Monday, June 11, 2018
Equity Market Recap
· U.S. stocks quietly pushed higher throughout the session, managing to overcome trade disappointment after the G-7 meeting over the weekend ended with worsening tensions over U.S. tariffs and a dispute between U.S. President Trump and Canadian Prime Minister Justin Trudeau. Attention now turns (despite trade issues not going away) to President Trump’s meeting with North Korea’s Kim Jong Un which takes place tomorrow in Singapore as well as three central bank meetings this week. The FOMC concludes its meeting Wednesday as a 25-bps rate hike is expected, while the ECB convenes on Thursday with an expected announcement from Draghi related to the timing of a QE reduction. Finally, the Bank of Japan policy meeting is Thursday night/Friday morning. There are also key inflation reports the next two days (CPI/PP).
· With today’s gains, the Dow Industrials posted its 4th straight day higher, while the NASDAQ resumed its upward momentum and the S&P 500 moved back near 3-month highs. The S&P 500 rose, led by telecoms and consumer staples, with most sectors gaining. The dollar advanced with U.S. Treasury yields while Italian bonds and stocks jumped after the new finance minister confirmed the country’s commitment to the euro. In currencies, the Mexico’s peso led losses among the world’s major currencies amid uncertainty over the future of Nafta, along with declines in the Canadian dollar. Bitcoin traded near a two-month low following a hacking incident at South Korean cryptocurrency exchange Coinrail. European stocks closed higher, led by a strong move in Italian stocks (up 3.4%), rising the most in more than a year, after the country’s new finance minister offered reassuring comments about the EuroZone, while investors also snapped up Italian debt, driving down the yield on Italy’s 2-year note by 53 basis points to 1.06%, and 10-year bond fell 28 basis points to 2.82%.
· July WTI crude oil climbs by 36c, or nearly 0.6%, to settle at $66.10 per barrel, erasing earlier losses. Oil prices had slipped initially, adding to last week declines amid reports that Saudi Arabia increased production ahead of OPEC’s June 22 meeting; the added crude of ~100K bbl/day last month, raising Saudi production to 10M bbl/day marks an about face in the country’s recent actions; also, Russian news agency Interfax said over the weekend that Russia’s oil production had risen to 11.1M bbl/day in early June, up from slightly less than 11M bbl/day for most of May.
· Gold prices rise 50c to settle at $1,303.20 an ounce, trading little changed as the dollar remains steady ahead of several potential market moving events this week including three central bank meetings (FOMC on Wednesday), the North Korea summit tomorrow and several inflation data points the next few days.
· The U.S. dollar index (DXY) bounced off lows to end the day mixed, as the dollar index topped 93.50, falling vs. the euro (paring losses in the afternoon), but gaining ground vs. emerging markets and safe haven currencies. Markets await the U.S. and North Korea summit tomorrow and three central bank meetings later this week. There are also several key inflation reports the next few days which could move the needle for currencies as well. Trade remains the big catalyst after a tough G7 this weekend. Canadian dollar slumps following the G-7 summit as did the Mexican peso; while the euro rises back above 1.18 vs. the greenback.
· Treasury markets slipped early, as yields held gains up about 3 bps to around 2.96% as markets await the U.S./North Korea summit tomorrow. Three central banks meetings this week (FOMC, ECB, and BOJ) also a reason for patience in bonds today. It was also a very busy day of auctions with a 10 and 3-year today (more below). The Fed is set to meet on Wednesday when they’re likely to implement a rate hike with markets also expecting a shift to four rate increases on the accompanying dot plot, the Fed’s projections for monetary policy. Strengthening inflation numbers, a tight labor market, and talk of second-quarter growth rising above 3% could shift the central bank on a more aggressive hiking path.
· The U.S. Treasury sold $32B in 3-year notes at a yield of 2.664% vs. 2.663% pre-sale when-issued at a bid-to-cover at 2.83 vs. 2.76 prior auction and indirect bidders awarded 5.14% and directs with 9.2% of auction. The U.S. Treasury also sold $22B in 10-year notes at a yield of 2.962% vs. 2.965% prior to auction, with a bid-to-cover (demand) at 2.59 vs. 2.56 prior auction and indirect bidders awarded 56% of auction and directs getting 16.3% (highest since May 2015)
Sector News Breakdown
· Retailers; RCII said it received an increased offer to acquire the company from one of the suitors that was involved in its sale process. The report came hours after the rent-to-own furniture retailer said it ended its strategic review ; FIT shares jumped after positive commentary by Citron Research saying the future of wearables is undeniable and its transformation from consumer products to med-tech is real
· Consumer Staples; MNST tgt raised to $63 at Morgan Stanley citing potential for a US price increase, topline upside vs. consensus, perceived strategic potential, and attractive valuation; NWL added $2.5B to its stock repurchase program
· Housing & Building Products; USG to be acquired by Knauf in a transaction valued at approximately $7.0B with holders to receive $44 per share, consists of $43.50 per share in cash payable upon closing of the transaction and a 50c special dividend
· Lodging; HST and PK both downgraded to sell at Goldman Sachs saying rally leaves unfavorable risk-reward and recommends buying MAR, HLT and WH with 20%/20%/32% 12-month total return potential; PEB submits revised merger proposal for a strategic combination with LHO which represents an implied price of $37.80 per LaSalle common share/offer represents premium of 13% over Blackstone/LaSalle pact for $33.50 per share
· Auto’s; ADNT cut its forecast for full-year adjusted Ebitda to about $1.25B from a prior range of $1.4B-$1.45B (est. $1.32B) due to continued challenges with its Seat Structures and Mechanisms segment, as well as lower than expected operational conversion in its Seating segment
· Oil related news; PBR upgraded to market perform at Raymond James with the stock down ~40% since the first evidence emerged of politics being re-injected into fuel pricing, the resulting multiple compression has made risk/reward more balanced; OXY upgraded to buy at Jefferies in conjunction with their update to oil price estimates saying it is one of the most levered to oil price in their US integrated universe
· E&P sector; Jefferies said, in tandem note where they adjust near-term WTI price forecast up and our LT forecast down ~$3/bbl (from $63 to $60/bbl), they upgrade XEC to Buy and downgrade OAS to Hold – says believe the Permian basis-driven selloff is overdone, while oil fundamentals in general are attractive; APA was upgraded to buy at Argus to reflect the impact of rising crude oil prices, as well as management’s decision to allocate nearly 70% of 2018 capital spending to Permian basin production; FRAC rated new buy and $21.50 tgt at Goldman Sachs
· Utilities and power generation; PCG fell after saying it expects to record a “significant liability” for losses stemming from fatal fires in California in October that state officials said were started by the utility giant’s equipment. California said on Friday what many in the state’s wine country suspected: that PCG equipment ignited some of the most destructive wildfires and the state also found evidence of alleged legal violations by the utility in eight of the blazes; SRE rises as two shareholders (Elliott Management and Bluescape Resources Co) recommended six new directors for the company’s board and urged a strategic review of its business; DTE cut at Wells Fargo
· Battery/Utilities mentioned favorably in Barron’s saying fast growth in grid storage will make wind power even more competitive, which is good news for utilities with plenty room to add wind capacity like AEP and XEL and for wind developers like NEE. Nuclear-heavy companies in deregulated markets like EXC and PEG could face rising competitive pressures
· Insurance; GNW surges as gets approval from U.S. national security panel for $2.7B buyout by China Oceanwide Holdings Group after companies agreed to use 3rd-party provider from U.S. to help protect consumer data; more regulatory approvals are needed
· REITs; in office REITs, Evercore upgraded VNO to outperform from in line, downgraded ESRT to in line from outperform and downgraded BDN to in line from outperform given a lack of near-term catalysts. Retail REITs: Evercore upgraded BRX to outperform from in line and downgraded DDR to underperform from in line since the stock rose almost 12% last week. In lodging, Evercore downgraded HST to in line from outperform (PT still $23) given recent outperformance
· Consumer finance and payments; EEFT downgraded to neutral from buy and lower price target to $94 from $101, while the firm upgraded FDC to buy and raise price target to as believe revenue growth is poised to improve
· Pharma; AGN announced positive results from Phase 2b/3 clinical trial evaluating the efficacy, safety, and tolerability of orally administered atogepant, where all active treatment arms met the primary endpoint across all doses and dose regimens, with a statistically significant reduction from baseline in monthly migraine/probable migraine headache days; SGEN upgraded to buy at SunTrust and upped tgt to $80 on improved prospects for Adcetris’ ongoing launch in 1L cHL following updated ECHELON-1 analyses and positive KOL feedback at ASCO
· Biotech movers; VICL shares fell after saying the Phase 2 clinical study of its therapeutic bivalent vaccine candidate for herpes simplex virus type 2, or HSV-2, didn’t meet its primary endpoint; INCY was upgraded to outperform and tgt raised to $96 from $70 at Evercore saying that the value of Jakafi, and the potential to generate cash flow/pipeline success not reflected in shares; gene-editing stocks (CRSP, NTLA, EDIT) dropped late morning two studies published in Nature Medicine, scientists found that editing cells with CRISPR-Cas9 technology increases the risk of cancer, reported STAT’s Sharon Begley
· Medical equipment and devices; BSX shares jumped late morning after the WSJ reported SYK has made a takeover approach for the device maker – BSX later responded saying later they do not comment on speculation
· Healthcare services and suppliers; EVHC to be taken private by KKR in a deal valued at $5.57 billion, with shareholders to receive $46 per share ; EOLS tgt raised to $33 at Mizuho from $16 as believes the company has a better chance to quickly clear the last regulatory hurdles with the FDA and get approval for its wrinkle treatment, DWP-450
Industrials & Materials
· Transports; Dow Transports topped the 11,000 level for the first time since late January, led by the bounce in airlines (AAL, UAL, LUV) – transports in general have gotten a lift over the last month as oil prices tumble from 3 1/2 year highs ahead of OPEC meeting this month; airlines broadly higher as LUV mentioned positively in Barron’s saying shares could soar 25% as temporary headwinds like fuel costs abate and the carrier benefits from U.S. corporate tax cuts; UAL said late Friday that May load factor rose to 83.6% from 81.6%, as a 6.7% increase in traffic outpaced a 4.2% rise in capacity.
· Chemicals; WLK downgraded at RBC Capital as believe there is less upside potential vs. downside risk across the chlor-alkali, vinyls, and polyolefins chemical chains over the next 12 months, while also cut OLN to sector perform at RBC Capital saying EDC prices remain volatile, epoxy upside could be limited; and Winchester continues to underperform
Technology, Media & Telecom
· Internet; NTES board announced repurchase of up to $1B in added stock; YNDX authorizes $100M share buyback plan; FB positive mention at KeyBanc saying believe Instagram will drive 27% of incremental ad revenue in 2018, going up to 58% by 2020, at which point we estimate the service will have over 1.4B MAU and over $22B of revenue;
· Semiconductors; NXPI was downgraded at SunTrust; Semi equipment stocks dragging the Philly semi index (SOX) lower, led by declines in AMAT, LRCX, MKSI, KLAC; recall last week weakness in the group after several analyst expressed caution to LRCX after recent checks suggest risk its near-term shipments due to pushouts from memory makers
· Software movers; WDAY said it would buy Adaptive Insights Inc. in a deal valued at $1.55 billion, paying a hefty premium for the cloud-based company that was expected to go public this week ; ADBE tgt raised to $268 at RBC Capital on expectations for an earnings beat and modest forecast raise when the company reports results on Thursday; PTC rises as ROK said it would buy an 8.4% stake in PTC for $1 billion
· Media & Telecom; MTCH was upgraded to buy at Jefferies and raise tgt to $50 saying believes FB’s dating will likely appeal to an older demographic rather than millennials on Tinder; tomorrow marks the expected court decision on whether AT&T (T) $85B deal with TWX proceeds or if the federal judge in Washington will grant the U.S. Justice Department’s request to block the takeover on antitrust grounds; Intelsat (I) trades down as much as 10% after convert