Wednesday, May 30, 2018
U. S. equities rebound in early trading, with gains in energy and banking stocks (two biggest market drags on Tuesday) fueling the recovery from a steep selloff driven by Italy’s political crisis. Tuesday’s decline was the largest in a month amid concerns surrounding political uncertainty in Italy (Spain as well). However, Italy’s stocks and bonds, as well as the euro, were all in recovery mode, and U.S. stock futures were taking part in the advance as bonds pare gains and yields inch higher. Reports that Italy’s two biggest antiestablishment parties (the 5 Star Movement and the League) were again in talks to form a coalition government after an earlier agreement helped ease concerns along with a smooth Italian bond auction. After leading the Dow lower the last few sessions (along with financials), energy stocks CVX and XOM (which was upgraded at RBC) the top gainers in the index. Small Caps extend gains as the Russell 2000 and S&P Small Cap 600 each trade to fresh intraday record highs. Canada’s central bank left interest rates on hold (at 1.25%) for a third straight decision Wednesday, but gave an upbeat assessment of the economy and removed some of its more cautious language. U.S. oil prices on track to snap a 5-day losing streak, it’s longest in nearly 4-months ahead of inventory data and as the dollar slips from 2018 highs. Earnings plentiful in the consumer space, with shares of DKS, MOV rising on results while CHS, DSW, and KORS declining on results. The S&P 500 index trades back above its key 100-day moving average (2,710), while the NASDAQ surges over 60 points, topping the 7,450 level.
Treasuries, Currencies and Commodities
· In currency markets, the U.S. dollar falling from best levels since November, with the dollar index (DXY) down roughly -0.4% to 94.40 (after highs above 95 yesterday), as the euro rebounds from 10-month lows. The Canadian dollar climbs more than 1% after the Bank of Canada kept interest rates unchanged and remains hawkish on outlook – CAD/USD down at 1.2886 (was above 1.30 prior to data)
· Precious metals little changed, as gold futures holding above the $1,300 an ounce level, underpinned slightly by the Italy scenario, trade-talk uncertainty and North Korean diplomacy, after hitting a fresh low for 2018 earlier in May.
· Energy futures higher for the first time in six days, with WTI crude rising around 1% back above $67 per barrel ahead of inventory data tonight (API) and tomorrow (EIA) along with a pullback in the dollar. Oil prices sank late last week on reports that OPEC and Russia are considering lifting oil production in order to hold down recent gains linked to supply shortfalls from Venezuela.
· Treasury markets pare some yesterday’s gains, as yields tick higher (only modestly), with the 10-year yield up about 4 bps at 2.83% (yesterday lows 2.76% and recent 7-yr highs above 3.11% over a week ago) as Italy concerns fade for the time being. Helping allay fears, Italy successfully sold five- and 10-year debt at an auction, bringing some relief to jittery markets following this week’s meltdown in the nation’s bonds amid a political crisis.
· The U.S. economy (GDP) grew at 2.2%, slightly softer than originally reported reading of 2.3%due to a slower buildup in inventories. Gross domestic product was trimmed to an annual 2.2% pace from 2.3%; note GDP rose 2.9% in prior quarter. Personal consumption rose 1.0% in 1Q after rising 4.0% prior quarter while GDP price index rose 1.9% in 1Q after rising 2.3% prior quarter and Core PCE q/q rose 2.3% in 1Q after rising 1.9% prior quarter
· The U.S. added 178K private-sector jobs in May according to payrolls processor ADP, below the 190K estimate while April’s figure was revised downward by 41,000 to 163K; the private payroll report comes ahead of the nonfarm payroll report this Friday
· Trade deficit for April narrowed to (-$68.B) from (-$68.6B) in prior month and was better than the (-$71.0B) deficit estimate; imports fell 0.5% in April to $207.777B from $208.851B in March, while exports fell 0.5% in April to $139.588B from $140.259B in March
Sector Movers Today
· Large Cap Pharma; WCG agreed to acquire Meridian for $2.5B in cash; AZN said that the Terranova phase 3 trial of Fasenra, its first respiratory biologic treatment, didn’t meet its primary endpoint of reducing exacerbations in patients who have chronic obstructive pulmonary disease; CNBC reported that AGN to sell women’s health and infectious disease units after strategic review https://cnb.cx/2LL3vrk ; ABBV was downgraded to underperform at Credit Suisse citing concern about the longevity of their flagship product Humira/separately, ABBV said about 75.7M shares tendered at $105 per share
· Athletic retailers active after DKS shares surge following better-than-expected 1Q results and raised guidance – year $2.92-$3.12 vs. est. $2.91 (the news comes after FL better results a week ago); shares of vendors such as NKE, UAA, VFC, COLM were also active on results; DKS year $2.92-$3.12 vs. est. $2.91 (up from prior $2.80-$3.00) and as Q1 comp sales fell less than expected (-0.9%)
· Energy rebounds with oil; XOM upgraded to outperform at RBC Capital noting underperformance after combination of disappointing results and the acceleration of its investment plans, but see the potential for substantial dividend growth alongside superior returns; Husky (HSE.CN) upgraded to outperform at BMO Capital noting shares have outperformed their peers over the last 18 months but remain undervalued, in their opinion and believe the company is now better positioned to deliver growing free cash flow
· In retailer research; WWW upgraded to buy at Argus with $40 tgt after recently reported solid 1Q18 earnings, driven by strength in its core businesses, and raised its 2018 guidance; GIII upgraded to outperform at Cowen ahead of two near-term catalysts (PVH’s eps release on 5/30 and GIII’s 6/5) but says call today goes beyond just guidance towards more of an earnings inflection in FY20 and beyond; TGT was added to Bank America US one list
· CRM +1%; posted solid Q1 results that beat on earnings and revenues while also posted a beat on billings (+16%y/y vs. +12% consensus), and came in slightly above the highest expectations
· DKS +24%; following better-than-expected 1Q results and raised guidance – year $2.92-$3.12 vs. est. $2.91 (up from prior $2.80-$3.00) and as Q1 comp sales fell less than expected (-0.9%)
· FCAU +4%; after Bloomberg reported the company is considering ending sales of Fiat cars in North America and China in the coming years, while mostly confining Chrysler to the U.S.
· HPQ +3%; Q2 18 beat consensus revenues by ~$400M and raised the midpoint of its FY 18 EPS outlook by 4.5c to $1.97-$2.02, though negative news as veteran CFO announces retirement
· MDP +2%; upgraded to buy at Citigroup as sees a favorable risk/reward
· MOV +11%; rises as full-year forecast tops views after Q1 sales and margin beat
· MU +2%; KeyBanc says they expect annual DRAM supply to remain at or below anticipated demand through 2019, with pricing likely to rise moderately through at least 3Q (positive for MU)
· CHS -20%; after Q1 EPS missed and issued a disappointing Q2 forecast as sees comp sales down low-to-mid-single digits vs average estimate of negative 4.1%;
· DAKT -18%; after quarterly results
· DSW -10%; as Q1 EPS and revs top views but full-year guidance falls short of consensus
· GOGO -8%; after Morgan Stanley cut tgt to $3 saying recent weak results continued to raise questions about GOGO’s underlying business
· KORS -11%; on mixed results as posted better Q4 comp sales of up 2.3% vs. est. (-1.3%) on better earnings, but fails to outweigh operating margin of 7.4% that was below co.’s guidance of ~10% given in February
· TPX -4%; Wedbush said based on checks with numerous retailers, we believe bricks and mortar retail mattress sales declined low single digits for the Memorial Day sales period, continuing the trend from 1Q18.