Thursday, May 31, 2018
Equity Market Recap
· U.S. stocks closed the day lower, led by a decline in industrials as the U.S. decision to impose tariffs on steel and aluminum imports from the European Union, Canada and Mexico renewed fresh trade-war worries. Energy stocks dropped along with oil prices (down roughly 2% for the month) while financials slumped as bond yields slipped again. Bonds ended little changed on the day after a volatile two-prior sessions, while the dollar was flat and commodity prices slipped.
· This morning, the U.S. announced tariffs on steel and aluminum imports from Canada, Mexico and the European Union starting Friday. Canada and Mexico had previously gotten exemptions while U.S. officials seek to renegotiate the North American Free Trade Agreement (NAFTA), and the EU also had an exemption. The tariffs of 25% on steel imports and 10% on aluminum were announced in March by President Trump. The EU later responded by saying they will impose duties on US products, while Mexico and Canada also announced retaliatory measures.
· Retailers in focus after a heavy round of earnings, with dollar stores (DG, DLTR) falling on weaker results, while GES, SHLD, BBW, EXPR slip on results as well. Tonight, markets get results from LULU, ULTA, COST and GME with ANF and BIG tomorrow. The tech heavy Nasdaq Comp outperforms, while Small Caps look dip from record highs.
· Economic data mostly better as jobless claims fall, Chicago PMI tops views and personal spending jumps, but housing data weak…though tomorrow’s monthly jobs report data (est. for 190K jobs added for Nonfarm and Private payroll with unemployment holding steady at 3.9%) remains the key data point ahead of the June FOMC meeting – where a rate hike is widely expected.
· Personal Income for April rose 0.3%, in-line with estimates while personal spending jumped 0.6%, topping the 0.4% estimate while the prior month was upwardly revised to 0.5% from 0.4%. The PCE index, the Federal Reserve’s preferred inflation gauge, rose 0.2%, as did the core rate that strips out food and energy (in-line with views). The rate of inflation over the past 12 months, however, was unchanged at 2%. Similarly, the core rate was flat at 1.8%. The compensation up 0.3% in April vs 0.2% gain the prior month and savings rate at 2.8% in April vs. 3.0% prior.
· Chicago PMI Business Index at 62.7, topping the consensus of 58.4 as new orders, employment and inventories rise at a faster pace, while prices paid rise at slower pace
· Weekly Jobless Claims fell -13K to 221K, below the 228K estimate (vs. prior claims 234K); the 4-week moving avg. at 222.25k in the week ending May 26; continuing claims fell 16k to 1.726m in the week ending May 19
· Pending Home Sales for April fell (-1.3%) MoM vs. estimate up 0.4%; Northeast unchanged March fell 5.6%, Midwest fell 3.2%; March rose 2.9%, South fell 1%; March rose 2.5% and the West fell 0.4%; March fell 1%; unadjusted pending homes up 0.4% y/y after falling 4.3% y/y in March
· Crude oil prices fall for the 6th time in the last seven days, as WTI crude drops -$1.17 to settle at $67.04 per barrel (highs $68.30 and lows $66.56) after mixed inventory data. Brent prices edge higher while WTI crude slipped. Overnight, API reported that U.S. crude supplies rose by 1M barrels for the week ended May 25, showed a fall of -1.7M barrels in gasoline stockpiles, while inventories of distillates climbed by 1.5M barrels. Oil prices later pared losses after the EIA reported a surprise weekly drawdown in inventories of -3.6M barrels s. est. build of 450K barrels, while Cushing stockpiles fell -556K barrels. Prices then reversed and moved lower after the EIA said U.S. crude output up 2.1% in March to record 10.47M B/D. For the month, oil prices dropped 2%, its first monthly decline since February.
· Gold prices slipped, with June futures down -$1.80 to settle at $1,304.70 an ounce, reversing earlier gains and closing the month out with a decline of about (-1%) as the dollar touched fresh 2018 highs. Gold prices erased modest gains following a round of economic data, but head of the highly anticipated monthly payrolls report tomorrow morning. Expectations are for the Federal Reserve to raise interest rates as soon as next month. Gold has recently found support amid Italian and Spanish political concerns and the impact for the European Union’s future.
· The U.S. dollar ends mixed as the dollar index (DXY) held above the 94 level, down from earlier weekly highs above 95, but still ends the month up 2.4% on rising rate hike expectations, better economic data, and political uncertainty in Europe. The euro little changed after bouncing from 10-month lows yesterday while the dollar fell vs. the yen. The Mexican Peso and Canadian dollar slump vs. the dollar after the U.S. imposes tariffs on steel and aluminum imports (though each country vowed retaliation against the US regarding their own trade counter measures). The British pound was little changed while Bitcoin bounced 3% on the day.
· Treasury prices edged higher Thursday, sending yields lower on mixed economic data, though worries about Italy continued to fade; the 10-year yield slips back to 2.83% from around 2.844% late yesterday and off earlier morning highs around 2.86% while the 2-yr yield steady at 2.415%. The Trump administration announced it will impose tariffs on European steel and aluminum, renewing the trade war fears that has plagued markets in recent months and giving a bid to defensive and safe haven assets such as bonds. Italian government bond yields continued to retreat after spiking Monday and Tuesday on fears a political impasse could led to new. The 10-year yield big swings in just over a week – with yield highs of 3.11% and lows 2.76%.
Sector News Breakdown
· Retailers; PVH better Q1 EPS/sales and comps while Q2 EPS guides above views, though mi-point of year view below estimates; SHLDslumps as Q1 comp sales decline of (-11.9%) weighs on sentiment with negative Ebitda; EXPR posted an unexpected quarterly profit; BBW shares fall after Q1 results miss; KIRK rises to 5-month highs after quarterly results top expectations; JILL also higher after earnings results in women’s apparel; TLYS Q1 EPS beat estimates on better than expected margins and expense control, while 2Q18 comp and EPS guidance exceeded expectations; GES in-line Q1 loss of (23c) and comps on better revs, but mid-point year EPS guide below estimates; AEO Q1 EPS and comps beat on better Q2 view; DKS was upgraded to peer perform at Wolfe Research after earnings beat yesterday
· Dollar stores; sector under pressure after earnings results from DG and DLTR; DLTR Q1 EPS missed by 5c on weaker sales of $5.55B and comp sales of 1.4% missing the 2.4% estimate and issues weak profit guidance, lowering year view; DG same story, with EPS missing by 4c on light revs and comp sales of 2.1% missing the 3.1% est. as each partially blamed weather for miss
· Leisure sector; RV sector (CWH, THO, WGO) dropped after the Trump administration announced imposing tariffs on steel and aluminum imported from the European Union, Canada and Mexico. Recall RV stocks fell in February after the tariffs were recommended by the Commerce department – LCII earlier this month cited raw materials inflation, at least partially caused by the new tariffs as offsetting some of its margin improvement
· Lodging sector; Morgan Stanley upgraded STAY to overweight while noting LQ and LHO best performing the last 6-months benefitting from meaningful re-ratings by unlocking under-appreciated value. Jefferies initiates lodging space as expect the lodging group overall to continue posting modest upside to the broader market, with peak valuations the key pressure point for C-Corps
· Auto sector; German automakers weak initially after reports U.S. President Donald Trump has threatened to hit European cars with a U.S. import tax if the European Union follows through on its threat to bring in $3.5B of its own levies on U.S. agriculture, steel and industrial products; TSLA said they investigated the facts of the incident in Brussels and can confirm that the customer was driving and operating his car himself, without using Autopilot; Softbank Vision Fund to invest $2.25B in GM’s Cruise Automation self-driving car unit https://bloom.bg/2kEeAhC
· Consumer Staples; packaged food companies (CPB, POST) among the top decliners amid fears of increased trade wars with Mexico, Canada and the European Union; meat producers PPC, TSN, SAFM also tumble after Mexico said to take reciprocal actions against US tariffs
· Inventory data mixed as EIA overshadows API: the API reported that U.S. crude supplies rose by 1M barrels for the week ended May 25, showed a fall of -1.7M barrels in gasoline stockpiles, while inventories of distillates climbed by 1.5M barrels. However, oil prices later pared losses after the EIA reported a surprise weekly drawdown in inventories of -3.6M barrels s. est. build of 450K barrels, while Cushing stockpiles fell -556K barrels. Prices then reversed and moved lower after the EIA said U.S. crude output up 2.1% in March to record 10.47M B/D
· Large Cap banks; DB shares slump again after the Financial Times first reported its U.S. business was put on a Federal Reserve list of problem banks and added to a group of troubled lenders monitored by the country’s deposit insurance regulator; GS shares weak along with broader banks and insurance names, GS trades lowest levels since September
· Insurance; CLGX said 2018 storm surge report sees more than 6.9M homes along the Atlantic and Gulf coasts at potential risk of damage from hurricane storm surge inundation/report sees total reconstruction cost value more than $1.6T; Bloomberg reported that the SEC is reviewing whistle-blowers’ allegations that AFL may have misled investors in reporting its financial results
· REITs; BTIG on apartment REITs, downgrading AVB to neutral as comp net operating income (NOI) may trail sector averages, and as new supply deliveries probably won’t peak until Q4, while cut MAA to neutral as well and lowers comp NOI rev. assumptions, ests.. BTIG added stayed buy on CPT as comp NOI growth should stay at high-end of sector avg and reiterates ESS buy; Separately, Goldman added CPT to its Americas Conviction List, as macro environment favors the company, with recent reports implying U.S. job growth has stabilized
· Pharma movers; MDGL shares spiked as MGL-3196 showed statistically significant more patients treated with MGL-3196 compared with placebo treated patients achieved a two point reduction in NAS on biopsy and also statistically significant more patients treated with MGL-3196 compared with placebo treated patients achieved resolution of NASH on biopsy; VKTX shares rallied in sympathy as Viking’s VK-2809 works in similar way as Madrigal’s MGL-3196, while ICPT shares fall on the NASH results; CRIS said FDA granted Fast Track designation for development of fimepinostat (CUDC-907) in patients with relapsed or refractory diffuse large B-cell lymphoma; SCPH shares plunge after the FDA has informed it that it has identified deficiencies in its FUROSCIX Infusor NDA that precludes discussions about labeling requirements; CORT shares slide after Stifel downgraded to hold
· Biotech movers; CRSP and VRTX said the U.S. FDA put a hold on a new-drug application for a drug used for the treatment of sickle-cell disease, “pending the resolution of certain questions that will be provided by the FDA as part of its review.” MESO reported solid fiscal 3Q18 financial results and confirmed plans to present an update on the following milestone by the end of calendar 3Q18; CLSDslides as Phase 2 data of CLS-TA in combination with REGN’s Eylea in patients with diabetic macular edema failed to improve visual acuity compared to Eylea alone; BIIB was upgraded to buy at Canaccord; TTOO 6.1M share Secondary priced at $7.50; NKTR teams up with SNDX to collaborate on a Phase 1b/2 clinical trial assessing the combination of entinostat and NKTR-214 in patients with metastatic melanoma who have progressed after receiving a PD-1 inhibitor
· Healthcare services/managed care; MGLN active as The Virginia Senate voted Wednesday in favor of a state budget that includes Medicaid expansion. The legislation now awaits signature from the Governor, Ralph Northam, who is widely expected to approve it (Raymond James est. that Magellan will attain ~50,000 additional lives throughout 2019 as a result of expansion); CMD lowers FY18 sales growth outlook to 12.5%-13% from 13%-14%, while slightly raises low-end of year EPS view by 3c to $2.47-$2.50; MMSI falls as CFO leaves to pursue other interests; in research, HQY was downgraded at Cantor while the firm upgraded QSII to overweight
Industrials & Materials
· Machinery sector; Goldman Sachs lowered its machinery sector view to neutral from attractive on the expectation that U.S. truck production will peak over the year, a challenge for 25% of machinery coverage and downgraded PCAR to neutral from buy as U.S. truck spot market indicators have stabilized at new cycle highs while spot load-to-truck ratio has fallen 30% over the past four months and may decline further if rail service levels improve; Goldman remains bullish on the outlook for commodity capex-levered markets and reiterates buy ratings on CAT, DE, TRMB and AGCO; TITN mixed results and maintained its EPS guidance for FY19 as unfavorable spring weather delayed ag planting and negatively impacted FQ1 sales
· Metals & Mining; Steel (AKS, X, STLD) and aluminum stocks (AA, CENX) in the U.S. rose after reports that President Donald Trump may impose tariffs on steel and aluminum products from Canada, Mexico and Europe as the temporary exemptions are due to expire Friday. Morgan Stanley said AA, CSTM, KALU likely to be hurt by U.S. steel tariff as AA’s large smelting capacity is located in Canada, while other two may continue to face cost inflation
Technology, Media & Telecom
· Semiconductors; MU was downgraded to equal-weight at Morgan Stanley saying after being bullish on memory for the last two years, they are moving to a neutral stance. DRAM remains strong but looks priced in as MU is very close to our PT and see the 2H NAND recovery that bulls are looking for as increasingly unlikely; ADI up a second day after earnings; AAPL supplier Dialog semi (DLGNF) cuts FY18 revenue growth by about 5% saying it has been provided with a reduced share of the volume forecast from Apple for the main Power Management IC (PMIC) for the 2018 smartphone platform
· Software & Hardware; BOX shares slumped following 35% rally in over a month into earnings last night which had high expectations/ posted modest upside to top-line/margins in Q1 but slowing billings growth (+14% vs. 28% last Q); GLW upgraded to overweight at Morgan Stanley as believe Corning has the ability to generate up to $3 of earnings in the coming years, representing an opportunity for investors; TECD shares jump as Q1 EPS/revs handily top views on better guide; KEYS advanced on earnings results
· Optical stocks; sector was weak yesterday heading into CIEN earnings this morning as the company Q2 EPS missed by 7c though revs of $730M topped estimates, but margins of 40.7% was below views; FNSR reports in a week while optical group remains focused on US situation with Chinese company ZTE Corp which currently has sanctions against it (many opticals get good portion of revs from ZTE – AAOI, ACIA, LITE)
· Internet movers; SNAP shares outperformed after Citron Research out $17 tgt on shares saying time to spook shorts who have overstayed their welcome; GOOGL shares advanced amid optimism over the impact of the European Union’s new privacy law that take effect on Friday.