The Dow had a good week but gains were kept in check by unrest in Iraq. New deals and positive economic data helped the blue chip index register marginal gains on Monday. The Dow moved upward on Tuesday, led by gains in financials and small cap stocks. Encouraging indications from the Fed helped the blue chip index post gains on Wednesday. The effect of Wednesday’s policy statement continued into Thursday as the Dow managed to rise for the fifth successive session. During the first four trading days, the Dow has gained 0.84%.
Last Week’s Performance
The Dow gained about 0.3% on Friday following President Barack Obama’s decision to refrain from sending in ground troops to Iraq. His comments partially eased concerns about oil supply disruption due to the ongoing Iraqi sectarian clash. Intel Corporation’s (INTL) second-quarter revenue forecast hike also helped benchmarks shrug of early jitters caused by weak consumer sentiment data. The Thomson-Reuters/University of Michigan preliminary June reading on consumer sentiment dropped to a three-month low of 81.2 from May’s final reading of 81.9.
For the week, the Dow lost 0.9%. Merger and acquisition activities and a rally in small-cap stocks had propelled benchmarks to record highs on Monday. However, the rally halted on Tuesday as investors focused on valuations. The S&P 500 traded at 16.5 times the forecasted earnings of its members. Moreover, the gauge’s 14-day relative strength index was at 73.7 on Tuesday, above the key technical level of 70. Any reading above 70 indicates a sell signal.
Benchmarks ended in the red on Wednesday after World Bank trimmed its 2014 global growth forecast to 2.8% for the year. In January, the bank had projected that the global economy will expand by 3.2% this year. On Thursday, a spike in crude oil prices and discouraging economic data dragged the benchmarks down.
The Dow This Week
Stocks had a volatile run through Monday’s session, rebounding from a mid-day slump to settle in the green powered by new deals and upbeat economic reports. Encouraging data on manufacturing activity in the New York region, industrial production and U.S. homebuilders’ confidence also added to the rally. However, Iraq’s political tensions and its effect on crude oil prices kept gains in check. The Dow gained a meager 0.03%.
The blue chip index gained about 0.2% on Tuesday after gains in financial and small-cap stocks helped benchmarks shrug off initial losses to end in the green. Stocks had opened in the red owing to dismal housing data. However, improved consumer price data firmed up the US dollar, also leading to expectations of a rate hike. Markets secured their third-straight positive finish on a day when the two-day FOMC meeting commenced. Gains were kept in check though, owing to concerns over unrest in Iraq.
Benchmarks’ upward move continued for the fourth-straight trading day on Wednesday after the Federal Reserve kept its monetary policy “highly accommodative” and suggested there would be no immediate rate hikes. The central bank’s move to trim the bond repurchase yet again by $10 billion was widely accepted as the benchmarks scored their best gains in about four weeks. The Dow closed shy of a three-digit gain as it jumped 98.13 points, or 0.6%,
The Dow added 0.1% on Thursday as optimism from Wednesday’s policy statement continued. Stocks had dropped to the red zone for a considerable period during the afternoon before managing a rebound almost at the end of the session. Economic data on initial claims and business activity were positive. The Labor Department reported a 6,000 decline in initial claims to 312,000 in the week ending June 14. The Philadelphia Fed’s manufacturing index showed business activity was at its best since September last year. However, gains were muted though owing to investors locking their gains.
Components Moving the Index
Intel Corporation upped its second quarter revenue and gross margin forecasts. The largest semiconductor products manufacturer expects second-quarter net sales of $13.7 billion (+/- $300 million), up from $13.0 billion (+/- $300 million). The company also increased gross margin guidance by 1 percentage point (pp) to 64% (+/- 2 pp). The annual tax rate is expected to be 27%, down from 28% expected earlier.
The company also expects full-year revenues to improve versus the prior expectations of numbers being in line with the 2013 level. Gross margin is now expected in the upper half of the previous range of 61% (+/- a few percentage points). Shares of Intel increased 6.8% on Friday following the announcement and also helped the broader markets.
The Boeing Co. (BA) has secured a commitment of a sizable order from Chinese carrier China Eastern Airlines Corp. for 80 737 single-aisle jets. The deal, a mix of the current 737-800 and the new 737 MAX model, is valued at a whopping $7.4 billion at current list prices.
Upon finalization, the contract will likely be the largest purchase by any Chinese airline for single-aisle airplanes. The jets are expected to be delivered in stages between 2016 and 2020. As part of the accord, China Eastern would also dispose of 20 ageing Boeing aircraft – 15 737-300s and 5 757s – to Boeing for an unspecified amount of cash.
Chevron Corp. (CVX) announced that a subsidiary – Chevron Global Energy Inc. – has sold to the Republic of Chad its 25% non-operated interest in an oil producing acreage located in southern Chad. This is in addition to a stake in the related pipeline system. Chevron closed the deal on Jun 13 and received about $1.3 billion.
The assets under consideration include 7 oilfields located in the Doba Basin in which the company holds stake. These fields had an average net yield of 18,000 barrels of oil per day in 2013. The transaction also covers sale of Chevron’s 21% non-operated interest in a pipeline that delivers oil to the Cameroon coast and other related marine facilities.
Johnson & Johnson (JNJ) has joined forces with Vertex Pharmaceuticals Inc. (VRTX) for the worldwide development and commercialization of VX-787. The candidate is being developed for the treatment of influenza.
Vertex Pharma will be receiving an upfront payment of $30 million from Johnson & Johnson as per the deal. Johnson & Johnson will enjoy full global development and commercialization rights to VX-787. Vertex Pharma is also eligible to receive development and commercial milestone payments along with royalties on future product sales. The deal is however subject to the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act.
Performance of the Top 10 Dow Companies
The table given below shows the price movements of the 10 largest components of the Dow, which is a price weighted index, over the last five days and during the last six months. Over the last five trading days, the Dow has gained 1.04%.
|
Ticker |
Last 5 Day’s Performance |
6 Month Performance |
|
V |
-0.60% |
-2.62% |
|
IBM |
+0.21% |
+1.56% |
|
GS |
+1.96% |
-3.10% |
|
MMM |
+0.87% |
+5.68% |
|
BA |
+0.15% |
-2.82% |
|
CVX |
+4.71% |
+7.50% |
|
UTX |
+0.81% |
+6.25% |
|
XOM |
+0.92% |
+4.00% |
|
MCD |
+2.35% |
+5.60% |
|
CAT |
+0.91% |
+20.60% |
Next Week’s Outlook
Positive indications from the Fed and a series of encouraging economic reports have helped the Dow register strong gains. Mergers and acquisitions activity has also aided the markets. The Fed’s policy statement has lifted investor sentiment with its effects spilling over into a second successive day.
The situation in Iraq has limited gains during such sessions. By and large, however, other positive indicators including economic data have helped stocks override such concerns. Next week has several important economic reports lined up. This includes data on the housing sector, consumer confidence, durable orders and personal consumption. However, GDP data holds the key and a further downgrade might just spoil the markets’ positive run.
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