On Friday, the major indices ended an upbeat week with modest gains despite pulling back from their early highs. The S&P 500 gained 0.5% while the NASAQ underperformed; only rising mildly by 0.2%. On the week, the Dow Jones increased 91.06 points to close at 17810.06 while the NASDAQ was up 11.10 points to close at 4,712.97. The S&P 500 advanced 10.75 points to close at 2,063.50.
The stock market – and specifically equities – advanced in the early morning hours after two major global central banks made some surprising announcements. Most notably, the People's Bank of China announced its first rate cut in two years, lowering its deposit rate 25 basis points to 2.75% and trimming its one-year lending rate 40 basis points to 5.60%. The news boosted U.S. futures and European equities, while comments made by European Central Bank (ECB) President Mario Draghi also contributed to increased risk tolerance.
S&P 500 (November 17th- 21st, 2014)
Draghi reminded the markets that low Eurozone inflation has become increasingly challenging and the central bank is ready to act fast if current trends continue. The euro responded by falling near to its early November low, while the U.S. dollar strengthened.
Cyclical sectors fared better than their defensively-oriented counterparts with commodity-linked groups posting solid gains. The strength in these areas could be traced back to the news of the rate cut in China that underpinned miners and steelmakers. For instance, Rio Tinto surged 4.9% while the broader materials sector settled 1.3% up.
Also of note, the energy sector was up 1.2% with help from crude oil, which rose 1.1% to $76.53/barrel. However, crude ended well below its early high in the neighborhood of $77.75/barrel.
Elsewhere, the consumer discretionary sector (up 0.2%) could not hold its early gain amid weakness in select retailers. Similarly, technology (up 0.2%) couldn’t maintain much of its opening advance with Apple, Intel, and Microsoft pressuring the top-weighted sector from its early high.
On Friday, Chinese firm Alibaba continued to hit the financial headlines with its announcement of its sale of a large bond. Alibaba Group Holding sold the largest bond by an Asian company Thursday evening through a $8 billion six-tranche offering. The tight pricing achieved on the deal led many to believe the US-listed Chinese ecommerce giant got away without paying a Chinese premium.
Over the course of the 24-hour time frame of sorting the deal, orders topped at US$57 billion before settling at close to US$55 billion. U.S. investors anchored the trade by taking about three-quarters of the notes. The company hasn’t disclosed the distribution statistics.
Alibaba (November 17th – 21st, 2014)
Analysts suggest that this is a defining trade not just for the sheer size, but the fact that it got priced against a peer group in a developed market. Alibaba bonds priced through some of the U.S. blue chip tech giants such as Amazon and eBay. Alibaba achieved tight pricing as it was clear in positioning away from China. Asian investors, whose orders exceeded US$11 billion across the tranches, were allocated a mere 15%-20% of the notes, sources noted.
Asian traders generally found Alibaba bonds expensive as they have many other Chinese credits that offer higher risk-adjusted premiums. According to a research note published by Nomura yesterday, Chinese credits typically pay a 20bp-50bp premium to their American peers due to the “China Discount” driven by the headline risk of the country and other technical factors.
The 20-year bond was a clear outperformer in the secondary market, tightening more than 10bp in the Asia morning. The other tranches were around par or a couple of basis points wider by early afternoon in Asian hours.
Despite this achievement, Alibaba’s stock performed best at the start of the trading week. For the week, Alibaba’s stock soared at the start of the week, reaching a weekly high of $114.95 on Monday before the stock reached a weekly low of $107.50 on Wednesday.
the S&P 500 experienced a major spark first thing on Friday following the release of data from the ECB and China, before the index declined slightly. Those that traded binary options based on the value of the S&P 500 through a binary put option first thing on Friday morning would have been “in the money” by midday of the same trading day.
the pound had a range of movement throughout the week, based on much speculation over the release of its inflation figures on Friday. Those that traded binary options based on the value of the GBP/USD currency pair first thing on Thursday morning through a binary call option would have experienced successful results by midday of the same trading day.
there was a lot of interest and excitement around Alibaba’s stock this week with its bond selling activity. Those that traded binary options based on the value of this stock first thing on Wednesday morning through a binary call option would have been “in the money” by the afternoon of the same trading day.
The week ahead will involve a range of U.S. and global data that is bound to cause some movement in the markets. There are no major data releases scheduled for Monday but on Tuesday, November 25th U.S. Gross Domestic Product (GDP) and Consumer Confidence figures will be released. Then, on Wednesday, November 26th U.S. jobless claims and new home sales data will be announced. If there is a further decline in U.S. jobless claims, this should spark further growth in the value of U.S. indices such as the S&P 500 and NASDAQ. On Thursday, markets in the U.S. will be closed for Thanksgiving Day.
Economic data coming out of Europe and China caused a lot of movement across the global markets. In the U.S., further sparked growth for U.S. indices, allowing them to set new records. It’s clear that the U.S. economy is showing signs of continued optimism and strength. With further quantitative easing measures in the Eurozone and China, time will tell if they will soon experience similar growth and success.
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