Eclectic Topics Via Merrill Lynch

October 30th, 2014 8:02 pm | by John Jansen |

Via Merrill Lynch Research:


  • Flows catching up to returns. Mutual fund an ETF flows to risky assets, such as stocks, high yield bonds and levered loans turned more positive last week as the market rally continued. Flows in the prior week were rather mixed, however (see here), still weighed down by the sharp selloff in the first half of October. With the S&P 500 now back to the September levels flows to equity funds rebounded. Stock funds reported a $14.14bn inflow last week following an $8.75bn outflow in the prior week. Inflows to high yield remained strong at $1.47bn. Outflows from levered loan funds also moderated to a $0.38bn outflow last week (the lowest since the week ending on September 3rd), from a $1.27bn outflow in the prior week. Seen as defensive against higher interest rate risk, loan funds also likely benefited from the recent rebound in rates. – Yuriy Shchuchinov (Page 4)
  • Earnings have been supportive of small-cap rally. Good reporting season thus far for small caps…At the start of the month we saw some rocky performance by the small caps but since then the size segment has bounced back nicely. We attribute much of the bounce to a solid start to the earnings season and something we think will continue. Estimated growth seemed too conservative to us given the strength in the US economy and the fact that small caps track the US economy closely. With about 25% of the small-cap universe reporting, profits are up over 10% on sales growth of 9.5% and topping the large caps. If the earnings growth difference holds up between small and large, it will be the sixth straight quarter of better profit growth for small over large. The longest streak was 20 consecutive quarters from 2Q 2002 through 3Q 2006. Steven G. DeSanctis, CFA, Benjamin Wang (Page 6)
  • US Economic Watch: A noisy 3-handle. 3Q GDP grew 3.5%. The first release of 3Q GDP revealed a solid 3.5% qoq saar gain over the quarter, coming in stronger than expectations of 3.0%. However, the details of the report were not quite as strong as the headline would imply. There was an outsized gain of 16% in defense spending, which added 0.7pp to growth. Net exports also added 1.3pp. Both defense spending and trade tend to be very volatile and subject to revisions. Elsewhere, we saw modest improvements in business investment and a slowdown in consumer spending and residential investment. On the inflation front, core PCE prices increased 1.4% qoq saar, a slowdown from the 2.0% pace in 2Q and consistent with the deceleration we have seen elsewhere. – Michelle Meyer, Ethan S. Harris, Alexander Lin (Page 7)
  • Claims continue to trend lower. Initial jobless claims inched up to 287,000 for the week ending October 25, from 284,000 in the prior week. This was in line with expectations of 285,000. The trend for claims continues to improve, with the 4-week moving average decreasing to 281,000 from 281,250, the lowest since May 2000. The Labor Department noted that there were no special factors nor were any states estimated, making this a clean report. – Alexander Lin (Page 8)


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