Friday, June 1, 2018
Equity Market Recap
· Stocks jumped on Friday while bonds sank as the latest U.S. jobs report confirmed the strength of the U.S. economy and likelihood of the Federal Reserve raising interest rates at its upcoming meeting in June. The improving jobs report overshadowed recent market fears of trade wars/tariffs between the U.S. and partners Canada, Mexico and the EU (don’t forget China) and political changes in Europe. The unemployment rate fell to 3.8% in May, while average hourly earnings increased more than expected. Technology shares led the rally, with the Nasdaq Composite Index rising to an 11-week high. Overall, stocks were in rally mode from the onset, starting the new month off in the green after a solid May.
· In sector news, technology shares paced the market gains as the Nasdaq Composite more than 1.5%, or 110 points topping the 7,550 level (all-time highs 7,637 on 3/13), led by a 2% jump in semiconductors and strength in FAANG/Internet, with NFLX, AMZN touching new all-time highs along with big gains in AAPL, GOOGL and FB as well. Bloomberg noted that the S&P 500’s technology index is sitting at an all-time high. The Biotech sector in focus this weekend ahead of the American Society of Clinical Oncology (ASCO) cancer conference, 6/1-6/5, in Chicago. Casino stocks (WYNN, LVS) fell after Macau gaming data missed estimates, while auto stocks rebound after better monthly auto sales data (though tariff impact remains a concern for the sector). Small Cap Russell 2000 index rebounds after pulling back from record closing highs yesterday.
· News out of Europe helped markets overseas as Giovanni Tria was named the new Italian finance minister, as populist parties the League and the 5 Star Movement on Thursday evening struck a deal to form a coalition government, ending months of political deadlock. Meanwhile in Spain, Prime Minister Mariano Rajoy was ousted from power after losing a no-confidence vote in parliament.
· Another positive late day for markets, President Donald Trump said a June 12 meeting with North Korean leader Kim Jong Un is going ahead as planned, after the president met with a top lieutenant to Kim. Trump told reporters after Gen. Kim Yong Chol met with him at the White House that he didn’t expect to sign something at the summit in Singapore.
· Nonfarm Payrolls for May rose 223K, topping the 190K estimate, while the prior month was revised to 159K from 164K; Nonfarm private payrolls rose 218K vs. prior 162K and above the 190K estimate; Manufacturing payrolls rose 18K after rising 25K in the prior month and compared to the 20K estimate; the participation rate 62.7% vs prior 62.8%. Average hourly earnings rose 0.3% MoM, topping the 0.2% estimate while the unemployment rate fell to 3.8% vs prior 3.9% (due to the decline in the labor participation rate)
· ISM Manufacturing for May rises to 58.7 from 57.3 last month and slightly above the 58.2 estimate: Breakdown showed new orders rose to 63.7 vs 61.2 prior month, employment rose to 56.3 from 54.2, while inventories fell to 50.2 from 52.9; prices paid rose to 79.5 vs 79.3
· Construction Spending for April rose 1.8%, topping the 0.8% estimate while March was unrevised at -1.7%; Private construction rose 2.8% in April, Private residential construction rose 4.5%, Private nonresidential construction rose 0.8%, and Public construction fell 1.3% in April
· Crude oil ends the day and week lower, with WTI crude oil falling -$1.23, or 1.8% to settle at $65.81 per barrel, marking the lowest finish since April, and down nearly 3.1% for the week. Oil futures fell Friday as growing U.S. production and the possibility that OPEC and its allies will boost output prompted U.S. benchmark prices to settle at their lowest level since April.
· Gold prices settle the day lower by -$5.40 to $1,299.30 an ounce and posting a -0.7% drop on the week as the dollar rose, with rising rate hike expectations and easing political concerns in Europe denting the precious metal late week. The better-than-expected economic data today in the form of non-farm payrolls, with unemployment falling to 18-year lows, solidified expectations the FOMC will raise rates at its upcoming meeting.
· The U.S. dollar ends the day mostly higher, but finished little changed on the week, as the dollar index (DXY) climbed to around 94.20 (off earlier week highs above 95) after a better-than-expected jobs report outweighed renewed fears over trade wars. The euro slipped to $1.1663 versus $1.1694 late yesterday while the British pound moved off its recent 2018 lows. The dollar also gained vs. the safe-haven yen amid easing peace talks with North Korea and political changes in Europe working itself out. The dollar reclaimed some lost territory on Friday and inched higher, even as retaliatory action is expected from U.S. trade partners over the steel and aluminum tariffs that come into effect on Friday.
· Treasury markets reverse earlier losses to settle down slightly; bonds initially fell following the strong monthly jobs report, with yields recovering off recent lows (10-year back above 2.90% after falling below 2.76% earlier this week – though off recent 7-year highs above 3.11%). The strong economic data helping offset the recent fears according to trade wars and tariffs between the US and trade partners.
Sector News Breakdown
· Retailers; LULU shares jump after Q1 results beating EPS estimates by 20%, able to drive 19% FX (20% reported) comp growth with strong broad-based results, including 60% growth in e-commerce amid strong operating margins up 264 bps YOY (vs. guidance up 50-100 bps); ANF Q1 EPS loss smaller than expected on higher revs and comp sales and margins; COST Q3 earnings and comp sales topped estimates though markets concerned with profitability as higher sales came amid shrinking gross margins; in footwear, CAL Q1 EPS missed by 4c and an unexpected comp sales decline at Famous Footwear to (-0.8%) vs. est. +2.2%; GCO downgraded at Piper
· Dollar & Discount stories; the sector plunged yesterday following quarterly earnings misses from both DG and DLTR, while today, BIGreported Q1 results that trailed estimates and cut its year forecasts (shares of FIVE also active)
· Auto’s; monthly auto sales data for May released today: 1) FCAU said May U.S. auto sales rose 11% vs. est. 7.4%; 2) Ford (F) said May monthly auto U.S. sales rose 0.53%, beating the down (-0.6%) estimate and said F-Series sales increased 11% in May and is on track to deliver its ninth consecutive year gain; note GM is no longer providing monthly auto sales data; 3) NSANY U.S. May auto sales fell a smaller (-4.1%) vs. est. (-7.6%); 4) HMC May auto sales up 3.1% vs. 1.1% est.; 5) TM monthly May U.S. auto sales fell (-1.3%) vs. est. (-.2%)
· Consumer Staples; COT was reinstated overweight at JPMorgan (from neutral); SMG downgraded to underweight at JPMorgan as faces challenges both in its core consumer business and in its hydroponics operation, which serves the cannabis market; in cosmetics, ULTA posted Q1 EPS/sales and comps (+8.1% vs. est. 6.9% – but below 14.3% rise a year ago) above views, but Q2 guidance of $2.35-$2.40 below the $2.48 est.
· Casino, Lodging & Leisure; in gaming (WYNN, MGM, MLCO), Macau gross gaming revenue increased 12.1% in May to 25.5B patacas to fall short of the 17% consensus analyst estimate, according to the Gaming Inspection and Coordination Bureau. Macau GGR was up 27.6% in April and 23.7% a year ago in May; in leisure, HOG said tariffs will drive up costs for all products made with these raw materials
· Top stories: Baker Hughes (BHGE) weekly rig count rose 1 to 1,060, with oil rigs up 2 to 861, gas rigs down 1 to 197, and miscellaneous rigs unchanged at 2; PBR shares plunged after announcing CEO Pedro Parente resigned; the coal space was strong, led by gains in BTU, ARCH, ARLP as White House directs Department of Energy to “prepare immediate steps” to stop closures of some coal, nuclear power plants; Permian Basin E&P stocks underperform on Permian oil price differential concerns, as most names fall with decline in oil on the day/week (MTDR, VNOM, CPE, CXO, RSPP). In addition, Bloomberg noted COP cited the discount sellers in the Permian have to take vs. Gulf Coast prices, a gap that’s soared to >$20/bbl a barrel this week as traders fret over dwindling pipeline space
· REITs; Barclays upgraded RLJ to overweight and raised a number of lodging REIT price targets ahead of meetings with lodging REIT management teams at next week’s NAREIT conference in New York. Stifel upgraded shares of EGP, HIW, FSP and UDR as they believe the macro environment is changing to the positive for REITs, and upgrading certain names which they think can benefit the most. Key aspects of a “likely tilting playing field” include lower interest rates and risk-off investment sentiment due to uncertainty in Italy and Southern Europe, and stronger-than-ever interest in hard-asset real estate. In Self storage REITs (CUBE, EXR, LSI), KeyBanc said new supply growth remains the biggest headwind to fundamentals within the industry
· Lending and Finance; auto lenders ALLY and SC shares were active after FCAU said it will set up a captive financial unit in the U.S. to take advantage of opportunities in the consumer finance, as the company has option to buy out its existing partner, SC, and started talks, its CFO said, adding that such move could add $500M-$800M in incremental pretax within 4 years; ELLI announced the departure of Matt LaVay, CFO, who is leaving for personal reasons; SQ updated its Q2 and full-year outlooks after acquisition of Weebly Inc.; NAVI upgraded to outperform at Wedbush
· Biotech sector will be in focus this weekend ahead of the American Society of Clinical Oncology (ASCO) cancer conference, 6/1-6/5, in Chicago – ABBV, AGIO, BCRX, BLUE, CELG, IDRA, INCY, MDRX, MRK GR, RHHBY, TSRO, NKTR, LLY, among them; in news today, ONVOshares fell after earnings miss pressured shares; MDGL shares pare some of yesterday’s 145% gains on positive data, as analysts take up price targets; ABBV downgraded at Piper saying the risk/reward on this name – while once compelling on the reward side – may be skewing increasingly toward risk
· Medical devices & equipment; ISRG announces a new FDA clearance for the da Vinci SP surgical system for urologic surgical procedures that are appropriate for a single port approach; TTOO was upgraded to outperform at Leerink with $12 tgt
Industrials & Materials
· Transports; Transports to intraday highs midday, with the Dow Index back above the 10,900 level up 1.5% on the day, led by rail companies UNP, CSX up as well as strength in FDX, KEX, EXPD; the Dow Transports have not been above the 11K level since early February
· Metals & Mining; after giving up gains yesterday despite positive news for the industry that the US imposed the steel and aluminum tariffs, the materials and steel stocks rebounded today (X, AKS, STLD, NUE, CENX, AA)
· Aerospace & Defense; Airbus is facing an unprecedented challenge in ramping up production to meet 2018 delivery targets following engine delays/said delivering 80 to 90 aircraft every month in the second half of the year has never been done before; SPR reaffirmed its earnings and sales guidance at investor conference today
Technology, Media & Telecom
· Internet; AMZN new all-time highs, topping 1,646 before paring gains, but posts 7th straight daily gain; GOOGL up another 3% today, makes 5% gain in 2-days amid optimism over the impact of the European Union’s new privacy law that take effect on Friday; FB shares neared record all-time highs of $195.32 reached in early February as Internet sector continues outperformance; NFLX also near record best levels
· Semiconductors; AMD shares rise after Stifel raised estimates and tgt (to $17) as continue to see AMD meeting its product introduction milestones which is increasing their customers’ confidence in adopting AMD CPUs and GPUs; MRVL delivered a solid quarter with the slightly lower F2Q revenue guide due to ZTE largely offset by better than expected margins, as the quality of revenue mix and opex controls both improved; The Philly semi index (SOX) up over 2% today, as the index rises to its best levels since late March at 1,407
· Software movers; WDAY solid upside to the Street on both revenue and EPS in 1Q but fell well short on billings ($496.6M vs. $519.5M consensus); VMW posted a top-to-bottom line quarterly beat and a FY19 guidance raise as big license revs beat (+21% or +17% in c/c to $774M above guidance $730M), and total revs growth of 14% (+12% in c/c, above the 10% guide); ZUO shares up over 20% after its first earnings results since IPO