Market Review: June 26, 2018

Terrie AmengualDaily Market Report

Closing Recap

Tuesday, June 26, 2018

Equity Market Recap

· U.S. stocks were in mini-rally mode, recovering part of yesterday’s sharp declines as investors turned their attention to the rally in the energy market. Oil prices jumped 3.5%, topping the $70 per barrel mark for the first time in a month on reports the U.S. is pressing allies to halt imports of Iranian crude by a Nov. 4 deadline. For the moment at least, major averages turned back above/or held key technical levels as the White House tried to calm investor fears over trade tensions between the U.S. and trading partners China, EU and Canada. Note China’s Shanghai Composite is down more than 10% over the last 30-trading days and 20% off its late January highs marking “correction” territory since the trade spat. Overall, stocks rebounded after the worst single day decline in about two-months for the S&P 500 and Nasdaq Composite, and as the Dow Industrials fell below its 200-day moving average (yesterday the Dow snapped its streak of 501 consecutive trading days of closes above its 200-day moving average). The dollar added to monthly and quarterly gains, while gold prices slumped to 6-month lows. European stocks bounced after sliding over 2% on Monday to end at its lowest close since May 3.

· In stock related news, former Dow component GE (removed from the index today) a top story today after announcing a spinoff plan of its healthcare division (shares rose over 8%), while homebuilders advanced following better-than-expected quarterly results from Lennar. Financials extend recent decline as financial sector ETF (XLF) falls for an 11th straight session, with banks hurt by weaker bond yields and ahead of the second round of Fed stress tests Thursday.


· Oil prices jumped, with WTI crude topping the $70 per barrel mark for the first time in a month, rising $2.45, or 3.5% to finish at $70.53 per barrel. Prices rose amid uncertainty of Libyan oil supplies intensifying after a militia leader handed over control of some of the country’s biggest crude-exporting terminals to a rival. Reports midday that the U.S. wants to cut Iran oil imports to zero also contributed to oil’s price gains. The stories offset a rising dollar and a mid-afternoon report from Bloomberg that Saudi Aramco is aiming to boost production next month to about 10.8M barrels a day, topping the previous high of10.72 million barrels a day in November 2016.

· Gold prices end lower, falling -$9.00, or 0.7% to settle at $1,259.90 an ounce, touching fresh 6-month lows as the dollar rebounds. The move comes after prices closed at their lowest settlement of the year at $1,268.90 an ounce and the contract so far is tracking a nearly 3% June drop. Gold prices also leveraged to rising rates, as the FOMC provided a hawkish outlook at its last meeting after raising rates a second time this year.


· The U.S. dollar rebounded following a few days of selling pressure (pulling back from 2018 highs), with the dollar index (DXY) rising around 0.5% to 94.75, gaining ground against the yen, Pound and euro. With only four days left in the second quarter and first half of the year, the dollar gauge is on track to have gained 4.9% in the quarter and 2.7% since the beginning of the year. The dollar posted modest gains against the Canadian dollar despite the jump in oil prices.

Bond Market

· Treasury markets end little changed, with the 10-year yield not far off yesterday’s late closing prices just below 2.88%, as focus remained on the heavy bond auctions this week. Today marked the first of three bond auctions from the Treasury Department, which will sell $100 billion of coupon-bearing debt this week. The U.S. Treasury sold $34B in 2-year notes at a yield of 2.538 vs. 2.536% when-issued prior to auction with a bid-to-cover (demand) of 2.73 vs. 2.88 prior auction and indirect bidders awarded 42.5% of the auction and directs awarded 15.4%. The 2-year note yield held steady at 2.53% and the 30-year 3.02%, as bond markets quiet to start the week.

Economic Data

· Consumer Confidence for June fell to 126.4 from 128.8 last month and came in below the 128.0 estimate; the present situation confidence fell to 161.1 vs. 161.2 last month and the consumer confidence expectations fell to 103.2 vs. 107.2 last month

· Richmond Fed Manufacturing reading for June at 20 tops the 15 estimate; shipments +17 vs. 15 prior, while capacity utilization +15 vs. 19 prior

· S&P CoreLogic Case-Shiller 20-City Index up 6.56% YoY in April, mostly in-line with the 6.80% estimate after rising 6.49% in prior month. S&P/Case-Shiller 20-city NSA index at 210.17 after 208.5 in March

Sector News Breakdown


· Housing & Building Products; homebuilder LEN posted better than expected quarterly results, while new home orders beat consensus expectations, and the company came in at the high end of its gross margin guidance for the quarter (KBH reports later this week); HOME was upgraded to Overweight at Morgan Stanley and raise price target to $47 as have increased confidence in HOME’s ability to generate high teens sales growth LSD/MSD comps and margin gains; Building products names USCR and SUM trading at 52-week lows

· Casino & Lodging; Goldman Sachs downgraded MGM to neutral and removed from conviction buy list citing the delays experienced at Park MGM along with a slower than anticipated recovery at Mandalay Bay, while the firm reiterated buy on WH and added it to conviction buy list saying well positioned to benefit from RevPAR outperformance in the mid-scale and economy segments

· Auto movers; Goldman Sachs said they expect TSLA to announce its 2Q18 deliveries shortly after the quarter ends and based on the QTD May cadence, they believe the company is tracking below its 2018 Model S/X guidance of approx. 100k units, but above the FactSet consensus expectations for the quarter

· Consumer Retail and Staples; TJX was downgraded to neutral by Atlantic Securities solely on valuation saying they do not see a reason to be more negative on near-term performance; CMG CEO Brian Niccol expected to lay out his vision for Chipotle Wednesday afternoon during a special investor call; PF jumped after CNBC reported that CAG is in advanced talks to acquire the company and deal could be announced as soon as this week ; BF/B said to hike Jack Daniel’s prices in Europe to counter tariffs


· Weekly inventory data upcoming tonight (API) and tomorrow morning (DOE), but earlier this morning, Bloomberg reported that Saudi Arabia is planning to pump a record amount of crude in July, embarking on one of its biggest-ever export surges to cool down oil prices. State oil company Saudi Aramco is aiming to boost production next month to about 10.8M barrels a day, topping the previous high of10.72 million barrels a day in November 2016

· E&P sector; OAS announces $283MM for a portion of the marketed non-core Bakken asset sales. OAS announced the sale of 65,000 net acres of non-core assets along with 4.4 MBoed of production for $283MM, or ~$1,600/acre (assuming $40k/flowing); KOS shares fell after coming up dry at its latest exploration well offshore Suriname

· MLPs, Utilities; BWP settled with investors who argued that Loews Corp. was driving down the share price by intentionally stalling a decision on whether to buy out the remaining stake it didn’t own in co; KMI was upgraded to outperform at Bernstein saying KMI’s Trans Mountain pipeline (TMX) sale could provide a path to outperformance/overnight, KMI joined Blackstone and Apache to build a $2B Permian natural gas pipeline

· Oil services; BMO Capital lowered estimates for HAL and SLB to account for lower U.S. growth assumptions and higher international costs as activity ramps in a highly competitive price environment/follows recent report from two weeks ago suggesting 2019E EPS risk of 23%/21% for HAL/SLB vs. consensus (cuts HAL tgt to $59 from $63 and SLB to $71 from $75)


· Large Cap banks closely watch ahead of DFAST capital payout news for banks on Thursday after all 35 banks passed Fed stress tests last Thursday; The XLF falls for an 11th straight session as financials remain under pressure; shares of BAC, MS, JPM, GS all down at 2018 lows along with weakness in regionals as well; Bank America boosted its capital payout assumptions higher for HBAN (97%), RF (152%), and CMA (110%); UCBI and ABCB cut to hold from buy at SunTrust, as firm is now shifting its buy ratings toward banks with specific near-term catalysts that have more EPS upside potential;

· Other movers; AXP announced plans to launch a new cobranded Amazon credit card for small businesses in the U.S.; SQ was downgraded at Stephens following recent rally in shares and prefers PYPL, but upped tgt to $65 from $50 given an improved overall growth outlook; in exchanges, CBOE was upgraded at JPMorgan as sees a number of signs of stabilization in both Open Interest and Volumes, though at lower levels; in services, FDS shares slipped following decelerating annual subscription value (ASV); in lending, TREE was downgraded to neutral at Compass Point as momentum in the company’s core “mortgage vertical” appears to be slowing


· Large Cap Pharma; SPPI rises after Bloomberg reports it is exploring options including a sale of the business amid takeover interest from other drugmakers; GWPH shares slid late yesterday despite the FDA for the first time approving the company’s Epidiolex to treat two rare forms of epilepsy/today, analysts positive with Goldman Sachs reiterating buy and $188 tgt; AKAO said the FDA has approved ZEMDRI for adults with complicated urinary tract infections/also says FDA issued Complete Response Letter on Plazomicin regarding potential indication for treatment of BSI; HRTX 5M share Spot Secondary priced at $39.50

· Medical devices, equipment and services; Janney said the GE’s health-care spinoff will likely be a strong, new competitive deal-maker for life science tools, rivaling the likes of TMO, DHR for deals; WBA starts trading in the Dow Industrial Average after announcement last week it replaced GE; AXGN tgt raised to $70 at Leerink as significant runway ahead for increased adoption in a large underpenetrated existing commercially targeted $2.2B

· Biotech movers; PBYI shares jumped after saying a committee of the European Medicines Agency adopted a positive trend vote recommending marketing approval of neratinib; MDCO said data from the ORION-1 Phase II trial showed that injection of 300 mg of inclisiran lowered LDL-cholesterol by more than 50% in patients with atherosclerotic cardiovascular disease and those considered ASCVD-risk equivalents, regardless of whether those patients had diabetes; EXEL to replace CPRT in the S&P MidCap 400; INCY falls as downgraded to sector perform at RBC Capital saying in the n-t they would expect shares to trade in line until there is more visibility on meaningful new revenue opportunities

Industrials & Materials

· Industrial & Machinery; GE announced in company update that it will sell 20% of its health business and spin off the rest to its shareholders, while the stake in BHGE will be sold over the next two to three years/also will seek to reduce net debt by about $25 billion by 2020/will narrow its focus to power, renewable energy and jet engines

· Transports; in car rentals, Morgan Stanley resumed coverage of CAR at underweight and $30 target, and raised tgt for HTZ to $15 from $13; Transports dropped, trading as low as 10,420, holding above its 200-day MA support of 10,378 (well off record highs 11,423 on January)

· Tankers came under pressure with declines in DRYS, TNK, FRO following losses on Monday on continuing fears the VLCC market could get hit if China imposes tariffs on crude oil imports from U.S

· Metals & Mining; in steel, SCHN reported in-line Q3 revenue of $652M; NUE said 21 of its 24 end markets are stabilizing or improving; VALE and BHP, the owners of Brazilian mining company Samarco Mineracao SA, agreed with Brazilian authorities to suspend for two years a $41B civil claim over the catastrophic 2015 collapse of a tailings dam while talks continue; copper and metals in general remain pressured by rising trade tensions with China and the U.S.

Technology, Media & Telecom

· Internet; AKAM said that currency-related headwinds will trim its full-year revenue forecast to $2.675B-$2.705B from a prior view of $2.69B-$2.72B, and its 2Q revenue forecast to $658M-$663M from $658M-$670M while raised year EPS view by 5c on top/bottom line; MELI was upgraded to overweight at KeyBanc with a $350 tgt; SPOT initiated overweight and $210 tgt at Barclay’s; NFLX initiated outperform and $503 tgt at Imperial Capital; TWTR said late day it will require email or phone to deal with abuse

· Semiconductors; Philly semi index (SOX) edges higher, bouncing off yesterday’s -3.1% decline (though was down as much as 4.5% at one point), led by MU and LRCX after UBS upgraded shares of both; INTC was downgraded at Bernstein to underperform the top decliner

· Telecom & Media; CTL was upgraded to buy at Jefferies as expect them to grow ’18 EBITDA owing to deal synergies and believe the story will shift to one where the company can meet or beat expectations; AMCX downgraded to neutral at Goldman Sachs as see downside risk to estimates because of slower advertising growth due to ratings headwinds from The Walking Dead (TWD) franchise and pressures on affiliate fee growth; Barclays downgraded SIRI to underweight after outperformance in shares, while cut LSXMA to equal-weight; LEE in pact with BH Media Group/to manage Berkshire Hathaway’s newspaper and digital operations in 30 markets; AMC announces a new tier to its Stubs loyalty program that allows customers to see up to 3 moves per week, as well as repeat viewings, for $19.95 per month is now live to join.

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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