Tuesday, June 19, 2018
Equity Market Recap
· Stocks felt the pain of escalating trade tensions between the U.S. and China, as the Dow Industrial Average ended closed off its worst levels of the day (was down over -418 points earlier), but still dropped for a 6th straight session, its longest such losing streak in about 15-months. Technology, industrial and materials stocks were among the worst performing sectors today amid escalating trade tensions between the U.S. and China, though the tech heavy Nasdaq ended at its best levels of the day, well off its lows. European stocks ended near three-week lows after Trump indicated his administration is looking to hit China with further tariffs on in imported goods. Overall, U.S. markets tracked Asian market weakness (China index fell below 3,000 for the first time since 2016 and Hang Seng fell over -800 points) after President Donald Trump threatened to slap tariffs on another $200 billion in Chinese import. The new tariffs are in response to China’s retaliatory tariffs announced after the $50 billion in tariffs that the U.S. put into effect Friday. Sectors have been pressured over the last month due to trade wars and impact of tariffs include the auto sector (GM), defense (BA), food related (PPC), housing (LEN), solar (FSLR), technology and agriculture (DE), to name a few. The trade news dominated headlines and stock action, with the dollar rising to fresh 2018 highs, Treasuries gained and commodity prices fell across the board, with a 1% decline WTI crude ahead of the OPEC meeting this week. There are a few standout earnings report tonight with transport giant Fed-Ex reporting after the close as well as Oracle in the software sector.
· Crude oil prices dropped 78c, or 1.2% to settle at $65.07 per barrel (highs $65.90 and lows $64.39) as commodity prices fell across the board amid the impact of the trade issues between the U.S. and China, while markets continue to await the final decision by OPEC this week regarding the future production outlook (with some members wanting large output such as Russia, moderate output like Saudi Arabia, and no output increase like Iran). Gold prices dipped -$1.50 to settle at $1,278.60 an ounce, staying near 2018 lows as the dollar traded to new 2018 highs earlier, failing to gain any interest as a safe haven interest despite ongoing trade war fears.
Currencies & Bonds
· The U.S. dollar gained, as the dollar index (DXY) moved back above the 95 level (touches fresh 2018 highs of 95.296 earlier before paring gains) as emerging market and major currencies fall on trade fears and rising rate hike impacts. Fears of China retaliation against any additional U.S. tariffs weighed on currencies as the Euro slid to lows of 1.1531 before paring losses, while the Pound falls below 1.3200 vs. the dollar. The dollar also gained vs. the Canadian dollar (back above the 1.32 level) and South American currencies again.
· Treasury markets extend recent gains as the 10-year yield drops below 2.9% with markets rotation back into safe-haven plays amid the ongoing trade dispute news between the U.S. and China; rotation into defensive assets continues, with the 10-year yield down from highs around 3% last week after the FOMC raised rates by 25 bps and boosted its outlook on rate hikes. The 10-year yield moved to its lowest levels in 3-weeks while the 2-yr yield was at 2.54%.
· Housing Starts for May rose to 1,350K from 1,286K prior month and above the 1,311K estimate; starts rose 5.0% in May after falling 3.1% the prior month; single family starts rose to 936K; multifamily starts rose to 414K in May
· Building permits for May fell to 1,301K vs. the 1,364K in April and below the 1,350K estimate; permits fell 4.6% in May after falling 0.9% the prior month; completions rose to 1,291k in May, from 1,267k the prior month
Sector News Breakdown
· Retailers; GME confirmed reports from yesterday that it was holding exploratory talks about a potential sale of the company; MAT was downgraded to neutral at UBS on valuation after outperformance in shares vs. broader markets; CNBC noted that NKE gets 12% of total revs from China, TIF 13% of revs, and TPR 14% of total sales; WHR falls after monthly AHAM data showed shipments of major home appliances fell 4.7% y/y to 6.68M units last month
· Consumer Staples & Restaurants; CL announced a $5B share buyback plan; DPS was downgraded to hold at Stifel citing substantial outperformance and a series of public filings; SBUX gets 15% of total revs from China and MCD 15% according to CNBC report earlier today;
· Housing & Building Products; Homebuilders; Citigroup upgrades BECN and MAS to Buy and upgrade PHM and KBH to neutral from sell, while cutting FPH to Neutral from Buy as firm said they think LEN underperformance is overdone, and the stock screens well from a valuation perspective; MTH has favorable geographic exposure, and is a good takeout candidate; HHC continues to ramp up NOI through its development pipeline, MAS provides investor’s exposure to R&R spending and BECN appears to be pushing price to offset input costs – builder industry has been punished on tariff concerns; GRBK falls after filing to sell shares owned by Dan Loeb’s Third Point hedge funds, along with new stock
· Services; ARMK shares active after Morgan Stanley cuts Q3 estimates on lower baseball attendance, noting that industry-wide baseball attendance is down 6.7% through June 14, and that attendance has declined by 9.5% at Aramark’s 10 stadiums
· Energy sector eagerly awaits results from the upcoming OPEC meeting in Vienna the tail-end of this week, with reports indications several pushing to repeal output cuts they started 18 months ago while others argue no supply increase is needed. Iran and Venezuela have said production cuts should remain as exports from both nations are constrained or falling (Iran faces threat of U.S. sanctions, Venezuela’s economy is collapsing). Meanwhile, Russia is most vocal in urging the group to raise production, potentially by as much as 1.5M barrels per day (non-OPEC member). As of Monday, according to Bloomberg reports, some members were discussing plan to add 300k-600k b/dover next few months between OPEC and its allies, in a potential compromise as its lower than scenarios of between 500k and 1m b/d that Saudi officials suggested last week.
· E&P sector; CPG announces it has entered into definitive purchase and sale agreements to dispose of certain non-core assets in the Williston Basin for proceeds of approximately $280M; HK said it plans to cut July operated rig count to 3 from 4, cites lower near-term realized oil prices in the Midland market and is in advanced talks to secure 25,000 bbl/d of firm capacity on a pipeline to Gulf Coast. Oil equipment and services; HP was upgraded to buy at Jefferies with $80 tgt saying the 13% pullback over the past month is unwarranted, and expect any Permian fall-off to be shallow and limited to 2H18, while US Land Drilling fundamentals remain strong
· MLPs, Utilities; TELL 12M share Spot Secondary priced at $9.90; in coal, MKM Research raised seaborne coking coal price deck for 3Q and 4Q to $185/metric ton and $165/metric ton respectively and raised estimates for coking coal exposed names ARCH, BTU, HCC, and TECK. Utility outperform as investors dumped riskier assets, and the yield on 10-year Treasuries fell three basis points to 2.88%, the lowest in almost three weeks, helping dividend paying sectors such as utilities (AEP, DUK, PNW, etc.); GEVO rises solidly again after surging 261% yesterday as the EPA approved Isobutanol at a 16% blend level in gasoline for on-road use in automobiles (prior approval was for up to 12.5% blend)
· Large Cap banks will be in focus later this week, when round 1 of ban stress tests released Thursday night for big banks (JPM, WFC, C, etc.); Citigroup said today they anchoring payout ratios from 2017 is not comparable due to tax reform, and all else equal, they think payouts will be down y/y. They see most potential for bigger-than-expected returns at BK, CIT, CMA, KEY, NTRS, PNC, and WFC. In other bank news, PBCT agreed to acquire FBNK in a deal valued at about $544M as FBNK holders to get 1.725 shares of PBCT for each share held, valued at $32.33
· European banks active, with Bank America making a few changes, downgrading BCS to neutral after outperforming so far this year and as they trim longer term IB revenue growth forecasts, while reiterate our Buy ratings on both UBS and CS and neutral on DB as 1) revenues are unlikely to recover near term but 2) as a near term capital raise seems unlikely – notes group has sold off on concerns of a slower ECB rate hike cycle, greater political risks in the region and trade war fear
· Consumer finance and payments; SQ positive mention at KeyBanc, raising their tgt to $70, saying its peer-to-peer money-transfer app Square Cash could be worth $20 per share with potential for $50 billion-plus of payment volume and $450 million of revenue out through 2022
· Biotech movers; SRPT the top story today, with shares surging as much as 68% after its DMD gene therapy data topped expectations/showed prelim Phase 1/2a results of its gene therapy for Duchenne muscular dystrophy (DMD) showed an average of 38% of micro-dystrophin compared to normal (SRPT tgt raised to Street high $267 at HC Wainright on news); SLDB rises in sympathy with SRPT news, after shares rose 10% yesterday after the FDA lifted its clinical hold on its Phase 1/2 study of SGT-001; shares of PTCT and WVE declined on the perceived negative read-through on their DMD candidates
· Pharma movers; NEPT shares rise as announced multiyear agreement with Canopy Growth to supplement its extraction, refinement and extract formulation capacity; NVUS said the FDA is on board with the start of a Phase 2 clinical trial assessing drug/device combo OP-02 for the treatment of otitis media; BLUE was upgraded to outperform at Evercore, while the firm downgrade shares of MDGL
· Healthcare services; COTV, which provides payment services to the health care industry, agreed to be acquired by Verscend Technologies Inc., a portfolio company of private-equity firm Veritas Capital, $44.75 per share in cash, in a $4.9B deal
· Medical devices and equipment movers; group active after Roche Holding AG agreed to buy the rest of FMI it didn’t already own for $2.4B, paying $137 per share in cash (shares of diagnostic services such as ILMN, MYGN, EXAS active); NURO receives $3.8M milestone payment under its collaboration with GSK
Industrials & Materials
· Industrial & Machinery; shares of agricultural related and machinery stock were pressured on fears of the China retaliation to US tariffs; shares of CAT, DE, MOS, CF among top decliners in the S&P 500 early; industrials such as BA, UTX, MMM also declined; CNBC noted that DE has 8% revenue exposure to China, CAT 9%, BA 11% total sales, MMM 13% and AOS 33% of total business revs in China
· Transports; in package delivery space, FDX reports earnings tonight, while UPS to invest $130 million in five natural gas fueling stations and 700 new vehicles
· Metals & Mining; one of the weakest sectors today, with declines in steel, iron ore, copper, and aluminum tumbling, as the escalating trade conflict between the U.S. and China directly adds risks of an economic slowdown; CMC was downgraded to underperform at Bank America in light of growing concern over rebar price weakness into Q4, as they prefer NUE and STLD; gold related stocks also failing to rally
Technology, Media & Telecom
· Internet; SNAP reiterated underperform at Cowen and cut ests for 2Q18, FY18-23 today as they trimmed their User and ARPU or monetization forecast; NFLX rises (tops $400 for the first time) as several analysts raise tgt prices today ($500 the highest from GBH Insight; Piper raised to $420 and raised to $460 from $375 at Monness Crespi); China related Internet names BABA, BIDU, JD lower on increasing trade tensions with the U.S.
· Semiconductors; Philly semi index (SOX) underperforms broader Nasdaq a second day, down as much as -2.4% before paring losses, led by declines in SGH, ON, ASML, MRVL, QRVO; AAPL suppliers (SWKS, AVGO, QRVO, CRUS) weakened after a report that the company’s chief executive, Tim Cook, had visited the White House last month to warn that imposing tariffs on Chinese goods could hurt the iPhone maker
· Software & Hardware; FFIV was downgraded to neutral at Citigroup citing outperformance in shares; in security software, FTNTdowngraded at Cowen saying historical execution has been generally inconsistent and are uncertain as to whether the company can sustain its momentum going forward; RHT shares fall after Raymond James downgrade on valuation
· Optical sector/components; shares of ACIA, AAOI, FNSR, LITE, OCLR among casualties due to ongoing trade war concerns with China as the U.S. government said they may impose tariffs on another $200 billion in Chinese imports, prompting a vow of retaliation from China. The group also with negative news overnight after a provision in the Senate defense bill will reimpose penalties on China’s ZTE Corp. (optical companies get lots of revs from ZTE)
· Media & Telecom; VZ upgraded to buy at Deutsche Bank with $56 tgt saying the company’s fundamentals are inflecting but the shares have remained range-bound; AT&T (T) was downgraded to neutral from overweight as believes reversal of the Time Warner acquisition by the Department of Justice is very unlikely and would not be surprised to see AT&T shares rebound fairly quickly; SIRIwas downgraded to hold at Pivotal Research