Mid-Morning Look: June 01, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Friday, June 1, 2018

U.S. stocks in rally mode, starting the new month off in the green as a better than expected jobs report bolstered the view for a strong U.S. economy, overshadowing 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 jobs report showed a decline in the unemployment rate to 3.8% from 3.9% (18-year lows due to lower participation rate) as wages increased more than expected and the US added 33K more jobs this month than estimated. The U.S. dollar is set to push its weekly streak of gains to seven weeks, the most since 2014, while the 10-year Treasury yield rose above 2.90% (off earlier weekly lows below 2.76%). News out of Europe easing those markets 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 he lost a no-confidence vote in parliament. In sector news, technology shares leading markets higher as the Nasdaq Composite spikes back above the 7,500 level (all-time highs 7,637 on 3/13). 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. Casino stocks (WYNN, LVS) lower 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.

Treasuries, Currencies and Commodities

· In currency markets, the U.S. dollar index bounces after yesterday’s decline, led higher following the stronger jobs report, keeping expectations that the FOMC will raise interest rates at its upcoming June meeting; the dollar rises vs. the yen, euro along with emerging market currencies as well – Mexican Peso, Canadian Loonie a tough week following the trade tariffs

· Precious metals erase recent gains, as gold prices drop back under the $1,300 an ounce level as the dollar rebounds amid rising rate hike expectations after positive economic data

· Energy futures fall, as WTI futures add to weekly declines; for the month of May, crude oil prices dipped 2%, the first losing month since February following mixed inventory data yesterday and recent 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 driven lower following the strong monthly jobs report as well; 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.

Economic Data

· 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

Sector Movers Today

· Auto movers; 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%)

· 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

· 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

· Macau gaming (WYNN, MGM, MLCO) shares lower after May revenue number comes in below expectations. Though May marked the 22nd straight month of positive growth for the gambling region, the +12% GGR pace fell short of the consensus estimate of +17%

      Stock GAINERS

· ISRG +1%; gained FDA approval for its da Vinci SP in urological procedures, which will now have a phased roll-out in 2018 before ramping up in 2019 and beyond

· LULU +14%; 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

· MRVL +3%; delivered a solid quarter with the slightly lower F2Q revenue guide due to ZTE largely offset by better than expected margins

· TTOO +5%; was upgraded to outperform at Leerink with $12 tgt

· VMW +8%; 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)

· YEXT +5%; following quarterly earnings results


· ANF -7%; reverses earlier gains despite Q1 EPS loss smaller than expected on higher revs and comp sales and margins

· BIG -6%; reported Q1 results that trailed estimates and cut its year forecasts

· CAL -4%; Q1 EPS missed by 4c and an unexpected comp sales decline at Famous Footwear to (-0.8%) vs. est. +2.2%

· COST -1%; Q3 earnings and comp sales topped estimates though markets concerned with profitability as higher sales came amid shrinking gross margins

· FULT -1%; reported that potentially fraudulent activities at an unnamed customer will result in an 18c hit to Q2 earnings

· PBR -5%; after announcing CEO Pedro Parente resigned

· ULTA -1%; 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 estimate

· WDAY -4%; upside to the Street on both revenue and EPS in 1Q but fell short on billings ($496.6M vs. $519.5M consensus)

· WYNN -2%; after May revenue number comes in below expectations


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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