Wednesday, May 2, 2018
Equity Market Recap
· U.S. stocks slumped late, with the Nasdaq Composite erasing gains and the Dow Industrial Average falling for a fourth straight session as markets digested results from the FOMC policy meeting. Small Caps outperformed, with the Russell 2000 higher by more than 0.5% most of the session, but also pared gains late. Stocks initially rallied following the FOMC results, as they left interest rates unchanged at 1.5%-1.75% (as expected), noting inflation is close to target without indicating any intention to move from their gradual path of interest-rate increases. They remained hawkish but gave a more subdued path for economic growth. The comments caused brief profit taking in the dollar and sent yields lower…but that was short lived as the 10-year yield moved back above 2.97% and the dollar surged the final hour to extend it recent winning streak vs. the euro and pound (among others). Earnings results overnight from Dow component Apple helped technology, as shares gained as much as 5%. Another extremely busy night of earnings tonight and tomorrow with the nonfarm payroll report a potential market catalyst this Friday.
· The FOMC left interest rates unchanged at 1.5%-1.75% with no dissents (expected), noting inflation is close to target without indicating any intention to move from their gradual path of interest-rate increases. The FOMC said “inflation on a 12-month basis is expected to run near the committee’s symmetric 2% objective over the medium term,” and “the committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.” The FOMC also noted the weakness in growth in the first quarter, removing a reference in the in March statement that the economic outlook had “strengthened in recent months.” They balanced that out by noting strong growth in business investment.
· Private-sector payroll data from ADP stayed strong in April, as employers added 204K jobs, topping the 198K estimate, while the prior month was revised down to 228K from 241K. This is the sixth month in a row of job growth above 200,000. Small firms added 62,000 jobs in April, medium-sized businesses added 88,000 to large companies added 54,000
· Oil prices finish near the highs of the day, with WTI crude gaining 68c to settle at $67.93 per barrel (highs of day were $68), despite bearish weekly inventory data as both the EIA and API posted larger weekly builds. The EIA said crude supplies rose 6.2M barrels for the week (above the est. around 2M), while API reported an increase of 3.4M barrels. Meanwhile, a May 12 deadline for the U.S. to decide whether to reimpose sanctions on Iran remains on investors’ minds. The International Monetary Fund’s threat to expel Venezuela for its failure to adequately provide economic data helped propel stocks late day. Gold futures were little changed, down -$1.20 to $1,305.60 an ounce to its lowest settlement since early March, as futures closed ahead of the FOMC policy meeting at 2:00 PM EST. Gold futures advanced after the Fed.
· The U.S. dollar opened the day higher, adding to its most recent gains vs. other currencies, but pared its modest gain late afternoon as the FOMC kept rates unchanged and said that the consumer price inflation was moving closer to the 2% target. According to a previous plot of Fed members’ outlooks for rates in coming years, the FOMC is likely to hike rates three times in total in 2018. There was nothing in the report that shook expectations for that, leading to some profit taking after the 3-week surge in the greenback. The pound dropped late day to lows after looking to snap its 5-day losing streak, while the euro reversed to trade higher, reclaiming the 1.20 level (though also found itself sliding back below late day). The dollar traded above 110 vs. the yen for the first time since early February late morning before falling back to 109.60 after the FOMC statement. Bitcoin prices rise back above $9,100.
· Treasury yields edged lower following the FOMC policy statement from its meeting, where they made no changes to its benchmark interest rate (as expected), maintaining its 1.50% to 1.75% range. The 10-year yield slipped nearly 2 bps to below 2.96% while the 2-yr yield dipped back under 2.50%, down about 1 bps. The Fed said inflation should run near the central bank’s 2% target over the next 12 months. Next market moving catalyst for markets the nonfarm payroll report this upcoming Friday after today’s ADP private payroll report was mixed.
Sector News Breakdown
· Consumer Staples; in food, MDLZ Q1 results slightly better; in cosmetics, EL Q3 results topped views on top/bottom line, while raises year outlook view but concerns about slowing sales growth in Americas and weak U.S. store traffic weigh on shares (COTY, AVP shares move); CLX cuts year EPS view to $6.15-$6.30 from prior $6.17-$6.37 as worsening gross margin outlook offsets lower expected effective tax rate of 22%-23%; HSY downgraded at Argus; beer industry weak led by TAP after Q1 EPS and net sales that missed analysts’ estimates amid weakness in U.S. beer industry (BUD, STZ also active)
· Restaurants; YUMC shares fall after its KFC beat top line expectations as it successfully lapped CNY promotions, but Pizza Hut posted its weakest comp since 1H16 (KFC comps remain strong (+5%) and system sales growth (+9%) is generally consistent with the industry); TXRH was downgraded to underweight at JPMorgan as doesn’t see upside; DENN shares fall after Longbow downgraded shares after earnings results
· Housing & Building Products; Building product companies MLM & VMC upgraded to buy at Bank America saying seasonally slow quarter facing tough y/y comps Q118 results likely reflected a typical seasonal trend of weather-related disruptions that hamper activity but can be offset by better volume later in the year; lumber futures rose to a record of $579.80 on the CME
· Education stocks outperformed; CPLA posted Q1 earnings topping views while STRA led the group on earnings beat and as guided for a pick-up in Q2 enrollments by 8%
· Weekly inventory data was bearish for oil complex: this morning the EIA said weekly crude stockpiles rose +6,218M barrels, well above the median est. +1,229M barrels; Cushing crude rose +416K barrels; overnight, the API reported that U.S. crude supplies rose by 3.4M barrels for the week ended April 27, a climb of 1.6M barrels in gasoline stockpiles, while inventories of distillates fell by -4.1M barrel
· E&P sector; CHK reported Q1 earnings that beat expectations, helped by higher pricing and gas production; CXO reported strong 1Q results as both production and prices beat and raised the low end of FY guidance from ~223 MBOED to ~227 MBOED while maintaining the top end at 231 MBOED; DVN rises as Q1 came in better than expected while also increased oil production and announced 2 incredible wells (12k+ Barrels a day) in Delaware and in STACK; APC oil beat was primarily driven by GOM while the cash flow miss was due to a number of factors and also raised FY’18 capex guidance by 2% at the midpoint to $4.4B; NFX Q1 production estimates by ~3%, though the positive variance came from non-Anadarko regions while raised its 2018 domestic output target by 2% at the midpoint; DNOW jumps on earnings
· Pipeline, MLP and Utility; TCP plunges as it cuts its distribution by 35%; EIX leads utility index lower after earnings miss; WES and WGP both advanced on earnings; ENBL slides despite top and bottom line beat
· Cards, payments and services; MA rises after posting another quarter of strong growth and revs up 27% while raises 2018 revenue growth to be in the high-teens vs. a prior forecast for growth at a mid-teens rate; WU revenues beat consensus, aided by another quarter of good performance in the core C2C business as well as an FX tailwind/EPS beat aided by low tax rate; DBD shares fall as suspends its dividend and to improve cash generation and its net debt position and said plans to streamline operations; shares of PYPL and SQ fell late day after Bloomberg reported AMZN is offering to pass along the discounts it gets on credit-card fees to other retailers if they use its online payments service
· Insurance; UNM shares dropped as Q1 operating EPS missed estimates that included disappointing long-term care (LTC) results; ALL also a drag on insurer sector after Q1 results (ALL beat EPS but one analyst noted that miles driven continued to increase and loss costs decline in Q1 was ‘unexpected; VOYA rises after big jump in book value; GNW rises after results; results tonight from PRU, LNC, MET
· REITs; mall REITs slip after SKT was downgraded to underweight at KeyBanc saying conditions seem to be deteriorating at a faster pace across the firm’s pure-play outlet center portfolio; outside of weakness from SKT, lots of other movers on earnings: EXR,
· Holding companies; HCHC shares jump as Janssen Biotech agrees to buy privately-held BeneVir Biopharm to boost its immunotherapy platform, will pay $140M cash at close and potential additional milestone payments of as much as $900M (BeneVir is a portfolio company within HC2’s Pansend Life Sciences) https://on.mktw.net/2jkWr7E
· Bank rating changes; HFWA was upgraded to overweight at Piper based on a much stronger NIM outlook and taking advantage of recent weakness; Wedbush upgraded shares of CATY to outperform owing to its steady growth in loans and deposits and TCF to neutral, while downgraded UMPQ on valuation
· Large Cap Pharma; sector has had a rough week, led by declines in PFE yesterday and quarterly revenue missing estimates as group has failed to recover thus far; more weakness in generic and specialty pharma (MYL, ENDP, VRX); RIGL tgt raised to $10 at BMO Capital after Rigel set the monthly wholesale acquisition cost (WAC) of its newly approved drug, Tavalisse, at $9,450
· Biotech movers; GILD slides as company missed consensus expectations for sales and non-GAAP earnings by 5% and 10%, respectively, while total sales and product revenue misses as well; ESPR shares plunge ; market awaits CELG results later this week as well
· Healthcare services; TDOC reported numbers that beat estimates and guidance at $90M/($0.39) vs. consensus of $87M/($0.43); Drug distributors CAH and MCK rally behind ABC earnings after 2Q results likely better than feared as group has been under pressure over the past on fears of AMZN to enter into the space; CVS shares fell after 2Q revenues missed estimates
· Hospitals; sector surges a second day, led by CYH result ; Credit Suisse said the co is making progress on its debt restructuring & received two amendments that unlock senior debt capacity that could be used to exchange or restructure current outstanding notes; note the group jumped yesterday after THC results (ended higher 19% Tuesday); ACHC reported a good quarter, with trends in the U.S. relatively stable
· Medical devices and equipment; NUVA shares dropped on mixed Q1 results as operating margins were not as expected, prompting downgrade at BMO Capital; KTWO shares rose as Q1 revs topped views and raised its outlook for the year
Industrials & Materials
· Heavy duty Machinery; CMI was downgraded at Wells Fargo saying charges for legacy product issues marred CMI’s performance and management highlighted a risk that up to $400 million additional charges could be taken; PCAR and CMI both downgraded at UBS limited by slowing growth and cost headwinds; TEX Q1 EPS beats, guidance raised by more than beat while backlogs at multi-year highs
· Transports; in airlines, DAL April rose 3.7%, with a 7.1% gain in domestic traffic offsetting a 1.6% decline in international and capacity rose 4% systemwide; in trucking, CHRW drags truckers lower as reported 1Q results below sell-side consensus according to one analyst; WERN rises after reports UPS is in talks with at least one U.S. trucking firm to launch an in-home delivery service for large, heavy goods such as couches and treadmills https://reut.rs/2KtIBwh ; MATX helps offset CHRW weakness in Dow Transports after earnings results; CAR reports tonight
· Metals & Mining and Materials; UFS upgraded at Davidson as pricing benefits from Pulp were clearly demonstrated, and earnings potential from rising Uncoated Freesheet prices is evident; HSC quarterly beat and increase in guidance on improving industrial business and good margin improvement; CMP Q1 results ahead of estimates and 2018 guidance maintained despite Goderich strike
· Chemicals; ASH quarterly earnings beat by 20c on higher revenues and slightly better Q3 results; tomorrow earnings results expected from DWDP and CC;
Technology, Media & Telecom
· Apple (AAPL) reported better-than-feared Q2 results and guidance and announced 16% dividend boost and $100B stock buyback; Q1 iPhone units were essentially in-line and gross margin was 38.3% (report alleviate fears of slowing demand)
· Semi’s; AAPL supply chain; Apple’s better-than-feared results seen slightly positive for Apple supply chain companies AVGO, CRUS, QRVO, SWKS, and SYNA, but group focuses on upcoming earnings from SWKS and QRVO; outside of the AAPL supply chain movers; MTSI shares jumped over 25% after posting better than expected Q2 results and in-line guidance and expects improvements in GM and operating leverage due to sale of the lower margin business, LR4
· Hardware and Equipment movers; CRAY advances after 2Q revenue forecast beat all estimates and experienced the best bookings period in several years and exited 1Q18 with $500M in backlog; JNPR Hyperscale provided better support this qtr, while Bank America upgraded shares
· Internet; SNAP shares fell as much as 20% as Q1 brought softer results that were negatively impacted by ongoing app changes, as quarterly revenue fell short of consensus as well as deceleration in DAU growth; SFLY strong 1Q results, driven by improving core Consumer segment, and the Lifetouch acquisition; Wayfair (W) shares jump after Q2 rev forecast and margins come in above consensus views handily
· Software movers; solid results from ULTI and PAYC, which Stifel said believe the broader HCM landscape remains healthy with limited changes competitively and expect healthy results from PCTY; ZEN strong quarter of execution with accelerating billings growth and continuing improvements in upmarket metrics; SEND generally in line with management estimates, and positive trends around email volume growth
· 3-D printing; sector weaker after SSYS missed Q1 EPS and revenue estimates, attributed to underperformance in North America related to high-end system orders, specifically from customers in government and other key verticals; DDD reports tonight
· Optical stocks rise on LITE earnings beat; LITE up 10% after Q3 beat and improved Q4 outlook; shares of FNSR, FN, NPTN, IIVI rise while AAOI notable laggard
· Research firm IDC said smartphone shipments dropped 2.9% in Q1, fueled by weakness in China. A total of 334.3M smartphones shipped during the quarter, down from 344.4M a year earlier. IDC said that shipments in China dropped to below 100M for the first time since 2013
· Other gainers on earnings: BRKS, FIVN, FTR, GLUU, GRMN, LFUS, LITE, SFLY, UIS, ULTI, ZEN
· Decliners on earnings: ARRS, QLYS, RRD, SNAP, SSNC, VRSK
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.