Monday, June 11, 2018
U.S. stock markets edge higher ahead of one of the busiest macro weeks (if not the biggest) of the year thus far, trying to extend last week gains. The Dow Industrials try to make it a 4th consecutive day higher, shrugging off tensions after a volatile G-7 summit over the weekend between the U.S. and its trading partners (Canada, EU), and turning their attention to President Trump’s meeting with North Korea’s Kim Jong Un which takes place tomorrow in Singapore. The weekend saw a fresh escalation of tensions between Trump and Canadian Prime Minister Justin Trudeau, ending with Trump withdrawing his support for the group’s communiqué after Trudeau criticized U.S. tariffs on Canadian metals. Back to the summit, the first meeting between a sitting U.S. president and a North Korean leader is scheduled for Tuesday at 9 a.m. Singapore time, or 9 p.m. on Monday Eastern Time. Outside of the G7 and summit, this week marks a busy week of economic data (CPI tomorrow and PPI Wednesday), and three central bank meetings, starting with the FOMC Wednesday (25 bps rate hike expected), the ECB on Thursday (expected to announce the timing of a QQ reduction) and the Bank of Japan Friday morning.
Treasuries, Currencies and Commodities
· In currency markets, the U.S. dollar index (DXY) slightly lower, trading around 93.50 as markets await the U.S. and North Korea summit tomorrow and three central bank meetings later this week. There are also 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; while the euro rises back above 1.18 vs. the greenback.
· Precious metals are little changed as the dollar remains steady and markets await key macro market moving catalysts later this week; gold holding above $1,300 an ounce
· Energy futures slip amid reports late last week that indicate 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
· Treasury markets slip as yields inch higher ahead of the U.S./North Korea summit tomorrow; the 10-yr yield up above 2.96% – trading in range of 2.92%-2.97% the last few days after extreme volatility the prior 2-weeks (yield on 10-yr high of 3.11% vs. lows around 2.76%). Three central banks meetings this week (FOMC, ECB, and BOJ) may rattle markets.
Sector Movers Today
· 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
· 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
· 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
· 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
· EVHC +2%; to be taken private by KKR in a deal valued at $5.57 billion, with shareholders to receive $46 per share
· GNW +27%; 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
· LHO +1%; after PEB submits revised merger proposal for a strategic combination with LHO which represents an implied price of $37.80 per share (up from prior $33.50)
· LUV +2%; as airlines broadly higher; LUV mentioned positively in Barron’s saying shares could soar 25% as temporary headwinds like fuel costs abate
· PTC +5%; as ROK said it would buy an 8.4% stake in PTC for $1 billion
· RCII +4%; 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
· SRE +16%; 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.
· USG +3%; to be acquired by Knauf in a transaction valued at approximately $7.0B with holders to receive $44.00 per share, which consists of $43.50 per share in cash payable upon closing of the transaction and a $0.50 per share special dividend
· ADNT -16%; cut its forecast for full-year adjusted Ebitda to about $1.25B from a prior range of $1.4B-$1.45B (est. $1.32B) and said CEO was stepping down
· OLN -2%; downgraded at RBC Capital saying EDC prices remain volatile, epoxy upside could be limited; and Winchester continues to underperform
· PCG -4%; California confirmed on Friday 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/PCG fell after saying it expects to record a “significant liability” for losses stemming from fatal fires in California
· SHAK -4%; after filing a mixed securities shelf registration, which includes up to 12.3m shares of Class A common stock that may be sold
· VICL -23%; 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