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Friday, January 2, 2015

December 2014 - Monthly Market Commentary



December was a mixed month for global risk assets, as the US dollar continued its uptrend, oil and most other commodities continued to weaken, most global equity markets moved lower, though US small caps rose and outperformed large caps.  The US monthly jobs report showed strong hiring in November with a 321,000 advance in payrolls that far exceeded most analyst estimates; the unemployment rate held steady at 5.8%.  The Federal Reserve tweaked their indication to hold interest rates near zero for a ‘considerable time’ to a statement that they will be ‘patient’ on the timing of their first interest rate increase since 2006.

Global M&A activity continued apace in December, capping a strong year.  Notable announced deals included Berkshire Hathaway’s purchase of two business units (Integrity Industries and Engineered Chemistry) from Weatherford International for at least $750 million, Otsuka Holdings’ acquisition of Avanir Pharmaceuticals for $3.5 billion, Cypress Semiconductor’s $1.6 billion purchase of Spansion, Procter & Gamble’s $600 million sale of its majority stake in Fujian Nanping Nanfu Battery to CDH Investments, Merck’s $8.4 billion acquisition of Cubist Pharmaceuticals, Haitong Securities’ $465 million purchase of Novo Banco, Temasek’s $200 million acquisition of a 10% stake in Virtu Financial, Compagnie de Saint-Gobain’s $2.8 billion purchase of a controlling stake in Sika, Baidu’s investment in Uber for an undisclosed price, Hearst’s $2 billion purchase of a 30% stake in Fitch Group, PetSmart’s $8.2 billion sale to a group led by BC Partners, Woodside Petroleum’s $2.75 billion purchase of Apache’s stake in several natural gas projects, Regal-Beloit’s $1.4 billion acquisition of a power transmission business from Emerson Electric, Riverbed Technology’s $3.6 billion sale to Thoma Bravo and Teacher’s Private Capital, Repsol’s $8.3 billion purchase of Talisman Energy, Royal Philips’ $1 billion acquisition of Volcano Corp., Visteon’s $3.6 billion sale of its ownership interest in Halla Visteon Climate Control to Hahn & Co. and Hankook Tire, Ace’s $365 million purchase of a business unit from Allianz, Xavier Niel’s $2.9 billion acquisition of Orange Switzerland, and Ceasars Entertainment’s merger with affiliate Ceasars Acquisition.

Developed market equity markets mostly fell in December (see page 8).  Australia rose 1.9%, while Italy (-5.4%), Spain (-4.4%) and Hong Kong (-4.1%) saw the biggest losses.  US small caps outperformed, with the Russell 2000 up 2.8%, while the Russell 1000 was down 0.2% (see page 3).  Utilities (+3.5%), Financials (+1.8%), and Consumer Discretionary (+1%) were the best performing US sectors, while Telecom (-6.1%), IT (-1.7%), and Health Care (-1.3%) were the worst performing (see page 2).  Large cap growth (-1%) underperformed large cap value (+0.6%) in December (see page 3).  Emerging Market equities were largely lower in December (see page 9), with gains in China (+1.2%) and Indonesia (+1%) and the biggest losses in Russia (-10.1%), Argentina (-9.8%), and Brazil (-8.3%). 

In currencies, the USD Index strengthened 2.2% in December (see page 10).  The weakest developed market currencies against the USD were the Norwegian Krone (-5.6%), the Swedish Krona (-4.5%) and the Australian Dollar (-3.9%).  The USD was stronger against most emerging market currencies with the biggest gains against the Russian Ruble (-13.1%), Mexican Peso (-5.6%), and the Turkish Lira (-4.8%).

The US Treasury yield curve flattened in December (see page 12).  10 year rates closed the year at 2.17%, up slightly from 2.16% at November month end.  Investment grade and high yield credit spreads widened in December (see page 13).

In commodities, the GSCI index fell 13.6% in December (see page 11), with losses in Energy (-19.7%), Livestock (-4.7%), Industrial Metals (-4.4%), and Agriculture (-0.6%); gains were seen in Precious Metals (+0.7%).  Within individual commodities, Natural Gas led losses (-29.9%), followed by Gasoline (-20%), Crude Oil (-19.7%), Brent Crude (-18.4%); Cocoa (+2.4%), Corn (+2.1%), Wheat (+1.9%), and Gold (+0.7%) gained.

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