Monday, May 7, 2018
Equity Market Recap
· U.S. stocks had been on cruise control most of the day, with major averages broadly higher (Dow was up over 200 points NASDAQ up around 1% at highs), before a late day tweet from President Trump created near-term uncertainty. President Donald Trump said on Twitter that he will announce his decision on the Iran nuclear deal on Tuesday. The announcement comes ahead of Saturday’s deadline and help alleviate uncertainty tied to the possible reinstatement of economic sanctions on Iran, which could lead to tighter global oil supplies. Prior to the headlines, energy stocks had been among the day’s top performers, getting a lift as WTI crude tops $70 a barrel for the 1st time since November 2014 (settled at $70.73 per barrel) ahead of the Iran deal. President Trump tweeted late day “I will be announcing my decision on the Iran Deal tomorrow from the White House at 2:00pm. Technology the other sector standout as Apple advanced for a sixth straight day of gains (and reached a record high for a 2nd straight day). Outside of Iran, earnings begin to wrap up, but not before a few very busy upcoming days ahead, along with possible headlines related to NAFTA, China and trade talks possibly soon as well. The dollar’s continued gains appear to be pushing small cap stocks higher of late (less leveraged to multi-national exposure), as the dollar index hit the highest intraday level in more than four months, with the Russell rising. European stocks climb to 3-month high, as the Stoxx Europe 600 index rose 0.6% to end at 389.50, closing at its highest level since Feb. 1 (coming off 6-week winning streak as well); Germany’s DAX 30 index added 1% to settle below 13,000.
· Energy futures rise as WTI crude settles at $70.73, rising more than $1 to trade to its best levels since late 2014 amid geopolitical and macro risks. Iran remains center stage with markets preparing for a re-imposition of U.S. sanctions on the oil producer, which could hurt exports from the OPEC country. Other than that, oils recent surge comes after OPEC/NON-OPEC accord led by the Saudis and Russians to limit production and lower inventory stocks. Rising global demand also helping oil sentiment (IEA recently forecasts global oil demand at 99.3M barrels a day this year, up from 97.8M barrels a day in 2017, as well as Venezuela’s continued output deterioration and the Iran fears. In gasoline, the U.S. is on average now $2.90 per gallon for gasoline, posting its 10th straight-week of increases.
· Gold prices end little change, slipping 60c to settle at $1,314.10 an ounce, holding steady despite another advance by the U.S. dollar. Gold prices have rebounded off its 2-month lows last week, holding above the $1,300 an ounce level. The dollar has gained and gold declined amid recent commentary indicating that Fed officials are open-minded to more aggressive interest-rate action
Currencies & Bonds
· The dollar index (DXY) finished higher, touching highs of 92.97 before paring gains throughout the session, but remains in upward trend at fresh 2018 highs. The dollar has benefited from rising rate hike and inflation expectations amid stronger economic data, while data in Europe has been softer (weak German orders last night the latest) on lower inflation expectations. The Pound bounces off recent 4-month lows today (has slipped on Brexit adoption concerns). Bitcoin prices dropped after cautious comments by MSFT CEO Bill Gates and BRK/A CEO Buffett this morning on CNBC. Bitcoin prices slide 4% to around $9,300 after reaching a weekend high of $9,954.95.
· Treasury markets end little changed, with the benchmark 10-year yield holding around the 2.95% level most of the day (remains in multi week trading range of 2.90%-3.03%). No major economic data today to move markets and fed speakers also failed to move the needle.
Sector News Breakdown
· Retailers; Department stores (DDS, KSS, M, JCP) among the worst performers in the S&P 500, falling ahead of monthly same-store sales results from the handful of names that still report; WWW mentioned cautiously in Barron’s saying the shoemaker is on the hook for chemical contamination of the water supply in communities around its factories; in auto, TSLA shares have rebounded back to levels prior to last weeks “odd” earnings call (shares touched lows of around $275 last Thursday…but shares back up to $300); BLNK shares surge as Whole Foods Market providing Blink charging Electric Vehicle chargers at new locations
· Consumer Staples; TSN reported Q2 EPS and sales miss citing a drop in pork sales while freight and labor costs increased (raises concerns for poultry and meat producers PPC, SAFM); in food space, SYY Q3 sales and margins in-line with consensus views; IFF entered into a definitive agreement to buy Frutarom Industries Ltd., in a cash and stock deal valued at around $7.1 billion. https://on.mktw.net/2I0QnvY ; CHD was upgraded to neutral at Macquarie
· Restaurant news; Nestlé SA (NSRGY) entered a deal to market coffee chain SBUX consumer and food service products. The deal will give Nestle perpetual rights” to market Starbucks products globally outside of its coffee shops and will pay $7.15B up front https://on.mktw.net/2rsdwQy ; MCD was added to conviction buy list at Goldman Sachs; SHAK cut to underweight at JPM on valuation; DRFG Q1 EPS missed while revenue topped views on lower comp sales (-3.6%); JACK was downgraded to mixed from positive by OTR Global
· Energy stocks get a boost as WTI crude tops $70 (highest levels since November 2014) per barrel as geopolitical risk takes center stage with markets preparing for a re-imposition of U.S. sanctions on Middle East crude producer Iran. President Trump will decide by May 12 whether to curb that deal and reimpose economic sanctions on Iran which could hurt its export of oil
· Energy news; 52-week highs in the S&P 500 today, led by energy (MRO, HES, VLO, PSX, NRG, COP, OXY, APC, OKE); XOM positive in Barron’s noting though sometimes seen by investors as a fossil of the fossil-fuel era, is building for a comeback as demand for oil and natural gas grows/company plans to increase output by 25% and double earnings by 2025; other movers on earnings included NOG, KOS; BAS upgraded to overweight at Barclay’s; CVRR afternoon highs up 9.5% after Goldman upgrade
· Utilities; Mizuho upgraded FE to buy and raise tgt to $36.50 based on valuation and the potential to be an M&A candidate, while downgraded ALE to neutral from buy based on valuation given the relative outperformance to the UTY of 10.8%; overall though, utilities underperformed
· Solar stocks were higher, rallying with energy space as well and ahead of the California Energy Commission, which is scheduled to vote Wednesday on new energy standards mandating most new homes have solar panels starting in 2020 according to Bloomberg; shares of FSLR, JKS, SEDG among movers. SPWR also active ahead of earnings tomorrow
· Large Cap banks, advanced, along with big gains in tech and energy; lending stocks mentioned favorably at UBS today, upgrading TREE to buy on view current valuation is an attractive entry point, SC upgraded to buy as believe Santander Consumer’s 1Q18 results demonstrate that strong asset growth combined with provision leverage will generate EPS growth above our prior forecasts and raised DFS to neutral; investment space, GSBD upgraded at Raymond James
· REITs; BX said it would buy GPT for $27.50 per share, an asset manager of commercial real estate, in a deal valued at $7.6B in cash. https://reut.rs/2rw9Jmv ; Mizuho upgraded FR to buy and upgraded PGRE to neutral as believe the narrative for PGRE has improved
· Large Cap Pharma; industry focusing on President Trump’s speech later this week which is expected to focus on drug price competition; the FDA approved NVS’ combined use of its Tafinlar and Mekinist for the treatment of a type of thyroid cancer; KIN gets FDA approval for problem weight loss in cats; HZNP edged higher on news the HHS wants to delay effective date on the 340b program to July 2019 from July 2018 to consider “alternative and supplemental regulatory provisions” (Mizuho noted rule would have hurt sales for HZNP’s gout therapy, Krystexxa)
· Biotech movers; Leerink raises tgts on a few names based on discussions with MEDACorp payor specialists and analysis of better pricing for hemophilia gene therapies in the industry pipeline, as ups tgt on QURE to $63 from $26, ONCE to $74 from $55 and BMRN to $145 from $132
· Medical equipment and devices; EARS active after the European Medicines Agency approves trial design for a late-stage study of EARS’ experimental treatment, AM-111, for acute inner ear hearing loss; LMNX upgraded to hold from sell at Deutsche Bank as view that the risks are balanced by rewards; ILMN upgraded to overweight and $300 tgt at Barclays
· Healthcare services and technology; shares of ATHN spiked after CNBC’s David Faber reported Paul Singer’s Elliott to make all-cash offer for co of $155-$160 a share https://cnb.cx/2rpxCvP (Elliott later confirmed the offer of $160 per share); in the dental industry, XRAY shares slipped after it reported Q1 was better than expected, but lowered its full year outlook by 15c at the midpoint, citing increased marketing support, additional sales reps, and other efforts (shares of PDCO, HSIC also moved)
Industrials & Materials
· Industrials & Machinery; Evercore/ISI upgraded shares of DE, TEX and ETN to outperform saying the rate hike cycle is not a death sentence for the machinery industry, especially early in the cycle; ETN was downgraded at Barclays as believes the company’s organic growth has peaked and will begin to slow in 2019
· Transports; Transports up slightly, lagging broader markets as airline weakness weighs on sector (AAL, DAL, LUV, UAL shares all down over 1%), though the remainder of components marched higher including truckers and rails
Technology, Media & Telecom
· Hardware movers; AAPL shares extend record highs, rising a sixth straight session, the longest win streak since September 2017 (AAPL has rallied 10.3% since Q2 results beat expectations and up as much as 15% over the last 6-days – best 6-day total since March 2009)
· Semiconductors; NVDA strong as Bank America said remains positive ahead of 1Q earnings scheduled for May 10 and expects a beat and raise driven by data center segment sales and strong cloud capex; MSCC shares rally on report the company’s purchase of MCHP has been cleared by China’s Ministry of Commerce https://bit.ly/2HXc2VB
· Software and Services; CTSH shares fell as Q1 results were mostly in-line while Q2 guidance for EPS and revenue fell short of midpoint of views ; Optical strength in ACIA, AAOI, LITE, OCLR, FNSR and NPTN as group helped by China’s ZTE Corp submitting an application to the U.S. Commerce Department’s Bureau of Industry and Security (BIS) for the suspension of a business ban, it said in a filing to the Shenzhen stock exchange https://reut.rs/2rpBugm
· Media & Telecom movers; in theatres, NCMI reported a narrower than expected Q1 adjusted EPS loss; TRCO was upgraded to buy at Deutsche Bank as continue to see very high probability of deal close with SBGI ($35 cash + .23SBGI shares) in late 2Q with a +14% implied deal spread based on Friday’s closing prices; DIS’ “Avengers” tops box office after passing $1B in gross sales