Wednesday, June 20, 2018
Equity Market Recap
· U.S. stocks end mostly higher, cautiously climbing back from days of declines triggered by the escalating trade dispute between the US and China. The tech heavy Nasdaq Composite posted a new intraday record high of 7,806.59 before paring gains late day, led by new all-time highs for Facebook Amazon, and Netflix today. Oil prices up as data showed the biggest weekly drop in U.S. crude supplies since January. The EIA reported that crude supplies dropped by -5.9 million barrels for the week ended June 15. The bounce in oil comes ahead of this week’s OPEC meeting. The Russell 2000 index of smaller-company stocks added to record gains, topping the 1,700 level as they are more leveraged domestically, and less impacted from trade concerns and a surging dollar. The Dow slumps for a 7th straight day as fears about the growing trade dispute between the U.S. and China continue to pull shares of industrials and materials lower. The media space active after Disney boosted its offer for FOX assets to $38 per share ($71B) topping its prior offer as well as CMCSA’s $65B offer last week ($35 per share). Bloomberg also reported that Disney is close to winning U.S. antitrust approval for its deal. Stocks rebound after yesterday’s decline as President Donald Trump threatened to put new tariffs on as much as $400 billion in imports from China and China threatened to retaliate. Shares of ORCL, FDX and SBUX all declined following earnings results and guidance that disappointed, ahead of Micron results tonight.
· Oil prices rise, with August WTI crude up 81c, or 1.3% to settle at $65.71 per barrel (July oil settled up $1.15 or 1.8% at $66.22 per barrel on expiration). Another day of OPEC oil ministers speaking ahead of its official meeting Friday in Vienna. Iranian Minister Zanganeh said he was optimistic about the outcome of the OPEC meeting, a marked contrast to comments the previous day when he said a deal was unlikely. Saudi Energy Minister Khalid Al-Falih said every minister he’s spoken to agrees that it’s time for the group to change course. Weekly inventory data was bullish on larger than expected weekly drawdowns according to the EIA report
· Gold prices fall to settle at the lowest levels of the year, falling -$4.10 or 0.3% to settle at $1,274.50 an ounce as a stronger dollar weighed on the precious metal. With today’s declines, gold futures are down roughly -2.3% so far in June as the dollar trades near 2018 highs. Silver prices also slide, down a 4th straight session.
· The U.S. dollar hit an 11-month high before paring gains as increased trade conflict with China has emerging market currencies lower the last few weeks, as the dollar index tops and holds the 95 level; safe-haven currencies such as the Swiss franc and the Japanese yen were stronger while the euro slipped and the Pound was little changed (off earlier highs). The dollar moved to year high of 1.3316 vs. the Canadian dollar.
· Treasury markets slipped late day, with the yield on the 10-year up over 2 bps at 2.92% after Federal Reserve Chairman Jerome Powell reasserted the need for gradual rate increases, citing a tight labor market. Earlier, yields had been down around 2.88% as trade war concerns have boosted investment in bonds recently, overshadowing the stronger outlook on rates and the economy from the Fed last week.
· Current-account deficit for Q1 rose 6.9% mostly because of a wider trade gap in goods, as the deficit increased to (-$124.1 billion) from a revised (-$116.1 billion in Q4), and came in narrower than the estimated loss of (-$124.1B)
· Existing-home sales for May fell (-0.4%) to 5.43M, below the expected 1.1% rise to 5.52M; April was revised to 5.45M from 5.46M; there was 4.1 months’ supply in May vs. 4.0 in April and 3.8 months’ supply seasonally adjusted in May vs. 3.8 in April seasonally adjusted; median home price rose 4.9% from last year to $264,800, a record high price
Sector News Breakdown
· Restaurants & Staples; SBUX slides after guided global 3Q18 (Jun) comps to 1% below the Street at 3%, including China comps at flat to negative, and FY18 EPS down 10c to $2.39-2.43 from $2.48-2.53; SBH downgraded to Market Perform at Cowen; ALRM was cut to sell at Goldman Sachs saying their analysis reveals that new “Do it Yourself” deployments with professional monitoring are 35% cheaper than professionally installed and monitored security systems; SMG was downgraded to Underperform at Raymond James
· Housing & Building Products; in furnishing, WSM was downgraded at Citigroup following outperformance, with the shares up 30% over the last month; LZB shares dropped on mixed quarterly results as EPS beat helped by tax benefit while sales missed estimates; homebuilders (PHM, MTH, TOL, LEN) remained weak on trade fears, rising rate environment making mortgage rates go higher and recent mixed housing data
· Autos & Leisure; RV stocks active after WGO quarterly results topped estimates ($1.02/$562.3M vs. est. 91c/$539.2M), helping sector (THO, CWH, LCII); WSJ reported the U.S. ambassador to Germany Richard Grenell is expected to relay a proposal from leading German automakers to the Trump administration Wednesday to abandon all import tariffs for cars between the EU and U.S.
· Inventory data: last night, the API reported that U.S. crude supplies fell by -3M barrels for the week ended June 15, though posted a climb of 2.1M barrels in gasoline stockpiles, while inventories of distillates rose by 750,000 barrels. This morning, the EIA reported mixed data, bullish for crude oil as weekly oil inventories fell -5.91M barrels vs. the est. draw of -2.5M, while Cushing crude fell -1,296M barrels, though gasoline posted an unexpected +3,277M build
· Energy top stories; RDS/A agreed to sell oil and gas assets in Norway and Malaysia for over $1.3 billion, bringing it closer to a target of $30 billion in disposals by year-end/sold its interests in two oil fields offshore Norway to OKEA for ~$556M and completed the sale of its 15% holding in Petronas-operated Malaysia LNG Tiga for $750M; HES and XOM said offshore Guyana Longtail-1 well encountered approximately 256 feet of high-quality, oil-bearing sandstone
· E&P movers; ZN said it expects to begin perforation, stimulation and flow back operations on multiple stages of its Megiddo-Jezreel #1 well as early as June 21; PXD CEO said late yesterday the Permian Basin will have to shut wells within four months because of a lack of pipelines to get the oil to customers, weighing on shares
· Utilities; Morgan Stanley said sees ‘significant’ chance PCG not in violation for Tubbs fire After looking in further depth into the largest of the Northern California wildfires, the Tubbs; DUK upgraded to buy and tgt raised to $84 at Bank America citing recent share underperformance and resolved regulatory overhangs; XEL downgraded to neutral at Bank America saying sees positive catalysts as largely played out
· Large Cap banks; group awaits the Fed stress tests tomorrow (and follow up next week); Citigroup (C) was upgraded to buy at Deutsche Bank saying the stress test/DFAST/CCAR should be positive for C (results due June 21 and 28), macro tides tend to ebb and flow, there’s been some positive developments in US cards; in insurance AIG has purchased a UK life insurance business from Munich Re; overall financial space holding steady as bond yields move lower
· Consumer finance and payments; PYPL agreed to acquire financial-technology company Hyperwallet Systems Inc. for about $400 million ; SQ tgt raised to $73 from $64 at Evercore/ISI following a discussion with CFO Sarah Friar as the meeting indicated that positive trends should continue
· Services: Amazon, Berkshire Hathaway and JPMorgan Chase announced the next step in their partnership on U.S. employee healthcare with the appointment of Dr. Atul Gawande as its Chief Executive Officer, effective July 9. The new company will be headquartered in Boston and will operate as an independent entity that is free from profit-making incentives and constraints; STAA rises after resolving an FDA warning letter, removing a four-year-plus overhang
· Pharma movers; ANIK shares fall after saying its Cingal 16-02 study did not achieve primary endpoint/while CINGAL achieved greater pain reduction numerically at every time point in the study, the difference at 26-weeks did not reach statistical significance; BMY said the FDA designated its drug as orphan treatment for gastric cancer (GC) and gastro-esophageal junction cancer; KALA to conduct new late-stage study for dry eye disease candidate KPI-121
· Deal pricing news: APEN 3.747M share Spot Secondary priced at $5.50, CATB 42M share Secondary priced at $1.00, EIDX 6.25M share IPO priced at $17.00, GLMD 5M share Secondary priced at $15.00, KIN 4.632M share Spot Secondary priced at $9.50, OBSV4.75M share Secondary priced at $15.39
· Biotech movers; Barclays upgraded PTCT and downgraded IONS to underweight given initial comparable if not better efficacy data, similar therapeutic approach (boosting backup protein) and oral delivery, risdiplam could be disruptive to IONS/BIIB’s Spinraza, in addition to gene therapy threat
· Reuters reports that the Canadian Senate voted 52-29 yesterday in favor of legalizing the recreational use of marijuana nationwide, the first G7 country to do so. The new law, expected to be enacted in the next 8-12 weeks
Industrials & Materials
· Industrial & Machinery; GE is being removed from the Dow Jones Industrial Average and will be replaced by WBA/GE was a part of the blue-chip index when it was introduced in 1896 and had been part of the index continuously since 1907; ATU Q3 EPS and sales topped consensus on better Q4 and FY guidance
· Transports; transport delivery giant FDX reported Q4 results which were essentially in line on a core basis, with its sizeable EPS beat coming below the line, largely from tax/a spike in cap-ex spending for 2020-2021 caused a little trepidation after solid quarter
Technology, Media & Telecom
· Media & Telecom movers; DIS has agreed to pay $38 per FOXA share for the same assets under the original agreement, with a bid around $71B, topping its original $28 offer and $3 above the $35 CMCSA offer for the assets last week (news gives boost to other media related companies, CBS, DISCA, VIAB); in movie theatre, AMC is launching a subscription service where members can see up to three movies per week for $19.95 per month; Intelsat (I) shares jump after upgrade to outperform at RBC Capital as firm expects the FCC to take up the proposal to monetize C-band spectrum put forward by Intelsat and SES
· Semiconductors; SYNA rises after Dialog Semiconductor PLC confirmed its in discussions with SYNA saying its board is performing due diligence on an acquisition of Synaptics ; shares of MU active ahead of earnings tonight
· Internet; SNAP estimates cut for a second straight day as Needham slashed its forecast for 2Q revenue by 15% saying user projections and channel checks suggest a dramatic slowdown of spending by brands on SNAP vs 1Q (Cowen made similar call Tuesday); NFLX rises to fresh all-time highs after topping $400 for the first time yesterday; FB shares new record highs topping $200 level for the first time today; Wayfair (W) shares to new record highs after MKM raised 12-month price target from $92 to $130 saying actions follow the recent survey; AMZN also a record high today as 60% of FAANG trades to new highs
· Software movers; ORCL shares slump as Q4 top and bottom line beat but analysts noted the elimination of cloud disclosures combined with FQ1 guidance below consensus (due to currency translation headwinds) likely weakened shares; APPN downgraded to hold at SunTrust noting shares have outperformed every one of our 19 coverage stocks, returning an impressive 52% versus median stock in our group up 26%; ANSS upgraded at Goldman Sachs citing a more positive secular outlook, helped by new price points to improve penetration and PTC partnership
· Video games (EA, ATVI, TTWO); according to NPD, May U.S. console/handheld software sales were $170 million, down 11% year-over-year driven by a stronger recent release slate a year earlier and Switch softness, but above some analyst estimates due in large part to better-than-expected catalog sales, including for the Switch
· Components and Hardware movers; Business process services company SNX is in discussions to acquire CVG in a move that would create a bigger player in the technology and information services space, though talks could still fall apart