Mid-Morning Look: May 31, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look
Thursday, May 31, 2018

U.S. equities are mixed as trade tensions weigh on industrials, energy stocks fall with oil prices resuming downward momentum, while financials lower as bond yields slip again. This morning, Commerce Secretary Wilbur Ross confirmed prior reports that the U.S. will impose 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. The news sent material stocks higher initially, but have since pared gains. 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. The tech heavy Nasdaq Comp outperforms broader markets, while Small Caps look to add to record closing highs from yesterday. Economic data mostly better as jobless claims fall, Chicago PMI tops views and personal spending jumps, but housing data weak. The dollar mixed, gold edging higher and bonds extends recent gains.


Treasuries, Currencies and Commodities

· In currency markets, the dollar index (DXY) little changed above the 94 level, down from earlier week highs above 95, but still strong of late; the euro little changed after bouncing from 10-month lows yesterday; the dollar falls vs. yen; the Mexican Peso and Canadian dollar slump vs. the dollar after the U.S. imposes tariffs on steel and aluminum imports

· Precious metals get a small lift as trade fears renewed after the US imposes tariffs on steel and aluminum for Canada, Mexico and EU

· Energy futures active amid weekly inventory data; Brent prices edging higher while WTI crude slips more than $1, moving back down near the $67 per barrel level ahead of inventory data at 11:00 today (pushed out 1-day due to Memorial day holiday). Overnight, 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

· Treasury prices edge 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%


Economic Data

· 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


Sector Movers Today

· 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; 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

· 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 will invest $2.25 billion in GM’s Cruise Automation self-driving car unit

· 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

· 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


Stock GAINERS

· AKS +2%; as steel stocks and aluminum stocks (CENX) 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.

· GLW +3%; upgraded to overweight at Morgan Stanley as believe Corning has the ability to generate up to $3 of earnings in the coming years

· GM +11%; as ; Softbank Vision Fund will invest $2.25 billion in GM’s Cruise Automation self-driving car unit https://bloom.bg/2kEeAhC

· MDGL +99%; 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

· NKTR +3%; 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

· TECD +9%; shares jump as Q1 EPS/revs handily top views on better guide

· VKTX +40%; rallied in sympathy as Viking’s VK-2809 works in similar way as Madrigal’s MGL-3196

 

Stock LAGGARDS

· BOX -9%; shares have rallied 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)

· CLSD -24%; 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

· CMD -10%; as 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

· CRSP -9%; said the U.S. FDA put a hold on a new-drug application for a drug used for the treatment of sickle-cell disease

· DB -7%; 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

· DG -8%; EPS missing by 4c on light revs and comp sales of 2.1% missing the 3.1% est. as each dollar store partially blamed weather for miss

· DLTR -12%; 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

· MU -5%; 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

· SCPH -35%; as the FDA has informed it that it has identified deficiencies in its FUROSCIX Infusor NDA that precludes discussions about labeling requirements

· TITN -10%; mixed results and maintained its EPS guidance for FY19 as unfavorable spring weather delayed ag planting and negatively impacted FQ1 sales


Syndicate

· Cherry Hill Mortgage (CHMI) 2.75M share Spot Secondary priced at $18.05

· Hancock Jaffe Laboratories (HJLI) 1.5M unit IPO priced at $5.00

· Houlihan Lokey (HLI) 3M share Spot Secondary priced at $49.15

· Sesen Bio (SESN) 22.222M share Spot Secondary priced at $1.80

· T2 Biosystems (TTOO) 6.1M share Secondary priced at $7.50

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Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P.  Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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