Dow 30 Stock Roundup: Microsoft Acquires LinkedIn, Merck To Buy Afferent Pharmaceuticals

The Dow suffered significantly last week, weighed down by concerns about the path of rate hikes and a possible Brexit. Markets received a brief respite near the very end of the week after Brexit concerns ebbed somewhat. Ultimately, the Fed refrained from raising rates, expressing concerns about the state of the labor market. The statement released at the end of the two-day policy meeting raised concerns about the number of rate hikes this year. The Dow has lost 0.9% over the first four trading days of the week.

Last Week’s Performance

The index declined 0.7% on Friday as concerns regarding “Brexit” raised global growth worries. In a scenario when Britain is preparing itself for a “Brexit” referendum on Jun 23, most of the polls that released recently indicated that there is a strong possibility of Britain’s exit from the EU. Investors speculated that a “Brexit” may have a negative impact on the global economy, which in turn led bond yields to decline. Yield on U.S. 10-year Treasury bonds declined to their lowest level since Feb 11.

Moreover, Baker Hughes Incorporated (NYSE:BHI) reported that the rig count in the U.S. increased for the second straight week to 414 from 408 last week. This development weighed on energy shares. Separately, preliminary reading of University of Michigan’s consumer sentiment index came in at 94.3 in June, lower than the previous month’s reading of 94.7.

The Dow gained 0.3% over the week, defying a broader decline in stocks. Oil prices played a major role in setting the tone of stock movements last week. Meanwhile, declining possibility of a June rate hike also had a significant impact on investor sentiment.

Moreover, disruptions in crude production in Nigeria, slump in the U.S. crude output and decline in the U.S. commercial crude oil inventories had a positive impact on oil prices. Weakening of the U.S. dollar following uncertainty over rate hike also boosted oil prices. Most of the economic data released last week was encouraging in nature.

The Dow This Week

The index declined 0.7% on Monday following concerns ahead of the Federal Open Market Committee (FOMC) policy meeting and a possible “Brexit.” Though concerns regarding May’s jobs report and “Brexit” reduced the rate hike possibility by a significant extent in this meeting, investors continued to await clues regarding the timing of the hike. This had a significant impact on U.S. government bond yields.

Separately, news that LinkedIn Corporation (NYSE:LNKD) was being acquired by Microsoft Corporation (NASDAQ:MSFT) also had a significant impact on investor sentiment. Though this development boosted LinkedIn’s shares, which surged 46.6%, shares of Microsoft declined 2.6% and the technology sector also suffered.

Moreover, shares of Apple Inc. (NASDAQ:AAPL) declined 1.5% after hosting the Worldwide Developers Conference in San Francisco. It also announced that Siri, which was exclusively enabled only in iPhones, will also be available in MacBook computers.

The index lost 0.3% on Tuesday as these two factors continued to weigh on investor sentiment. The new YouGov poll for the Times released on Monday showed that the percentage of those in favor of a Brexit had grown to 46% while those against such a move had fallen to 39%.

In contrast, domestic economic data was mostly positive. Retail sales increased 0.5% in May to $455.6 billion. Additionally, the metric experienced a 2.5% year-on-year increase. Excluding auto sales, retail sales increased 0.4% last month after gaining 0.8% a month ago.

Also, U.S. import prices increased 1.4% in May, registering its highest gain since Mar 2012. It was also higher than the consensus estimate of 0.8%. Moreover, export prices rose 1.1% last month, higher than April’s increase of 0.5%.

The index declined again on Wednesday, moving 0.2% lower after the Fed opted to keep interest rate unchanged and raised concerns about the number of hikes this year. The Federal Open Market Committee (FOMC) decided to keep federal funds rate unchanged between 0.25% and 0.5% following concerns regarding weak jobs data. Concerns regarding “Brexit” continue to drag major benchmarks lower.

Additionally, oil prices declined as concerns over weak demand offset a fall in crude inventories. The EIA reported that U.S. crude inventories declined by 0.9 million barrels to 531.5 million barrels for the week ending June 10, compared to the previous week’s decline of 3.2 million barrels.

In economic news, industrial production declined 0.4% in May, wider than the consensus estimate of a 0.2% decrease. However, the PPI rose 0.4% in May, higher than the consensus estimate of a 0.3% rise and April’s rise of 0.2%.

The index finally rebounded on Thursday, gaining 0.5% following a slight reduction in “Brexit” concerns and rate hike fears. Death of a member of British Parliament, Jo Cox, helped in reducing concerns regarding a Brexit. The lawmaker was an active campaigner for the country to remain in the European Union. It is being speculated that the incident will reduce chances of a “Brexit” in Jun 23’s referendum.

Separately, indication of a delayed rate hike this year also had a positive impact on benchmarks. After deciding to keep the federal funds rate unchanged in its two-day policy meeting, the subsequent statements from the Fed and comments from Yellen raised possibilities that a rate hike may get delayed in the coming months.

The National Association of Home Builders (NAHB) reported that home builder sentiment index gained 2 points in May to 60 after remaining flat for four consecutive months. Additionally, CPI rose 0.2% in May, less than a 0.4% rise in April and the consensus estimate of a 0.3% gain. However, CPI rose 1% over the past 12 months. Core CPI also gained 0.2%, in line with the consensus estimate.

Components Moving the Index

Microsoft agreed to acquire LinkedIn for $26.2 billion, or $196 a share. The company holds most of its cash in short-term investments that it won’t be liquidating to finance the acquisition. Instead it will raise the necessary debt. The deal was approved by the boards of both companies and awaits regulatory approval in the U.S., EU, Canada and Brazil.

LinkedIn will operate as a separate unit for now headed by its current CEO Jeff Weiner who will report to Microsoft CEO Satya Nadella. Microsoft expects to complete the integration by 2018 and the acquisition will be slightly dilutive to its 2017 and 2018 fiscal years ending in June (read: Zacks Investment Research

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Written By: Zacks Investment Research