Market Review: June 18, 2018

Terrie AmengualDaily Market Report

Closing Recap

Monday, June 18, 2018

Equity Market Recap

· U.S. stock markets end mixed, as Small Caps once again outperform Large Caps and the technology leading Nasdaq Composite rallied more than 60 points off its lows to close little changed. Small Caps have risen to record all-time highs as they are seen less exposed to the ongoing trade problems/tariffs the U.S. is having with China, Canada, Mexico and the EU. The Dow Industrial Average fell for a 5thconsecutive session, while energy stocks were the bright spot in the S&P 500 as oil prices jumped ahead of this week’s OPEC meeting in Vienna following a report that suggested OPEC members, along with allies such as Russia, were discussing a smaller-than-expected production hike (after oil prices fell 4% late last week). China’s retaliatory action late last week against tariffs imposed by the U.S. last week ($50B in tariffs) has also reignited fears of a possible trade war. Markets are also continuing to assess the impact of tightening monetary policy by central banks after the U.S. Federal Reserve raised interest rate last week and the European Central Bank said it planned to end its bond-purchase program at year-end. There was no major economic data today or quarterly earnings results to impact markets. There was general weakness in Healthcare (outside of a few individual stock driven stories), homebuilders (on tariff impact), and consumer discretionary (after recent sector rally). Oil prices closed higher along with a small bump in gold, while the dollar was little changed.

Commodities

· Energy prices rebound after slipping last week, as WTI crude rises 79c to settle at $65.85 per barrel, with all eyes on this week’s OPEC meeting in Vienna. OPEC members discussed modest production increase to bridge gap between Russia and Iran, ahead of ministerial meeting Friday. Bloomberg noted some members discussing accord to add 300k-600k b/d over next few months between OPEC and its allies – note Iran wants no increase, and said on Sunday that Iran, Venezuela and Iraq would veto a Saudi-proposed boost Oil bounces1.2% following last week’s 4% decline. Ecuador oil minister said late afternoon he expects a difficult meeting and that OPEC has a proposal to increase output 1.5M barrels per day.

· Crude-oil production from seven major U.S. shale plays is expected to see a climb of 141,000 barrels a day in July to 7.339 million barrels a day, according to a report from the Energy Information Administration. Oil output from the Permian Basin, which covers parts of western Texas and southeastern New Mexico, is expected to see the largest climb among the big shale plays, with an increase of 73,000 barrels a day

· Gold futures rise $1.60 to settle at $1,280.10 an ounce, bouncing off lowest levels of 2018 as bond yields pull back and as trade tensions elevated global uncertainty. After closing at its lowest settlement since December and falling about 2% last week, gold prices managed small gains to start the week. Friday’s drop for the metal came as the U.S. dollar marked a 1.3% weekly gain.

Currencies & Bonds

· The dollar index (DXY) ended little changed, rising as high as 95.04 before paring gains to settle around 94.80. The dollar was mostly flattish vs. major market currencies (euro, yen, and pound) after last week’s strong gains following hawkish FOMC commentary. Dollar rising again vs. emerging markets as well on trade concerns and rising rates (Canada, Mexico, and Argentina).

· Benchmark Treasury rates held steady just under 2.93%, bouncing off earlier lows of 2.91% for the benchmark 10-year note yield as global trade concerns weight on market sentiment, giving a boost to safe-haven assets early with gold and Treasuries edging higher. President Donald Trump approved tariffs of 25% on about $50 billion of Chinese goods on Friday, drawing retaliatory measures by China on U.S. goods of the same value, which has kept bonds bid higher. There were no major economic data points to move markets.

Sector News Breakdown

Consumer

· Retailers; RCII to be taken private by Vintage Capital in deal valued at about $1.4 billion, with shareholders to receive $15 per share https://on.mktw.net/2tgsZo0; PERY agreed to be taken private by its founder, George Feldenkrais, in a $437M deal as investors will get $27.50 a share in cash https://bloom.bg/2thhFYN ; HIBB downgraded to underperform at Bank America as expect negative same-store sales in F4Q and next year as HIBB laps its e-commerce launch resulting in continued pressure to net income growth; GMEshares jumped later day after Reuters reported the company is holding talks with private equity firms about a potential transaction after receiving buyout interest https://reut.rs/2JLc8op

· Consumer Staples; protein stocks fall (PPC, SAFM) after Stephens warned on some near-term challenges on Pilgrim’s Pride, while keeping a positive view on the long-term potential for the poultry stock/shares both lower today on tariff anxiety.

· Restaurants; CAKE was downgraded to neutral at BTIG on valuation after surpassing $55 tgt saying despite potential 2Q comp sales upside amid improved consumer spending and easier y/y comparisons, wage/labor pressures will continue to weigh on margins; DPZtgt was raised to Street high $310 at BTIG; MCD shares dropped after EU Competition Commissioner Margrethe Vestager said there are a number of “challenges” in the tax state aid case concerning McDonald’s

Energy

· Energy stocks were mostly higher, led by small cap names as the sector shrugged off OPEC output talk to lead S&P sector off lows (ahead of official meeting in Vienna late week). Brent crude erased earlier losses as OPEC was said to discuss a smaller-than-expected increase in production. Sub-sector gains were broad based, with gains in E&P, equipment and integrated names leading; energy stocks had taken a dip last week after the sector fell four-straight sessions from Tuesday through Friday last week. Dow component CVXshares gained as Raymond James upgraded to outperform from market perform, citing “juicy” leverage to Brent oil prices.

· Utilities; the sector was raised to overweight at Morgan Stanley as 10-year Treasury yields appear close enough to a top for investors to start moving in a defensive direction; said yields may try to make another high at some point this summer,” above a recent high of 3.12%, even though equity markets are beginning to trade as if the top is already in; in other research, UBS downgraded targets on several utility stocks (AWR, AWK, NEE, XEL, PNM, WEC, ES, ETR); GEVO rises after the Environmental Protection Agency raised the amount of Isobutanol used for on-road use in cars to a 16 percent blend level from a previous 12.5 percent blend level.

Financials

· Banking sector news; BOKF to acquire COBZ in deal valued at roughly $1B as CoBiz will receive 0.17 shares of BOK Financial common stock and $5.70 in cash for each share of CoBiz common stock in deal valued at $23.02 per share https://yhoo.it/2lirhyR ; RF was upgraded to outperform and tgt to $21 at RBC Capital; banking stocks still lagging after the recent dip in Treasury yields; in insurance space CB was downgraded to neutral at Goldman Sachs, while asset manager BLK was upgraded to buy at Citigroup (though group was weaker on the session); in finance, GDOT downgraded to neutral at BTIG as the stock price trades above the company’s target price; FLT rises after S&P 500 inclusion

· REITs and Real Estate; Goldman downgraded online real estate stocks ZG (to neutral) and RDFN (to sell) amid expectations for continued tightness in housing and mortgage availability/also cites likely seasonal underperformance, signs of increasing competition in online real estate, ZG’s significant outperformance YTD, RDN’s rising cost of operation; in deal news, WPC agreed to merge with Corporate Property Associates 17 Global Inc. (CPA), a publicly-held but non-traded REIT, in an all-stock deal valued at about $6 billion https://on.mktw.net/2ykLyNr

Healthcare

· Pharma related movers; VRX falls as the FDA failed to approve the company’s lotion intended to treat plaque psoriasis; TEVA was upgraded to market perform at Wells Fargo; CBIO shares plunge in response to its announcement of preliminary results from a Phase 1/2 clinical trial evaluating CB 2679d/ISU304 in patients with severe hemophilia B; CBPO received a $110 per share bid from shareholder CITIC Capital Holdings that values the company at $3.65B https://yhoo.it/2t5nx7V; big Pharma was weak with PFE, BMY, MRK, JNJ all under pressure; VSTM rises as its duvelisib shows significant treatment effect in CLL study

· Biotech movers; SLDB said the FDA lifted its clinical hold on SGT-001, the company’s treatment for Duchenne muscular dystrophy, allowing a Phase 1/11 trial to resume; PTCT shares jump (upgraded at RBC and William Blair) after the company and Roche (RHHBY)presented an update from the Firefish trial with risdiplam in type 1 muscular atrophy babies ages 1-7 months; over 90% of SMA babies treated with risdiplam achieved more than a four-point increase in a test of motor skills; ZIOP shares slip as the FDA placed on clinical hold a Phase 1 trial to evaluate CD19-specific CAR-T therapies manufactured under point-of-care and requested additional information in support of the investigational new drug (IND) application for the trial; DMD/gene therapy stocks active today on PTCT, SLDB data include EDIT, NTLA, CRSP, BOLD, SRPT

· Medical devices & Equipment; QTNT rises as reports concordance data for the initial MosaiQ blood grouping microarray generated in its European field trial, which exceeded the targeted criteria for submission for CE marking

Industrials & Materials

· Industrial & Machinery; UTX tgt was raised to $195 at Bank America saying that Pratt & Whitney’s Geared Turbofan (GTF) could be worth $35 per share or $28.3b over 40 years; Bloomberg reported Airbus SE is studying options to extend the range of its A321 narrow body plane ahead of a decision by BA. on whether to push ahead with a competing model

· Homebuilders remain weak, with shares of PHM, DHI, LEN, TOL, MTH falling, as residential construction firms turned slightly less confident in June as tariffs on lumber bit into bottom lines; the trade tariffs trade issues has weighed on homebuilder sentiment

· Tanker sector; Wells Fargo upgraded DHT, FRO & TNK to outperform as they believe the Tanker group is uniquely positioned to benefit from both a likely OPEC production increase (June 22-23) and potentially significant IMO 2020 tailwinds. Wells said they believe the potential for IMO 2020-driven ton-mile and floating storage catalysts could create a thematic bid for the sector, with near-trough level NAVs helping to limit downside risks (raises targets for EURN, DHT, FRO, TNK, ASC and TNP)

Technology, Media & Telecom

· Internet; 52-week highs today for FB and AMZN in the Internet space; GOOGL is investing $550 million in Chinese e-commerce retailer JD in a partnership that will help both companies expand their retailing presence in Southeast Asia, the U.S. and Europe https://on.mktw.net/2JV9KHz; Craig Hallum raised tgt for GRUB to $140 from $110 saying overall network growth has accelerated to its highest month/month growth in five months

· Semiconductors; The Philly Semi index (SOX) down around 1% aft 1,408 (intraday lows 1,395), underperforms broader Nasdaq which is little changed on the day; INTC top decliner while AMD top gainer up roughly 5%; Dow component INTC lower after Northland downgraded to underperform as expect server growth to slow in Q3, GPUs and ASICs are more critical to improving performance in data centers than CPUs and increased competition from AMD among other reasons cited; NVDA tgt raised to $285 from $266 at UBS citing a China-led facial recognition boom that could provide an additional $5B sales opportunity for Nvidia by 2020

· Media & Telecom; DIS and DISCA both downgraded at Pivotal Research; DIS cut to sell as the stock’s recent run-up fails to reflect that a higher price paid for Fox’s Entertainment assets would reduce the value of Disney to its shareholders; also DISCA cut after 30% gain over the last 2-weeks; Separately, DIS issued an advisory to theaters showing its ‘Incredibles 2’ after some viewers posted on social media that a scene in the movie could trigger seizures in people with epilepsy, migraines or chronic illness

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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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