The Dow suffered losses over the week, weighed down by a dismal start to the earnings season and weakness in financial shares. Alcoa Inc. AA started the earnings season on a poor note after its earnings and revenue grew less-than-expected. Energy prices continued to remain volatile, rising and falling in consonance with news on production levels. A decline in financial shares also dragged down shares over the week.
Last Week’s Performance
The Dow decreased almost 0.2% on Friday after investors digested a weaker-than-expected jobs report. The economy added 156,000 jobs in September, less than the consensus expectations of 173,000. Monthly job additions averaged 192,000 in the past three months, weaker than last year’s robust additions of 229,000.
Fed officials, however, believed that such modest jobs expansion was more than enough for a rate hike by the end of the year. Fed Vice Chairman Stanley Fischer said that September’s jobs report was a “Goldilocks” scenario, indicating a rate hike is appropriate. Cleveland Federal Reserve President Loretta Mester added that U.S. was at full employment and an increase in rates was needed.
The index declined 0.4% over last week. Weaker-than-expected September’s jobs data weighed on the broader markets. Indications that ECB’s quantitative easing program may meet its conclusion before the scheduled time of Mar 2017 also dented investor sentiment. British Prime Minister Teresa May indicated that the process of U.K.’s exit from the EU will start by March-end, adding to the bearish sentiment.
The Dow This Week
The index gained 0.5% on Monday lifted by gains in energy shares. Oil prices moved north on Monday after Saudi Arabia’s energy minister, Khalid al-Falih, said he was hopeful that major oil producing nations will agree to trim production level before year-end. He added that it is also “unthinkable” that oil prices could rise another 20% this year to touch $60 a barrel.
Vladimir Putin also supported curbs on petroleum output. Putin was ready to “join common efforts to limit oil production and urges others to as well.”Dow components such as Chevron CVX and Exxon Mobil XOM surged 1.7% and 1.9%, respectively. Hillary Clinton’s lead in the U.S. presidential campaign against Donald Trump also added to the bullish sentiment.
The index decreased 1.1% on Tuesday following a disappointing start to the third quarter earnings season. Alcoa unofficially kicked off the earnings season and its shares tanked 11% after its earnings and revenue grew less-than-expected. This was the biggest daily percentage drop for the stock since Aug. 8, 2011.
A retreat in oil prices also dented investor sentiment. The IEA said oil production by OPEC rose to record highs in September, which eventually dragged oil prices down. The top energy watchdog said that OPEC crude output rose by 160,000 barrels a day (bpd) to a record 33.64 million bpd last month. A stronger dollar too had a negative impact on oil prices.
The index gained 0.1% on Wednesday, led higher by real estate, utilities and telecom sectors. Big dividend payers posted significant gains after Fed minutes provided little insight about the next interest rate hike. Minutes from the Fed’s September meeting showed that policy makers were divided over the timing of a rate hike. While some officials called for a rate hike “relatively soon”, others wanted to see further progress towards full employment and faster inflation.
The index lost 0.3% on Thursday, dragged down by declines in financial shares. Concerns about Deutsche Bank AG DB’s liquidity adversely affected financial shares, while Wells Fargo & Co WFC added to the atmosphere of mistrust. Deutsche Bank has endured questions about whether it will be able to withstand the cost of any settlement with the U.S. Department of Justice. Wells Fargo, on the other hand, was accused of creating fake accounts that led to its CEO John Stumpf’s resignation.
Meantime, Fed policy makers were divided over the timing of a rate hike, which also had a negative impact on financial shares. Investors were also nervous over weak Chinese trade data.
Components Moving the Index
General Electric Company GE recently declared its intention to purchase LM Wind Power for $1.65 billion (€1.5 billion). This deal is expected to close in the first half of 2017, while it is expected to be accretive to earnings in 2018. GE has a Zacks Rank #3 (Hold).
Headquartered in Kolding, Denmark, LM Wind Power is the world's largest independent supplier of rotor blades to the wind industry. It has produced over 185,000 blades since 1978. The company is owned by Doughty Hanson, a London-based private equity firm. LM Wind Power has its operations across four continents in eight countries, including Denmark, Spain, Poland, Canada, the U.S., India, China and Brazil.
Per the terms of the acquisition, it will provide wind turbine blades for General Electrics’ Renewable Energy business, enhancing its ability to augment energy output and create value for its onshore and offshore customers.
The Boeing Company BA recently clinched a contract for offering labor, services and materials for the Trident II (D-5) strategic weapon system’s inertial navigation equipment. Work related to this contract is scheduled to be over by Sep 30, 2019. Boeing has a Zacks Rank #3.
The Trident II D5 is the latest generation of the U.S. Navy's submarine-launched fleet ballistic missiles, developed and produced by Pentagon’s largest contractor – Lockheed Martin Corp. LMT.
Valued at $32.8 million, this contract was awarded by the Strategic Systems Programs, Washington, DC. On full exercise of the contract’s options, its value will stand at a maximum of $88.9 million. (Read: Boeing Secures $32.8M Deal to Serve Trident II D5 Missile)
In a separate development, Boeing has reported third-quarter 2016 deliveries, wherein commercial deliveries dropped 5.5% but defense shipments were up 4.2% year over year. Boeing’s third-quarter 2016 commercial deliveries of 188 airplanes were down due to lower demand for the 737, 777 and 787 Dreamliners. Sequentially, deliveries reflected a 5.5% decline. (Read: Boeing Reports Q3 Deliveries: Commercial Down, Defense Up)
Chevron, the second-largest U.S. oil producer, recently confirmed that it is contemplating the sale of its natural gas assets in Bangladesh to counter weak commodity prices. The assets that are likely to be sold produce natural gas and condensate from three fields in the northeast of the country.
In Bangladesh, Chevron operates the Bibiyana, Jalalabad and Moulavi Bazar fields. Moreover, the company sells all the production to state oil company Petrobangla. Its net daily production last year averaged 720 million cubic feet of natural gas and 3,000 barrels of condensate. According to Bloomberg reports, Chevron is seeking about $2 billion from the potential sale of natural gas assets in Bangladesh. The stock holds a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Coca-Cola Company KO plans to buy Anheuser-Busch InBev's (“ABI”) stake in Coca-Cola’s largest African bottler – Coca-Cola Beverages Africa (“CCBA”). This closely follows the acquisition of SABMiller by ABI on Oct 10.
Zacks Rank #3 rated Coca-Cola exercised its right to buy the African bottler under a change-of-control clause as it plans to execute its long-term strategy in these markets in collaboration with others. Coca-Cola also plans to negotiate the terms of the buyout with ABI and discuss the refranchising of CCBA with the other partners.
As per Coca-Cola officials, "While the company respects ABI’s capabilities, it has a number of existing partners who are highly qualified and interested in these bottling territories.” (Read: Coca-Cola Company (KO) to Acquire ABI's Stake in CCBA)
United Technologies Corporation’s UTX unit Pratt & Whitney recently entered into a definitive agreement with Hanwha Techwin Co. to acquire 30% equity interest in P&W NGPF Manufacturing Company Singapore Pte. Ltd. (PWMS). Financial details of the deal remain under wraps. Established in 1952, Hanwha is a leading business conglomerate in South Korea. United Technologies has a Zacks Rank #3.
Per the joint venture, Pratt & Whitney will offer its complete assistance in the sourcing of critical parts while providing capital investment requirements with Hanwha. In addition, Hanwha has also acquired a call option from Pratt & Whitney to purchase more equity by 2023. The Singapore division specializes in the manufacture of hybrid metallic fan blade parts and high-pressure turbine disks for the company’s PurePower Geared Turbofan (GTF) engine family. (Read: United Technologies' Segment Inks Deals to Augment Growth)
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 lost 1%.
Last 5 Day’s Performance
Next Week’s Outlook
Markets remained weighed down by concerns about the nature of this earnings season. Additionally, uncertainty prevailed over the direction of oil prices and the likelihood of a Fed rate hike. Investors were also worried about financial shares due to ensuing investigations against key players from the sector. The nature of upcoming economic reports, including data on retail sales and industrial production are likely to determine the movement of stocks in the week ahead.
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