Wednesday, April 4, 18
Equity Market Recap
· Stocks end higher in what was a tale of two markets on Tuesday. U.S. futures plunged overnight, with major averages opening significantly lower, after China officially retaliated against the U.S., by issuing tariffs of its own on U.S. goods. The U.S. proposed 25% tariffs on products from China worth about $50 billion, including semiconductors, lithium batteries, steel, electronics components, and dishwashers while China issued a similar proposed amount of $50B on 106 U.S. made products, such as aircraft, autos and soybean. The news rattled global markets sending the S&P 500 back below its 200-day moving average support (2,592), Dow Industrials falling over -500 points and the Nasdaq opening in correction territory for the first time in two-years.
· However, investors swooped in pretty much at the open, helping rally major U.S. averages off their lows as major averages end significantly higher when it was all said and done, ahead of key economic data later this week (nonfarm payroll report Friday after ADP topped expectations today). Small Caps outperformed most of the day, as the Russell 2000 index rebounded from down as much as -1.35%, turning positive late morning and jumping late day. The Nasdaq Composite rebounded off lows of 6,811 to turn positive late morning, bouncing more than 225 points to highs of 7,059. The Dow Industrials with a more than 700 point move off the lows after being down as much as -510 points. Lastly, the S&P 500 Index turned positive early afternoon (was down almost 1.6% to start the day), recovering above its 200-day moving average level (2,591), led by defensive sectors consumers, telecom and REITs. A bullish reversal for stocks in what started as a very precarious start to the day. Bonds fell (reversing earlier gains, while oil pared losses and the dollar inched off earlier lows.
· Private payroll data stronger as ADP said private-sector employers expanded their workforce by a seasonally adjusted 241K jobs last month, topping the 210K estimate and marked the fifth straight gain above 200,000 (prior month revised to 246K from 235K). Small firms added 47,000 jobs in March, medium-sized businesses added 127,000 and large companies added 67,000
· ISM Non-manufacturing index at 58.8 vs 59.5 prior month and mostly in-line with the 59.0 estimate; new orders fell to 59.5 from 64.8, its decline largest since Aug. 2016 while supplier deliveries gauge highest since Nov. 2005, rising t0 58.5 from 55.5; other components: employment rose to 56.6 vs 55.0 and prices paid rose to 61.5 vs 61.0
· U.S. Feb. Factory Goods Orders rise 1.2%, below the 1.7% estimate, while Factory orders for January were revised up to -1.3% from -1.4% previously; New orders ex-trans. for Feb. rise 0.1% and new orders ex-defense for Feb. rise 0.9% after falling 0.8% in January
· Oil prices rebound off lows still down on the day; WTI crude slips 14c or 0.2% to settle at $63.37 per barrel (well off the lows of $62.64 per barrel), getting a boost late amid the rally in stocks off the lows. The dollar a non-factor today in commodity space, trading little changed most of the session while weekly inventory data was mostly bullish following a larger than expected weekly drawdown in crude oil inventories reported by the EIA (-4,617M barrel draw for WTI crude vs. the -2M barrel draw estimate, though Cushing crude +3,666M)
· Gold rises $2.90, or 0.2% to settle at $1,340.20 an ounce as markets move back into the defensive/safe haven related assets (bonds, gold rally). The move to defensive assets (though gold ended well off its highs) came after China said it would impose tariffs of up to 25% on 106 American products such as soybeans, boosting trade tensions with the U.S.
· The U.S. dollar ended modestly lower as renewed trade war fears with China intensified as the country put tariffs on more than 100 products imported from America, which overshadowed a stronger ADP private payroll report (rising rate hike expectations further from the Fed). While the China-U. S. trade dispute is a key focus, there are still big jobs related economic data points for markets to focus on this week (nonfarm payroll on Friday). The Fed’s Bullard put cold water on expectations of aggressive rate hikes this year saying “the U.S. central bank doesn’t have to raise interest rates further, as monetary policy is close to “neutral.” Bitcoin under pressure again, falling more than 7% and dropping below the $6,900 level.
· Treasuries ends lower erasing earlier gains; after investors rushed into the safety of bonds to start the day on the China/US tariff spat, but bonds retreated from their best level as stocks recovered off the lows (turning positive late afternoon), sending yields higher. Treasury prices dropped yesterday, pushing up yields, as the yield on the benchmark 10-year Treasury note climbed 5.3 bps to 2.784%, the biggest one-day yield climb since Feb. 14, snapping a fourth straight session of falling yields, while the 2-year note yield rose 4.2 basis points to 2.286%. Stronger ADP private payroll data also helped support a sell-off in bonds.
Sector News Breakdown
· Autos; a day after strength in the group given stellar March US sales data from the likes of GM, FCAU and Ford, auto dealers slide early after KMX Q4 results missed analysts’ expectations, and the company said it was disappointed by the comparable store unit sales performance (shares of LAD, ABG, AN, GPI, PAG, SAH, CVNA moved in sympathy);TSLA deliveries of 29,980 missed consensus of above 36K, although Model 3 deliveries of 8K came in slightly better/said built 2,020 Model 3 cars in the last seven days, trailing its target for a 2,500-unit rate (fears of a needed capital raise remained a concern for several analysts today)
· Consumer Staples; Morgan Stanley said they continue to be concerned about a GM squeeze in the Staples group in Q1 with decelerating pricing at the same time commodities are re-inflating, on top of weak organic sales growth with demand fragmentation and weak pricing in the US and local players gaining share in emerging markets (cuts tgts PG PT $85 from $92; CLX $128 from $133; EPC to $53 from $56; TUP to $60 from $66…boosts PT on EL to $160 from $147); SAM was upgraded to outperform at Cowen citing strong non-beer trends
· Restaurants; PLAY mixed Q4 EPS/rev results but issued soft FY19 guidance and a miss on Q4 comps but shares rebound from earlier losses; EAT was upgraded to positive by OTR Global
· Housing & Building Products; Building products sector downgraded to neutral at Goldman Sachs on the greatest level of risk since began sector coverage in 2015; said shifted sector coverage to a more defensive and value-oriented mindset focusing primarily on pricing power/Goldman Sachs downgrades WHR and APOG to sell from neutral and OCto neutral from buy; in homebuilding, LEN Q1 EPS, revs and new orders (rose 30% vs. 19% est.) topped consensus, sending shares much higher and lifting the rest of the builders
· Inventory data: EIA data reported a larger than expected -4,617M barrel draw for WTI crude vs. the -2M barrel draw estimate, though Cushing crude +3,666M; gasoline draw of -1,116M compared to est. -1,500M draw and distillate build rose+537M vs. est. -1,300M draw. US exports rose to a record 2.18M barrels per day
· Oil services; popular sector among analysts this week (recent upgrades of SLB and BHGE the last few days); today WFT upgraded to hold at Jefferies as firm said shares reflect low expectations for divestitures (proceeds/timing) and non-N.A. recovery/separately, Jefferies says it revised 1Q18 oil service estimates lower; SunTrust lowers estimates onHAL, BHGE to account for slightly weaker OFS results in Q1-18 resulting from well-known weather and sand supply issues
· E&P sector: Deutsche Bank adds 4 E&Ps to its coverage list, with new buys on WLL as sees 2018 as transition year and PDCE saying the entry point is attractive and hold ratings on NFX citing gassier production and Stack resource downside-risk concerns and CRZO amid execution risk
· Prices for Renewable Identification Numbers fell to their lowest since 2015 earlier today on worries that the Environmental Protection Agency will grant more Renewable Fuels Standard waiver credits to refiners, Platts reported. The market dropped initially following news yesterday that the EPA granted a hardship waiver to major refiner ANDVexempting three of the company’s refineries from having to comply with the U.S. blending mandate, then fell further on reports that 25 additional refineries were granted hardship exemptions, a much larger number than in previous years.
· Large Cap banks underperformed, as investors await the start of earnings next Friday led by the big banks (JPM, C, WFC, PNC); in insurance; CB pre-announced 1Q catastrophe losses of $380M pre-tax ($305M after tax), primarily from the California mudslides in early January as well as the US northeast winter storms (Barclays said events have an after-tax impact of 65c per share); PRA was downgraded to hold at SunTrust citing elevated risk of higher-than-expected losses in coming periods
· Large Cap Pharma; PTI shares rose after the company’s combination treatment for cystic fibrosis received a “fast track” designation from the FDA; ENDP was downgraded to neutral at Mizuho citing a combination of lower revenues, delayed pipeline contribution, a lack of 2018 catalysts and the persistent opioid litigation overhang; AMRN Q1 prelim product revenue view of $43M misses the $45.7M estimate; LLY said its CYRAMZA Phase III REACH-2 study met OS primary and secondary endpoints; ANTM listed among top 5 holdings in Jana Partners letter
· Biotech movers; biotech (IBB) rebounding from February lows, rising on the day; PTCT was downgraded to underweight at Barclay’s as sees limited upside to 2018 revenue expectations and believes PTC’s growth trajectory is fully priced in
· Healthcare services; HSIC was upgraded to outperform at Leerink saying AMZN, PDCO and FTC fears are overdone and sees as leader in stable market
· Medical devices and equipment; QDEL guided 2018 revenue $21M above the Street and 5-year growth to 8-11% CAGR; Agilent Technologies (A) to acquire Lasergen for $105M; MTD shares fell on tariff fears (Bloomberg noted China accounted for about 16% of 2017 revenue); RMD downgraded to neutral at Citigroup saying shares now fairly reflect the topline growth prospects and potential for operating leverage
Industrials & Materials
· Industrials & Machinery; sector among one of the hardest hit from the US and China tariff news; shares of machinery giants DE, CAT fall, as well as appliance makers GE, WHR; autos declined on the China tariffs (GM, F) as well as chemical and agriculture-related names, including ADM, BG; shares of AYI declined after reporting Q2 EPS that missed estimates and cautioning that market growth may remain sluggish for the remainder of the year.
· Chemicals; sector was among the worst performing today following U.S. and China trade war concerns, while stocks that have exposure to commodities are taking most of the damage; shares of LYB, WLK, OLN, ALB, GRA, DWDP declined after China slapped tariffs on a wide swath of resins used in products such as food packaging and pipe.
Technology, Media & Telecom
· Internet; FB said late day that up to 87M people may have been affected by Cambridge Analytica; FB CEO Mark Zuckerberg will testify before the House Energy and Commerce Committee on April 11 about the company’s use and protection of user data, lawmakers said Wednesday; OSTK snaps 8-day losing streak, up over 6% today; in online travel space, two analyst initiations: Wedbush outperform rated on BKNG ($2,500 tgt) and neutral on TRIP, EXPE, TRVG and Davidson buy on EXPE ($132 tgt), neutral on BKNG, TRVG,and TRIP
· Semiconductors; TSM cautious mention at Morgan Stanley as firm sees downside risks to the Street’s 2Q forecasts, given the recent Bitcoin price weakness and lengthier high-end smartphone replacement cycle; ON shares defended at MKM after pullback saying data points and checks point to the potential for continued positive estimate revisions for ON in the near-term; AMD and NVDA shares weak as Chinese company Bitman has revealed a specialized Ethereum mining system (Antminer E3) to ship in July for $800
· Hardware & Software movers; KeyBanc said online survival game Fortnite will hurt results at ATVI, EA and TTWO due higher competition, and sees Call of Duty and Grand Theft Auto most at risk based on survey results; CLDR shares plunged given bookings miss, restructuring, and guided to FY19 revenue growth of 20% vs. consensus’ 27% as Americas customer expansion bookings shortfall late in the quarter; SSNC priced 26.3M share secondary at $47.50 per share; AAPL is working on touchless gesture control and curved screens for future iPhones, Bloomberg reported
· Telecom & Media; GLOB was upgraded to buy at SunTrust citing improvement in trends in pricing, positive trends in key data points and better valuation (however, shares slipped late morning after a negative comment from SprucePoint); VRTU downgraded at SunTrust citing outperformance and that pricing dynamics may limit upside; WPP shares slipped as its board is looking into allegations of improper personal behavior by CEO Martin Sorrell and also probing charges that Sorrell misused company assets