Wednesday, March 21, 18
Equity Market Recap
· U.S. stocks were very volatile following the FOMC rate decision where as expected, the Fed raised interest rates for the sixth time since 2015, upping by 25 bps to a range of to 1.5%-1.75% citing stronger economic growth. In his first press conference as Fed Chairperson, Jerome Powell said they haven’t made a decision on their long-run framework, but commentary initially failed to ease investor concerns about rising rates. Bonds slumped and yields spiked while the dollar erased all of yesterday’s gains, falling broadly. Stocks initially jumped to session highs after the release of the FOMC text that showed an improving sentiment on the economy, but the move was short lived, as stocks tanked over the next 60 minutes to fresh intraday lows (the NASDAQ fell nearly 100-points from its prior highs) before reversing back mixed on the day. Outside of the FOMC news, focus also remained on Washington as Congressional leaders finalized a spending deal for the rest of the fiscal year, trying to get a deal done to prevent another government shutdown early Saturday. The $1.3 trillion funding level was agreed to by President Donald Trump and congressional leaders last month as part of a two-year budget deal.
· Sector movers: shares of U.S. banks and brokerage firms rallied after The Federal Reserve hiked its benchmark interest rate by a quarter-point and forecast a steeper path of hikes in 2019 and 2020, citing an improving economic outlook. Interest rate sensitive sectors, such as utilities, homebuilders and REITs saw some late day weakness on the rising rate expectations. Energy stocks outperformed all session, led by E&P, integrated and equipment stocks, as WTI crude gains $1.63, or 2.6%, to settle at $65.17 per barrel. Consumer Staples, specifically food related stocks (CPB, CAG, K) declined following a weaker outlook from GIS after earnings results and cost inflation commentary.
· The Federal Open Market Committee (FOMC), as expected, raised its benchmark interest rate target by 25 bps to 1.5%-1.75% saying sees economy now rising at a “moderate rate.” The Fed estimates show steeper path for rate increases in 2019-20 as median estimate shows three 2019 hikes vs. two in the December outlook (13 of 15 fed dots at 3 or more 2018 hikes vs 10 of 16 in December). The Fed also raised estimate of longer-run funds rate to 2.9% vs 2.8% prior and the median 2018 GDP growth est. rises to 2.7% from 2.5% in December’s est. The Fed median 2018 estimate for core PCE inflation unchanged at 1.9%.
· Oil prices rose to 7-week highs, rising for the 5th time in the last six sessions, bolstered by renewed geopolitical risk to global supply and bullish inventory data. WTI crude rose $1.63, or 2.6% to settle at $65.17 per barrel, its highest settlement since February. Meeting of Saudi crown prince and President Trump raises prospect of tensions against Iran (follows concerns after Secretary of State Tillerson was recently dismissed by President Trump). Both WTI and Brent crude finished at their highest levels in weeks as Saudi Crown Prince Mohammed bin Salman’s meeting with President Donald Trump in Washington. Inventory data also provided a boost after the EIA reported an unexpected weekly drawdown in inventories compared to a 2.5M barrel build est. Gold prices settled prior to the FOMC meeting results, rising by $9.60, or 0.7% to settle at $1,321.50 an ounce, trading to 1-week highs as the dollar dropped early in the session.
· The U.S. dollar extended losses following the FOMC policy statement, with the dollar index (DXY) falling more than -0.5% and nearly erasing all of yesterday’s gains. While the central bank raised rates by 25 basis points, in line with expectations, it also stuck with its plan to only complete another two additional rate hikes, three in total, this year (though dots came close to a total of four hikes). The euro was volatile, rising well above the 1.23 level (up about 0.45%), while the greenback slumped vs. the yen and fell 1% vs. the Pound. The Mexican peso and Canadian dollar rallied after the U.S. reportedly compromised on one of the most top issues in NAFTA.
· After holding steadily higher prior to the FOMC rate decision, Treasury yields edged higher after the Federal Reserve released its policy statement and its interest rate projections, or the dot plot. There were both dovish and hawkish views in the report, but tiled more to the hawkish side as they predicted the economy will grow even faster in the next two years than it previously estimated. The 10-year Treasury note yield jumped over 4 bps, topping the 2.93% level, while the 2-year yield jumped 2 bps to 2.357% before paring gains (back to 2.30%). By the end of 2019, the Fed expects its benchmark rate to hit 2.9% vs. a prior 2.7%.
· Existing-Home Sales for February rise 3% to 5.54M rate, topping the 5.4M estimate, while January was unrevised at 5.38M; there were 3.4 month’s supply in Feb. vs. 3.4 in January as inventory rose 4.6% to 1.59M homes; Median home price rose 5.9% from last year to $241,700
· U.S. current account deficit for Q4 rises to (-$128.2B) from (-$101.5B) in Q3 and compared to estimates of (-$125.0B); balance of goods and services deficit widened to (-$153.89B) compared to (-$135.27B) prior quarter
Sector News Breakdown
· Autos (GM, F, FCAU) and suppliers (AXL, BWA, LEA) outperform as markets were encouraged by potential progress in negotiations over NAFTA Agreement, after the Globe and Mail reported that the U.S. has dropped a demand for auto imports to have at least 50% U.S. content
· Retailers; JWN board ends talks with the company’s founding family over a proposal to take the department-store chain private, saying the two sides couldn’t agree on a price https://goo.gl/JwMyL2 ; PLCE was upgraded to buy at Citigroup after pullback in shares;
· Homebuilders and furnishing sector; SCS posted Q4 top and bottom line beat, but Q1 guidance was mixed to lower; Homebuilders TOL, LEN, PHM, DHI, MTH all outperform after stronger existing home sales data earlier today (note KBH reports earnings Thursday night)
· Consumer Staples; GIS posted a Q3 EPS/sales beat but cuts FY18 constant-currency adjusted EPS view to flat to up 1% vs. prior view of up 3%-4% increase and sees FY18 total segment operating profit down 5%-6% citing higher freight and commodity expenses (food stocks CPB, K, CAG, SJM, HSY among top S&P decliners early on GIS outlook); In tobacco, PM said to shift entire capacity of Greek cigarette factory to smoke-free products; Piper said the tobacco industry will not see any impact from the FDA’s proposed tobacco flavor restrictions for at least 8-12 years or more
· Casino, Lodging & Leisure; in gaming, WYNN to sell 12.13M shares of common stock for holders; MLCO said it would buy back up to $500M in ordinary shares; in leisure,WGO Q2 EPS beat by 2c on better revs ($4684M) noting recorded net benefit $2.3M in 2Q related to tax reform but shares slump as 2Q results that included a sharp decline in adjusted Ebitda for its Motorized segment; in cruise lines, CCL to report earnings tomorrow morning
· Energy sector led the S&P 500 higher early as WTI crude rallied past the $65 per barrel level, getting another push after inventory data. Brent oil climbed to a six-week high on growing speculation that the U.S. could take diplomatic measures against exports from Iran. OPEC and its allies held discussions about changing the way they measure the impact of their production cuts, including proposals that would affect how quickly they hit their target, according to delegates from the group, Bloomberg reported. Among the top S&P performers: RRC, HES, HP, DVN, NFX, MRO, APC, NBL, CXO
· E&P sector; Johns Rice initiated 12 small and mid-cap onshore E&P stocks and transferring coverage of 3 additional stocks, with favorite stocks HPR, PVAC, QEP, WLL, and WPX noting all of these companies have compelling assets, improved (or improving) balance sheets and visibility to cash flow neutrality; not to mention they all trade at a discount to their respective E&P peers.
· MLP sector; Alerian MLP Index (AMZ) higher, but still underperforms broader energy complex amid recent FERC tax ruling. Bank America/Merrill the latest to make changes based on FERC ruling saying prefers names with clear earnings and cash flow growth through 2020, modest equity funding needs; the firm highlights ENBL, EPD, MPLX, TRP: upgrades DCP to buy on valuation, KMI to buy from neutral; should benefit from its c-corp structure. Downgrades: EQM/EQGP to neutral from buy given uncertainty on split from EQT, TCP to underperform from neutral; sees TRP being “reluctant to drop additional FERC-regulated assets into TCP
· Large Cap bank movers; DB warned the euro’s gain against the dollar and higher funding costs will weigh on revenue in the securities unit this quarter (said corporate and investment bank unit faces a 300M-euro ($368M) headwind from the currency effect and 150M euros from higher funding costs); CS CEO said Q1 was a “very confused” quarter
· Other financial movers; CBOE was downgraded to underweight at JP Morgan as they see continued risk of a further slowdown in VIX Futures activity and see the potential for VIX options trading activity to slow as well as short volatility activity falls from more elevated levels
· Pharma movers: PTI withdraws its equity offering following share price decline; ARNA filed to sell 7.5M shares after stock surged over 20% yesterday on positive data; Morgan Stanley with several rating changes: GBT, SRPT and LOXO cut to equal-weight after a strong run for SMid-cap biotech; WCG was upgraded to outperform in managed care at Wells Fargo saying the company could benefit from significantly higher favorable prior period development (PPD) in 2018
· Biotech movers; PRTA and CELG sign R&D pact for neurodegenerative diseases as Prothena will receive $100M upfront payment and a $50M equity investment from Celgene under an agreement to develop new therapies for a range of neurodegenerative diseases; ALDR shares volatile after its CEO unexpectedly stepped down; BLUE tgt raised to $209 from $152 at Morgan Stanley on peak sales potential for bb2121 of ~$2.6B from ~1B
· Medical equipment and devices; BSX agreed to buy privately held NxThera for up to $406M, including $306M in upfront cash payment; MYGN was upgraded to equal-weight at Morgan Stanley saying risk/reward looks balanced after the stock’s recent weakness and survey showing improving market share in hereditary cancer testing;CTLT upgraded to outperform at Raymond James after pullback in shares following Q1 results
· Secondary offerings: CISN 5.75M share Secondary priced at $10.75; GLYC 7M share Secondary priced at $17.00; VYGR 1M share Block Trade priced at $20.25; XNCR7.3M share Secondary priced at $31.00
Industrials & Materials
· Ag & Machinery; Farm equipment makers (DE, AGOC, CNHI, LNN) were active as the U.S.-China tariff war intensifies, with the WSJ reporting that China is preparing to hit back with tit-for-tat tariffs aimed at Donald Trump’s support base, including levies targeting U.S. agricultural exports from farm belt states. WSJ also reported Tuesday that the White House will release a plan Thursday imposing tariffs of at least $30B
· Industrials; ATU lowered its FY18 EPS view by a nickel for earnings, but raised its sales view to $1.14B-$1.16B from $1.1B-$1.13B; the U.S. Architecture Billings Index, a leading indicator of construction activity, rose to 52.0 in Feb. vs 54.7 a month earlier
· Transports; FDX reported a “messy quarter” according to some analysts as Q3 results were affected by several unusual items, but the $3.72, was well ahead of consensus at $3.11. Overall, total revenues +10% YoY, with Express +9%, Ground +11% and Freight +14%, but the company lowered its FY18 capex guidance by a modest $100M to $5.8B in the wake of tax reform
· Airlines under pressure; group fell after LUV cut its Q1 RASM outlook to in line with a year ago from up 1%-2%; recast certain financial information to reflect adoption of new accounting rules; sees ‘immaterial’ impact of new accounting standards to Q1, 2018 RASM comparisons; sector also slips as Northeast snowstorm grounds many flights (DAL, AAL, JBLU)
· Chemicals; BAYRY won conditional European Union approval for its $66B takeover of MON after pledging to sell off assets worth more than EU6B; mostly to strengthen BASF’s position in seeds and pesticides/BASF is lined up to buy most units divested by Bayer and Monsanto
Technology, Media & Telecom
· Internet; FB share fallout continues #DeleteFacebook campaign on social media has ramped up so much that even a co-founder of WhatsApp (which was bought by FB) has joined – move follows recent revelation that the London data mining firm Cambridge Analytica misused data from as many as 50 million Facebook users; Dropbox (DBX) initiated buy and $22 tgt at Davidson ahead of IPO launch (Dropbox boosted its IPO price to $18-$20 from $16-$18); Pandora (P) announced its acquisition of ad-tech firm AdsWizz for $145M https://goo.gl/yarxdz
· Semiconductors; after a rough start to the week, the Philly Semi index (SOX) has recovered, up around 40 points off lows: AMD addressed a report earlier this month that its chips were uniquely susceptible to specific attacks. In a blog post posted late Tuesday, the company acknowledged the vulnerabilities’ existence and but said that to deploy each exploit would require administrative access to the system; ENTG trades to 52-week highs after analyst day; Bank America reinstated semi-equipment stocks AMAT, LRCX, KLAC and TER with buy ratings
· Software & Hardware; MULE acquired by CRM for enterprise value of $6.5B, w/MULE holders receiving $36.00 in cash and 0.0711 shares of CRM stocks – valued at $44.89 https://goo.gl/8rzLV1