Friday, May 25, 2018
Equity Market Recap
· U.S. stocks end mixed as weakness in the energy sector following a 4% decline in oil prices weighed on the Dow and S&P 500 index, while the tech heavy Nasdaq Comp held strong amid strength in semiconductors, though software dipped on earnings (ADSK, SPLK). Energy was the big story of the day, with WTI crude falling to more than 3-week lows on reports that the OPEC and major oil producer Russia were considering lifting some curbs on oil output, sparking a steep decline in crude prices. However, technology-related shares were seeing a late-morning rebound, closing out the week with more than a 1% gain. Bonds markets closed early due to the long holiday weekend, extending gains as yields fell sharply on the week (10-yr down over 13 bps, with the 30-yr yield down 11 bps the last 5-days). The last few days focused on macro factors, with stocks sliding yesterday after President Donald Trump called off a June 12 summit with North Korea, while the ongoing trade dispute with China also looms large for investors. Next week will be the last jobs report ahead of the June FOMC meeting, where minutes from its last policy meeting showed a rate hike seems a lock as they also backed off on inflation concerns. The dollar jumped to fresh 2018 highs, scoring big gains vs. the euro and pound as European markets backed off amid political turmoil in Span (main opposition party called a parliamentary vote in an effort to oust Prime Minister Mariano Rajoy) and in Italy.
· Durable Goods Orders for April fell (-1.7%) vs. est. down (-1.3%) – dragged down by civilian aircrafts; Durable goods new orders revised up to 2.7% for March from 2.6%; new orders ex-transportation rose 0.9% in April after 0.4% rise and new orders ex-defense fell 1.9% in April after 4.3% rise; non-defense capital goods orders ex-aircraft rose 1% in April after falling 0.9% in March
· May final University of Michigan Confidence fell to 98.0 – compared to preliminary reading, last month figure and estimate all standing at 98.8; the expectations index rose to 89.1 vs. 88.4 last month and the current economic conditions index fell to 111.8 vs. 114.9 last month.
· Oil prices end the day sharply lower, with WTI crude plunging -$2.83, or 4% to settle at $67.88 per barrel for its 4th straight decline and down nearly 5% for the week to its lowest settlement in over 3-weeks. Prices pullback from recent 3 ½ year highs above $82 per barrel, sliding on reports OPEC and Russia are considering lifting oil production in order to hold down recent gains linked to supply shortfalls from Venezuela. The report suggested that OPEC and Russia could lift production by as much as 1 million barrels a day. Speaking at an economic conference in St. Petersburg, both Saudi oil minister Khalid al Falih, and Russia’s Alexander Novak said the output changes would be gradual, but wouldn’t define the daily additional barrels of oil to the market until OPEC ministers met and discussed the terms at their meeting next month in Vienna.
· Bearish data this afternoon as well regarding supply, as fifteen oil rigs were added in the U.S. this week Baker Hughes rig count, the biggest increase in three months, and it’s tied for 6th place among the biggest weekly increase since the oil rig count bottomed two years ago according to Bloomberg. The news overshadowed recent fears of production declines from OPEC member Iran after recently imposed sanctions by the U.S.
· Gold prices ended down slightly, with June gold slipping 70c to settle at $1,303.70 an ounce, holding above the $1,300 an ounce level. For the week, gold prices gained roughly 1% as investors piled into safe haven assets amid global fears (EU political questions, trade spat with China and North Korea news). The surging dollar prevented gold from outperforming.
· The U.S. dollar ends the day and week high, as the dollar index (DXY) traded back above the 94 level, to fresh 2018 highs. The euro was among the biggest decliners, falling over -0.5% to lows of 1.1647, the lowest since early November before paring losses, while the British Pound also falls vs. the dollar, hovering around the 1.33 level (lowest since November). The dollar bounced off the safe-haven Japanese yen to around 109.50. Bitcoin prices fell over 1.3% under $7,500, down roughly 9% for the week and third straight weekly decline. The biggest mover on the day was the dollar jump vs. the Canadian Loonie as oil prices caved, rising 0.7% at 1.298.
· Treasury markets extended its weekly rally, with the 10-year yield falling below 2.93%. Weakness overseas, fears of uncertainty with North Korea, and trade dispute fears with China and countries related to NAFTA all weighing on market sentiment this week that saw defensive assets rally. Bond markets closed early today ahead of Memorial Day holiday: the 30-yr yield slipped 3.8 bps to 3.098%, contributing to a weekly drop of 11.8 bps, the largest since July 2016. The 10-year Treasury note yield fell 4.9 bps to 2.931%, extending a weekly drop of 13.6 bps, the largest such decline since April 2017. The 2-year note yield fell -3.2 bps to 2.480%, and 6.8 bps on week.
Sector News Breakdown
· Retailers; in apparel, GPS shares decline as Q1 EPS missed with comp sales mixed as Old Navy comp result was the weakest since 3Q16 (+3%) and significantly decelerated from 4Q17 (+9%), with under-performance in the company’s second largest brand, Gap (-4% comp); BKE shares slip after profit beat expectations, but revenue missed/Q1 comps fell (-3.1%) vs. est. (-3.3%); ROST Q1 EPS and sales top consensus, though Q2 outlook disappointed; in sporting goods, HIBB reported an unexpected Q1 comp sales decline of (-0.3%) vs. est of up over 1%/reaffirms year
· Athletic and footwear-related stocks active after FL Q1 results topped consensus estimates across the board, citing improvement in the flow of premium goods from top vendors (comp sales fell a smaller -2.8% vs. est. -3.6%); shares of NKE, UAA, DKS got a lift; also in footwear, DECK shares jumped as Q4 EPS and revenue topped consensus estimates, including better-than-expected sales growth (+8.4%), while gross margin was in-line as UGG sales increased for the second straight quarter; SCVL trades higher after issuing profit guidance ahead of expectations (expects full-year EPS of $1.90-$2.05 vs. $1.94 est.) and said sales growth and a “favorable” inventory position led to the 31% Y/Y increase in operating income during Q1
· Consumer Staples & Restaurants; HLF shares slipped after Carl Icahn said at most only 11.4M shares could possibly be purchased in the Herbalife tender, which would still leave the investor the largest shareholder with at least 34.3M shares; CL was upgraded to buy at Argus with $72 tgt saying stock price has been dragged down to a point where the shares offer value; ZOES shares plunged on wider Q1 EPS loss on lower than expected revs of $102.1M and a unexpected decline in Q1 comps (-2.3%)/also cut full year outlook (downgraded by one analyst while others cut tgts)
· Housing & Building Products; homebuilders benefit for a 2nd straight day following the sharp drop in Treasury yields from highs – TOL, LEN, MTH, DHI all up over 2% on the day – the bounce comes after two negative developments this week: 1) TOL weaker earnings results, 2) 30-year fixed-rate mortgage averaged 4.66% in the week ending May 24 (7-yr highs)
· Auto movers; FCAU shares slipped early on reports they are recalling 4.8M vehicles to address a defect that could prevent the cruise control system from disengaging
· Energy sector sank across the board following the sharp pullback in oil prices after OPEC and Russia are considering lifting oil production in order to hold down recent gains linked to supply shortfalls from Venezuela, which has sent oil prices tumbling and stocks following; APA, NBL, MRO, NFX, HES, HAL, BHGE all down 4% or more while Dow components XOM and CVX top decliners in the index a second day.
· Baker Hughes (BHGE) weekly rig count data showed the total rig count rose 13 to 1,046, with oil rigs up 15 to 859, gas rigs down -2 to 198, and miscellaneous rigs unchanged at 2 – it was the 7th time in 8 weeks that US drillers added oil rigs
· Saudi Oil Minister Khalid Al-Falih said the initial public offering of Saudi Aramco will be “most likely” happen in 2019, confirming a delay into next year for what’s likely to be the world’s largest ever share sale. “We’re simply waiting for a market readiness for the IPO,” he said.
· E&P sector; CPE announced the acquisition of 28,657 net surface acres from XEC in Ward County for a total consideration of ~$570M in cash or ~$12,000 per acre (adjusted for production). The acquisition adds 6,831 boepd of production (73% oil), 212 net horizontal drilling locations prospective for the Third Bone Spring, Wolfcamp A and Wolfcamp B
· Solar movers; after falling over 15% the last few days, Roth Capital defends shares of SEDG noting weakness related to a launch of a rival offering from Huawei is imminent…but firm says “vast majority” of Huawei inverters sold in the EU are without optimizers and his recent checks suggest U.S. distributors have “little to no awareness” of a Huawei launch
· Large Cap banks have fallen this week alongside the drop in bond yields; where the Fed has sounded much hawkish, with recent comments indicating a rate hike in June is almost a certain, bonds have gained regardless as investors sought safe haven assets in the face of macro uncertainty. In Consumer Finance and Payments; PYPL upgraded to buy with $99 tgt at Stifel after second analyst day since its separation from eBay/believe PayPal is still in the early stages of its transformation from a button / online checkout company to a global payments platform.
· Large Cap Pharma & Biotech; generally quiet for the sector today; AZN said that a phase 3 trial of its cancer drug Imfinzi had met one of its two primary endpoints in an interim analysis of data. In healthcare services and suppliers; labs companies DGX and LH advance after announcing a long-term strategic partnership with UNH. The UnitedHealth contract begins on January 1, 2019 – and includes a broad range of value-based programs; QSII shares jump as reported higher profits and higher sales than estimated while continues to expect FY20 rev growth in the high single-digits
Industrials & Materials
· Transports; Transports outperform broader averages for a second straight session (rallied 1% yesterday despite major averages falling); led today by airlines AAL, JBLU, ALK, LUV, amid the sharp drop in oil prices while rails pare recent gains (UNP, KSU top decliners in the index early); airlines were not the only one benefitting from the drop in oil as truckers and tankers also saw strong gains on the day
· Metals & Mining; will they or won’t they reading tariffs on foreign steel remain key to steel sector of late; no news today as material stocks mostly lower – led by copper, iron ore and steel stocks
Technology, Media & Telecom
· Internet; AMZN a top story today after a series of miscues picked up by one of its voice-activated Echo speakers during a couple’s private conversation resulted in the chat being recorded and sent to one of their acquaintances without their knowledge
· Semiconductors; MRVL announces completion of CFIUS review of previously announced merger transaction with CAVM (MRVL reports earnings next week); MU shares pared recent gains after market research firm TrendForce said China’s antitrust agency recently held a meeting with MU representatives to discuss concerns about continuing price increase for PC DRAM products over the past quarters – Bloomberg reported; NXPI shares jumped mid-session
· Opticals active after Fox Business News reported that President Donald Trump reached a tentative deal with China on ZTE; optical stocks ACIA, AAOI, OCLR jumped as they get revenues from Chinese phone maker ZTE Corp.
· Software movers; SPLK reported results that came in above guidance and consensus, though, the billings metric came in somewhat light/also raised its full-year outlook/negative was the implied 606-adjusted billings growth of just 18%; ADSK shares fell as 1Q earnings/revs beat estimates on strong ARR (annual recurring revenues) but new subscription adds of 101k were below consensus estimates of 123k/606 write-downs negatively impacted billings; VEEV also active on earnings
· Hardware & Storage movers; NTNX strong beat on revenue, billings and gross profit performance in the quarter and higher than expected revenue guidance for the upcoming Q4 (analysts noted expectations were high, so the stock might face short-term pressure, particularly with higher expenses and lower EPS); Samsung Electronics Co. must pay AAPL $539M for infringing patents related to the iPhone’s design
· Media & Telecom movers; LGF/A results finished broadly in line, with segment EBITDA ahead but Starz subs and FCF coming in lower than expected – total Starz subs declined sequentially (-500k), and y/y (-700k); DIS Star Wars spin-off, “Solo: A Stars Wars Story” took in an uninspiring $14.1 million in Thursday night previews, less than half of $29 million that “Rogue One” captured in 2016; CBB fell to 7-year low after Morgan Stanley downgraded to underweight; EGHT shares dropped after earnings and guidance disappoints