Tuesday, April 17, 18
Equity Market Recap
· Stocks end sharply higher, further surpassing key technical levels as the Nasdaq Composite joined the S&P 500 and Dow Industrials by topping its 50-day moving average resistance for the first time in about a month as the market has turned its attention to corporate earnings. Dow component UNH posted better quarterly results, while NFLX earnings and subscriber data helped lift tech shares (Internet names rallied), though financials failed to participate despite GS earnings topping views. Transports another weak sector today, failing to rally; likely on profit taking as the index surged over 2% Monday. Earnings overshadowed trade as China retaliated for the U.S.’s ban on ZTE Corp. with agricultural duties. The CBOE Volatility index (VIX) declined for a 6thstraight day as fear subsides, falling to its lowest levels in over a month below the 15 mark as global tensions have taken a back seat (for now) to earnings. Better-than-expected data on housing and industrial production as well as growth numbers from China also helped financial markets. The U.S. dollar rose, shrugging off Trump’s currency intervention commentary while the ruble fell after economic advisor Kudlow said the U.S. is considering additional Russia sanctions. Treasuries pared losses and West Texas crude traded above $66 a barrel.
· Housing Starts for March rose 1.9% to 1,319K, above the estimate of 1.267M, while the prior month was upwardly revised to 1.295M from 1.236M; starts rose 1.9% in March after falling 3.3% the prior month; single family starts fell to 867K; multifamily starts rose to 452K in March
· Building permits for March rose to 1,354M, topping the 1.321M estimate and came in above the upwardly revised figure of 1.321M in Feb (from 1.298M); Permits rose 2.5% in March after falling 4.1% the prior month; completions fell to 1,217k in March, from 1,282k the prior month
· Industrial production for March rose 0.5% MoM, above the 0.3% estimate, after rising 1% in February (was revised up to 1% from 0.9% in Feb). Capacity utilization rose to 78% (vs. est. 77.9%) from 77.7% in Feb., which was unrevised from initial release
· Crude oil prices reversed earlier losses to settle higher, bouncing back after prices declined yesterday. Prices dipped yesterday from more than 3-year highs reached last Friday but was overall muted today ahead of weekly inventory data tonight (API) and tomorrow morning (EIA). WTI crude finished higher by 30c or 0.5% to settle at $66.52 per barrel. Today’s action follows concerns of potential supply-disruptive military action in Syria and retaliation from Russia and Iran, allies to the country. Markets are also keeping a watchful eye over the possible re-imposition of sanctions against Iran.
· Gold prices fell -$1.20 to settle at $1,349.50 an ounce, snapping its 2-day win streak as investors rotated back into riskier assets such as stocks and out of defensive assets such as gold. Stocks advanced on the back of upbeat earnings and a rally in the dollar. Gold posted a rise of roughly 0.8% last week, after ending Wednesday at the highest finish since late January.
Currencies & Bonds
· The U.S. dollar was modestly higher as the dollar index (DXY) rises after recent weakness as housing starts, industrial production, capacity utilization data earlier this morning topped consensus estimates. The dollar also helped by a softer round of economic data out of Europe as U.K., wages grew 2.8% in February, slightly above inflation, but missing forecasts of 3%, while German economic sentiment dropped further in April, as the ZEW think tank said its measure of economic expectations fell to minus 8.2 points from 5.1 points in March. The euro pared losses late day (high 1.2414 and low 1.2336), while the yen was little changed vs. the greenback.
· Bonds were little changed on the session, trading in narrow range as yields finish little changed on the day; 10-yr 2.815% (down 1 bps), 2-yr 2.39% (trading back at 10-year highs) and 30-yr 3.016%. Bonds slipped early in the session following better-than-expected housing starts data and industrial production, both topping estimates, but bond yields leveled off later.
Other Interesting tidbits
· China’s central bank said it would free up more than $200 billion for banks to lend and repay short-term loans. The People’s Bank of China said the amount of reserves commercial banks are required to hold would be reduced by 1%, which takes effect on April 25, and will unleash about 1.3 trillion yuan in funds. Also overnight, China reported forecast-beating first-quarter economic growth of 6.8%. The IMF lifted its U.S. growth estimate for 2018 to 2.9% and its 2019 estimate to 2.7%, both increases of two-tenths of a percentage point. It kept unchanged its world economic output estimate from January at 3.9% for both this year and next year.
Sector News Breakdown
· Auto sector; TSLA has halted Model 3 production for four to five days; Guggenheim comments on auto retailers as assumes coverage of AAP with buy and initiates MNRO with buy citing self-help sales and margin initiatives, improved execution from new management teams, better sales mix/assumes coverage of AZO and ORLY at neutral and initiates GPC and LKQ with neutral
· Consumer Staples; Goldman Sachs with several changes in the beverage sector today, as they upgraded CCE (deleveraging and capital allocation) to buy and downgrade TAP to neutral and remain Buy-rated on MNST. Goldman also said are more cautious on names with unfavorable grocer/retailer exposure where we still see downside to estimates and they swapped KO (upgraded to neutral) from PEP (downgraded to sell); in restaurants, TXRH was downgraded at Longbow as believe system-wide same-store sales were up 3.5-4.0% in 1Q18, which encompasses our 3.9% system-wide comp growth estimate for 1Q and consensus at up 4.0%.
· Energy stocks lagged outside of some strength in the MLP sector, though the energy complex has outperformed over the last month as oil prices jump to more than 3-year highs. MLPs outperform for a second day as the Alerian MLP Index (AMZ) rises as much as 2%, trading as high as 264 and off 52-week lows on 3/27 of 231.86
· Natural gas sector; Citigroup downgraded shares of AR, COG, RRC & SWN to neutral from b and cut CHK to sell after they lowered the half-cycle PV10 breakeven natural gas price for production growth from the predominantly natural gas plays the E&P coverage group is currently developing to $1.94/MMBtu. Firm lowering 2018 composite spot natural gas price forecast to $2.75/MMBtu from $3.00/MMBtu, and for 2019 to $2.60/MMBtu from $3.35/MMBtu
· Large Cap banks; GS posted a 27% rise in Q1 net income after a big rebound from its core trading business helped by market volatility, while fixed-income, currency and commodities trading division did a lot better/Q1 investment banking revs $1.79B, FICC sales & trading revenue $2.07B and equities sales & trading revenue $2.31B/raised quarterly dividend (shares fell after CEO said sees no buyback in Q2); CMA Q1 EPS just beat but revs disappoint and said Q1 average loans $48.4B, down $512M q/q, but up $521M YoY; in trust banks, NTRS total revenue grew 15% to $1.48B, above the $1.44B est. driven by growth in trust, investment and other servicing fees; WTFC posted better operating revenues for the quarter and EPS beat also helped by lower than expected credit costs; Earnings due post-mkt: FULT, HBHC, HOPE, IBKR, LTXB, TMK, UBNK, WSBC
· Payment services/Services; PAYX downgraded to underperform at Bank America and cut tgt to $60 from $66 saying its tough to see how shares could move higher in the near-term given the size of the reinvestment plans announced on the firm’s recent earnings call; Bank America also added ADP to its US 1 list citing the firm’s underappreciated margin expansion story
· Other movers; in investment advisors, LAZ was upgraded to buy at Bank America on strong M&A pipeline & upside for Europe. 5% above consensus ’18 EPS & see 25% total return potential; in REITS, PLD advanced after earnings; LHO shares active after Bloomberg reported has attracted interest from other potential buyers other than PEB https://bloom.bg/2HHnc1D
· Large Cap Pharma and biotech; Dow component JNJ reported Q1 EPS beat by 5c on higher sales and raised year revenue guidance (but only maintained 2018 EPS view flat despite beat); JNJ also announced plans of restructuring that targets roughly $2B in cost savings, which moved suppliers (ANIK, ALKS, MODN); GWPH active after FDA briefing documents conclude profile in GW Pharma’s application on Epidiolex (cannabidiol) as a treatment of seizures associated with Lennox-Gastaut syndrome; CLVS 1.838M share Secondary priced at $54.41; BMY falls a second day after better MRK data yesterday; BLCMfiles to sell 7M shares of common stock
· Managed care sector; UNH boosted 2018 forecast and beat quarterly estimates and consolidated medical loss ratio (MLR) beat by 30 bps despite the strong flu season, helping boost rivals early (AET, CI, HUM); shares of hospital (HCA, THC, CYH, LPNT, QHC) also active
Industrials & Materials
· Transports; sector underperforms, as the DJ Transport index negative on the day despite 1% gains for the Dow and S&P and 1.6% rise for the Nasdaq. Transports outperformed Monday behind trucker strength JBHT (earnings), CHRW (upgrade) and airlines, rising over 2.3%; LUV shares dropped late day after reports one of its passengers did following reports the plane made an emergency landing due to an apparent engine failure (en route from Dallas to New York – landing in Philadelphia)
· Chemicals; CE Q1 EPS topped the highest estimates driven by upstream Acetyl Chain and raises FY18 EPS view to up 20%-25% from up 12%-16% (shares of EMN also move on report)
· Defense sector; LLL, LMT, RTN, NOC, GD shares popped midday after Reuters reported Trump administration rolling out new weapons sales policy, as soon as this week, aimed at allowing more allies to buy more arms
Technology, Media & Telecom
· Internet; NFLX shares rise and analysts raise tgts after the company reported another strong quarter with 1Q subscriber net adds totaling 7.4M, a 1Q-record that follows 4Q17’s all-time best 8.3M net adds and better guidance/also modestly raised its outlook for operating margin for the year to 10%-11%; TWTR was upgraded to equal weight at Morgan Stanley citing more positive conversations with advertisers/agencies and potentially improving user growth; GRUB initiated overweight and $120 tgt at Stephens calling it clearest leader in online ordering space
· Semiconductors; Semi’s in general strong with broader tech; the Philly Semi index (SOX) rises over 1.5% as tops the 1,350 level (topping its 50-day MA resistance earlier of 1,314); LRCX outperforms ahead of earnings tonight; MLNX preannounced positive results and guided the year higher with improved visibility as indicates it experienced strong demand for its HPC/AI EDR solutions said Craig Hallum
· Hardware movers; ROKU rises on positive read-through from NFLX results; says ESPN+ through the new ESPN channel is available on its platform; and as Point72 Asset Management took a passive stake; GPRO active after Longbow said it sees 60/40 odds GoPro is bought this year, which is alluring, but not enough to upgrade the stock
· Media movers; WWE downgraded to neutral at JPMorgan as now think the risk/reward is more balanced ahead of the company’s media rights cycle following recent outperformance; in advertising, OMC Q1 EPS and revs just above consensus views; DIS was upgraded to hold from sell at Pivotal Research while they downgraded TWX to hold
· Optical sector; sector trying to recover after falling yesterday (ACIA, AAOI, FN, NPTN, LITE, OCLR) on reports the U.S. Commerce Department is banning American firms from selling components to ZTE for seven years due to ZTE having violated terms in a sanctions violation case; ACIA downgraded by at least two analysts as they receive 30% of revs from ZTE; MTSI said Q2 sales from ZTE represented about $1.6M and were immaterial quarter revenue as a whole; NPTN said to write off $1.5M ZTE products (had expected 5% of annualized revs from these)
· Software movers; SEAC shares fell as Q4 results were in-line to slightly better, but rev guidance of $13M-$15M vs. est. $18.57M and year revs $80M-$90M vs. est. $82.6M missed views; OTEX positive mention by Blue Harbour’s Cliff Robbins says Open Text is taking share from IBM and is doing very well with acquisitions, specifically its Documentum purchase
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.