The Dow experienced a chequered week marked by surging volatility. Investor concerns about an imminent rate hike ebbed on Monday, leading to gains. However, slowdown in global oil demand growth dragged down shares on Tuesday. The index moved lower on Wednesday due to a slump in crude-oil prices. An Apple-inspired tech rally, rise in oil prices and reduced expectations of an imminent rate hike helped the Dow gain on Thursday.
Last Week’s Performance
The Dow tanked nearly 400 points, or 2.1% last Friday posting its biggest one-day percentage drop since late June. Rate hike fears dampened investor sentiment following hawkish comments from Boston Fed President Eric Rosengren. Rosengren backed gradual interest rate hikes and cautioned that waiting too long for a rate hike might adversely affect some asset markets like commercial real estate.
Oil prices also fell as fears of glut persisted, while investors remained nervous following a nuclear test by North Korea. Domestic crude inventories suffered their steepest fall since 1999. But, traders and money managers view such a large drop are mostly due to inclement weather that curtailed production and prevented imports into the U.S. Gulf Coast.
The Dow declined 2.2% over last week. Fresh signs that the Fed could back away from easy-money policy along with slump in oil prices led the selloff. Additionally, the ECB kept interest rates unchanged and refrained from announcing additional stimulus measures, disappointing investors.
The Dow This Week
The index gained 1.3% on Monday after investor concerns about an imminent rate hike ebbed. Federal Reserve Governor Lael Brainard said that it would be wise for the Fed to keep monetary policy loose. Muted inflation and uncertain global developments made her cautious against hiking rates too fast. Two other officials also said that the Fed shouldn’t be in a hurry to raise rates.
The index declined 1.4% on Tuesday on Tuesday mostly dragged down by energy shares. Slowdown in global oil demand growth weighed on oil prices. According to the IEA, demand for global oil sank to 800,000 barrels per day (bpd) in the third quarter of this year. IEA also trimmed its 2016 demand growth forecast by 100,000 bpd to 1.3 million bpd.
The IEA said that demand growth has very nearly vanished in developed countries, while it slowed down drastically in Asian powerhouses such as China and India. Investors also remain on the edge as Fed officials differ on rate hike expectations. The VIX rose 18% to close at 17.85, implying that investors foresee further downward swings in the stock market.
The index lost 0.2% on Wednesday due to a slump in crude-oil prices. Increase in stockpiles of gasoline and distillates, including heating oil and diesel fuel adversely affected oil prices. Meanwhile, Libyan officials confirmed that they plan to load the first crude-oil cargo in almost two years from Ras Lanuf.
Dow components such as Chevron Corp. CVX and Exxon Mobil Corp. XOM dropped 1% and 0.7%, respectively. Shares of Apple Inc. AAPL climbed 3.5%, with its market capitalization topping $600 billion for the first time since April as investors believe that its new iPhone would shore up sales.
The index gained almost 1% on Thursday following an Apple-inspired tech rally, rise in oil prices and reduced expectations of an imminent rate hike. News that the first set of iPhone 7 were sold out globally helped Apple’s shares jump 3.4% to $115.57 on Thursday, its highest close since December. The iPhone maker registered its first four-day winning streak with successive gains over 2% since Apr 2009.
Meanwhile, retail sales and industrial activity fell more than expected last month, while manufacturing activity slumped and jobs growth slowed down. All these discouraging results lowered expectations that the Fed would hike rates at its next meeting.
Components Moving the Index
3M Company MMM recently inked a definitive agreement to divest its temporary protective films business to Pregis LLC, a leading global provider of innovative protective packaging materials, for an undisclosed amount. Despite annual global sales of approximately $50 million, Zacks Rank #3 (Hold) rated 3M decided to divest the unit as it was deemed to be a non-core business in its strategic portfolio review.
The transaction is expected to be completed by the year end, subject to mandatory closing conditions and regulatory approvals. About 90 employees of the divested entity are expected to join Pregis, following the completion of the sale procedure. (Read: 3M to Divest Protective Films Business, Shares Falter)
The Boeing Company’s BA Defense, Space and Security division recently won an indefinite-delivery/indefinite-quantity foreign military sales (FMS) contract from the Pentagon for the production of Small Diameter Bomb Increment I (SDB I) weapons systems. Valued at $700 million, the contract was awarded by the Air Force Life Cycle Management Center, Eglin Air Force Base, FL. (Read: Boeing Wins $700M FMS Contract from Air Force for SDB I)
Meanwhile, In a bid to compete against Airbus Group NV’s EADSY longest single-aisle jet – A321neo, Zacks Rank #3 rated Boeing is analyzing two potential designs for a longer version of its existing 737 Max 9 model, as per a recent report by Bloomberg. The new model, to be named Max 10, will be the largest aircraft in Boeing’s 737 product line. (Read: Boeing to Redesign 737 Max 9 to Vie with Airbus A321neo)
ExxonMobil Corp. and Oil Search Ltd. recently signed a deal with Gini Energy, a company controlled by China’s Cnooc Ltd. CEO, to acquire majority interest in two deepwater exploration acreages in the Gulf of Papua.
Under the terms, Oil Search and Zacks Rank #3 rated ExxonMobil will purchase 40% stake each in two exploration licenses from Gini Energy. ExxonMobil will become operator of the licenses, while Gini Energy will retain 20% equity holding.
The two licenses, namely PPL 373 and PPL 375, are situated roughly 150 kilometers south of Port Moresby. They cover a combined 24,936 kilometers, with water depths ranging from 1000 meters to 2500 meters. (Read: Exxon, Oil Search to Buy 40% Stake in Gulf of Papua Acreage)
General Electric Co. GE unit GE Digital, recently acquired Meridium, Inc., a global leader in asset performance management (APM) software and services for asset-intensive industries. The transaction marks a logical extension to its long-standing relationship with Meridium since Jul 2014, wherein it acquired a 26% ownership stake in it. The total acquisition, including the original investment, was worth an enterprise value of $495 million.
GE Digital will utilize its Predix platform along with Meridium’s enterprise software solutions to improve the APM offering through advanced asset-centric analytics, industrial software and value-added services. The Predix software of Zacks Rank #2 (Buy) rated General Electric is designed to add intelligence to the Internet of Things applications. (Read: GE Digital Acquires Meridium to Boost Industrial Internet)
Microsoft Corp. MSFT is gradually gaining traction in the Customer Relationship Management (CRM) space. The company recently announced that it has entered into a six-year agreement with HP Inc. HPQ for the deployment of Microsoft Dynamics CRM Online at its sales, marketing and service units.
Although Microsoft did not divulge the details of the agreement, we believe the HP-deal is a major win as it demonstrates the company’s growing clout in the cloud CRM market. The stock holds a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Verizon Communications Inc. VZ seems to be highly focused in strengthening its footprint in the Internet of Things (IoT) space. Recently, the company inked a deal to acquire Sensity Systems Inc., a small Internet of Things (IoT) start-up, based in Sunnyvale, CA. Sensity Systems provides smart city solutions, enabling light owners and businesses to switch to connected LED lights from older lighting systems. (Read: Verizon to Buy Sensity Systems, Add LED to IoT Platform)
Meanwhile, Zacks Rank #3 rated Verizon recently entered into a partnership with Qualcomm Technologies, Inc., a subsidiary of Qualcomm Inc. QCOM, the largest manufacturer of wireless chipsets. This partnership will see Verizon's IoT platform, ThingSpace, being integrated into Qualcomm Technologies' MDM9206 Category M LTE modem. (Read: Verizon (VZ) Ties Up with Qualcomm, IoT Prospects Bright)
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 declined 0.9%.
Last 5 Day’s Performance
Next Week’s Outlook
Markets are passing through volatile times as Fed officials make contradictory comments about the likelihood of a rate hike. However, rate hike fears have declined over the week as the movement of oil prices took center stage. Disappointing economic reports were primarily responsible for falling rate hike odds. The fate of upcoming economic reports and oil price movement are likely to determine the movement of stocks in the week ahead.
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