Monday, April 9, 18
Equity Market Recap
· U.S. stocks posted strong gains on Monday (but finished well off its best levels), led by a broad-based rebound as technology shares outperformed along with financials (ahead of key earnings results this week JPM, C, WFC) and energy stocks as oil recouped all of its losses on Friday. The move higher began overnight as the Trump Administration played down the threat of a trade war with China that sent investors searching for safer assets last week (though now tensions with Russia ramping up again following increased sanctions announced late Friday that sent Russian markets and currency lower today). Bonds slipped as yields climbed, while the dollar dropped vs. most currencies, paring some of last week’s gains. Today also marked a strong bounce after the weaker jobs report Friday with the focus turning to the CPI report and FOMC Minutes, with both expected Wednesday. Volatility has been excessive over the last few months, as CNBC noted that the average S&P intraday move (up or down): last year: 0.30%…this year, so far: 0.94% and since Feb 1: 1.14%…though most coming in the last 2-weeks. Note stocks sold off steadily in the final hour of trading, with major averages nearly erasing gains of between 1%-2% earlier.
· We have a busy week of potentially market moving catalysts including: the China Boao Forum underway, China’s Davos (China President Xi speaks tonight, starts at 9:30 PM EST), President Donald Trump, Mexican President Enrique Pena Nieto and Canada Prime Minister Justin Trudeau meet at the Summit of the Americas in Peru at the end of the week, FB’s Zuckerberg before Congress tomorrow, and the start of earnings season with financials out later this week.
· The Congressional Budget Office (CBO) forecasts the U.S. budget deficit will reach $1.008 trillion in fiscal year 2020. The CBO forecasts a budget shortfall of $804B in FY-18, compared with estimates for a $563B deficit in its June report. The CBO forecasts real GDP growth of 3.3% in 2018, based on 4Q y/y. Its 2018 forecast in June report was for 2% growth.
· Oil prices end higher, with WTI crude rising $1.36 or 2.19% to settle at $63.42 per barrel after falling roughly 2% on Friday, with WTI down 4.4% and Brent losing 3.2%, for the week, their worst week in two months amid growing fears of a trade war between China and the U.S. Prices rebounded today as reports indicated Trump’s administration may be softening its stance in the trade spat with China (for now), helping boost oil prices ahead of monthly OPEC, IEA oil reports due later this week. Oil prices also rebounding after late last week, the number of rigs drilling for oil in the U.S. rose by 11 last week, according to Baker Hughes (bearish indicator). Gold prices reversed earlier losses, with June gold settling at $1,340.10 an ounce up $4, or 0.3%, posting back-to-back sessions gains.
· The U.S. dollar declined, with the dollar index down (-0.2%) back under the 90 level, falling against the euro, Canadian dollar and Pound. The euro rises to highs of 1.233, rising about 0.3% after the ECB annual report noted the central bank’s message of strong economic expansion expected to continue in 2018 and, despite uncertainties, policy makers are confident that inflation will converge toward medium-term goals; the Japanese yen gained vs. greenback, while the Russian ruble tanks following sanctions against them last Friday by the U.S. The Canadian dollar notches 6-week high vs. US dollar at 1.2728. Sterling climbed against the dollar, boosted by data showing British house prices rose more than expected in March (Pound posted its 3rd straight day of gains on raising rate expectations). Comments from Chinese President Yi expected at a conference will likely move the needle for currencies tomorrow.
· Treasuries slipped as yields rebound with the 10-year rising more than 4 bps to highs around 2.81% before paring gains to end around 2.775%, ahead of a catalyst rich week for bonds. Markets to receive PPI tomorrow and the consumer-price index (CPI) Wednesday, along with the minutes of the Federal Reserve’s March meeting as well (which comes after the softer jobs payroll report last Friday). Bonds took a breather after recent gains (10-year yield has fallen over 20 bps from highs above 2.95% just a few weeks ago), as money rotated back into stocks today.
Sector News Breakdown
· Retailers; overall consumer discretionary stocks lagged broader market gains; JPMorgan said based on their 1Q-to-date fieldwork and satellite data – they see 1Q same-store-sales (including April calendar and weather pressure) tracking to meet or beat current Street consensus at 16 of 20 (80%) retailers within our Dept Stores & Specialty Softlines; HEAR shares rise as Q1 pre-announced revenues of $39.5M-$40.5M and adjusted EBTIDA of $3.5-$4.5M above views, likely benefiting from demand for its headsets driven by Fortnite gameplay
· Autos; after strong monthly (March) auto sales data last week lifted the group, more positive news today as Morgan Stanley upgraded GM to overweight and upped tgt to $48 from $45 saying potential U.S. infrastructure spending may boost pickup truck demand, and autonomous vehicle expectations have been reset to rational levels (also upped FCAU tgt and positive on AXL in the supplier industry)
· Energy stocks rebound alongside gains in broader market and oil prices after falling sharply on Friday. In MLP sector, KMIthreatened on Sunday to scrap its proposed expansion of the Trans Mountain pipeline if Canada’s provincial and federal governments cannot resolve their differences over the project by May 31; Seaport Global upgraded EQM/EQGP to buy and downgraded WES/WGP to Neutral in front of needed restructuring and downgrade AM/AMGP on strategy concerns. SunTrust upgraded both PAA/PAGP to buy amid view there is room left for further outperformance despite the move last week. In refiners, JPMorgan lowered 1Q estimates for refiners (again) on weak capture rates, while most of integrateds estimates were revised up a bit on higher crude prices
· Large Cap banks rise ahead of a potentially busy week, with FOMC minutes out mid-week and the start of earnings for banks Friday (JPM, C, WFC); CMA was upgraded to outperform at Wedbush ahead of earnings; RBC preview of SMID names saying continue to favor asset sensitive names with leverage to growth. Names that fit this profile include CADE, CMA, FCB, STL, WAL, WTFC, and ZION/expect margin expansion across these names from recent and future rate increases; WFC dipped late day after Reuters reported the Consumer Financial Protection Bureau is seeking a fine against Wells Fargo that could exceed several hundred million dollars for auto insurance and mortgage lending abuses,
· Brokers and investment managers; bank America said increasing volatility, risk of trade wars, rising geopolitical tensions, and high valuations are all raising red flags for investment managers as they downgraded BEN and JHG to neutral and underperform respectively, while upgraded AMTD to buy amid a fast moving market, deregulation, and higher interest rates
· Mortgage Insurer weaker after MTG said it is cutting borrower-paid premiums by 11% (weighed on RDN and ESNT) ; KBW said overall industry share may increase modestly vs FHA, which may help offset price reduction’s impact
· Large Cap Pharma; MRK blockbuster cancer drug, Keytruda, met the main study goal of helping previously untreated lung cancer patients live longer (rival BMY fell in reaction); PCRX announced late Friday that it received approval for an upper extremity nerve block indication for Exparel on the PDUFA; APOP said it successfully completed proof-of-concept testing of ApoTainer, a new scalable method for manufacturing stem cells
· Biotech movers; AVXS to be acquired by NVS for $8.7 billion, saying its holders will get $218 for each share, an 88% premium https://on.mktw.net/2ICKtRw (shares of other gene therapy companies rose in sympath6y VYGR, NOVN, QURE, BOLD, ONCE);MNLO shares plunge after announced that Serlopitant missed the primary endpoint and a key secondary endpoint for the phase 2 pruritus associated with atopic dermatitis (AD) study; ACAD shares fall after a CNN report noted “several hundred adverse event reports” that questioned whether the company’s lead drug, Nuplazid, played a role in the deaths of already sick and elderly patients; NLNK extends losses from Friday when it fell over 42% after announced a decision to review its clinical programs after disappointing ECHO-301 study in melanoma from INCY; IONS licensed IONIS-AZ6-2.5-LRx, or AZD2693, to AZN, and will receive a $30M license fee; REGN cut at Raymond James
· MedTech & Equipment; Goldman Sachs upgraded Agilent (A) to buy and downgraded MTD to neutral saying heading into 1Q18 earnings, they see an attractive fundamental backdrop across Tools, positioning the group for continued beat-and-raises throughout the course of 2018
Industrials & Materials
· AG & Machinery; CAT was upgraded to positive from mixed at OTR Global on accelerating 1Q orders, which is above a deceleration modeled by the Street saying Q1 pricing up 1%-4% y/y and dealers notified of another 1%-2% increment set for July 1; industrials and multi industry names rebounded with broader market, while Citigroup said they would advantage of the 1Q stock weakness in Multi’s (down an average 9% ytd) to buy select names headed into 1Q earnings
· Aerospace & Defense; Defense stocks gained on market expectations a military strike by U.S. forces against Syrian targets remains a likely response (GD, BA, LMT, NOC); AAL ordered 47 BA 787 Dreamliners for long-range flying/AAL canceled an order for 22 of Airbus’s twin-aisle A350 jets/Boeing deal is worth a total of $12.3 billion before customary discounts
· Metals & Mining; aluminum prices rise (CENX and AA) as investors weighed the impact of U.S. sanctions on Rusal, the world’s biggest supplier of the metal outside of China and a major producer of alumina/expectations aluminum market may tighten quickly due to possible tariffs on Chinese imports and U.S. sanction on Rusal; SocGen with a few changes in space, upgrading BHP to buy keeps GLNCY as top pick and downgraded Anglo on price; NEM shares dropped on suspension of operations at Ghana mine
· Chemicals; WLK downgraded to neutral at JPMorgan given recent outperformance, valuation, and the potential for moderating business conditions (owing to increased ethylene and polyethylene capacity); MON shares jumped late day after the WSJ reported the Department of Justice to allow Bayer acquisition of Monsanto after concessions (notes EU already approved BAYRY for MON deal) https://on.wsj.com/2Ex3VNf
Technology, Media & Telecom
· Internet; FB’s CEO Mark Zuckerberg released prepared testimony ahead of Wednesday’s hearing related to what happened with Cambridge Analytica data breach; GOOGL collects personal information about kids on YouTube and uses it to target advertising in violation of federal law, according to a coalition of child advocacy and consumer groups; YNDX lower amid weakness in Russian related stocks as Russian markets fell amid concerns over U.S. sanctions (QIWI, VEON also weak); Internet names in general nice re3covery today (NFLX, AMZN, GOOGL, BABA)
· Semiconductors; the Philly semi index (SOX) advances, rising more than 2.6% to highs around the 1,300 level, as all 30-components in SOX higher, led by gains in equipment names ENTG, AMAT, LRCX and MKSI; semis were among the top tech leaders today
· Other movers; AAPL announced new versions of the iPhone 8 and iPhone 8 Plus in red, keeping its entry-level iPhones fresh; in Media & Telecom; VIAB has asked CBS to sweeten its merger bid by about $2.8 billion or almost a quarter more than CBS’s offer, Reuters https://reut.rs/2JvIpfb
Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.