Market Perspective for February 6, 2015

Stocks are set to close out a bullish week on a positive note after the Bureau of Labor Statistics announced a net 257,000 jobs were added in January, well above expectations. Wages climbed 0.5 percent on the month, the fastest growth since 2008. The BLS also revised jobs data from November and December upwards, to 423,000 and 329,000 respectively. The job growth in January may be a little overstated due to the BLS appearing to leave out job cuts in the oil and gas extraction sector, but overall there’s enough hiring in the economy to make up for job losses in the energy sector.

The S&P 500 came into Friday up 3.38 percent and is now in positive territory for the year, erasing the 3.10 percent loss in January. Stocks moved higher in early trading on the back of the strong jobs report. The sector winner on Friday was financials, which struggled in January. Higher interest rates means bigger profits for lenders.

Energy also helped push the market higher after oil prices rebounded sharply. At one point, crude oil was up roughly 20 percent from last week. The S&P 500 energy sector had gains of more than 5 percent coming into Friday trading. Although all sectors gained ground, the defensive sectors of utilities, consumer staples and healthcare lagged after leading in January.

Biotechnology weighed on the healthcare sector after Gilead Sciences (GILD), a $150 billion market cap company and a top holding in many biotechnology funds, announced a steep price cut for its hepatitis C drug. Back in December, biotech shares sank when AbbVie (ABBV) and Express Scripts (ESRX) signed a deal in which ESRX would sell ABBV’s new hepatitis C drug at a steep discount. In return, ESRX agreed to only sell AbbVie’s drug. Investors were concerned a price war could erupt and GILD’s move confirmed those fears.

The U.S. dollar also moved higher on the jobs news. With wages and job growth picking up in a month when coincident economic data was somewhat negative (which is why analysts were all forecasting slower job growth), the Federal Reserve will face greater pressure to raise rates at the earliest opportunity. The U.S. dollar was stronger against the yen and the euro on Friday as well, after falling for much of the week.

The strong dollar is starting to impact economic data, with the government announcing the December trade deficit climbed to $46.6 billion, in contrast to expectations that the deficit would fall to $38 billion. As the U.S. dollar strengthens, capital is likely to flow into the U.S., and this must be balanced by either increased U.S. investment abroad or an increased trade deficit. Since the formula for calculating GDP counts exports as a positive for growth and imports as a negative, the rise in the trade deficit will lower the GDP growth estimate for the fourth quarter of 2014. That said, the growth in the deficit is a positive sign because it reflects relative strength in the U.S. economy and the dollar.

Overseas, Greece held to its negotiating position despite intense pressure from Europe. The European Central Bank (ECB) announced it would no longer accept Greek bonds as collateral, which could starve the Greek banking system of euros. Greek shares tumbled on the news. The ECB is still providing emergency liquidity assistance, though that ends on February 25 if Greece doesn’t implement all of the existing bailout terms.

Further east, Turkey’s currency plunged to new lows versus the dollar after President Erdogan attacked the independence of the central bank. Saudi Arabia’s riyal came under pressure as well, even though the country’s reserves exceed its money supply. China’s currency reversed some of last week’s drop, but the central bank eased reserve requirements and currency markets are buzzing with rumors of a widening trading band. The yuan has been hitting the lower limit in trading recently and a widening of the trading band would allow for a larger drop in the currency.

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