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A Tranquil U.S. Equity Market Reaction To Greece PartiallyReflects Rational Market Valuations
Greek sovereign credit default swap (CDS) spreads spiked to new highs on both the trading days
before (7,891 basis points [bps]) and after (7,192 bps) Greeks overwhelmingly rejected
European austerity terms. If the referendum had passed in the affirmative, much needed bailout
funds would have prevented Greece from defaulting on its €1.5 billion International Monetary
Fund debt payment due July 7. This illustrates the near-doubling of perceived Greek credit risk
from the prior 2015 CDS high of 4,339 bps recorded on June 17.
Broad sovereign credit contagion risks, meanwhile, remain largely contained. As of July 6, CDS
spreads for many countries, such as Portugal (221 bps), Italy (148 bps), and Spain (123 bps),
held within previously existing trading ranges that Global Markets Intelligence (GMI) Research
outlined in its previous Lookout Report (see "Greek Drama Drives The Market As Contagion
Risks And Volatility Remain Contained--For Now," published June 26, 2015) (see chart 1).
Lookout Reportfrom Global Markets Intelligence
July 10, 2015
Michael G Thompson
Managing Director
Global Markets Intelligence
(1) 212-438-3480
Robert A Keiser
Vice President
Global Markets Intelligence
(1) 212-438-3540
The Lookout Report is a compendium
of current data and perspectives from
across S&P Capital IQ and S&P Dow
Jones Indices covering corporate
earnings, market and credit risks,
capital markets activity, index
investing, and proprietary data and
analytics. Published biweekly by the
Global Markets Intelligence research
group, the Lookout Report offers a
detailed cross-market and cross-asset
view of investment conditions, risks,
and opportunities.
Chart 1
Despite pre-opening indications in the futures market on July 6 that suggested a steep risk-off collapse in U.S. stocks, the
equity market actually stayed well-behaved in the immediate aftermath of the Greek referendum. The S&P 500 Index
closed at 2,068.76 on July 6, just under 3% lower than this year's settlement high of 2,130.82 recorded on May 21. The
initial restrained reactions in U.S. equities and European credit markets demonstrate the predominantly rational investor
reaction to the latest chapter in the ongoing Greek credit drama.
GMI also believes that fully valued--but still rational--equity market valuations are also helping buttress the U.S. stock
market despite elevated geopolitical and global macroeconomic uncertainty. These ambiguities can be tied to various
issues, such as the ongoing Greek bail-out negotiations, the Iran nuclear summit, the Chinese economic outlook and
related heightened volatility in Asian stock markets, and even the indeterminate outlook for U.S. monetary policy. But for
many investors, there still appears to be no alternative to high-quality U.S. stocks, as long as European sovereign credit
contagion risks remain suppressed and the U.S. economy continues to expand at the 2.25% GDP growth rate
characteristic of the recovery cycle since mid-year 2009.
Existing equity market valuations, however, rule out neither new 2015 highs for the market later this year or a 10%
near-term correction. Earlier this year, the U.S. equity market repeatedly topped out at a 17.5x forward price-to-earnings
(P/E) valuation ceiling. The market has now pulled back to a more affordable 16.5x multiple (see chart 2) due to sharply
lower stock prices as of July 8, and the chronological circumstance of moving 12-month forward earnings expectations
into the third quarter of 2015. GMI Research believes that the S&P 500 Index should remain within a 16x-18x P/E
A Tranquil U.S. Equity Market Reaction To Greece Partially Reflects Rational Market Valuations Lookout Report from Global Markets Intelligence
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valuation band until present uncertainties diminish and the rates of U.S. and global GDP growth improve. Based on
current S&P Capital IQ consensus expectations for future S&P 500 corporate earnings, this P/E ratio-based trading
bracket implies an approximate range of 1,990 to 2,235 for the S&P 500 Index, with a central tendency toward 17x and
2,110 in the coming months, barring any major exogenous shocks to the broad market outlook.
Chart 2
Nonetheless, investors should consider the following potential permutations of current geopolitical and macroeconomic
circumstances:
• Under a scenario of renewed disappointing economic growth in Europe following significant debt forgiveness
concessions to Greece, credit contagion risks could escalate in the region if separatist movements in countries, such as
Spain and Portugal, respond to economic unease by demanding similar considerations from their creditors.
• A more protracted economic slowdown or even a recession in China as government efforts to transition China toward a
domestic consumption-driven economy progress more slowly than originally envisioned, resulting in renewed
deflationary forces across the globe.
• The U.S. dollar strengthens even further in response to the Greek/Europe debt resolution that ultimately disappoints
global investors. A strengthening dollar might impart additional downward pressure on crude oil and commodity
prices, driving risk-aversion in speculative-grade bonds as an asset class and within highly leveraged industries within
the energy sector in particular.
• A general slowdown in U.S. and global GDP growth sharply diminishes corporate earnings expectations. This would
A Tranquil U.S. Equity Market Reaction To Greece Partially Reflects Rational Market Valuations Lookout Report from Global Markets Intelligence
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force investors to accept a sub-16x P/E valuation for globally focused large-cap equities in response to what has been a
subpar economic recovery cycle since exiting the 2008/2009 global financial crisis.
For the moment, GMI Research is encouraged by the resumption of U.S. non-farm payroll growth in excess of 200,000
new jobs that occurred in May and June. This followed the prior slowdown in new job creation in March and April that
came on the heels of 12 consecutive months of better than 200,000 net new job gains occurring between March 2014 and
February 2015 (i.e., outside of the severe winter weather disrupted first quarters of 2014 and 2015). Excluding a
momentous increase in perceived sovereign credit risks across Europe, we view any prospective 5%-10% correction in
stock market prices as a buying opportunity that is supported by persistent improvement in underlying U.S.
macroeconomic fundamentals, as well as the still-attractive 2.0% dividend yield associated with the S&P 500 stock index.
Inside This Issue:
Macroeconomic Overview: A Tranquil U.S. Equity Market Reaction To Greece Partially Reflects Rational Market Valuations
Greek sovereign CDS spreads spiked to new highs on both the trading days before and after Greeks overwhelmingly
rejected European austerity terms. Broad sovereign credit contagion risks, meanwhile, remained contained. This
observation, combined with rational U.S. equity market valuations and healthy underlying U.S. macroeconomic
conditions, helped stabilize the equity market in the week following Greece's public referendum result.
Economic And Market Outlook: The S&P 500 Looks For A New Earnings Barometer
Alcoa unofficially kicked off earnings season on July 8 with mixed results. The aluminum producer beat on the top line
because of strength in its aerospace, automotive, and alumina businesses; however, it missed bottom-line estimates by
$0.02, which marks only the second time the company has missed earnings estimates in 14 quarters. Historically, Alcoa
has been considered a barometer for corporate earnings. But a dramatically changing economic landscape and the weight
of commodity pricing on this global manufacturer has changed that perspective. Thus, we can throw out the old adage:
"As Alcoa goes, earnings season goes."
S&P Dow Jones Index Commentary: Dividend Growth Might Have Slowed, But The Record Still Seems Feasible For U.S.
Domestic Common Issues
Given the current declared dividend policies of the underlying companies, a catastrophic event (or government action)
would be needed for companies not to pay out a record amount this year. Dividends continue to increase in 2015, but the
rate of growth has declined. Dividends still paint a positive picture as increases remain strong and with another record of
actual cash payments expected. The question at this point is: Will we extend the four-year run of double-digit growth in
actual payments? We should be close to that mark, and while the actual rate is relevant to the official record, it is a nice
neighborhood to be in.
Leveraged Commentary And Data: Loan Market Technicals Strengthen In June Amid Strong Repayments And A CLO Surge
Loan market technical conditions firmed in June amid strong repayments reduced the stock of loans outstanding, CLO
issuance surged before quarter-end, and loan mutual fund flows remained effectively neutral. As a result, loan prices
declined only marginally despite the latest Greek debt turmoil, which more significantly dented returns of other risk assets.
In June, the excess of visible capital formation over supply jumped to a three-month high of $15.3 billion from $4.7
billion in May. A lack of supply has been the big technical story of 2015.
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R2P Corporate Bond Monitor
In North America, economic conditions remained fairly stable, which is indicative of healthy domestic demand; however,
weak overseas demand continued to weigh on the economy. The unemployment rate fell to 5.3% from 5.5% in June,
representing a seven-year low, though a reduction in the labor force partially caused the decrease. Wage growth,
conversely, remained flat. In Europe, the emphasis remains on Greece's potential exit after the Greek public voted "no" in
a referendum to agree with the eurozone's austerity demands. This left the nation and the eurozone on a knife-edge
regarding a new deal.
Capital Market Commentary: IPOs, M&A, And Debt
The first half of 2015 had the weakest amount of IPO proceeds with less than $16.7 billion in new issues. Compare that to
another weak period, second half of 2012 with $10.3 billion. The beginning of 2015 represents the slowest start of the
year since 2010 when $6.5 billion in IPOs came to market. Looking to the second half of the year, the prospects for a
strong rebound are mixed. After an extremely strong pace of M&A activity in the first half of 2015, we expect a modest
gain in deal value in the second half, according to a historic review. Specifically since 1998, U.S. announced M&A deal
value has averaged a 4.7% advance in the second half of the year from the preceding first half.
Economic And Market Outlook: The S&P 500 Looks For A New Earnings Barometer
North America
Alcoa Inc. (Alcoa) unofficially kicked off earnings season on July 8 with mixed results. The aluminum producer beat on
the top line because of strength in its aerospace, automotive, and alumina businesses; however, it missed bottom-line
estimates by $0.02, which marks only the second time the company has missed earnings estimates in 14 quarters.
Historically, Alcoa has been considered a barometer for corporate earnings. But a dramatically changing economic
landscape and the weight of commodity pricing on this global manufacturer has changed that perspective. Thus, we can
throw out the old adage: "As Alcoa goes, earnings season goes."
With Alcoa fading out, the financials sector could replace it as an earnings barometer partly because it provides a good
perspective on the economic environment given its dependence on businesses and consumers for loan demand, as well as
interest rate movements in achieving profitability. Furthermore, reporting early is key to being an early-season predictor.
The sector and specifically the banks will dominate the earnings calendar in the second week of reporting season as
JPMorgan Chase & Co., Wells Fargo & Co., BlackRock Inc., Bank of America Corp., The Goldman Sachs Group Inc.,
and Citigroup Inc. announce their results. The information technology sector could also be considered an Alcoa
replacement as it has the largest weighting in the index with regards to not only earnings but also in determining market
direction. Therefore, we'll be keeping a close eye on the sector as earnings unfold.
Current second-quarter 2015 estimates for the S&P 500 remain rather pessimistic at $28.42, a 4.4% decrease in earnings
year-over-year. If estimates hit their mark, this will be the first decline in growth since the third quarter of 2009. Excluding
the 60.9% decline from the energy sector, S&P 500 growth is expected to be 3.4%.
A Tranquil U.S. Equity Market Reaction To Greece Partially Reflects Rational Market Valuations Lookout Report from Global Markets Intelligence
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Chart 3
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Chart 4
As second-quarter results come in, we are placing a greater focus on future growth, which drives the market. Four sectors
are expected to propel the majority of second half growth. The consumer discretionary sector leads with 14.6% and
14.3% projections in the third and fourth quarters, respectively. That is well ahead of the -1.3% and 2.9% growth rates
anticipated for the S&P 500 in the same periods. Only financials and telecommunication services come close with
approximately a 10% average in the second half.
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Table 1
Second Half Earnings Per Share Growth By Sector
Third quarter (%) Fourth quarter (%) Fiscal-year 2015 (%)
Consumer discretionary 14.63 14.27 11.09
Consumer staples 0.03 3.65 1.26
Energy (59.43) (40.66) (54.96)
Financials 9.81 10.77 10.80
Health care 7.89 9.49 10.95
Industrials 3.72 3.16 3.81
Information technology 3.97 0.83 3.73
Materials (0.39) 5.25 1.98
Telecommunication services 6.29 14.98 6.97
Utilities 2.47 6.38 2.08
S&P 500 (1.27) 2.92 0.07
Source: S&P Capital IQ.
Analysts and investors are usually bullish in the second half of the year, but given the outsized double-digit growth
projected for the consumer discretionary group, as well as its index's impressive price outperformance, upbeat guidance
needs to be provided for the third quarter (and second half). The consumer discretionary index has appreciated 5.6%
year-to-date versus a 0.6% decline in the S&P 500. The auto retailers, cruise lines, and fast food/quick service restaurants
are expected to lead 2015 earnings growth for the sector. Companies such as General Motors Co., Ford Motor Co., Royal
Caribbean Cruises Ltd., and Darden Restaurants Inc. will be the ones to watch as they release second-quarter results.
Their sentiment regarding the consumer and the outlook will determine where S&P 500 earnings and the market could go,
making this group the best new barometer as we navigate second-quarter earnings, in our opinion.
Europe
The Greek situation continues to concern global markets. The country now has until July 12 to secure a third bailout from
its creditors and prevent a eurozone exit. Currently, the country owes €3.0 billion in debt to the European Central Bank
by July 13. Although global markets are presently subdued (see the Macroeconomic Overview above), the situation could
lead to significant market volatility.
Earnings growth for the Euro 350 is expected to be 10.8% in 2015 (versus 9.4% a month ago) and 11.6% in 2016 (versus
12.4% a month ago).
Eight of 10 sectors are expected to report growth this year. Impressively, double-digit growth is expected from seven
sectors with information technology (25.7% growth) leading the charge for the third year in a row. The consumer
discretionary (24.7%) sector, financials (20.2%), industrials (17.4%), and telecommunication services (16.4%) follow
with robust growth rates as these sectors and the overall economy are expected to benefit from the region's quantitative
easing program. Health care, utilities, and consumer staples round out the positive growth sectors with growth of 13.1%,
10.2%, and 9.7%, respectively. Energy (-32.5%) and materials (-0.5%) are the only sectors projecting a decline in growth.
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Table 2
CY 2015 And 2016 EPS And Growth Rate
--CY 2015-- --CY 2016--
EPS (€) Growth (%) EPS (€) Growth (%)
Consumer discretionary 127.66 24.70 144.43 13.10
Consumer staples 158.99 9.70 172.26 8.30
Energy 81.50 (32.50) 100.09 22.80
Financials 73.32 20.20 80.64 10.00
Health care 127.34 13.10 139.37 9.40
Industrials 108.48 17.40 120.18 10.80
Information technology 61.40 25.70 72.55 18.10
Materials 138.84 (0.50) 163.94 18.10
Telecommunication services 74.92 16.40 81.59 8.90
Utilities 94.48 10.20 96.18 1.80
S&P 350 97.86 10.80 109.17 11.60
CY--Calendar year. EPS--Earnings per share. Source: S&P Capital IQ.
Contact Information: Lindsey Bell, Senior Analyst--Global Markets Intelligence, [email protected].
S&P Dow Jones Index Commentary: Dividend Growth Might Have Slowed, But The Record StillSeems Feasible For U.S. Domestic Common Issues
Given the current declared dividend policies of the underlying companies in the S&P 500, a catastrophic event (or
government action) would be needed for companies not to pay out a record amount this year.
However, dividend payment increases have experienced a recent drop:
• The second quarter of 2015 had 562 dividend increases compared with 696 increases during the second quarter of
2014, a 19.3% decrease.
• For the 12-month period ended June 2015, 3,092 issues increased their payments, down from 3,134 in the prior
12-month period, a 1.3% decrease.
On the flip side, dividend decreases (defined as either a decrease or suspension) have increased:
• In second-quarter 2015, 85 companies decreased dividends compared to 57 in second quarter of 2014.
• For the 12-month period ended June 2015, 389 companies decreased their dividend payments, up from 254 decreases in
the prior 12-month period.
The percentage of non-S&P 500 domestic common issues paying a dividend rose slightly to 48.7% from the 48.6% during
first-quarter 2015 and the 47.1% rate in second-quarter 2014. This group's weighted dividend yield increased to 2.59%
from the previous quarter's 2.51% and the 2.44% at the end of the second quarter of 2014.
Energy continues to be the weak point for dividends as it represented 45% of all dividend cuts for the U.S. equity market
during the quarter with trusts and limited partnerships becoming volatile and inconsistent in their payments.
Within the large-cap S&P 500, 421 issues (83.9%) of the 502 issues currently pay a dividend. All 30 members of the Dow
Jones Industrial Average pay a dividend.
Within the mid-cap S&P 400 and small-cap S&P 600, 70.5% and 54.2%, respectively, pay dividends.
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Index-level yields continue to vary greatly with large-caps at 2.09%, mid-caps at 1.54%, and small-caps at 1.34%. For
paying issues, the yields across market-size classifications continue to be compatible with each other with large-caps at
2.45%, mid-caps at 2.18%, and small-caps at 2.26%.
Dividends continue to increase in 2015, but the rate of growth has declined as year-to-date posted 1,577 increases
compared with 1,686 for the same period in 2014 and 1,267 in 2013. Dividends still paint a positive picture as increases
remain strong and with another record of actual cash payments expected.
The question at this point is: Will we extend the four-year run of double-digit growth in actual payments? We should be
close to that mark, and while the actual rate is relevant to the official record, it is a nice neighborhood to be in.
Table 3
Quarterly Dividends
Period No. of positive dividend actions No. of negative dividend actions
Q2 2015 562 85
Q2 2014 696 57
Q2 2013 591 65
Q2 2012 505 37
Q2 2011 444 21
Q2 2010 335 34
Q2 2009 233 250
Q2 2008 455 97
Q2 2007 542 18
Q--Quarter. Source: S&P Dow Jones Indices
Table 4
Annual Dividends
No. of positive dividend actions No. of negative dividend actions
12 months ended June 2015 3,092 389
12 months ended June 2014 3,134 254
2013 2,895 299
2012 2,887 275
2011 1,953 101
2010 1,729 145
2009 1,191 804
2008 1,874 606
2007 2,513 110
2006 2,617 87
2005 2,518 84
2004 2,298 62
2003 2,162 104
2002 1,756 135
2001 1,668 205
2000 1,886 137
1999 2,125 144
Source: S&P Dow Jones Indices
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Contact Information: Howard Silverblatt, Senior Index Analyst--S&P Dow Jones Indices, [email protected].
Leveraged Commentary And Data: Loan Market Technicals Strengthen In June Amid StrongRepayments And A CLO Surge
Loan market technical conditions firmed in June amid the following:
• Strong repayments reduced the stock of loans outstanding,
• Collateralized loan obligation (CLO) issuance surged before quarter-end, and
• Loan mutual fund flows remained effectively neutral.
As a result, loan prices declined only marginally despite the latest Greek debt turmoil, which more significantly dented
returns of other risk assets.
Table 5
Returns
June 2015 (%) Year-to-date (%)
S&P/LSTA Index (0.42) 2.83
BAML High-Yield Master (1.53) 2.49
10-year Treasury (1.91) (0.51)
S&P 500, including dividends (1.94) 1.24
BAML High-Grade Corp. (1.64) (0.46)
BAML--Bank of Americal Merrill Lynch. Sources: S&P Capital IQ LCD and Bank of America Merrill Lynch.
In June, the excess of visible capital formation over supply jumped to a three-month high of $15.3 billion from $4.7
billion in May.
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Chart 5
A lack of supply has been the big technical story of 2015 (see chart 6). In June, the amount of S&P/LSTA Index loans
outstanding fell to a four-month low of $835.9 billion from $839.2 billion in May. Furthermore, in the first half of 2015,
the universe of index loans expanded by just $853 million a month, on average, down from $12.5 billion in 2014.
A Tranquil U.S. Equity Market Reaction To Greece Partially Reflects Rational Market Valuations Lookout Report from Global Markets Intelligence
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Chart 6
This snail-like pace of net new supply creation reflects lackluster new-issue activity, on the one hand, and the still strong
pace of repayments on the other. In June, arrangers allocated and broke to market $16.5 billion of new institutional loans
compared with $22.6 billion of index repayments. In the first half of 2015, moreover, average monthly break
volume--sans repricings/refinancings--was $14.9 billion, compared with $21.9 billion in 2014, and monthly repayments
declined only slightly to $14.2 billion from $15.7 billion.
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Chart 7
On the demand side of the technical ledger, CLO volume bounced back to a three-month high of $12.7 billion in June,
from $5.7 billion in May, as managers and arrangers took advantage of weaker prices in the secondary market to fill
warehouses and print new vehicles before quarter-end.
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Chart 8
Surging CLO issuance more than offset the fact that retail investors withdrew $1.2 billion from loan mutual funds that
report weekly to Lipper FMI in June--the most red ink since January--after putting $388 million to work in the category in
May.
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Chart 9
The other technical factor that moved positively in June is bid-wanted-in-competition volume, which slowed to a
four-month low of $600 million, from a year-to-date peak of $1.0 billion in May.
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Chart 10
The market's underlying technical strength allowed loan prices to remain stable in June despite weakness across the capital
markets. It also allowed clearing yields to remain near their recent lows.
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Chart 11
Nonetheless, repricing activity climbed down in June to $10.8 billion from May's 26-month high of $36.6 billion as
investor fatigue with such issuer-friendly executions set in amid June's more-volatile macro environment.
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Chart 12
Looking ahead, the Greek debt situation will exert a major pull on all risk assets, including loans, though loans may
continue to be buffered somewhat by technical trends that remain positive.
For one thing, the calendar of merger and acquisition (M&A)-related loans contracted to $41 billion on July 1 from a
recent post-credit-crunch high of $50.8 billion a month earlier. And there is less here than meets the eye. Sources say that
the jumbo Charter Communications Inc. and Avago Technologies Finance Pte. Ltd. deals are likely to be substantially
smaller than the original financing commitment outlined as issuers opportunistically tap all available financing sources in
the capital markets.
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Chart 13
At the same time, managers continue to harvest large-scale repayments that need to be put back to work in the asset class.
The latest example is H.J. Heinz Co.'s roughly $6.38 billion of institutional loans, which the issuer extinguished as part of
its merger with Kraft Foods Group Inc. that closed on July 2. That followed Biomet Inc.'s repayment of its $2.8 billion
term loan B in late June.
With supply likely to remain constrained in the near-term, managers worry that repricings will perk up again unless the
macro situation worsens, causing the CLO engine to stall or retail investors to step up redemptions. Participants are also
unenthusiastic about the prospects for the home stretch of 2015. In general, they expect the second half to mirror the first
and be marked by periods of accelerated opportunistic deal-making when conditions are ripe; muted leveraged buyout
activity for the reasons already discussed; and a handful big-ticket strategic M&A trades--some of which are currently
being screened, arrangers note--that will be key contributors to supply, as well as fee income on the sell-side.
Follow Steve on Twitter for an early look at LCD analysis, plus market commentary.
Contact Information: Steve Miller, Managing Director--Leveraged Commentary And Data,
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R2P Corporate Bond Monitor
In North America, economic conditions remained fairly stable, which is indicative of healthy domestic demand; however,
weak overseas demand continued to weigh on the economy. The unemployment rate fell to 5.3% from 5.5% in June,
representing a seven-year low, though a reduction in the labor force partially caused the decrease. Wage growth,
conversely, remained flat.
Furthermore, confidence rose in June, according to the Conference Board, to 101.4 from 95.4 in May, driven by optimism
regarding jobs and income. The report also hinted toward a rise in spending as the "present situation" component of the
index rose significantly. Institute of Supply Management (ISM) manufacturing data continued the slow but steady rebound
in the sector since March as the index rose to 53.5 from 52.8 because of growth in new orders. The ISM
nonmanufacturing index showed a modest rise in activity with a recording of 56.0, up from 55.7. However, both segments
of the economy continued to show the drop in export demand because new overseas orders slowed in both ISM reports.
Elsewhere, factory orders data showed further decreases in new orders and shipments.
In Europe, the emphasis remains on Greece's potential exit after the Greek public voted "no" in a referendum to agree
with the eurozone's austerity demands. This left the nation and the eurozone on a knife-edge regarding a new deal.
Meanwhile, data releases pointed to marginal improvements as retail sales rose 0.2% month-over-month in June,
following a 0.7% rise in May because of food, drink, and tobacco increases. Inflation remained positive in June despite
falling slightly to 0.2% from 0.3% in May. The latest data and the Eurozone Future Inflation Gauge (EZFIG), which
trended higher, indicated that the European Central Bank's bond purchasing stimulus was having the desired effect.
Regardless of fairly stable domestic data, challenges in overseas markets led to a slight deterioration in risk-reward profiles
in North America for the month ended July 2, 2015, as credit risks outweighed continued spread widening in corporate
bond markets. Credit risk (as measured by the probability of default) increased in the month, which more than offset
wider spreads across the board as market risks remained fairly stable.
Europe's overall risk-reward profiles slightly improved in the month led mainly by widening spread levels. Both credit and
market risks remained flat in spite of the political challenges in the past few weeks.
For more of our market views and sector credit opinions, please see our monthly Fixed Income Strategy, "Euro Signals
Improve Despite Potential Greek Tragedy; Weak Spots Continue To Hold Back U.S. Fed Action," published June 30,
2015.
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Table 6
North American Risk-Reward Profiles By Sector*
Scores (%) OAS (bps) PD (%) BP Vol. (%)
Consumer discretionary 4 9 0.268 (0.036)
Consumer staples 1 12 0.132 0.016
Energy (7) 24 0.159 0.000
Financials (3) 4 0.003 (0.004)
Health care (3) 4 0.016 (0.006)
Industrials (8) 13 0.238 (0.010)
Information technology (10) 7 0.001 (0.007)
Materials (2) 23 0.132 (0.015)
Telecommunications services (3) 15 0.014 (0.020)
Utilities (9) 17 (0.014) (0.030)
Average (4) 13 0.095 (0.011)
*One-month average risk-to-price score and components changes to July 2, 2015. OAS--Option-adjusted spreads. bps--Basis points.
PD--Probability of default. BP Vol.--Bond-price volatility. Source: S&P Capital IQ.
Table 7
Europe Risk-Reward Profiles By Sector*
Scores (%) OAS (bps) PD (%) BP Vol. (%)
Consumer discretionary (5) 34 (0.010) 0.058
Consumer staples 4 15 (0.004) 0.007
Energy 19 20 (0.023) (0.066)
Financials (0) 12 0.008 0.003
Health care (11) 5 0.009 (0.027)
Industrials 6 13 (0.001) (0.011)
Information technology 2 14 (0.008) (0.037)
Materials 3 (13) (0.016) (0.029)
Telecommunication services 0 21 0.011 (0.006)
Utilites 11 15 (0.010) (0.001)
Average 3 14 (0.004) (0.011)
*One-month average risk-to-price score and components changes to July 2, 2015. OAS--Option-adjusted spreads. bps--Basis points.
PD--Probability of default. BP Vol.--Bond-price volatility. Source: S&P Capital IQ.
Fabrice Jaudi, Vice President--Global Markets Intelligence, [email protected].
Kunaal Vora, Credit Research Analyst, London +44(0)207 176 8317; [email protected].
Capital Market Commentary: IPOs, M&A, And Debt
IPOs
The first half of 2015 had the weakest amount of IPO proceeds with less than $16.7 billion in new issues. Compare that to
another weak period, second half of 2012 with $10.3 billion. The beginning of 2015 represents the slowest start of the
year since 2010 when $6.5 billion in IPOs came to market. Looking to the second half of the year, the prospects for a
strong rebound are mixed. On one hand, second half IPO underwriting activity has historically averaged an 88% jump in
second half volume from the first half since 1998. However, for first halves with at least $10 billion in underwriting, the
subsequent semiannual period has registered a nearly 15% drop in proceeds. One catalyst for a second half surge may
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come from technology firms that decide to float an IPO. Such companies include Uber Technologies Inc., which recently
announced that it is seeking financing up to $1 billion from Chinese investors, and Airbnb Inc., which announced that it
has received $1.5 billion in equity funding from new investors.
Table 8
IPOs Priced In The U.S.
First half of the year (bil. $) Second half of the year (bil. $) Change (%)
1998 4.76 5.40 13.45
1999 8.78 19.28 119.59
2000 13.30 12.63 (5.04)
2001 15.97 11.00 (31.12)
2002 10.47 4.81 (54.06)
2003 0.97 6.15 534.02
2004 10.03 9.22 (8.08)
2005 10.41 8.58 (17.58)
2006 11.58 14.23 22.88
2007 15.61 17.73 13.58
2008 22.05 0.59 (97.32)
2009 2.00 16.52 726.00
2010 6.54 24.62 276.45
2011 21.61 9.78 (54.74)
2012 25.43 10.32 (59.42)
2013 18.51 29.30 58.29
2014 31.75 49.76 56.72
2015 16.64 N.A. N.A.
N.A.--Not available. Source: S&P Capital IQ.
M&A
After an extremely strong pace of M&A activity in the first half of 2015, we expect a modest gain in deal value in the
second half, according to a historic review. Specifically since 1998, U.S. announced M&A deal value has averaged a 4.7%
advance in the second half of the year from the preceding first half. Additionally, U.S. M&A activity hasn't declined in the
second six months of the year since 2009 when deal value dropped by 19%. Furthermore, three of the past five
semiannual periods have seen double-digit percentage increases.
To date, more than $93 billion in U.S. M&A deals have crossed the wire in the third quarter led by Aetna Inc., which
entered into a definitive agreement to acquire Humana Inc. for $34.5 billion in cash and stock on July 2, 2015, and
insurer ACE Ltd., which agreed to acquire Chubb Corp. for $28.3 billion in cash and stock on July 1, 2015. Given this
quick start to third quarter deal activity, the prospects for a second-half gain in M&A proceeds look promising.
Table 9
Announced U.S. Merger And Acquisition Transactions
First half of the year proceeds (bil. $) Second half of the year proceeds (bil. $) Change (%)
1998 822.5 637.6 (22.48)
1999 707.5 549.1 (22.39)
2000 936.9 789.3 (15.75)
2001 372.3 356.9 (4.14)
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Table 9
Announced U.S. Merger And Acquisition Transactions (cont.)
2002 192.4 256.9 33.52
2003 173.0 335.9 94.16
2004 422.1 380.5 (9.86)
2005 581.1 493.3 (15.11)
2006 692.3 701.3 1.30
2007 836.9 561.4 (32.92)
2008 465.3 362.4 (22.11)
2009 400.9 328.4 (18.08)
2010 419.1 420.9 0.43
2011 501.1 505.0 0.78
2012 367.8 548.6 49.16
2013 482.7 625.2 29.52
2014 646.3 866.1 34.01
2015 1,008.2 N.A. N.A.
N.A.--Not available. Source: S&P Capital IQ.
Debt
The number of security identifiers sought among several debt assets classes reduced in June. According to Committee on
Uniform Security Identification Procedures (CUISP) Global Services, total CUSIP orders in upcoming domestic corporate
debt offerings declined to 698 orders in June from 1,004 orders in May. That result placed first-half 2015 domestic
corporate debt CUSIP orders in a negative state to year-earlier results as 5,011 orders were handled compared with 5,073
in the first half of 2014.
Table 10
Selected Debt CUSIP Requests
June May 2013 2012 Change (%)
Domestic corporate debt 698 1,004 5,011 5,073 (1.22)
Municipal bonds 1,513 1,527 8,308 6,009 38.26
Short-term municipal notes 191 93 584 606 (3.63)
Long-term municipal notes 58 13 183 270 (32.22)
International debt 297 300 1,618 1,378 17.42
PPN domestic debt 274 122 1,085 1,090 (0.46)
Total 3,031 3,059 16,789 14,426 16.38
CUSIP--Committee on Uniform Security Identification Procedures. YTD--Year-to-date. PPN--Private placement number. Source: CUSIP Global
Services. Source: S&P Capital IQ.
Contact Information: Rich Peterson, Senior Director--Global Markets Intelligence, [email protected].
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