Friday, June 22, 2018
Equity Market Recap
· U.S. stocks end the day mostly higher, with energy and industrial stocks leading the gains, while technology dropped following a decline in software stocks. U.S. crude surged 4.6%, its biggest one-day gain since November 2016 after OPEC reached a compromise agreement to lift oil production by up to 1m barrels a day. Transports were pressured amid the spike in oil prices, with airlines among the biggest decliners, while the energy complex was broadly higher, led by gains in integrated, drillers, services and E&P stocks. All 35 large cap banks passed the Fed stress tests last night, with banks expected to announce buybacks and dividend requests next Thursday. With todays gain in the Dow Industrial Average, the index snapped its 8-day losing streak (if fell a 9th straight day, would mark longest losing streak since 1978).
· Trade has remained the main topic all week after the U.S. slapped additional $200B in tariffs on China (takes effects first week of July) and China countering with its own tariffs on the U.S. This morning, new pressures hit after President Trump in a tweet said “Based on the Tariffs and Trade Barriers long placed on the U.S. and it great companies and workers by the European Union, if these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20% Tariff on all of their cars coming into the U.S.” News sent European auto makers FCAU, DDAIF, VLKAY quickly lower. Late yesterday it was reported that White House officials are trying to restart talks with China before the tariffs implementation takes place in July, but nothing new today. Markets will be also closely be watching the presidential election in Turkey and the political news in Italy which shook stocks and bonds earlier.
· Energy futures advanced, with WTI crude rising $3.04, or around 4.6% to settle at $68.58 per barrel (highs $68.82 and lows $65/71) to its best levels in three-weeks after reports OPEC agreed in principle for a 600K barrel per day increase, less than the rumored +700K to 1Ml bpd talked about during the week. Agreement in principle for nominal 1m b/d oil-production increase, meaning a 600k b/d increase in real terms, a delegate says. Deal would mean return to 100% compliance with production quota said a delegate. A weekly rig data report also showed oil drillers cut back on the amount of rigs this week, the first time in about 3-months.
· Gold prices end little changed, rising 20c to settle at $1,270.70 an ounce, and registers a -0.6% decline for the week. Prices had finished at $1.270.50 Thursday, which was the lowest settlement since December amid a bounce in the dollar and a decline in broader commodity prices given the trade tariff spat ongoing between the US and China.
· The U.S. dollar ended the day and week roughly lower by -0.25%, as the Euro and Pound bounced after its last few week declines (helped by better PMI data overnight), while the dollar was little changed against the Japanese yen. The Canadian dollar initially slipped vs. the US dollar, with the buck rising to highs of 1.3382 after economic data out of Canada showed the country’s inflation rate has been running well behind forecasts…but dollar fell to afternoon lows around 1.3280 (-0.2%) as rising oil prices helped emerging market currencies. Watch the Turkish Lira next week after country holds its election for a new president this weekend/Lira tries to bounce off historic lows Tuesday (down 23% YTD vs. dollar). Argentina’s peso closes stronger on the week for the first time in nine weeks. Bitcoin prices dropped more 9% to new 7-month lows, down about $600 at $6,100, with broad weakness in crypto space (Ethereum, Litecoin, and Ripple) after the Japanese Financial Services Agency ordered six exchanges to improve business practices after a series of inspections over the past few months.
· Treasury market’s rise slightly, as the yield on the benchmark 10-year holds around the 2.90% level most of the week (lows around 2.88% and highs 2.93%), as investors contemplate impact from the trade war situation between the U.S. and other countries. Yields have failed to lift meaningfully despite the ECB and FOMC getting more hawkish last week on rates. The benchmark 2-year rate was fractionally higher at 2.54%, though it tested 2.56% into the open. Busy week of auctions coming up as the Treasury will be selling over $200B in bills and coupons including an up-sized $34B in 2-year notes (Tuesday), $36B in 5-year notes and $16B in 2-year FRNs (both Wednesday), and $30B in 7-year notes (Thursday).
Sector News Breakdown
· Retailers; DG was upgraded to strong buy at Raymond James calling it one of the most attractive ”all weather” investments in hardline retail as the company can deliver 8% to 9% annual revenue growth; in hardline retail, OLLI and HZN both downgraded to underperform at Bank America saying valuations have gotten frothy for some of their hardline retail names; in auto retail, KMX shares rise after the used-car dealer’s 1Q EPS, revenue and same store sales topped analysts’ estimates (LAD, ABG, AN, GPI, PAG, SAH move in sympathy); NKE downgraded at Buckingham, but raise tgt to $80 ahead of earnings, saying view risk/reward more balanced
· Consumer Staples & Restaurants; HAIN shares active after the NY Post reported PPC is bidding for Hain Celestial’s protein business, which sells to Chipotle and Panera ; BJRI tgt raised to street high $68 at Canaccord noting for the restaurant industry, for the second week of June, casual dining restaurant checks suggest that comps were up +2.0% to +2.5%; CAKE was downgraded to hold at Maxim on price, while DRI upgraded at Bank America after earnings; earnings next week from GIS, STZ, CAG in the food/beverage space
· Homebuilders in focus next week with earnings results from LEN and KBH expected while group has slipped adding to recent losses amid tariff concerns, rising lumber costs; earnings next week from BBBY, PIR in the home furnishing sector
· Autos active again today, with European auto names falling the most after U.S. President Trump said in a tweet “Based on the Tariffs and Trade Barriers long placed on the U.S. and it great companies and workers by the European Union, if these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20% Tariff on all of their cars coming into the U.S.” News sent European auto makers FCAU, DDAIF, VLKAY) quickly lower; TSLA weak after Bernstein said Tesla’s Automotive segment’s gross margins may be overstated, noting a steep plunge in the gross margins of the Services and Other segment
· Casino, Lodging & Leisure; in casino’s (WYNN, MLCO), Morgan Stanley noted Macau May visitor arrivals reached 2.7mn, up 5.2% YoY and Chinese visitors totaled 1.9mn, up 9.3% YoY. This explains weak mass revenue growth in May at only 8.3% YoY. Mass revenue per Chinese visitor also declined by 1%; CCL reports earnings in the cruise line space on Monday
· OPEC reached an agreement in principle to boost oil production, achieving a last-minute compromise that overcame Iran’s threats to veto any supply hike. The preliminary accord allows for an additional 600,000 b/d to flow onto the market, about 0.5% of global supply, said a delegate. That reflects a 1 million b/d adjustment on paper to the production cuts implemented by OPEC and its allies, the delegate said – Bloomberg – energy space broadly higher on oil rise: SLB, NE, RIG, CXO, FANG, WLL, MRO, NFX, etc.
· Baker Hughes (BHGE) reports weekly total rig data fell -7 rigs from last week to 1,052, with oil rigs down -1 to 862 (first time drillers cut rigs in 12-weeks), gas rigs down -6 to 188 and miscellaneous rigs unchanged at 2
· Top news stories; IO shares dropped as much as 18% after U.S. Supreme Court ruled against it in patent dispute with SLB’s WesternGeco, saying it can receive compensation from ION for sales lost after ION was found to infringe patents for equipment that provides underwater seismic data; CRZO shares declined after the WSJ reported holder Kimmeridge said to have sold stake
· Utility index; utilities trade higher around the 647 level, as extends bounce off June 10th lows of 610.78; PCG leading gains today up over 4%; ES shares higher after an upgraded at Janney; SO upgraded to neutral at Citigroup; solar names little bounce today, VSLR upgraded at Guggenheim
· Frac sand sector; SunTrust said on SLCA, Frac sand spot pricing is up again in Q2, new Permian supply is coming on line slower than expected, and SLCA has 70%-80% of its frac sand capacity, including more than 70% of its Northern White, under contract through the end of 2020
· Large Cap banks a focus last night ahead of Fed Bank stress tests…but all 35 of the banks tested by the Federal Reserve met the regulatory minimums for capital after being tested for the impact of a severe recession. The Fed said banks met the minimums after a “severely adverse” stress test that would cause $578 billion in losses for 35 lenders. The Fed said the aggregate common equity tier 1 capital ratio would fall from an actual level of 12.3% in the fourth quarter of 2017 to 7.9% under the stress-test scenario. Financials rolled late day to close near the lows (JPM).
· More on Stress tests: the bank with the highest level of capital was the U.S. unit of CS with a common equity tier 1 ratio of 17.6%, and DB was 12.2%. STT had the lowest at 5.3%, with GS at 5.6%. The minimum level is 4.5%. The Fed did not report the results from banks with less than $100 billion in assets — CIT, CMA and ZION because of the recently passed bank reform law
· Analyst breakdown of DFAST – ahead of CCAR stress tests next Thursday: Deutsche says DFAST was worse than expected, as minimum capital levels were lower than expected for many banks under coverage, raising concern that buybacks may disappoint. Morgan Stanley expects higher volatility over the next week as stressed capital ratios were significantly lower than expected; potential winners are ALLY, BBT, BK, HBAN, NTRS, and USB. Goldman saw 1st round as indicating a more difficult test, though most banks should be able to meet return expectations – Bloomberg
· Biotech & Pharma; Pharma stocks outperformed, led by gains in JNJ, BMY, and MRK; PTIE shares fall as its prescription drug for severe pain will face questions on whether it can deter abuse, FDA staff says in report ahead of next week’s committee meeting; ECOR5.2M share IPO priced at $15.00
· Medical equipment and devices; TNDM rises announced FDA approval of the t:slim X2 insulin pump with Basal-IQ, a predictive, low glucose suspend software feature that automatically detects and prevents the occurrence of hypoglycemic events in Type 1 diabetes patients; ZBH downgraded to hold at Argus on concern they are losing market share as it tries to restore full inventory of orthopedic implants and instruments
Industrials & Materials
· Industrial & Machinery; MTZ positive at Citigroup saying remains one of their favorite names in the E&C space and shares continue to trade at a ~7% discount to their historical 5-year average; EMR trailing three-month orders increased in the range of 5-10%; ECL was downgraded to underweight at JPMorgan as think that earnings expectations on the margin for Ecolab are likely to move lower due to the effects of the recent strengthening of the US dollar
· Transports; group rises early after topping the 10,900 level (high 10,924), but later declined given the sharp spike in oil prices/fears of increased costs; Dow Transports fall under 10,800 (off earlier highs 10,924) led by declines in airlines (DAL, LUV, JBLU) and truckers; WSC rallied after reaching an agreement to acquire Modular Space Holdings Inc. in a deal with an enterprise value of about $1.1 billion
Technology, Media & Telecom
· Semiconductors; KLAC was downgraded at Needham saying recent checks indicate a heightened risk for slower foundry investments in the second half of 2018 (which has weighed on semi-equipment names over the last week); SGH slides as revenue pull-in in the Brazil Mobile Memory business drove upside to F3Q results, but the expected reversal in F4Q leads to a guidance that is below expectations; MU shares extend declines after earnings this week
· Software & Hardware sector; rough week for software with RHT falling after lower Q2 guidance as sees Q2 revs $822M-$830M below the $855M estimate; lowers year revenue outlook to $3.38B-$3.41B from prior $3.43B-$3.46B (est. $3.45B); group slipped earlier in week after ORCL results and slowing cloud related revenues (shares of WDAY, SPLK, DATA, CRM weaker today); BB posted Q1 EPS and revenue that topped consensus, but shares reversed earlier gains
· Telecom & Media movers; media space has been active lately amid the bidding war for FOX assets between DIS and CMCSA, with DIS going into the week with the higher $71B bid; in telco, regulatory filing showed U.S. Satellite Company SATS has built up a 3% stake in its British rival IMASY, following a rejected preliminary takeover approach ; IQ shares slide again after falling -12% yesterday – stock just recently traded to record highs of $46.23 earlier this week – recall recent run higher for recent IPOs over the last week (DBX, HUYA); Intelsat (I) shares fall as much as 12%, the most in 9 weeks, as analysts’ said that the FCC’s deliberations over adopting the C-band spectrum “lacks direction.” Since TWX/T deal was approved by govt and then DIS/CMCSA battle for FOXassets – several media names have rallied in sympathy: over the last 10-days, CBS chares up over 11%, VIAB up around 10%, DISCA up 23%, AMCX up 8%, MSGN +16%.