Thursday, May 28, 2015
Headlines about the sharp sell-off in Chinese stocks and the ongoing Greek negotiations provide the backdrop for today’s action, with the major indexes on track to open modestly in the red. This comes a day after solid gains across the board that pushed the Nasdaq into record territory. Stocks have maintained a positive bias lately, but essentially remain in a narrow range.
Chinese stocks have been red hot lately, but they fell sharply on Thursday, with the Shanghai composite down -6.5% in Thursday’s session. There is no one factor that drove the sell-off, though a number of small factors came together to let some air out of what has been shaping up as a growing bubble.
Among the reasons cited for the Thursday declines were sales by the China sovereign-wealth fund, restrictions by brokerage firms on margin debt and some incremental liquidity restrictions by the country’s central bank. But despite the Thursday sell-off, the Shanghai Composite is still up more than 40% for the year and remains the top performing index in the world.
The momentum in Chinese stocks has been particularly perplexing given the ongoing slowdown in the country’s economy. But fiscal and monetary stimulus measures have been giving the market a big boost.
Hard to tell whether the China sell-off was a one-off or the start of something enduring. But we have no such questions about the end-point for the latest episode in the never-ending Greek drama.
Greece has to make a major payment to the IMF next week for which it doesn’t have the required cash. There have been conflicting reports about progress in the Brussels negotiations between the country and its creditors, with the Greek government announcing progress that seemed to indicate that a deal was near. But European officials played down those hopes, bringing down market euphoria of an imminent deal in today’s European session.
That said, yields on shorter maturity Greek government bonds came down more than 50 basis points today on deal hopes. But with yields on those bonds around 22.5%, they still reflect a high probability of a default. With the June 5 repayment date around the corner, Greece doesn’t have the luxury to delay a deal any longer.
In a major corporate deal, Avago (AVGO) is acquiring fellow chip-maker Broadcom (BRCM) for $35 billion in cash and stock. Avago, which was spun out of Agilent (A) some time back, makes chips for the wireless communications space, will gain in size and scope as a result of this deal that will help it better compete in the semiconductor space.
The company has been fairly active on the M&A front, having made roughly $8 billion worth of acquisitions in the last few years, including its purchase last year of LSI Corp and Emulex Corp this year. But this is by far the biggest deal for Avago and will strengthen its standing in the communications network end market. The stock has been a strong performer lately, up in excess of +30% year to date. No doubt, the stock will serve as a currency in the deal.
Sheraz Mian
Director of Research
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