a US House of Representatives panel investigating the company’s long-running problem with defective ignition switches that have been linked to 12 deaths. The National Highway Traffic Safety Administration acting Administrator David Friedman is also due to testify at the House Energy & Commerce Committee hearing.

The House Energy & Commerce Committee is expected to hold a hearing for the Food and Drug Administration‘s proposed changes to generic drug labelling on Tuesday, April 1, 2014. The proposed rule would require generic drugmakers to change prescribing information on their products if they receive new safety information, which they say would open them to product liability lawsuits. Janet Woodcock, head of the FDA’s Drugs division, will testify.

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