Wednesday, June 6, 2018
Equity Market Recap
· U.S. stocks on auto pilot, adding to recent gains, as the Nasdaq Composite sets another record intraday and closing all-time high along with the Russell 2000 Small Cap index. The blue-chip Dow Industrial Average jumped as much as 300 points, or over 1% as it retakes the 25,000 level (hitting a 12-week high), while the benchmark S&P 500 index also traded to its best levels since mid-March. Oil prices dropped to 2-month lows as bearish weekly inventory data weighed on sentiment. A combination that Treasury Secretary Steven Mnuchin reportedly urged President Donald Trump to exempt Canada from metals tariffs at a meeting Tuesday helped market sentiment. Along with reports late yesterday that China had offered to buy some $70 billion of U.S. goods to get the Trump administration to cool its tariff threats. Both helping out trade concerns along with news the Trump administration is putting the finishing touches on a deal with ZTE Corp. that would allow the Chinese telecom-equipment maker to resume purchases from its American suppliers. An improved trade balance report this morning boosted expectations for upcoming GDP data, while markets widely anticipate the FOMC to raise interest rates when they convene next week. Also in central bank news, the euro advanced on reports the ECB will discuss ending its QE easing. In sector news, insurance stocks dropped on reports AMZN may look to sell home insurance; transports mixed as airlines fall on lower guidance from DAL, while truckers rally; solar stocks fall for a 3rd straight day as analyst bearish following recent policy developments in China that are likely to put pressure on margins past 2019.
· Nonfarm productivity rose 0.4%, missing the 0.6% estimate as output (goods and services produced) climbed 2.7% instead of 2.8%; hours worked were revised to show a 2.3% gain vs. a preliminary 2.1%; Unit-labor costs, rose by 2.9%, a bit higher than the preliminary 2.7% estimate
· U.S. trade deficit falls to 7-month low as exports set fresh record; The U.S. trade deficit shrank (-2.1%) in April (before the Trump tariffs took effect) to (-$46.2B) from a revised (-$47.2B) in March, and below the (-$49.0B) estimate; Exports edged up 0.3% to a record $211.2B
· Oil prices end lower, with WTI crude sliding 79c, or 1.2% to finish at $64.73 per barrel, reversing earlier gains after weekly inventory data came in bearish. The API reported a -2M barrel drawdown in the latest week overnight, giving a lift to futures, but prices tumbled after the EIA reported a surprise inventory build of 2M barrels (vs. est. -2.1M), with Cushing stockpiles up 955K and gasoline also bigger build of 4.6M barrels vs. est. 500K build. The bearish data point turned oil prices around, moving back near 2-month lows.
· Gold prices slipped late day to end the day lower by 80c, settling at $1,310.40 an ounce, but held above the $1,300-an-ounce level for a second consecutive session; a weaker dollar buoyed the precious metal early as markets eye trade tensions, and the FOMC meeting next week and the Group of Seven leading industrialized nations this weekend. G-7 nations will hold talks in Canada on Friday and Saturday, where tariffs and trade are likely to be discussed.
· The U.S. dollar ends lower vs. most counterpart currencies, but rallied off its morning lows (DXY dollar index off lows 93.42 to afternoon highs around 93.70). The Euro climbed around 0.4% (highs 1.1796 vs. low 1.1713) after ECB officials (ECB Chief Economist Peter Praet and ECB policy maker Jens Weidmann) signaled they’re ready to ramp up discussions on ending the central bank’s massive bond-buying program when they meet next week (June 14). Outside of the euro, the greenback sunk vs. the British Pound and gave back yesterday gains vs. the Canadian dollar. The dollar managed to rise against the safe-haven Japanese yen.
· Treasury markets end lower, as yields advance across the board after remarks from European Central Bank senior officials showed the central bank remained on track to debate next week the timetable for ending its asset purchases; the 10-yr yield climbs 6 bps above 2.97%, while the 2-yr yield tops 2.52% and the 30-yr 3.13% as ECB chief economist Peter Praet confirmed the central bank would discuss the eventual wind-down of its monthly bond buying in next week’s meeting. Expectations of an FOMC rate hike as well at its meeting next week also lifted yields.
Sector News Breakdown
· Retailers; VRA issues full-year guidance ahead of expectations and amid improved margins due to a lower level of clearance and more full-price selling; LB said total comp sales up 5% in May vs. est. up 1.5%, while Victoria’s Secret May comp. rose 2% vs est. down -1.2% and Bath & Body Works rose 10% for the month vs. est. up 4.1%; SIG shares surge as Q1 EPS with surprise profit vs. est 7c loss on better sales, while comps declined less (-0.1%) vs. the (-4% est.; BIG to buy back about $100M in shares; in research, GIII was upgraded at Barclay’s, while Atlantic downgraded Macy’s (M) and KSS
· Consumer Staples; OLLI with mixed results as analysts noted significant sequential deceleration, two-year stack showing its smallest gain since 1Q14, traffic negative for the 2nd quarter in a row on negative side but strong EPS growth and healthy merchandise margins; BF/B reports mixed Q4 results as EPS beat by a penny, while revs of $733M missed estimates and guidance mid-point missed estimates ($1.75-$1.85 vs. est. $1.82); CVGW shares fall after Q2 revs missed estimates; TAP said it is committed to 2018 guidance despite challenges in Q1
· Housing & Building Products; FND was upgraded to overweight at Piper and up tgt to $58 following recent travels with mgmt and recent pullback in shares after the Q1 print; LGIH May 2018’s unit closing growth of 9.4% (572 units) was the lowest monthly growth rate since April 2017’s 7.0% comparison; NCS shares rise after Q2 results topped estimates
· Casino, Lodging & Leisure; after falling yesterday on cautious industry comments at Morgan Stanley, cruise stocks defended at Nomura (CCL, RCL, NCLH) saying they disagree with bear thesis that weak Caribbean pricing, coupled with unfavorable fuel and FX trends, could lead to substantial 2H18E EPS guidance misses
· Auto movers; TSLA CEO Elon musk said the company will “quite likely” meet its goal of making 5,000 Model 3 cars in a single week by the end of the month; Musk also signaled Tesla is close to announcing details of a China factory for building cars and batteries, perhaps next month
· Inventory data; last night, the API reported that U.S. crude supplies fell by -2M barrels for the week ended June 1; data also showed a rise of nearly 3.8M barrels in gasoline stockpiles, while inventories of distillates fell -871K barrels. This morning, the EIA reported a surprise inventory build of 2M barrels (vs. est. -2.1M), with Cushing stockpiles up 955K; gasoline also bigger build of 4.6M barrels vs. est. 500K build (bearish data)
· Top stories; DVN rises after agreeing to sell its ownership interests in ENLK and ELNC to an affiliate of fund manager Global Infrastructure Partners for $3.13B; Reuters reported SLB and HAL are preparing offers for an onshore production sharing deal with Brazil’s state-controlled PBR https://bit.ly/2HmAbnz
· Solar sector weak for a third day in a row; JMP Securities cuts FSLR rating citing recent policy developments in China that are likely to put pressure on margins past 2019 (Bank America cut FSLR yesterday and Roth cut rating on six solar names Monday based on some concerns)
· Coal sector; Jefferies increased seaborne coal price forecasts to reflect supply constraints and positive demand, especially from emerging markets including India (BTU, ARCH, ACGL); MKM also comments on sector as they continue to favor coking coal exposure to thermal coal, and reiterate our Buy ratings on ARCH, BTU, and TECK
· Utilities; several utilities D, PPL, DTE, ED, ES trade at 52-week lows as yields rise and rotation out of defensive sectors; AEE was upgraded to Equal Weight at Morgan Stanley stating that legislative and regulatory developments in Missouri have exceeded expectations in terms of how they benefit Ameren/company plans to invest a about $1B through 2023 to modernize the grid as a result of new legislation
· Large Cap and Regional banks among the day’s top performers as bond yield jumped ahead of the FOMC meeting next week, which is expected to produce a rate hike, as the sector looks to rebound from recent weakness; life insurance stocks slipped after the Information reported AMZN is said to consider offering home insurance (shares of PGR, TRV, CB, ALL came under pressure) https://bit.ly/2xMY9bU ; in brokers, ETFC May preliminary daily average revenue trades 254,000, up 1% from April saying derivatives represented 34% of total preliminary DARTs
· Pharma sector; VRX upgraded to overweight at Barclay’s citing increased bullishness that the company has hit an inflection point as its existing business stabilizes, and offers a foundation for growth driven by upcoming product launches/raises tgt to $29 from $20; VBLT rises as data shows MOSPD2 is needed for directional movement of tumor cells and some immune cells; AXON shares soar after Oxford BioMedica plc said it has entered an $842.5M licensing agreement for OXB-102, a gene therapy treatment for Parkinson’s disease
· Managed care; CI was upgraded to buy from neutral at Goldman Sachs and raised tgt to $212; UNH renews share buyback program of 100M shares and raises dividend 20% to 90c; AET President Karen Lynch to be EVP of CVS Health after CVS’s acquisition of Aetna closes
· Healthcare services and suppliers; ATHN CEO Jonathan Bush steps down as President and CEO while Jeff Immelt appointed Executive Chairman; HCSG upgraded to outperform at William Blair calling it an attractive long-term oppty at current levels
Industrials & Materials
· Transports; truckers get a lift early as CVTI gave 2Q18 EPS guidance of 45c-53c, above 38c estimate saying the truckload freight environment has been favorable, leading to operating results exceeding expectations (truckers CHRW, JBHT, LSTR); airlines negative news as DAL cuts its Q2 EPS view to $1.65-$1.75 (form prior $1.80-$2.00, below $1.88 estimate saying fuel costs at high end of guidance (AAL, UAL, JBLU, LUV move in sympathy)
· Defense Stocks (BA, LMT, NOC, GD) active after the Senate released the text of $716B defense authorization bill for FY 2019. The Senate Appropriations Defense Subcommittee held a closed hearing today at 10am to review defense innovation and research funding
· Industrial & Machinery; MTW as upgraded to buy at SunTrust raise estimates and tgt to $33 as came away incrementally more positive on the outlook for MTW at its Crane Day; FAST said May Net Sales $431.4M, up 12.5% YoY while May daily sales $19.6M, up 12.5% YoY
· Metals & Mining; U.S. Steel (X) announced this evening their decision to restart the second of two blast furnaces, blast furnace A, at its Granite City Works facility in Illinois/furnace is set to restart on October 1st and commence shipments in 4Q (KeyBanc says view X’s decision to restart more capacity as very accretive to FCF); CLF initiated buy and $11 tgt at Citigroup saying it has significant logistical, quality and cost advantages in providing high quality iron units to steel mills in an improved domestic market Chemicals; BHP got first-round bids for its U.S. shale portfolio from oil majors including BP, Chevron, and Shell, Bloomberg reported
Technology, Media & Telecom
· Internet; TWTR said it will offer $1.0 billion aggregate principal amount of convertible senior notes due in 2024 in a private placement to qualified institutional buyers (comes a day after announcement it will be added to the S&P 500 index); WIX tgt raised by several analysts after positive analyst day yesterday as believe newer products such as Code should increasingly gain traction throughout 2018; more privacy issues related to FB as he company said it had data-sharing partnerships with four Chinese consumer-device makers, including Huawei Technologies Co; YELP downgraded at KeyBanc; YY shares fall after Q2 revenue outlook slowing more than street expected according to one analyst (Morgan)
· Semiconductors; AMBA shares fell after guidance for next quarter missed estimates, while Oppenheimer downgraded shares as declining revenue from wearables and drones compressed FY19 revenue and margin outlook; NVDA CEO said during reporter roundtable that it will be “a long time” before the next gaming GPU announcement; AMD with update at Computex in Taiwan last night as analysts positive on presentation
· Optical stocks active after late day report from Reuters yesterday that the Trump administration is putting the finishing touches on a deal with ZTE Corp. that would allow the Chinese telecom-equipment maker to resume purchases from its American suppliers (shares of optical companies ACIA, AAOI, LITE, OCRL among those active on report – gets revs from ZTE)
· Tech strength overall, over 40 names in the S&P 500 at 52-week highs today: tech related include NTAP, ADI, CRM, FOX, VRSK, INTU, FFIV, AMZN, EA, MSFT, CTXS