Wednesday, May 30, 2018
Equity Market Recap
· Stocks end lower as investors returned from the holiday weekend, with the Dow Industrial Average falling fell as much as -500-points or roughly 2% (before paring losses), while the CBOE Volatility index (VIX) jumped nearly 40% to just above 18, the largest one-day gain since March 22 and highest level in more than a month. The market decline started with weakness in Europe amid a political crisis in Italy, and the threat to the euro project it represents, triggered a rush to traditional safe havens like U.S. debt, pulling down U.S. 10-year bond yields and in turn spurring losses for U.S. banks. The 10-year yield fell over 15 basis points on the day to lows around 2.77% and now more than 30 bps in about a week after Monday’s decision by Italian President Sergio Mattarella to block two antiestablishment parties from taking power. Weakness in Europe overshadowed news that North Korean leader Kim Jong Un has dispatched one of his top aides to New York for talks ahead of his planned summit with Donald Trump next month, the U.S. president said. Financials were among the top decliners in the S&P 500 today, led by weakness in Morgan Stanley and JP Morgan on the decline in yields, along with cautious comments from each at a financial services conference, with JPM warning they expects Q2 trading revenue to be flat. Small-cap stocks continue to flirt with turning higher, while tech, energy and discretionary sectors climbed along with REIT and utility stocks. Lower energy prices sent the sector lower, with oil falling for a 5th straight session. The dollar traded to nearly 1-year highs against the euro ahead of this week’s jobs data on Friday as well.
· Consumer confidence for May rises to 18-year highs of 128.0 from 125.6 prior (but was in-line with estimates); the present situation confidence rose to 161.7 vs. 157.5 last month while the consumer confidence expectations rose to 105.6 vs. 104.3 last month
· The S&P CoreLogic Case-Shiller National Home Price index rose 6.53% y/y in March after rising 6.51% in prior month; S&P/Case-Shiller 20-city NSA index at 208.62 after 206.57 in February; the 20-city SA index rose 0.53% m/m in March after rising 0.84% the prior month
· Oil prices end lower, with WTI crude sliding -$1.15 or 1.7%$ to settle at $66.73 per barrel, its 5th straight decline, and extending losses from last week after reports late last week that OPEC and Russia are considering lifting oil production in order to hold down recent gains linked to supply shortfalls from Venezuela. The recent spike in the dollar also weighing on commodity sentiment; WTI crude falls below $67 per barrel – down at 3-week lows. Precious metals fell with gold futures down -$4.90 or 0.4% to settle at $1,304.10 an ounce, under pressure as the U.S. dollar climbed, overshadowing the need for gold as a safe haven asset.
· The U.S. dollar posted strong gains on Tuesday, with the dollar index (DXY) at its best levels since early November, briefly topping the 95 level as it surged against the euro following political turmoil in both Italy and Spain. The euro sank to lows of 1.151 (falling as much as 1% before paring loss), and is down more than 4% this month alone amid political issues and fears of Italy leaving the euro. The Pound sinks below the 1.33 level vs. the greenback, its weakest levels since mid-November; though the buck sinks against the Japanese yen. Mexican peso also slumps.
· Bonds enjoyed the best 1-day gain since early February, with the yield on the benchmark 10-year falling more than 15 bps from Friday’s close of 2.93%, briefly breaking below 2.8%, and now down over 30 bps from its 7-year highs of 3.11% just 2-weeks ago. Bonds jumped as investors flocked to the safe-haven status of Treasuries on fears of a new general election it Italy could effectively turn into a referendum on the euro, while Spanish bonds were also under pressure ahead of a confidence vote later this week on Prime Minister Mariano Rajoy. Markets will also keep a watchful eye on the Friday’s jobs report where payroll growth is forecast to be higher. The yield on the shorter-term 2-yr yield now down over 20 bps in 2-weeks from its 2.58% level and the 30-year yield sunk under 3%. Last week, bonds gained as fears of uncertainty with North Korea, and trade dispute fears with China and NAFTA all weighed on market sentiment.
Sector News Breakdown
· Retailers; busy week of earnings: 5/30 morning CHS, DKS, DSW, KORS, MOV report…5/30 PM GES, PVH…on Thursday 5/31 AM we get AEO, DG, DLTR, EXPR, LULU, PERY…Thursday PM 5/31: CAL, COST, GME, ULTA; FRED to be replaced by GME in the S&P SmallCap 600 also effective prior to the open of trading on June 4
· Consumer Staples; shares of names like DNKN, SBUX active after JAB Holdings has bought a majority stake in Pret A Manger from Bridgepoint Capital and other minority shareholders for an undisclosed sum https://on.mktw.net/2xlNkxx ; HRL announces that the USDA ordered a recall of 229K pounds of canned pork and chicken due to the risk of metal contamination
· Auto’s; Ford (F) upgraded to buy at Jefferies saying despite being perceived a laggard, they think Ford is early among global OEMs in re-evaluating how it allocates capital, a process most OEMs outside NA have yet to address; FCAU weak in reaction to weakness in Italian related markets; in auto retail, Wedbush said with only a few days left in the quarter, their proprietary sales tracker indicates that KMX F1Q18 (ending 5/31/18) used unit comps are pacing in the -3% to -4% range, with May comps tracking ~-1% vs. ~-5% in April; suppliers fall (BWA, LEA, AXL) after NSANY said it would cut vehicle output in the U.S. and Mexico through the summer to reduce inventories in a cooling market, and lingering uncertainty on auto tariffs
· Casino, Lodging & Leisure; MGM and MGP said they reached an agreement to acquire Empire City Casino’s race track and casino in Yonkers, New York for $850 million; WYN to be replaced by ABMD in the S&P 500 index
· Energy stocks drop again, making it a 5th straight day oil prices decline, dragging energy related stocks lower with it. In Pipelines and MLPs; Canada to buy Kinder Morgan Canada Ltd.’s (KMI) Trans Mountain oil pipeline and its controversial expansion project for C$4.5 billion ($3.5 billion) https://on.mktw.net/2L5csdS
· Utilities; SCG was downgraded to sell at Williams Capital saying it appears the S.C. legislature is closing in on an SCG rate reduction and is looking at more “onerous ways to create unpleasant liquidity and rate issues; PCG shares active as after the close on Friday California Fire announced that they have determined the causes of four smaller wildfires from last October’s Northern California “Fire Siege.” In all four cases, Cal Fire concludes that the fires were caused by trees coming into contact with PG&E power lines
· Refiners; MPC and PSX upgraded to outperform at Wells Fargo as expect the IMO 2020 low sulfur marine fuel rule to be a positive for U.S. Independent/says MPC has the most potential upside in our view; believe PBF, DK and VLO also possess meaningful upside
· E&P sector, ahead of its June 19th shareholder meeting, SD sends a letter to shareholders updating its strategic review process and recommending they vote in favor of only two of the four independent directors that shareholder Carl Icahn wants to put on the board.
· Large Cap banks trade lower as bond yields extend last week’s declines – 10-yr yield off its lows but below last week closing prices of 2.931% (moves below 2.89%), while the 2-yr yield under 2.45%; at Deutsche Bank conference, JPM’s Pinto said corporate-credit, rates, commodities businesses are posting “good” results in Q2 compared with a year earlier, and expects trading revs to be flat; in other movers, ICE announced that it has entered into an agreement to acquire TMC Bonds LLC for $685M in cash. Overall, lower bond yields and global growth and trade concerns outweigh any optimism surround a rewrite of the Volcker Rule.
· Pharma movers; GMXAY shares fell after the company announced over the weekend that partner Janssen will stop studies of daratumumab in combination with Anti-PD-(L)1; AIMT releases additional results from phase 3 Palisade trial of AR101 for treatment of peanut allergy; CPRX active as the FDA accepts NDA and Priority Review status for its Firdapse for the treatment of Lambert-Eaton myasthenic syndrome (LEMS).
· Biotech movers; LOXO said the FDA accepted the company’s New Drug Application (NDA) and granted Priority Review for larotrectinib for the treatment of adult and pediatric patients with locally advanced or metastatic solid tumors harboring an NTRK gene fusion (note BAYRY is its collaboration partner); ASCO18 starts on Friday night with BLUE, CELG, BCMA CAR-T data.
· Medical equipment and devices; TRXC shares jump as the FDA has granted 510(k) clearance for the use of its Senhance Surgical System for laparoscopic inguinal hernia and laparoscopic cholecystectomy procedures; DGX was upgraded to overweight at Morgan Stanley; MYGN announced definitive agreement to acquire privately-held Counsyl, Inc. for $375M in cash/stock; Smith’s Group PLC confirmed that it has entered talks with ICUI https://on.mktw.net/2IXycYr ; ABMD to replace WYN in S&P 500 Index
Industrials & Materials
· Transports; ZTO shares rise after BABA said it has led a consortium of investors to buy about 10% of the Chinese courier ZTO Express Inc. for $1.38 billion, as part of the e-commerce firm’s push into offline services. https://reut.rs/2sgKFjD ; in rails, CP workers are set to strike Tuesday night, potentially forcing the railroad to shut down its freight service after its union gave notice;
· Metals & Mining; AEM upgraded to outperform in gold miner space at BMO Capital saying while managing through a period of capital intensity and project execution in the near term, AEM is expected to benefit from solid production growth and an improving free cash flow profile; TKR was upgraded to buy at Stifel after recent meeting with management. European Union Trade Commissioner Cecilia Malmstrom said the EU must brace for some kind of U.S. limits on steel and aluminum from the bloc as soon as June 1, when a waiver from tariffs imposed by US expires
Technology, Media & Telecom
· Internet; MOMO reported a clean beat across-the-board with revenue coming in 8% above high-end of guidance and non-GAAP net profit 34%/29% ahead of Street on better Q2 guidance; MELI tgt was cut to $260 from $330 at Morgan Stanley following weaker than expected Q1 results and to account for updated macro forecasts and a more negative outlook for profitability
· Semiconductors; Chinese authorities are set to approve QCOM’s planned $44B acquisition of Netherlands-based NXPI the next few days, according to reports https://on.mktw.net/2kwR6eg ; OLED shares jump after report that Apple might use OLED screens for all of its upcoming iPhone models/current generation of iPhones includes an OLED screen in the iPhone X but LCD screens in the 8 and 8 Plus (shares of CRUS, AVGO, QRVO dip on report) https://on.mktw.net/2skNZJL
· Software & Hardware; VRNT is in talks to buy NSO Group, a maker of cyber surveillance products, for about $1B, according to reports https://on.mktw.net/2L2rMrs ; SSYS shares fell after saying its CEO Ilan Levin was stepping down, effective June 1, after less than two years in the role; INFN shares fall on downgrade at Jefferies as believe the current valuation reflects the upside case for the business and we have concerns about the company’s competitiveness in the market; ROKU upgraded to equal-weight at Morgan Stanley citing solid user and monetization growth
· Media & Telecom; ATUS mentioned positively in Barron’s saying on June 8th, Altice will spin off its U.S. systems, with some shares of the Altice USA business trading here since last year, and arbitrage sales ahead of the spinoff pushing them down to levels that are cheap in comparison with other communications stocks – bulls see as much as 50% upside; movie theatres CNK, IMAX, AMC all declined following weak opening for DIS “Star Wars: Solo” movie