Monday, May 21, 2018
Equity Market Recap
· U.S. stocks close higher, with the Dow Jones Industrial Average outperforming major averages, led by a rebound in industrials (CAT, BA, MMM) after U.S. Treasury Secretary Steven Mnuchin said the U.S. trade war with China is “on hold” after the world’s two economic powers agreed to drop their tariff threats while they work on a wider trade agreement. The Nasdaq Composite pared gains, led by a decline in biotech stocks (CELG, BIIB) though still ended higher. The Dow Jones Industrial Average broke above 25,000 points for the first time since March, as investors cheered an easing in trade tensions between the United States and China. The Russell 2000 index of small-capitalization stocks rose traded to record highs for a 4th straight session as small Caps are less impacted by strong dollar moves as they primarily receive revenues domestically. There were also a handful of merger deals announced this morning as well, moving the needle for some stocks: WAB/GE, FITB/MBFI, LH/BX, and others (all details below). The dollar rose to 6-month highs before fading, while oil jumped back above $72 per barrel to fresh 3 ½ year highs. The euro headed for a sixth day of declines. The week ahead is loaded with risk events, including releases of the latest meeting minutes from both the Federal Reserve and European Central Bank, several debt sales from the U.S., and preliminary purchasing manager indexes from the euro zone. Meanwhile, geopolitical stress lingers, with South Korea’s president visiting Washington to discuss North Korea and Brexit negotiations ongoing.
· Oil futures with a midday push higher, taking WTI crude back above the $72 per barrel level, rising 96c, of 1.4% to settle at $72.24 per barrel as fears remain the U.S. could impose new sanctions on Venezuela, after weekend elections in the country. Venezuela President Nicolás Maduro, who has seen the country’s economy collapse, won a second six-year term Sunday in an election boycotted by the opposition and condemned as a sham by the U.S. and others. Supply concerns also warranted after recent sanctions against OPEC producer Iran.
· Gold futures slipped 40c to settle at $1,290.90 an ounce, settling around its lowest settlement this year, but pared losses after the dollar pulled back from a fresh 6-month high earlier. Gold prices have eased on rising rate hike expectations amid a strong US economy, a surging US dollar and reduced geopolitical concerns with Russia and North Korea. Gold futures are coming off a weekly drop of 2.2%.
Currencies & Bonds
· The dollar index (DXY) traded to a fresh 6-month high, rising above the 94 level earlier (94.05 high) before paring gains below 93.70 as investors cheered signs of easing trade tensions between the U.S. and China. The Turkish lira was taking a major hit against the dollar on Monday, hitting a fresh record low with the dollar buying 4.5755 lira. The dollar ended little changed vs. the euro and higher vs. the Japanese yen. The dollar index gained 1.2% last week.
· Treasury markets were little changed, as yields finish little changed from Friday’s closing levels, with the 10-yr yield just above 3.06%, the 2-yr yield at 2.566% and the 30-yr steady at 3.20%. The benchmark 10-year pulled back late last week from 7-year highs of 3.11%. There were no major economic data points to move markets, with focus on the easing trade tensions with China.
· The Chicago Fed’s National Activity Index, which aims to measure economic activity and potential inflationary pressures, beat expectations for April (0.34 vs 0.30 est.) and March was strongly revised higher — to 0.32 from 0.1.
Sector News Breakdown
· Retailers; DDS was upgraded to buy from underperform at Bank America; AEO was downgraded to hold at SunTrust saying while continue to believe its well-positioned from a fashion and macro standpoint, inventories and promotions have been elevated, which could limit GM upside; earnings calendar this week in retail include: AAP, AZO, KSS, TJX, URBN (on 5/22), LOW, CTRN, RL, TGT, TIF, LB (on 5/23), BBY, SSI, DECK, GPS, ROST (5/24), FL, BKE, HIBB (5/25) after positive earnings reports; from Macy’s last week, but results from WMT, JWN and JCP were a drag on retail; ULTA upgraded to positive by OTR Global; SHLD extends 15-year co-brand and private label credit card relationship with Citi
· Consumer Stapes; PF is reportedly mulling its options after getting M&A pressure from new activist Jana Partners, which is the top holder with a 9.5% stake/NY Post said PF has hired Evercore Partners to explore strategic alternatives https://bit.ly/2ICXMpi ; in restaurants, PLAY shares rise after Maxim raises tgt to street-high $68 new virtual reality (VR) game will be based on upcoming Jurassic Park film; CPB downgraded to underperform at Bank America
· Autos; TSLA CEO Elon Musk announced details about a high-performance upgrade for its Model 3 electric cars in a series of tweets Saturday night. Musk announced two new versions of the Model 3, both with dual motors. The performance version will cost around $78,000 and will feature a top speed of 155 mph and go from 0-60 in 3.5 seconds (TSLA tgt also raised to $500 at Berenberg); MNRO mixed Q4 results on EPS beat and slight miss on revs, though comp sales rose over 10%; AAP and AZO report earnings tomorrow
· Oil prices remain strong on Venezuela issues, Iran sanctions and rising demand expectations; 52-week highs today in energy in the S&P 500 index included: OXY, HES, APC, NBL, VLO, MRO, EOG, NOV in the energy sector; in news, COP active as courts in Curacao and Bonaire have partially lifted attachments introduced by ConocoPhillips that seek to seize assets from Venezuela’s PDVSA to satisfy a $2B arbitration ruling; KOS shares fall after reports to re-drill Anapai-1 well in Block 45 encountered “shallow bore-hole stability issues
· Utilities and Power; NRG announced to offer $500M in convertible senior notes as completes share buyback; SRE was upgraded to buy at Argus with $199 tgt; NEE said it would buy some assets including Gulf Power Co and Florida City Gas from rival SO for $5.08B https://reut.rs/2KFWbvA
· Large Cap banks; sector active on deal news in the regional banking sector as FITB agreed to buy MBFI in a transaction valued at approximately $4.B with about 90% of the consideration will be in stock with the rest in cash (valued at $33.56 per share) https://on.wsj.com/2LhUi9B ; There are 30-names in the S&P 500 index at 52-week highs today: SIVB, RJF, ZION, TROW, ETFC, SCHW in financial sector
· Financial services; INFO agrees to buy financial services and data provider Ipreo from Blackstone (BX) and Goldman Sachs (GS) Merchant Banking Division for $1.855B. Meanwhile, it plans to sell MarkitSERV, its derivatives processing business. https://reut.rs/2IBwZ97
· REITs; LHO agreed to be acquired by BX for $33.50 a share in an all-cash transaction, rebuffing suitor PEB in a deal total value of about $4.8B, including debt https://reut.rs/2ID88Sf ; last week, the REIT share prices declined 3.5% in the face of increases in the yield on the 10-yr Treasury; in research, Raymond James REITs upgraded WELL and downgraded shares of HCP and HTA to Market Perform saying upgrades stem from our belief that fundamentals within skilled nursing are beginning to show signs of stabilization after multi-year declines and negative sentiment appears to be nearing a bottom
· Large Cap Pharma; GLPG announced late Sunday the publication of GLPG1690 milestones for product aimed at chronic lung disease idiopathic pulmonary fibrosis (IPF); NBRV said Phase III trial of its Lefamulin Evaluation Against Pneumonia (LEAP 2) clinical trial for the treatment of community-acquired bacterial pneumonia met all FDA and EMA primary endpoints; BMY was downgraded to hold at UBS and tgt cut to $57 as expectations for its blockbuster drug, Opdivo, and earnings per share are no longer ahead of average estimates; AZN said the U.S. FDA has approved Lokelma for the treatment of adults with hyperkalemia and said it has applied for the expanded use of its Forxiga drug in Japan
· Healthcare services and suppliers; BAX outlined its strategy to boost growth and shareholder value at investor conference as it remains bullish on growth strategy, ups earnings guidance; Reuters reported over the weekend that HCA and KKR have partnered to make a buyout offer for EVHC https://reut.rs/2wW6cmk; MDSO fell on downgrade at Morgan Stanley
· Biotech sector underperforms; the IBB fell more than 1%, leading the pullback in the Nasdaq Composite index; CELG shares slumped for a 5th day, falling to a fresh 52-week low; in research, ACHN was upgraded at Barclays, while they downgraded PRTA to underweight; REGN and SNY report the New England Journal of Medicine published 2 positive phase 3 trials showing DUPIXENT improved moderate-to-severe asthma
Industrials & Materials
· Industrial movers; GE agreed to merge its railroad business with WAB in a deal valued at about $11 billion, letting GE raise some cash to fund its turnaround and shed one of its oldest operations https://on.wsj.com/2wZOCy2 ; ROP agreed to buy PowerPlan, a software and solutions provider, in an all-cash deal valued at $1.1 billion to enable customers to optimize financial performance and achieve regulatory compliance https://on.mktw.net/2GCcCXx
· Transports; KNX was upgraded to buy at Stifel with a price target of $48 given the underperformance versus other TL stocks (JBHT, LSTR); 52-week highs for JBHT, UNP, CSX; airlines got a lift midday after JPMorgan said SAVE said to raise domestic fares
· Metals & Mining; Steel stocks AKS, X slightly lower following news that the Trump administration would delay implementing tariffs on Chinese imports into the U.S./ delay comes three months after the administration recommended tariffs on steel and aluminum imports
Technology, Media & Telecom
· Internet; BIDU extends last week’s losses after former MSFT executive Qi Lu, who was hired to oversee virtually every aspect of its business, stepped down Friday from all active management roles just 14 months in the job; GOOGL bounces off Friday pullback after CBS “60-Minutes” report on competitive dominance; SNAP upgraded MoffettNathanson to neutral
· Semiconductors; MU raises Q3 EPS view to $3.12-$3.16 from prior $2.76-$2.90 view (est. $2.85) as boosted guidance at its analyst day today; raises Q3 revs to $7.7B-$7.8B from $7.2B-$7.6B (est. $7.47B); NXPI along with other semis rally after Treasury Secretary Steve Mnuchin said the U.S. and China agreed to “put the tariffs on hold” until a trade framework can be reached
· Software & Storage movers; big week of earnings with PSTG tonight, HPE, CTRP 5/22, SNPS 5/23, ADSK, NTNX, SPLK, VEEV 5/24; AYX was upgraded to overweight at KeyBanc saying headline risk from Tableau Prep is passed; growth investors should add on any weakness
· Media & Telecom movers; CBS shares mentioned positively in Barron’s saying the latest saga with VIAB making it even less likely that a merger will happen, and CBS could gain 25% to return to the $65 price it had before the merger looked likely
· Optical stocks ACIA, AAOI, NPTN, LITE early beneficiaries on the improved trade news between China and the U.S. as several optical names get revenue from Chinese phone maker ZTE Corp, which is at risk of being cut off from its American suppliers in the trade dispute