Weekly Economic Review Nov. 6, 2016
{
“There is no doubt that a surprise outcome of the election can create strong volatility.” Maturity 1 mo 3 mo 6 mo 31-Oct-2016 0.27 0.35 0.48 4-Nov-2016 0.27 0.35 0.48
1 yr 0.69 0.69
2 yr 0.87 0.87
3 yr 1.03 1.03
5 yr 1.30 1.30
Claus Nielsen
Head of Markets at Saxo Bank
10 yr 30 yr 1.77 2.50 1.77 2.50
Market Overview The S&P 500 posted its ninth straight session of losses (longest losing streak since 1980), dropping 1.9% for the week, ending at 2085.18pts. Tightening polls between the US presidential candidates, a highly possible interest rate hike in December, and a renewed fall in oil prices were the main suspects. Global markets in general are concerned with the election in that Clinton is seen as a more stable force for global financial markets than her counterpart Trump. Because of uncertainty in the next few weeks, safe-haven investments have done considerably well. The price of gold has gone up 3% over the last nine trading days while the yield of the 10-year US Treasury note has decreased. The FTSE 100 suffered the biggest weekly drop in 10 months pressured by a stronger pound. The FTSE fell 4.3% for the week, ending at 6,693.26pts. The pound was pressed by a High Court decision that ruled that a parliamentary vote must be held before the government can invoke Article 50, which states that a leaver of the EU must negotiate a deal upon its withdrawal as well as establish legal grounds for future relations with the EU. In other parts of Europe, markets rattled by political risk pushed stocks to their deepest weekly decline in nine months. The Stoxx Europe 600 index fell 3.5% for the week ending at 328.80pts. Japan’s Nikkei Stock Average dropped 1.3% as the yen gained strength on Thursday. The yen, seen traditionally as a safe haven, regained strength as the US presidential election draws close. A strong yen is bad for Japanese corporations as they are export-based.
Macroeconomic Overview The US added 161,000 jobs in October, slightly below the 175,000 prediction. However, the jobless rate dropped down to 4.9% and wage growth accelerated to 2.8%, its strongest pace since the recession further promoting the case of hiking up the interest rates soon. Non-farm business productivity, measured as the goods and services produced by Americans per hour, increased at 3.1%. There was a strong increase in output while hours increased only slightly. In the Eurozone, factories are picking up activities as they increase their prices for the first time in more than a year with Germany leading the pack. The Purchasing Managers Index (PMI) for the Eurozone’s manufacturing sector is now at 53.5 from 52.6 in September. A reading above 50.0 signals an increase in activity. The PMI for the services sector in the U.K. has also increased steadily, coming in at 54.5. The services sector accounts for 80% of the U.K.’s economic output. Employment is rising in virtually all major sectors in Europe while growth is steadily rising through loose monetary policy and a relatively weak Euro. The Chinese economy appears to have stabilized with 6.7% growth in the third quarter led by easily accessible credit, a booming property market, and other stimulus measures. China’s official manufacturing PMI hit 51.2 (highest in two years). However, Chinese regulators are monitoring accrued debt heavily. As the country’s economy slowly transitions into a consumer-based one, the Bank of China is trying to solve the problem of huge mounds of debt while maintaining loose monetary policy. A survey of analysts predicts that oil will stay below $60 a barrel in 2017. The sentiment is mainly backed by the increasing glut of crude oil as well as an unlikely OPEC production cut agreement by the end of the month. On Wednesday, data showed that crude stockpiles increased by more than 14 million barrels last week, the largest weekly climb ever recorded.
Fixed Income Overview Uncertainty driven by the upcoming US presidential candidate drove investors to safe-havens like US Treasury bonds and gold. The yield on the benchmark 10-year Treasury note fell to 1.783% from 1.811% on Thursday. During October, the yield increased by nearly a percentage point based on improving global manufacturing sectors, global inflation data, and concerns about major central banks reaching the limit of their bond purchasing programs. A growing number of investors and policy makers view central banks as ineffective in reviving anemic global growth, instead championing a resurgence of fiscal spending. The 10year Treasury note’s yield has been rising from its record low of 1.366% in early July. The Bank of England (BOE) shied away from implementing additional monetary stimulus, increasing selling pressure of government bonds throughout the continent. The 10-year German bund yield rose to 0.158% from 0.130% while the ten-year government bond yields in the U.K., France, Denmark and Sweden also increased. However, the bond market was jolted by its playing down chances of further monetary stimulus as it raised its inflation forecast for 2017, driven partly by a weaker British pound. Gold pushed past $1300 a troy ounce for the first time since October 4. Although expectations of higher rates tend to be bearish for gold, political uncertainty is driving up its price.
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Industry Focus: Healthcare The patent cliff has been a driving force in M&A activity within the life sciences industry. Over 150 drug patents are set to expire within the next 10 years, removing $190bn in patent-protected sales. These expiring patents, coupled with government pricing pressures in the aftermath of blunders by Valeant Pharmaceuticals and Martin Shkreli and increasing R&D costs, have urged pharmaceuticals and biotechnology firms to not only replenish their pipeline by acquiring small and midcap companies with promising drugs, but also invest in the development of orphan disease-focused drugs, which are drugs that service rare conditions. Notably, Horizon Pharmaceuticals recently acquired Raptor Pharmaceuticals for $800M in order to gain access to its line of orphan-disease drugs. Companies like Horizon, who have relied on generic-drug sales, are diversifying their product lines to incorporate orphan drugs in order to shield against the declining margins of traditional generic-drug sales. This week’s market activity follows much of the same trend. On Wednesday, Celldex Therapeutics acquired Kolltan Pharmaceuticals for $235M, adding a diverse portfolio of cancer and tumor-related drugs to its promising pipeline. Palatin Technologies, a biotech best known for its development of bremelanotide, a drug aimed at treating low sex drive in women, has also received several offers this week and is exploring a sale. Bremelanotide, in the final stages of clinical trial, has received positive reviews and could be a major player in an estimated $2bn market for drugs that treat low sexual desire for women.
Transaction Highlights CenturyLink acquires Level 3 for $25bn On Monday, telecommunications giant CenturyLink announced a deal to acquire Level 3 Communications for $25bn. CenturyLink agreed to pay $26.50 per share and to exchange 1.4286 shares of CenturyLink stock for each Level 3 shares in a cash-and-stock deal, implying a purchase price of $66.50 per share with a premium of 42%. This transaction will help strengthen CenturyLink’s corporate client base and expand both its international presence and service capabilities, adding more fiber networks and enhanced broadband infrastructure. CenturyLink has secured $10.2bn in debt financing from Bank of America Merrill Lynch and Morgan Stanley. Glen Post, CEO and President of CenturyLink, remarked, “The digital economy relies on broadband connectivity, and together with Level 3 we will have one of the most robust fiber network and high-speed data services companies in the world.” The deal is expected to produce almost $1bn in cost-saving synergies and reduce CenturyLink’s tax burden by adding $10bn in accumulated NOLs to CenturyLink’s balance sheet. Bank of America Merrill Lynch and Morgan Stanley were financial advisors to CenturyLink, with Evercore also contributing and providing a fairness opinion. Citigroup was the financial advisor to Level 3, and Lazard provided a fairness opinion. Broadcom acquires Brocade for $5.5bn Last Wednesday, Broadcom announced plans to acquire Brocade Communications for $5.5bn. Broadcom is paying $12.75 per share, implying a 47% premium, in this all-cash deal. While Broadcom has focused its business on developing wireless chips, the deal will help diversify Broadcom’s business line to include cloud-storage capabilities, a decision that comes in the midst of a slowing market for wireless chips. Although Brocade offers a diversified platform of services such as networkswitching technology, Broadcom plans on liquidating Brocade’s assets outside of its cloud-based technology, citing that the company did not want to compete with some of its customers. Broadcom believes that the deal will be accretive and add $900M to its adjusted EBITDA by FY 2018. Evercore served as financial advisor to Brocade, and Bank of Montreal served as financial advisor to Broadcom.
Data & Indicators Current Week Date 31-Oct 31-Oct 31-Oct 31-Oct 1-Nov 1-Nov 1-Nov 1-Nov 2-Nov 2-Nov 2-Nov 2-Nov 3-Nov 3-Nov 3-Nov 3-Nov 3-Nov 3-Nov 3-Nov 3-Nov 3-Nov 4-Nov 4-Nov 4-Nov 4-Nov 4-Nov 4-Nov
Time (ET) 8:30 AM 8:30 AM 8:30 AM 9:45 AM 10:00 AM 10:00 AM 2:00 PM 2:00 PM 7:00 AM 8:15 AM 10:30 AM 2:00 PM 7:30 AM 8:30 AM 8:30 AM 8:30 AM 8:30 AM 8:30 AM 10:00 AM 10:00 AM 10:30 AM 8:30 AM 8:30 AM 8:30 AM 8:30 AM 8:30 AM 8:30 AM
Statistic Personal Income Personal Spending Core PCE Price Index Chicago PMI ISM Index Construction Spending Auto Sales Truck Sales MBA Mortgage Index ADP Employment Change Crude Inventories FOMC Rate Decision Challenger Job Cuts Initial Claims Continuing Claims Unit Labor Costs Productivity-Prel Unit Labor Costs Factory Orders ISM Services Natural Gas Inventories Nonfarm Payrolls Nonfarm Private Payrolls Hourly Earnings Unemployment Rate Average Workweek Trade Balance
For Sep Sep Sep Oct Oct Sep Oct Oct 29-Oct Oct 29-Oct Nov Oct 29-Oct 22-Oct Q3 Q3 Q3 Sep Oct 29-Oct Oct Oct Oct Oct Oct Sep
Actual 0.30% 0.50% 0.10% 5060.00% 5190.00% -0.40% 5.31M 9.27M -1.20% 147K 14.420M -39.10% 265K 2026K 3.10% 0.30% 0.30% 5480.00% 54 bcf 161K 142K 0.40% 4.90% 3440.00% -$36.4B
Statistic Consumer Credit JOLTS - Job Openings MBA Mortgage Index Wholesale Inventories Crude Inventories Initial Claims Continuing Claims Natural Gas Inventories Treasury Budget Mich Sentiment
For Sep Sep 5-Nov Sep 5-Nov 5-Nov 29-Oct 5-Nov Oct Nov
Actual -
Briefing Forecast Market Expects 0.40% 0.40% 0.50% 0.50% 0.20% 0.10% 53.7 54 5190.00% 5170.00% 0.50% 0.50% NA NA NA NA NA NA 172K 165K NA NA 0.38% 0.38% NA NA 260K 256K NA NA NA 1.20% 1.70% 1.80% 1.30% 1.20% 0.20% 0.20% 5600.00% 5580.00% NA NA 180K 175K 175K 170K 0.30% 0.30% 5.00% 4.90% 3440.00% 3440.00% -$37.8B -$38.5B
Prior Revised From 0.20% --0.10% 0.00% 0.20% -5420.00% -5150.00% --0.50% -0.70% 5.30M 8.85M -4.10% 202K 154K -0.553M 0.38% -24.70% 258K -2040K 2039K 4.30% -0.20% -0.60% 3.90% 0.043 0.40% 0.20% 5710.00% 73 bcf 191K 156K 188K 167K 0.30% 0.002 5.00% -3440.00% --$40.5B -$40.7B
Upcoming Week Date 7-Nov 8-Nov 9-Nov 9-Nov 9-Nov 10-Nov 10-Nov 10-Nov 10-Nov 11-Nov
Time (ET) 3:00 AM 10:00 AM 7:00 AM 10:00 AM 10:30 AM 8:30 AM 8:30 AM 10:30 AM 2:00 PM 10:00 AM
Briefing Forecast Market Expects Prior Revised From $18.0B $17.5B $25.9B NA NA 5.443M NA NA -1.20% 0.20% 0.20% -0.20% NA NA 14.420M 265K 262K 265K NA NA 2026K NA NA 54 bcf NA NA -$136.6B 8700.00% 8790.00% 8720.00% -