Wednesday, May 16, 2018
U.S. equities start the day modestly higher, trying to pare yesterday’s losses (biggest one-day decline in over 3-weeks) as markets digest the recent spike in Treasury yields (10-year highest levels since 2011) and the dollar and its impact on corporate profits and on the Fed view of further rate hikes. Interest rate sensitive sectors (homebuilders, REITs, utilities) try and rebound after underperformance yesterday on rising borrowing costs, while technology bounces, led by semiconductors on positive analyst calls (MU and AMD). Retailers getting a lift this morning following a beat and raise quarterly result from department store giant Macy’s, helping push the sector higher (52-week highs BBY, NKE, M, TJX). Economic data was mixed as industrial production for April tops views, while housing starts missed.
Overall thus far, the dollar climbed, Treasuries edged higher, oil lower and stocks were mixed.
Treasuries, Currencies and Commodities
· In currency markets, Euro paring losses vs. the USD, bounces back to 1.18 level (off lows 1.1764), but still down over -0.3%; the dollar pares recent gains vs. the yen, but still holding above the 110 level (recently touched best levels since mid-January; British pound little changed vs. dollar early, holding around the 1.35 level after its recent pullback vs. the buck
· Commodity prices lower; after plunging over 2% yesterday to lowest levels since December, gold futures steady around $1,290 an ounce; oil prices slip after the IEA said commercial oil inventories for OPEC countries declined in March by 26.8M barrels to 62.819B barrels month-on-month. That’s 1 million barrels below the latest five-year average metric widely used by oil market participants to assess the rebalancing process – weekly inventory data also out today
· Treasury markets steady after plunging yesterday, with the yield on the 10-yr rising more than 8 bps on Tuesday, topping highs of 3.08% before settling at 3.07% late yesterday; the 2-yr yield remains at 2.58% as mixed economic data and Fed speakers have little impact today
· Housing Starts for April fell (-3.7%) to 1,287M annualized rate, below the est. of 1,310M and down from 1,336M in the prior month; single family starts rose to 894k; multifamily starts fell to 393k in April; building permits fell to 1,352M vs 1,377M in March (est. 1,350M); permits fell 1.8% in April after rising 4.1% the prior month
· Industrial production for April rose 0.7% MoM after rising 0.7% in March and came in slightly above the 0.6% economist estimate. Industrial Production revised up to 0.7% from 0.5% in March. Capacity utilization rose to 78% from 77.6% in March, revised down from 78%
Sector Movers Today
· Asset managers; several analyst calls today as Deutsche Bank upgraded TROW to buy from hold while cut its rating on WETF to hold as firm says the pace of passive share gains has slowed dramatically in 2018 so far upon more sustained alpha generation in many active mutual fund categories vs. comparable ETFs; TROW also upgraded to outperform at Credit Suisse as believe two key trends will drive stock outperformance into 2019-20 (accelerating organic growth and decelerating expense growth); in alternative asset managers, KKR was upgraded to buy and up tgt to $27 at Citigroup as believe KKR’s C-Corp conversion will: increase relevance of the sector and drive further positive revaluation among Alternatives and raise absolute upside for KKR
· Retailers; Macy’s (M) leads department stores higher (KSS, JCP) after the company’s 1Q results beat estimates across the board and boosted its year adjusted EPS and sales views; URBN was upgraded to neutral from sell at MKM Partners (tgt up to $41) citing expectations of a sales and margin recovery in the second half, with Q4 commentary suggesting improving trends; GME advanced after CNBC reported Tiger Management sent a letter to GameStop board urging the company to start a strategic review; BOOT shares rally as comp sales for Q1 of 12.1% easily topped the 5.3% estimate; PRTY 12M share Spot Secondary priced at $15.15; Wolfe Research downgraded DLTR to neutral, while upgraded TGT to outperform
· Restaurants; CMG upgraded to buy with $540 tgt at Argus as have favorable view of new CEO Brian Niccol (previously CEO of Taco Bell) and expect him to strengthen the company’s menu offerings and marketing program; RRGB was upgraded to buy at Maxim and raise tgt to $71 as well as up estimates ahead of earnings on May 22nd as expect multiple catalysts to contribute to annualize EPS growth of 20% in the next two years.
· Large Cap Pharma; TEVA rises after Warren Buffett’s Berkshire Hathaway doubles its stake during Q1; AGN shares benefit from news FDA declines to approve EOLS rival wrinkle treatment DWP-450 vs. its Botox; ALKS was upgraded to buy at Citigroup driven by pipeline optionality and near-term catalyst flow, as well as increased conviction around the ALKS 3831 value proposition
· Chemicals; LYB was upgraded to buy at Jefferies as believe current valuations do not capture the tailwinds from a potential rise in oil prices in 2H18-19 and favorable demand trends; GRA also upgraded to buy at Jefferies as find shares under-valued relative to non-cyclical peers and believe structural headwinds from the transition from ICEs to EVs are now priced in; lastly, Jefferies downgraded OMN and PPG to hold as believe these companies lack structural tailwinds in the near-medium term and risk-reward looks increasingly challenging for these name
· ABAX +15%; as ZTS agreed to acquire ABAX $83 per share in cash, or approximately $1.9B https://reut.rs/2Ks63Jd
· AMD +3%; as Susquehanna raised rating to neutral from negative
· BOOT +11%; as comp sales for Q1 of 12.1% easily topped the 5.3% estimate on better EPS
· CSIQ +3%; better than expected Q1 earnings as revenues more than doubled from the year-ago quarter, but guidance for Q2 revenues of $690M-$730M is well below the $1.04B est.
· M +5%; after the company’s 1Q results beat estimates across the board and boosted its year adjusted EPS and sales views, helping lift retailers
· MU +3%; RBC initiates with outperform and $80 tgt while Mizuho said believes analyst day could be a catalyst as it may reinforce a positive 2H outlook with iPhone/holiday build season, and as NAND/DRAM pricing exiting the JunQ remains stable
· PETQ +12%; after better results and reiterated 2018 financial guidance
· TEVA +3%; after Warren Buffett’s Berkshire Hathaway doubles its stake during Q1
· TROW +2%; 52-week highs after DBAB and CSFB both upgraded shares today
· EOLS -30%; after its experimental wrinkle treatment DWP-450 received a complete response letter (CRL) from the FDA, as deficiencies cited by the FDA isolated to items related to Chemistry, Manufacturing, and Controls
· IDXX -3%; falls in reaction to ABAX being acquire by ZTS in $1.9B deal
· PRTY -5%; 12M share Spot Secondary priced at $15.15
· VSTM -11%; 7.7M share Spot Secondary priced at $4.50