Market Review: June 25, 2018

Terrie AmengualDaily Market Report

Closing Recap

Monday, June 25, 2018

Equity Market Recap

· U.S. stocks fell sharply, extending last week’s weakness in the final week of the month and quarter, amid a technology driven pullback. However, stocks rebounded in the final 30-minutes of trading after the White House Peter Navarro said on CNBC that no investment restrictions planned at this time (regarding China). Prior to those comments, the benchmark S&P 500 index fell more than 2% late day, dropping below both its 50-day and 100-day moving average support levels (2,715.80 and 2,702.90 respectively). Technology stocks along with materials and metals (steels, copper) were among the biggest decliners amid the ongoing trade dispute with China and the U.S. The Nasdaq Composite dropped over 200 points, breaking below 7,500 (down as much as 2.8%), with semi’s falling as much as 4.5% (lows 1,311.28). Dow Industrials to new lows, down nearly -500 points or 1.6% after breaking below its 200-day moving average support of 24,279 earlier (not far off correction territory, which is 10% off record all-time highs 26,616). Bespoke noted the Dow snapped its streak of 501 consecutive trading days of closes above its 200-day moving average — the 3rd longest streak since the 5-day trading week began in 1952.

· The continued escalation in the trade spat between the US and China intensified over the weekend led to the sharp decline in global equities today (Europe and Asia also down). U.S. stocks came under pressure after reports that President Donald Trump hopes to announce further restrictions on Chinese investment in U.S. tech companies. China president Xi said today “no more turning the other cheek” as he vows he will strike back at the U.S., adding to the drama. (note above Navarro saying no investment restrictions planned at this time)

· European stock markets closed lower by 2% for largest fall in more than 3 months, also falling in reaction to the trade related concerns between the U.S. and China/EU, as the Stoxx Europe 600 Index ended at 377.17, adding to last week’s drop of 1.1%. The German DAX fell -2.5% to settle at 12,270 (2018 high 13,596) while the UK FTSE 100 fell over 2% to hold just above 7,500. China based stocks such as BABA, BIDA, JD, IQ, and HUYA down on the reports of limited Chinese investments as China’s Shanghai extended its recent decline.


· Oil prices end lower, as WTI crude reverses from earlier gains, falling 50c to settle at $68.08 per barrel, while Brent also sinks lower. Oil extends last week declines when it fell -5% last week after the Opec oil cartel agreed this weekend to ramp up oil production by as much as 1m barrels a day. The dip in the dollar failed to lift commodity prices on the day.

· Gold futures slipped to start the week, ending lower -$1.80 to settle at $1,268.90 an ounce, another low year to date, even as the U.S. dollar, strong throughout the month, but weakened against its currency rivals the last few days. Gold prices coming off a decline of -0.6% last week and are on track for a 2.8% decline in June with 4-trading sessions left. Gold prices have slumped amid a rising rate and dollar environment, overshadowing the need for it a safe-haven. Comex copper prices dropped below the $3.00 per pound level for the first time since April.


· The euro traded higher by roughly 0.5% against the dollar, topping the 1.17 level (highs 1.1713), while the greenback sunk vs. the Japanese yen in a flight to safe haven assets; the U.S. dollar index (DXY) dips, back around 94.25, and down more than a point off last week’s highs around 95.50 as global trade concerns weighing on currency markets. Bitcoin prices rise 3% to $6,250

· Treasury markets end higher as yields dropped ahead of a busy week of auctions: 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 (both Wednesday), and $30B in 7-year notes (Thursday). The yield on the 10-year yield fell

Economic Data

· New Home sales ran at a seasonally adjusted annual 689,000 rate in May, topping the 667,000 estimate, though the prior month was downwardly revised to 646K from 662K; The median sales price in May was $313,000, 3.3% lower than a year ago

· Dallas Fed Manufacturing for June came in better than expected at 36.5, topping the 24.9 estimate and also topped the 26.8 in the prior month; six-month outlook at 35.9 vs 30.0 prior month

Sector News Breakdown


· Retailers; Goldman Sachs initiated the apparel and accessories sector with an attractive view as growth appears to be accelerating – best ideas are buy-rated TPR (on conviction list), TIF, and VFC, as well as sell-rated PVH; GPS positive mention at Jefferies saying after refreshing Sum-Of-the-Parts analysis, finds room for the stock to rise about 50% as ups tgt to $50; toy retailers MAT and HAS got a midday boost after Bloomberg reported ex Toys R Us CEO Storch said to weigh a bid to restart the chain and seeks to get intellectual rights

· Consumer Staples; in food space, the NY Post reported late Friday that KHC is very interested in buying CPB after the soup and snack company announced last month it was reviewing all aspects of its strategic plans and portfolio composition stocks active after the report); HAIN CEO Simon will step down from the role once his successor begins and become non-executive chairman; AMZN said Prime member savings at Whole Foods begins June 27th; in beauty space, EL downgraded to equal-weight at Morgan Stanley on valuation

· Auto sector; group remains pressured given the tariff news between the U.S., China and the EU; late last week, European auto names fell (DDAIF, FCUA) 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.”; today, BWA was upgraded to buy at Goldman Sachs, while in auto retail KMX cut at Guggenheim

· Casino, Lodging & Leisure; in cruise lines, CCL Q2 profit beat expectations, but cut its full-year outlook/cut its adjusted EPS guidance range to $4.15-$4.25 from $4.20-$4.40 (vs. est. $4.36); in leisure products, HOG said it plans to shift some production of its motorcycles out of the U.S. in response to European Union tariffs, saying each motorcycle will cost about $2,200 more after the European Union raised its levies on imported U.S. bikes to 31% from 6%; 52-week lows for MGM, CCL, NCLH in the S&P 500 index; in boating space, HZO shares fell over 14% late day following BC’s failed attempt to sell its Sea Ray division and decision to discontinue Sea Ray’s yacht and sport yacht business (HZO downgraded at Craig Hallum)

· Housing & Building Products; not much news today in the group, but busy week coming up as earnings results from LEN and KBHexpected this week along with BBBY, PIR in the home furnishing sector


· Energy stocks were not immune to the broader market pullback on the day, with E&P stocks sinking while oil prices were mixed; SMboosted its 2Q total company production 10.1 MMBoe to 10.4 MMBoe, up from 9.7 MMBoe to 10.1 MMBoe, with about 41% oil in the commodity mix; reaffirmed its 2018 capital spending forecast and overall activity level

· Solar & Utilities; FSLR shares were upgraded to buy at Bank America stating that the latest IRS tax guidance allowing for up to 4-year ITC extension on solar projects with commence construction qualification was ” the most bullish interpretation IRS could have released; Utility stocks outperform, with the UTY rising more than 1% traded just shy of its 660 200-day MA resistance – hasn’t been above 200-day since December), getting a lift on lower bond yields and rotation into defensive sectors


· Large Cap banks (JPM, BAC, C); top story this week will remain round two of stress tests. Last week, all banks passed the first round of stress tests, showing they were strong enough to withstand a severe downturn and may now receive approval from the Federal Reserve to increase dividends and share repurchase. Results of second round, which take into account planned distributions to shareholders, will be released after markets close on Thursday. Banks today dropped with broad market weakness and further downturn in bond yields; 52-week lows for PFG, BHF, CB, HRB in the S&P 500 index (financials)

· Top news; AXP rises as Supreme Court on Monday ruled that they did not violate federal antitrust law by prohibiting merchants from discouraging customers from using their Amex card; MET sued by Massachusetts for failing to make pension payments to retirees ‘presumed dead’


· Pharma movers; group down broadly with overall market; SPHS shares fall as halts its dosing schedule for its Phase IIb prostate cancer study due to a patient dying shortly after receiving a second dose; ZFGN Phase 2 trial of ZGN-1061, designed to demonstrate proof-of-concept efficacy and safety in patients with type 2 diabetes and establish a minimally effective dose, met all its primary endpoints at 0.9 mg dose

· Biotech movers; MACK shares plunge after halting development of its MM-141 as CARRIE Phase 2 study in patients with previously untreated metastatic pancreatic cancer did not meet primary or secondary efficacy endpoints; SRPT tgt raised to Street high $275 at JMP Securities; several analysts raised tgt on ARRY after the company presented the latest results from a late-stage study in colorectal cancer

· Medical devices and equipment; DGX upgraded to overweight at Barclays and raise price target to $130 from $120 as feel Quest has a very favorable risk reward profile at current levels; ALGN tgt raised to Street-high $420 at Bank America as expect it to maintain a dominant position in the clear aligner market; GKOS said it has received premarket approval from the U.S. FDA for the iStent inject Trabecular Micro-Bypass System; ILMN tgt raised to $330 at Citigroup as the Nova cycle is on track, the full portfolio is driving demand & the company looks to be opening doors on several large TAM opportunities; VLRX announced positive results in a study of its V-Go wearable insulin delivery device in type 2 Diabetes patients who switched from insulin pens and syringes.

Industrials & Materials

· Industrial & Machinery; XRM shares soar after agreeing to be acquired by Andritz AG for $13.50 per share, more than double Friday’s $6.61 closing price, or ~$833M including debt ; GE reached an agreement to sell its distributed power business to private-equity firm Advent International for $3.25 billion ; LMT to create 150-200 new jobs for $1.2 bln deal to build aircraft for Bahrain

· Transports; Dow Transports fell more than 200 points, or about 2% , dropping just below its 100-day MA support 10,571 and to lowest levels since mid-May; broad weakness AAL (airline), FDX (delivery), CHRW (trucker), CAR (rental) among top decliners; AAWWraised its earnings growth outlook for Q2 earnings to rise 40% to 45% from a year ago, compared with the previous guidance of 30% to 35% and for year to rise 35% to 40%, above prior “low- to mid-30%” growth

· Railroads; sector mentioned positively by several analysts as Citigroup upgraded NSC to buy with $176 tgt, while CSX (tgt upped to $75 from $67) remains top pick followed by UNP as expects a “re-rating” for the U.S. rails, which are called a “must own sub-sector,” as valuations can drift higher over time thanks to capex being sustainable at current levels. Bernstein raised estimates on the rail sector as fundamental data points should continue to read positively, and is most bullish on UNP given supportive cash flow-based valuations

· Paper & Forest sector; GPK and WRK shares were active after KeyBanc noted Pulp & Paper Week reported greater coated recycled boxboard (CRB) prices, citing extended backlogs and tight supply and demand/RISI recognized a substantial $40/ton of the announced $50/ton June CRB (coated recycled paperboard) price increase (representing a 5% increase), with the publication pointing out “greatly extended backlogs”

Technology, Media & Telecom

· Internet; China based stocks such as BABA, BIDU, JD down on the reports of limited Chinese investments as well; BABA was initiated buy and $275 tgt at Argus saying although it has had a strong multi-year run, we regard the stock as attractive based on mid-double digit growth prospects for gross merchandise volume; BIDU shares active as says evaluating potential offering and listing of CDRs; NFLX shares fall as much as 6%, down over 45 points from last week records

· Semiconductors; Philly semi index (SOX) falls as much as 4.5% to 1,311, well off record highs 1,464 in mid-March, as breaks below/the 50-day MA support 1,351 and 100-day 1,346.50 (the 200-day support 1,302); CRUS rises after Susquehanna said Cirrus gets ANC in the AirPods2- Cirrus ANC coming for 2019 AirPods2. Just $50M top line (+4%), but a more serious $0.50 (15%) EPS impact; in research, Nomura Instinet downgrades INTC to a neutral on the CEO departure, while Bank America names AMD a top Smidcap pick and raise tgt to $20; MU to lows in semi space, as breaks below 50-day MA $54.85

· Media & Telecom; GTN said it reached a deal to buy media company Raycom Media Inc. in a deal valued at $3.65B, including $100 million of Raycom cash ; CRTO upgraded to outperform at Raymond James as believe GDPR headwinds have been relatively benign and expect headwinds to ease throughout 2019 and expect Apple ITP headwind should ease exiting 2019; WSJ reported before T (T) CEO Randall Stephenson set sights on TWX, he expressed interest in acquiring CBS and met with Shari Redstone

· Software & optical movers; SunTrust said they think VEEV is poised for ~20% top line growth for the next 3-5 years, surpassing $1 bil in revenue, on the way to $2 bil+; MSFT was upgraded to buy at Atlantic Securities; CIEN was upgraded to overweight at Morgan Stanley praising the combination of its new WaveLogic Ai chipset with the company’s global reach, as upped tgt to $30 and names its top optical pick

· Video games (ATVI, EA, TTWO) – Piper predicted that the videogame industry revenue will be ~100% digital by 2022, which would be a tailwind for the game publishers/said they get about 70% to 75% of their revenue from digital sources currently


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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