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Greece looms large at a time when 'bad news is bad news'

But current M&A mania in healthcare sector could fuel investor buying
Monday, June 1, 2015 - 05:50
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A KEY NUMBER: If the Labor Department says the economy added fewer than the 200,000 economists estimate in May, stocks may take a beating. If gains are stronger, fears of an early hike may pressure stocks too.

US STOCKS pared their gains for the month last week as traders hedged their bets on the outlook for US growth and the fate of Greece.

Stocks could rebound this week if employment data alleviates fears of an economic slowdown in the US, if Greece averts disaster yet again, or if more multi-billion dollar deals are struck.

For the last 18 months, markets have been jolted by a series of repeated false alarms. In the US, the Federal Reserve has faked traders out with warnings of imminent rate hikes. In Europe, Greece has come within weeks of a default and a euro exit again and again, only to reach eleventh hour settlements with its reluctant financial supporters in the European Union and the International Monetary Fund.

The market has grown so used to ignoring warnings from the Fed on rate hikes that it's become a bit of a "Boy Who Cried Wolf" risk, says one observer. Ms Yellen's recent warnings were unequivocal. The market must realise sooner or later that the wolf is real this time, said Joe Kinahan, chief derivatives strategist at TD Ameritrade. For months, the date of the Fed hike was in doubt, which meant that reports of uneven growth could be perceived as postponements.

"I think that it was for a long time 'bad news is good news'," said Mr Kinahan. "I think because of what she said last Friday, now bad news is actually kind of bad, in that the Fed rate hikes are coming one way or another. I think she's drawn a little bit of a line in the sand: 'We're still doing it in 2015, barring some complete disaster because at the end of the day the trend is still going the right way'."

Last week's gross domestic product and Chicago factory data suggested the US slowdown may not be entirely attributable to bad winter weather and the now-resolved disputes at West Coast ports, as most economists had assumed. Manufacturing and services surveys from May, due to be published this week, could confirm whether the first-quarter shrinking of the economy has continued in the second quarter.

If the Labor Department says the economy added any fewer than the roughly 200,000 economists estimate in May, stocks may take a beating. If the gains are much stronger than that, fears of an early hike may pressure stocks too.

One sign that rates are about to rise - and one major bullish factor for the stock market - is the deal craze. Corporations are rushing to get cheap loans for these deals. Late last week, The Wall Street Journal reported that Humana, a health insurer that administers insurance for government programmes like Medicare and Medicaid as well as the private markets, had been approached by suitors and had hired investment bank Goldman Sachs as it considers a sale.

Any deal for Humana would likely be worth more than its market capitalisation before Friday's rally, or about US$27 billion.

This would be the first health insurance deal of its size since President Barack Obama's healthcare reform bill. The deal could spark a similar industry consolidation as that which has occurred among drug makers, including the pending US$40 billion merger between Israeli generic drug maker Teva Pharmaceutical and its European rival Mylan, and Actavis's US$66 billion purchase of Allergan.

"Fully 8 per cent of healthcare stocks received a tender offer last year, led by the pharmaceutical, biotech and life sciences industry group, where 13 per cent of stocks garnered an offer," said analysts at brokerage Morgan Stanley, in a note to clients. "For the healthcare sector, M&A activity is approaching the 2012 peak, and (deals in) the aforementioned industry group is at its highest level since 1989."

During merger-and-acquisition craze, investors start to snap up stocks in sectors like health care in an effort to predict the next deal and capture the premium that the acquiring company usually pays for the acquired.

Like a Sophocles play cycle, the Greek economic crisis appears to be proceeding inexorably towards a tragic end. Last week, the EU and IMF hinted that they were running out of patience with the latest foot-dragging on the part of the Syriza government. For their part, the Greek leaders are seeking concessions that they had promised an electorate tired of high taxes and dwindling social services.

While the Greek economy is not a major part of the 19-nation euro-zone economy, an exit would be sure to send world stock markets into downfall.

"It's a domino effect, it's the Spain centre-left party, (which is also) anti-austerity . . . what if they get that idea that the new Greek government had?" said Quincy Krosby, market strategist at Prudential Financial.

The uncertainty over Greece has caused the euro to founder against the dollar again, and raised the odds of the two currencies trading at parity - or one for one - for the first time since the dawn of the European money.

Commodities are susceptible to volatility in currency markets. Oil has risen more than 40 per cent since March to stabilise around US$60 a barrel. But the gains and the stability are now at risk. "The US dollar has been roaring back of late," said one money manager. "This has been pressuring energy and material (stocks) significantly."

The fate of the bull market in oil - and stocks - rests in the hands of Greece yet again.

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