Wednesday, April 11, 18
Equity Market Recap
· U.S. stocks slipped for the first time in three days amid increased geopolitical tensions with Russia (Syria), trade war concerns (improving with China, but still a factor) and continued news out of Washington (recent gov’t raid on Trump personal lawyer Cohen), with markets falling to lows late day as it appeared it ran out of steam. Major U.S. averages opened lower after President Donald Trump warned Russia of imminent military action in Syria over a suspected poison gas attack, declaring that missiles “will be coming” and attacking Moscow for standing by Syrian President Bashar al-Assad. Trump reacted to an earlier warning from Russia that any U.S. missiles fired at Syria over the deadly assault on a rebel enclave would be shot down and the launch sites targeted. The tweets and threats started the day off bumpy, which only got bumpier.
· Energy stocks were one of the few bright spots today (outside of a rally in defensive sectors such as gold miners), with both WTI crude and Brent rising to its best levels since December 2014, and technology held up fairly well as Facebook CEO Zuckerberg testified on Capitol Hill for a second day. Markets slipped late morning following a Reuters report that Saudi Arabia intercepted a ballistic missile launched by Yemen’s Houthis towards the southern city of Jizan, Saudi-owned broadcaster Al Arabiya TV said. Markets took another leg down late afternoon after the March meeting FOMC minutes were released and taken as hawkish, with the dollar and bond yields rebounding off lows following the commentary. Lastly, the Republican Party was dealt a blow after House Speaker Paul Ryan said he won’t seek re-election in November, adding to concerns for a party that is already facing a possible Democratic takeover of the House in the November elections and setting off a GOP leadership battle.
· Consumer price index (CPI) for March fell (-0.1%) vs. estimate unchanged, while the core reading ex: food and energy rose 0.2%, in-line with economist estimates. Yet the rate of inflation over the past 12 months rose again to 2.4% from 2.2% and hit a one-year high (though in-line with views). The CPI reading ex: food, energy rose 2.1% YoY after rising 1.8% last month. The drop in energy prices alone is what turned the CPI negative for the first time since last May
· Oil prices advanced, adding to this week’s gains with WTI crude rising $1.31, or 2% to settle at $66.82 per barrel despite mostly bearish inventory data earlier. Oil prices were buoyed by the ongoing geopolitical tensions with Russia and the U.S., as well as news out of Saudi Arabia that sparked late morning buying. Brent crude rises $1.02 per barrel of 1.44% to settle at $72.06 per barrel (both WTI and Brent best levels since December 2014). Prices slipped early morning from its highs after the DOE said weekly crude inventories rose 3.3M barrels vs. the expected -1.25M barrel draw, while gasoline a surprise build of 458K barrels vs. an expected drawdown of -1.1M barrels and that US oil imports rose to highest level since August. However, weakness was short lived as Reuters report that Saudi Arabia intercepted a ballistic missile launched by Yemen’s Houthis towards the southern city of Jizan, Saudi-owned broadcaster Al Arabiya TV said.
· Gold futures jump amid a weaker dollar and escalating political tensions between the U.S. and Russia which added to buying of gold as a safe-haven investment. June gold advanced $14.10 or 1.1% to settle at $1,360 an ounce, its highest settlement since late January. The rally in gold came amid mixed returns for stocks (Dow weaker, while tech heavy NASDAQ rises). A report of an explosion in Saudi Arabia also contributed to the flight to defensive assets. Aluminum prices extended gains amid sanctions against Russia who is the 2nd largest exporter of the metal.
· The dollar index (DXY) was on track for its 3rd straight daily decline before getting a lift late afternoon. The minutes from the March FOMC meeting showed the Fed discussed the need to slow the U.S. economy down, raising expectations they made get more aggressive on their rate hike agenda. The commentary sent the euro lower, falling into negative territory below the 1.235 level after earlier highs of 1.2396, thought the dollar remained weaker vs. the yen. Concerns about trade wars with China amid the back and forth tariff commentary and White House under scrutiny has sent the dollar to near two-week lows. The greenback dropped to 7-week lows vs. the Canadian dollar on surging oil prices and hopes for NAFTA to be re-worked, while the Russian ruble deepened its recent losses, hitting its lowest levels since 2016 after US sanctions last Friday (though the currency rebounded off the lows).
· Treasuries erased earlier gains, with yields rising late afternoon following the release of the FOMC Minutes of the March meeting. Prior to the rebound, bonds had been enjoying early gains, with the 10-yr yield dropping to 1-week lows. The 10-year bounced back to closing levels yesterday just under 2.80% while the 2-yr rose to 2.315% after the minutes. The U.S. Treasury sold $21B in 10-yr notes at a yield of 2.795% vs. the 2.79% when issued prior to auction, with a bid-to-cover at 2.46 vs. 2.50% prior and indirect bidders awarded 53.2% of the bonds (smallest amount since November 2016). The auction results followed a lackluster 3-yr auction yesterday.
Sector News Breakdown
· Retailers; not much news in retail space, with stocks mixed; ELY 52-week high after positive SunTrust call raising price targets on golf names ELY and GOLF following positive spring off-course retail survey/research; in toys, MAT was upgraded to hold at Jefferies as believe the near-term risks around TRU liquidation, the delayed sales recovery and lack of portfolio contribution to value creation are more well-known now
· Casino, Lodging & Leisure; HLT 60M share secondary priced at $73.00 after HNA Group sells shares (analysts said sale removed overhang in shares); strength in general early for lodging names (MAR, H, CHH, WYN) after consumer price data released today showed a healthy gain for hotel and motel rates during the month of March; cruise lines rebound as CCL hikes dividend by 11% and adds $1B to stock buyback
· Strong gains for the energy sector again, with gains across E&P (CXO, NFX, PXD, EOG), integrated, oil drillers (DO, NE, ESV, RIG), and equipment (HP) as oil advances; HP was upgraded at Wells Fargo on strength in the land rig market as views the risk/reward for North American focused oilfield services as attractive; FANG preannounced 1Q18 production in line with consensus (first quarter in a while that it wasn’t a sizable beat) and production was reported as 102.6 MBOED vs. consensus at 100.2 MBOED
· Inventory data mostly bearish: last night, the API reported that U.S. crude supplies rose by roughly 1.8M barrels for the week ended April 6, showed a rise of 2M barrels in gasoline stockpiles, while inventories of distillates shed -3.8M barrels. This morning, the EIA said weekly crude inventories rose 3.3M barrels vs. the expected -1.25M barrel draw, while gasoline a surprise build of 458K barrels vs. an expected drawdown of -1.1M barrels
· MLPs; Mizuho upgraded NBLX to buy as YTD underperformance provides an attractive entry point for the high-growth MLP and said believe the midstream sector offers a favorable risk-reward value proposition as the 10.3% YTD sell-off is overdone; MLPs rise as Alerian MLP Index (AMZ) above 248 level …extending bounce from 52-week low of 231.86 on 3/27 as rising oil prices and yields helping space
· Headline news; TOT said it has acquired several assets in the Gulf of Mexico for around $300 million via an auction of bankrupt oil-exploration company Cobalt International assets; Saudi Aramco and a consortium of Indian state refiners agreed to build a mega refinery and petrochemical project on India’s west coast for an estimated $44B
· Banks active ahead of earnings this week: Last night, the Federal Reserve released its new capital proposal, which was long expected. The new proposal adds Stressed Capital Buffer (SCB) to replace the capital conservation buffer, but tempers this by: a) assuming risk-weighted assets are flat rather than growing in stress scenarios, and b) sharply reducing the assumption for capital distributions – no buybacks included, and dividends included for only four quarters rather than the full nine quarter test period as prescribed in current stress tests, said JPMorgan
· Asset managers: IVZ preliminary month-end assets under management (AUM) of $934.2B, a decrease of 1.2% MoM driven by unfavorable market returns, lower money market AUM, net long-term outflows; ABprelim AUM decreased to $549B during March 2018 from $555B at the end of February due to firm wide net outflows and market depreciation; APAM AUM totaled $114.8B and LM prelim AUM about $754.1B vs. $767.2B end of 2017; AMG downgraded at KBW
· Blockchain: LBCC, the former iced-tea company that rebranded with blockchain, will be suspended from Nasdaq on April 12, the firm said in an April 10 statement; LFIN, the FinTech-turned-crypto firm received a Nasdaq delisting notice on April 6 because it didn’t file its quarterly report on time, the company said in an April 10 filing
· Biotech and Large Cap Pharma; CBAY rises early on the heels of its announcement of additional preliminary data from a Phase 2 clinical trial assessing seladelpar in patients with primary biliary cholangitis; ALXN to Buy Wilson Therapeutics for $790M for rare disease drug; ARWR lead candidate shows encouraging action in HBV extension study; NTEC 4.76M share spot secondary priced at $5.25;
· Healthcare services; HIIQ rises after Calif. Dept of Insurance reached a $5m settlement with HCC Life Insurance Company; in managed care, Leerink said they came away with increased conviction on UNH, ANTM, HCA & THC, and incrementally more cautious on AET post April 9 Services Round Table for investors; EVHC defended by several analysts today after reports UNH has opted to terminate its contract with EVHC no later than 1/1/19, in response to Envision’s initial lawsuit which alleged that UNH forced EVHC’s doctors out-of-network or into unreasonable contracts; SGRY shares fell after Stifel reiterated sell and cut tgt to $15 as believe there’s more downside risk coming into earnings as valuation multiple 12.1x stretches above the high end of historical
· Medical equipment and devices; ALOG shares fall on “take-under” after agreeing to be acquired by an affiliate of Altaris Capital Partners for $84.00 per share in cash, or approximately $1.1B, a 13% discount to yesterday close https://on.mktw.net/2HcSvn6
Industrials & Materials
· Aerospace & Defense; AVAV shares jumped after upgraded to buy at Stifel and raise tgt to $65 as sees the company benefiting from tailwinds including an improving defense budget environment; defense stocks (GD, NOC, LMT, RTN) failed to rally meaningfully despite the tough talk between Russia and the U.S. pertaining to the Syria situation; Reuters reported late day that the US DoD has stopped accepting most deliveries of F-35 jets from LMT because of a dispute over who will cover costs for fixing a production error found last year on more than 200 of the stealthy jet
· Industrials; FAST posted weaker gross margins after in-line quarterly earnings and revenues; report also followed a softer miss from comp MSM yesterday; in waste sector, RSG downgraded at Raymond James and lower estimates for RM as well incorporating current recycling prices into estimates/raises WCN and CWST estimates as believe they have less recycling exposure; BW shares fall after cutting its 2018 Ebitda guidance outlook
· Metals & Mining; industrial related metals (aluminum and copper) have had a nice stretch of gains (AA, CENX, FCX, AKS) benefitting from the Trump/Syria/Russia tensions within commodity markets as aluminum has advanced about 10% in last 3 days, after the U.S. slapped new sanctions on Russia; in gold space, Deutsche Bank downgraded HMY to sell from hold and retain buys on GFI and AU as continue to forecast a dip in the gold price to end 2018 at US$1,260/oz (average of US$1,292/oz for 2018E) but thereafter we raise our gold price forecasts by +3% over 2019E-2022E (forecasting US$1,300/oz for 2019
Technology, Media & Telecom
· Internet; FB active as CEO Mark Zuckerberg testifies for second day in Washington on privacy, data breach; EBAY upgraded to overweight at KeyBanc with $50 tgt saying has successfully transitioned to a destination for compelling prices, and initiatives to enhance customer experience and attract brands should lead to continued GMV acceleration in 2018; GOOGL is in talks to buy NOK’s airplane broadband business, Bloomberg reported https://reut.rs/2qp2iff ; SPOT and Hulu join forces with $12.99 subscription plan; Goldman Sachs raises tgt to $350 on NFLX, third positive analyst comment in two days
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.