Mid-Morning Look: June 15, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Friday, June 15, 2018

U.S. equity markets are broadly lower, with the Dow Industrials down over 200 points and the Nasdaq Composite pulling back from its closing record highs yesterday on trade concerns. President Donald Trump announced that the United States will implement a 25% tariff on $50 billion of goods from China related to intellectual property and technology, and pledged to impose further levies if the Asian nation takes retaliatory measures. Trump said the U.S. “will pursue additional tariffs” if China retaliates. China doesn’t want trade war but will have to retaliate, a spokesman for the Ministry of Commerce says in a statement. Biggest sector underperformers include capital goods, technology hardware, metals/mining, solar and automakers amid the U.S.-China trade concerns. The new trade issues overshadowing a week previously dominated by central banks after the FOMC raised its outlook on rates to four this year from three (and upped this month by 25 bps), and the ECB decided to keep interest rates unchanged, as expected, and laid the groundwork for ending its asset purchase program by pledging that rates in the EuroZone would not start to rise at least until next summer. Overnight, the Bank of Japan stuck to its easing policy, keeping short-term interest rate at minus 0.1% and its target for the yield on 10-year government bonds at around 0%. Economic data was mixed (details below) in the U.S., while bonds gains, but commodity prices drop sharply.

Treasuries, Currencies and Commodities

· In currency markets, the dollar index down slightly around 94.75 after topping the 95 level earlier this morning (best levels of 2018 at 95.13 highs) as the euro bounces back above 1.16 after falling 1.5% yesterday and the greenback falls vs. the safe-haven Japanese yen. The dollar rises against emerging markets again (big sell-off this week for Canadian and Aussie dollar, as well as Mexican and Argentine Peso), as trade fears and declining oil prices take a toll on currencies

· Commodities: Precious metals drop as gold futures decline over 1.8% or $25 to trade back under $1,285 an ounce in a broad move lower for commodity prices on trade concerns with China today after the U.S. imposed new tariffs. Energy futures also broadly lower, with WTI crude sinking over 1.5% back below the $66 per barrel level. Oil prices headed for a second weekly decline in London as OPEC members clash on raising production at OPEC meeting next week.

· Treasury markets gain despite mixed economic data today and rising outlook for additional rate hikes at the Fed after this week’s meeting; today, strong manufacturing report for New York and higher confidence data out of Michigan, but industrial production surprised to the downside; Treasury yields slipping across the board, with the 10-yr at 2.89% (down 3 bps) and 2-yr at 2.54% (down from 2.6% this week) as investors rotate into safe-havens on trade concerns.

Economic Data

· The Empire State manufacturing survey rose 4.9 points in June to a reading of 25, the highest reading since October and topping the 18.8 estimate; solid gains for both new orders rising to 21.3 from 1.0 prior while the employment index jumped 10.3 points to a reading of 19. Though down slightly on the month, the prices paid index was a very high 52.7 (down from 54.0 prior)

· Industrial production for May fell (-0.1%) missing the 0.2% estimate and after rising 0.9% in April. Industrial Production was revised up to 0.9% from 0.7% in April. Capacity utilization fell to 77.9% from 78.1% in April, revised up from 78%

· University of Michigan prelim consumer sentiment survey for June rose to 99.3 vs. 98.0 prior month and came in above the 98.5 estimate; the current economic conditions index rose to 117.9 vs. 111.8 last month and the expectations index fell to 87.4 vs. 89.1 last month. Current economic conditions second-highest reading since May 2000 and Consumer expectations index at lowest level since January

Sector Movers Today

· Metals & Mining; ATI was downgraded to underweight at JPMorgan citing valuation; in steel space, positive guidance from both SCHN and STLD (after NUE guided higher yesterday as well); SCHN guides Q3 EPS $1.22-$1.28 vs. est. 98c, while STLD guided Q2 EPS $1.46-$1.50, topping the $1.39 estimate saying profitability from steel operations is expected to be meaningfully higher than sequential first quarter results/average quarterly steel product pricing is expected to increase more than scrap costs, as steel pricing across the platform has improved throughout 2Q

· Credit card data; monthly data showed: 1) BAC May net-charge-offs (NCOs) default rate 2.98% vs. 2.96% last month and delinquency rate 1.55% vs. 1.63% last month; 2) COF May Credit Card Charge-Offs 4.72% vs. 5.04% the prior month and May credit card delinquencies 3.22% vs 3.33% in April; 3) DFS May charge-off rate 3.4% vs. 3.2% last month and delinquency rate 2.2% vs. 2.3% last month; 4) ADS May Charge-Offs 6.4% vs April 6.3% and May delinquency rate 5.4% vs 4.9% YoY; 5) JPM May net credit losses 2.56% vs. 2.63% last month and delinquency rate 1.11% vs. 1.17% last month; 6) SYF May net charge-off 5.26% vs. 5.64% last month and reports May delinquency rate 2.73% vs. 2.84% last month

· REITs; JPMorgan with sector call saying following significant underperformance they turn more bullish on the group heading into H2; economic fundamentals are healthy and supply growth should moderate; meanwhile, REIT earnings growth will actually accelerate into ’19 (while it decelerates for the SPX); valuations for the group are reasonable. Upgrade KIM/LPT/PSB/TCO and downgrade ROIC/RPAI/STAG; top picks TCO, KIM, DRE, HCP, TIER, AMH, CPT, VER


· BAK +18%; as LYB says it has started talks with Braskem (BAK) controlling shareholder Odebrecht regarding a “potential transaction” between the companies https://reut.rs/2HPcvbv

· DBX +7%; adds to yesterday 14% gains and up a 5th straight day on momentum

· FNSR +3%; reported in-line revenue and weaker-than-expected earnings for its April-ended quarter, while Q4 outlook also missed views

· GOOS +27% after posting an unexpected higher on significantly better revs

· HOG +3%; KeyBanc positive saying they believe the near-term setup on HOG is improving, with our channel work pointing to a solid inflection in May domestic retail that is carrying into June

· NXPI +2%; on report Chinese regulators have approved QCOM’s acquisition of the chipmaker, according to a report from the South China Morning Post, which would be the final hurdle to approval for the $44 billion deal. https://on.mktw.net/2LREx8U

· VIAB +2%; after media names extend gains following concluded TWX/T $85B deal and news that CMCSA made higher $65B offer for FOX assets, topping DIS $52B bid


· ADBE -2%; reported top and bottom line quarterly beat, as analyst take targets higher, but shares slipped after trading at all-time highs prior (profit taking)

· AFMD -17%; after the percentage of complete metabolic responses for a combination of AFM13 highest dose with MRK’s Keytruda in Hodgkin lymphoma disappointed investors

· GBT -12%; as its voxelotor shows lower treatment effect in adolescents with SCD in mid-stage study

· JBL -8%; after mixed results as quarterly sales beat but only on penny EPS beat amid lower tax rate, while guidance for year brackets estimates for EPS on better revs

· OLED -3%; after WSJ report that AAPL plans to “stick with cheaper screens” with its upcoming iPhone line due to the price sensitivity of its customers. The story said that Apple expects the majority of its iPhone sales to come from devices with LCD screens this fall and next year

· SPLK –2%; downgraded to sell at Citigroup as see growth drivers plateauing, some warning signs in numbers and shares vulnerable with valuation in-line with high-growth SaaS app players

· TEVA -1%; said it will terminate Phase 3 development of fremanezumab for chronic cluster headache due to lack of efficacy


· Avalara (AVLR) 7.5M share IPO priced at $24.00

· Brighthouse Financial (BHF) 23.16M share Secondary priced at $44.50

· Cision (CISN) 12M share Secondary priced at $15.00

· Genco Shipping (GNK) 8.1M share Spot Secondary priced at $16.50

· Griffon (GFF) 4.855M share Secondary priced at $18.00

· Puxin Limited (NEW) 7.2M share IPO priced at $17.00

· Verrica Pharmaceuticals (VRCA) 5M share IPO priced at $15.00


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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