Wednesday, March 28, 18
Equity Market Recap
· U.S. stocks attempted to rally late day, unlike the swoons into the bell in previous sessions, though weakness in technology shares again led the Nasdaq Composite lower, while defensive sectors (REITs, Telecom, Healthcare) outperformed. Mega tech names such as FB, GOOGL, AMZN, NFLX and semiconductors have plunged the last few days on a bevy of concerns including data leak/privacy issues (TWTR, FB), tax concerns (GOOGL) and targets of the White House (AMZN). With today’s decline, U.S. stocks are on track for their worst quarterly return since 2015, with the Nasdaq Comp falling to lows of 6,900 before paring losses, but overall another volatile day of trading (7,036 high to 6,901 low). Shares of technology companies were under increased pressure yesterday as well after reports that the Trump administration is considering measures against Chinese investments in U.S. technologies. AMZN was the topic today after Axios reported President Trump is obsessed about going after Amazon (which lifted retailers, healthcare suppliers and mall REITs). Shares pared losses after the White House said there are no specific policy changes regarding Amazon right now, but always looking at different options. The weakness in tech overshadowed a stronger than expected Q4 GDP reading and possible easing tensions w/China. The other story today (quietly) was the strength in the U.S. dollar, rising broadly vs. counterparts and weighing on commodity prices as gold and oil slumped. Treasuries ended little changed after the ten-year yield briefly dipped below 2.75% before turning higher following a weak 7-year auction as the bid to cover the lowest since Feb 2016. Tomorrow marks the end of an abbreviated (but extremely volatile) trading week, with markets closed Friday in observance of Good Friday.
· Growth for the U.S. rises, as Q4 GDP was boosted to 2.9% from 2.5% second estimate (and above estimates of 2.7%, reflecting the biggest increase in consumer spending in three years and higher investment in business inventories (GDP rose 3.2% in prior quarter and 3.1% in Q2). Personal consumption rose 4.0% in 4Q after rising 2.2% prior quarter, while GDP price index rose 2.3% in 4Q after rising 2.1% prior quarter; core PCE q/q rose 1.9% in 4Q after rising 1.3% prior quarter
· Advanced Goods trade deficit for February widened to (-$75.4B) from (-$75.3B) and compared to est. (-$74.4B); report on wholesale inventories found a 1.1% increase in February while advanced retail inventories rose 0.4%; Imports rose 1.4% in Feb. to $211.899B and exports rose 2.2% in Feb.
· Pending home sales for February rise 3.1% MoM vs. est. up 2%; Northeast up 10.3%, Midwest up 0.7%, South up 3%, and West up 0.4%; Unadjusted pending homes fell 4.4% YoY after falling 1.9% y/y in January
· Oil prices end lower, reversing earlier gains; WTI crude prices fell 87c, or 1.3% to settle at $64.38 per barrel (high of day $65.13 and lows $63.72). A surge in the U.S. dollar reversed earlier highs following a slightly better set of EIA inventory data, as the crude build of double the forecast was offset by distillate and gasoline drawdowns at and more than forecast. The EIA said weekly crude inventories rose 1.643M barrels vs. est. for build of 850K (Cushing build of 1.8M barrels), while gasoline stockpiles fell -3.4M vs. est. -2.37M and distillates were in-line, down -2.0M barrels.
· Gold prices drop, falling for a 2nd straight day (after having its 4-day win streak snapped yesterday) as the dollar index (DXY) surges for a second session (rising above the 90 level, up 0.75%. Gold settle at $1,324.20 an ounce, down $-$17.80, or 1.3% at its lowest level in over a week (gold recently touched 5-week highs).
· The U.S. dollar rebounds for a second straight session, with the dollar index (DXY) rising about 0.75% to trade back above 90 (off recent 5-week lows) after a stronger than expected GDP reading for Q4, rising 2.9% vs. est. 2.7% growth and after Chinese President Xi Jinping said North Korea’s Kim Jong Un is willing to talk with U.S. President Donald Trump about giving up his nuclear weapons. Just a few days earlier, the dollar was on a downtrend, helping push gold higher, amid speculation that China’s response to U.S. tariffs would hurt the American economy. The euro declined to lows late afternoon, down -0.7% at 1.2317 (overnight high was 1.2422), while the greenback jumped 1.5% vs. the yen to above 107 (overnight low 105.33)
· Treasury prices opened higher, with yields falling as investors rotate out of riskier assets (stocks) and into safe-haven assets. However, yields reversed to the upside following a weak 7-year auction mid-afternoon. The U.S. Treasury sold $29B in 7-year notes at a yield of 2.72%, above the 2.701% when issued, but still posted a soft bid-to-cover at 2.34 vs. 2.49 prior auction and indirect bidders awarded 55.8% of auction (weak auction). Prior to the auction bonds had gained despite a better GDP reading today amid the recent volatility in stocks, and trade fears. The 10-year yield traded to lows around 2.75% (lowest levels since early February) before recovering (but well off its last month highs of above 2.95%), while the 2-year yield was little changed at 2.28%
Sector News Breakdown
· Retailers; LULU reported stronger-than-expected Q4 EPS, beating by 6c as comp growth of 11% beat the 6-7% estimate, largely driven by an impressive acceleration in e-commerce (+42%), with store comps (+1%) also accelerating on top of its raised 4Q17 EPS outlook; retailers in general (M, KSS, JCP, URBN, TGT) or “brick and mortar” names benefit fromAMZN weakness following an Axios report that President Trump is setting his sights on nemesis Jeff Bezos’s company; RH shares jump as EPS handily topped consensus as stronger GM offset a modest revenue shortfall, while guidance was mixed
· Consumer Staples & Restaurants; GIS 22.7M share Secondary priced at $44.00; UBS said in food space that data suggests that the majority of food retailers saw a slight slowdown at the start of 1Q, with Sam’s Club (WMT), FDO & KR decelerating the most. In contrast, SFM accelerated a bit; SONC reported Q2 results marked by disappointing comps (-2.9% vs +0.5% Street) due in part to adverse weather over the final two months of the quarter, while EPS came in above estimates aided by a favorable rate
· Auto sector; TSLA weak again (falls as much as 9%) after falling 8.2% yesterday as questions swirl about what caused a crash involving a Model X crossover in California on Friday, an accident that killed the driver; BMW AG and Daimler AG have agreed to combine their mobility-services business units, which include car sharing, ride hailing and other new services, in a new joint venture, they said, as both will own 50% in the venture
· E&P sector; CXO said it would buy smaller rival RSPP for an equity value of about $8B in an all-stock deal, with RSPP holders to get 0.320 of CXO shares valued at $50.24 per share, a 29% premium to yesterday close https://goo.gl/nFva61 (shares of other E&P names were active in sympathy including EGN, JAG, PE, others); oil prices end lower, reversing prior gains
· Inventory data: overnight, the API reported that U.S. crude supplies rose by 5.3M barrels for the week ended March 23, showed a drop of -5.8M barrels in gasoline stockpiles, while inventories of distillates shed -2.2M barrels last night. This morning, the EIA said weekly crude inventories rose 1.643M barrels vs. est. for build of 850K (Cushing build of 1.8M barrels), while gasoline stockpiles fell -3.4M vs. est. -2.37M and distillates were in-line, down -2.0M barrels
· Results for the latest bid round for oil & gas blocks in Mexico announced yesterday by Mexico’s national Hydrocarbons Commission. 16 of 35 PSC on offer were allocated, with 4 awards in the Burgos basin, 4 in Tampico-Misantla and Veracruz basin, and 8 blocks awarded in the Southeast basins. Total, BP and Pan American Energy won block 34; Total and Pemex won blocks 32 and 33; Pam American won block 31; Premier, DEA and Sapura won block 30; Pemex won block 29; ENI and Lukoil won block 28. Repsol won shallow water blocks 5 and 12 – Bloomberg
· Banks underperformed for a second day as Treasury yields extended recent weakness; earnings for large cap banks coming up in three-weeks, slow news flow likely for the group until then; in other news; BGCP said it sees Q1 results above high end of previously; EFX named former GE executive Mark Begor as chief executive officer; in Consumer and Specialty finance sector initiated at UBS with buy ratings on ALLY, AXP, COF, ELVT, and OMF, sell rated on DFS and SYF
· REITs; mall REITs (SPG, KIM, MAC, SKT) get a boost after a plunge in AMZN following an Axios report that President Trump is setting his sights on nemesis Jeff Bezos’s company; LHOrejected PEB’s stock swap offer which was announced earlier this morning https://goo.gl/E65S2P
· Large Cap Pharma; SHPG confirms that it has NOT received an approach from Takeda Pharmaceuticals/shares jumped overnight on reports Takeda said that it is considering making an offer for Shire and the proposal is at a preliminary and exploratory stage https://goo.gl/FgKSDu ; INCY active as Bank America noted Phase III ECHO-301 results are expected imminently
· Biotech movers; BLUE announced an agreement with CELG to co-develop and promote bb2121, an investigation therapy for the potential treatment of multiple myeloma; FIXXpriced 9M shares IPO at $16.00 per share; MGNX 4.5M share Secondary priced at $21.25; EDGE plunged after an independent data monitoring committee recommended a phase 3 study stopped because data showing the trial had a “low probability” of meeting its primary endpoint; PTCT shares fell as announces offering of 4M shares of common stock
· Healthcare services; WBA Q2 EPS and revenue topped consensus while boosted its year profit forecast to $5.85-$6.05 vs. est. $5.82; NVTA 7.1M share Secondary priced at $4.50; healthcare suppliers benefitted from a cautious comment on AMZN out of Axios, saying that President Trump is said to be looking at going after the company with antitrust or competition law; suppliers have been pressured of late on fear of AMZN entrance into the space (OMI, PDCO, RAD, CVS) getting a lift today
· Medical equipment and devices; CTLT upgraded to overweight at KeyBanc ahead of what they expect will be an increasing flow of new drug approvals in the coming years, as well as a rising prevalence of value-based contracts; TNDM upgraded to outperform at Cowen citing recent diabetes devices survey, which suggested the company is picking up market share
Industrials & Materials
· Industrial & Machinery; JEC was upgraded to buy at MKM Partners saying the addition of CH2M late last year has further cemented the company’s attractive end market exposure relative to peers; ANW rises after announcing Tuesday that a share purchase agreement with HEC Europe has been terminated
· Aerospace & Defense; CACI has withdrawn its $44 per share cash and stock offer to acquire CSRA, leaving GD the winning bidder who recently upped its offer to $6.9B and assume $2.8B in debt (CACI had made an unsolicited $7.2b cash-and-stock bid for the company); overall defense names were mostly weaker (RTN, LMT, NOC, GD)
Technology, Media & Telecom
· Internet; AMZN shares fall early, dropping below its 50-day moving average support, after reports President Trump is obsessed about going after Amazon, according to Axioshttps://goo.gl/qCUKz9 ; reports yesterday that the Trump administration is considering measures against Chinese investments in U.S. technologies really weighing as well on the high-beta sector, along with the privacy issues after FB data leak last week (GOOGL, NFLX, TWTR, BIDU active); FB will delay the unveiling of its upcoming smart speaker with a digital assistant, Bloomberg News reported late Tuesday; FB also revamped its privacy settings menu today
· Semiconductors; Philly semi index moves to lows, as the SOX falls nearly 2% to around the 1,300 level before paring losses; group already pressured by NVDA on suspending its self-driving car testing…this morning AAPL suppliers falling after few analysts take down iPhone estimates (Goldman) and Craig Hallum said believes Apple orders deteriorated late in Q1 and are likely coming in below what companies had expected…notes top suppliers with the most exposure to Apple include CRUS, QRVO, SWKS, SYNA and KN under coverage
· Software & Hardware movers; BILI prices 42M ADS IPO at $11.50 per ADS; TEUM shares dropped after posting Q4 results; Goldman Sachs reducing AAPL iPhone estimates saying demand expectations for March and June are already weak but we believe that early CQ1 demand indications suggest even lower actual numbers than consensus is modeling; BBposted record quarterly software revenue of $218M, while total revs of $239M topped the $215.5M estimate
· Software movers; SPLK hosted an analyst day, providing an update on its path to achieving its medium-term (FY20) targets with ASPs and mega orders tracking ahead of expectations, according to one analyst ; in video games, ATVI weakness continues, falling to lows around 200-day MA support at $64.90 per barrel (increased competition fromTTWO’s Fortnite
· Comm equipment and networking; PLT agreed to buy privately held communication company Polycom in a cash and stock deal valued at $2.0B https://goo.gl/2SXKdP; ANET can argue anew that CSCO patent 8,051,211 is invalid, U.S. Court of Appeals for the Federal Circuit ruled
· Media & Telecom; VIAB was upgraded to neutral at Citigroup with $30 tgt; in telecom, VZ and T were both upgraded to buy at HSBC Holdings today