MarketView for April 29

 

 

Summary

 

The S&P 500 index ended at an all-time high on Monday as growth-oriented stocks, including energy and technology, lead the way to the index's sixth rise in the past seven sessions. Stronger-than-expected housing data also to the market ebullience, as did Italy's formation of a new government, ending months of uncertainty and raising hopes for new policies to promote growth in the euro zone's third-largest economy.

 

Pressure has grown on the European Central Bank to lower interest rates with the euro zone mired in recession. Wall Street is evenly split on whether the ECB will cut rates at its meeting on Thursday, according to a Reuters poll.

 

Wall Street followed European stocks higher as Italian Prime Minister Enrico Letta urged a focus on growth policies and away from austerity measures in his inaugural speech.

 

The Fed will also meet this week for a two-day session beginning on Tuesday. The Fed is expected to maintain its stimulus policy. Data on Monday showing muted inflation gave the Fed room for accommodative measures.

 

Apple rose 3.1 percent to $430.12 after taking initial steps for what would be its first debt sale.

Among energy shares, Chevron Corp (CVX.N) rose 1.1 percent to $121.32.

 

A report showed contracts to buy previously owned homes rose last month to their highest level since April 2010, showing underlying strength in the housing market recovery, even though the pace of sales growth has cooled in recent months.

 

Moody's was the S&P 500's top percentage gainer, ending the day with a gain of  8.3 percent to close at $59.69 after the company settled a lawsuit alleging that it had misled investors about the safety of risky debt vehicles it had rated. McGraw-Hill, whose Standard & Poor's unit said it settled similar suits, rose 2.8 percent to $53.45.

 

Roper Industries fell 3.8 percent to $118.68 after reporting first-quarter revenue that missed expectations, though it raised its full-year profit outlook.

 

Of the 274 companies in the S&P 500 that have reported earnings to date for current season, 69 percent have beat analysts' expectations and 43.2 percent have reported revenue above expectations.

 

Volume was light, with about 5.10 billion shares changing hands on the three major equity exchanges, a number that was below the daily average so far this year of about 6.36 billion shares.

 

Consumer Spending Rises

 

Consumer spending rose unexpectedly during March as benign inflation supported household's spending power, a hopeful sign for an economy that lost significant momentum towards the end of the first quarter. According to a report released Monday morning by the Commerce Department, consumer spending was up 0.2 percent last month after an unrevised 0.7 percent increase in February.

 

After adjusting for inflation, spending increased 0.3 percent after advancing by the same margin in February. The spending details were included in Friday's first-quarter gross domestic product report. The report offered hope that growth in the second quarter would probably not slow as sharply as currently feared. The economy grew at a 2.5 percent annual pace in the first three months of the year.

 

Output in the first quarter was aided by a brisk 3.2 percent increase in consumer spending, despite the end in January of a 2 percent payroll tax cut. Last month, income rose 0.2 percent after a 1.1 percent increase in February. Income at the disposal of households after inflation and taxes increased 0.3 percent after a 0.7 percent gain in the prior month.

 

With income growth matching spending, the saving rate - the percentage of disposable income households are socking away - was unchanged at 2.7 percent. The report showed little inflation, with a price index for consumer spending dipping 0.1 percent, the first drop since November. A core reading that strips out food and energy costs was flat.

 

Over the past 12 months, inflation has risen just 1.0 percent, the smallest gain since October 2009 and a slowdown from the 1.3 percent logged in the period through February. Core prices are up 1.1 percent, the smallest rise since March 2011 and well below the Federal Reserve's 2 percent target. Core PCE had increased 1.3 percent in February.

 

The lack of inflation pressure gives the central bank scope to maintain its very easy monetary policy stance. Fed officials meet this week to assess the health of the economy. The Fed is widely expected to keep purchasing bonds at a pace of $85 billion a month.

 

Apple Looking to Debt Markets

 

Apple took initial steps Monday for what would be its first debt sale ever, as the U.S. computer giant lays the groundwork for what would be one of the most anticipated bond sales of the year.

 

The company was to begin investor calls today led by Deutsche Bank and Goldman Sachs, a source familiar with the situation told IFR, and filed SEC paperwork for a debt offering.

 

The only major tech company without a penny of debt on its books, Apple stunned the markets last week by announcing it could sell debt for the first time to help fund a $100 billion capital return program for shareholders.

 

Any bond offer from the makers of the iconic iPhone and iPad would be highly sought after by investors, and it is believed the company could raise funds at a cheaper rate than even Triple A rated Microsoft.

 

Apple was not immediately available for comment. It was not known if the company would look to issue debt in dollars, sterling, euros or some mix of currencies.

 

As it unveiled its first quarterly profit decline in more than a decade last week, Apple said it plans to buy back some $60 billion of shares over the next three years.

 

According to Street estimates, Apple has $145 billion of cash - but only $45 billion on hand in the US, and thus not enough to fully fund the share buy-back program. Research firm CreditSights said this meant that Apple would likely have to issue around $15 billion to $20 billion of debt for the next three years.

 

The change in strategy comes as Apple gives in to investor demands to unlock its vast pile of cash while grappling with uncertainties in the highly fluid tech sector.

 

While analysts suggest that coming to the debt markets makes sense now - with interest rates near record lows, the cost of issuing debt is cheaper than ever - Apple failed to get the coveted Triple A rating from agencies.

 

S&P awarded the company an AA+ rating after last week's announcement, while Moody's rated it Aa1.

 

On a conference call with analysts last week, Apple CEO Tim Cook acknowledged that the company's long spectacular growth - which relies heavily on new products - had been tempered.

 

And the decision to issue debt for the first time is seen by some in the market as a recognition that the realities of the marketplace have changed.

 

Even so, any debut debt offer from the company - one of the most instantly recognized brands in the world - will surely be snapped up by investors.

 

Because it has no debt outstanding, many believe Apple could sell bonds at tighter yield spreads than Microsoft, which last Thursday priced a new US$1billion 10-year bond at 70 basis points (bp) over Treasuries.

 

Bankers estimate that Apple could issue 10-year bonds at around 45bp-50bp over Treasuries. Given the funding needed and the size of investor demand, many believe Apple would issue debt across multiple maturities and currencies.