Friday, June 29, 2018
Equity Market Recap
· U.S. stocks end the day higher, but it wasn’t enough to erase earlier losses on the week, as major averages ended the quarter in upbeat fashion led by energy and financial stocks. WTI crude rallied to $74.10 (new 4 ½ year highs), while Brent jumped near $80 a barrel, following several bullish catalysts this week lifting energy related stocks. Many of the big banks and card companies said they would return capital to shareholders after passing the Federal Reserve’s stress tests, providing a boost for a sector that has lagged the last two-weeks. Better earnings results from Dow component Nike also helped the index (shares up over 10%). Today marked the end of the month, quarter and the first half of the year, with benchmarks putting mixed performances over these period. Markets were also pleased after China reportedly eased restrictions on foreign investment in sectors such as agriculture and banking overnight, while EU leaders reached a deal over the crisis of migration as well (lifting the euro). With today’s rally, major U.S. averages reclaimed key technical levels (Dow the 200-day support). The ongoing trade dispute has had a negative impact on various sectors such as autos, materials, industrials and technology shares and remain a key topic next week ahead of the holiday shortened week with tariffs expected to soon be implemented if a compromise can’t be found shortly.
· More news out of Washington today moving markets early: First it was Axios reporting early this morning that reported President Donald Trump has repeatedly told top White House officials he wants to withdraw the U.S. from WTO. Later, a WTO spokesman told Bloomberg “we have not heard anyone express this to us at any level of the U.S. government.” “We won’t speculate on anything we don’t know anything about.” Lastly, Secretary Treasury Mnuchin said the Axios story on Trump considering WTO withdrawal isn’t right, calls it “exaggeration.” Trump “has concerns about the WTO, he thinks there’s aspects of it that aren’t fair.” Stocks sunk initially on the headlines, but in the end had no effect on markets.
· Personal Income for May rose 0.4%, in-line with economist views while personal consumption rose 0.2%, missing the 0.4% estimate; real personal spending was unchanged vs. est. up 0.2%, while core inflation rose 0.2%, matching estimate and up 2.0% Y/y vs. est. up 1.9%; PCE prices rose 0.2%, also matching estimate; savings rate at 3.2% in May vs. 3.0% the prior month
· Chicago PMI data rose to 64.1, topping the 60 estimate reading and above the 62.7 the prior month; Prices paid, new orders, employment all rose at a faster pace, signaling expansion, while inventories, production rose at a slower pace; business activity has been positive for 12 months over the past year
· June Final Michigan Sentiment rose to 98.2 from 98 last month vs. est. 99 (it was 99.3 in the preliminary reading; the expectations index fell to 86.3 vs. 89.1 last month, while the current economic conditions index rose to 116.5 vs. 111.8 last month. Expected change in median prices during the next year rose to 3.0% vs. 2.8% last month.
· Oil prices end the day, month and quarter strong, as both the US and international benchmarks post their fourth consecutive quarter in the black, as WTI crude closes at its best levels since November 2014. WTI crude gained 70c to settle at $74.15 per barrel. Oil recorded its fourth straight session advance, as long-running efforts by OPEC, anticipated increases in demand and supply disruptions combined to thrust prices higher. Oil prices surged over the last week amid bullish inventory data from the EIA and API, and uncertainty of Libyan oil supplies intensifying after military conflict this week. For the week, WTI crude gained about 8.5%, over 11% for the month, and about 16% for the quarter (and 25% for the first half of 2018). The energy market has also been reacting to threats from the Trump administration this week, who indicated that the White House would look to sanction countries that don’t reduce their imports of Iranian crude to “zero” by Nov. 4. Iran currently exports around 2.4 million barrels a day of crude.
· Gold prices end Friday higher by $3.50 to settle at $1,254.50 an ounce, bouncing off 6-month lows and snapping a four session losing streak. Gold ended with a -2% monthly decline, a 5% decline for Q2 and down roughly 4% YTD. Gold prices have been falling in reaction to a rising dollar and increasing rate hike expectations. The four consecutive session losses marked the lengthiest selloff since a four-day slide ended Feb. 7.
· The U.S. dollar ends the month under pressure, but still posted strong monthly and quarterly returns. The dollar index (DXY) posted its strongest and first positive quarterly performance since late 2016, rising nearly 5%, though dropped -0.7% on the day, falling mostly against the Euro after the EU reached a deal over the divisive issue of refugees, removing some political risk and after some economic data. The dollar has been boosted the last few months on supportive U.S. economic data (topping weaker European region data) along with a hawkish Federal Reserve that remained on its gradual tightening track. Bitcoin prices drop over 2.5% to $5,880 to lowest levels since November. The Argentine peso fell more than 3% today and over 7% for the week, meaning it now requires nearly 29 Argentine units to purchase one greenback as continued tumble comes despite efforts by the country’s central bank to prop it up (ADRs BFR, BMA, LOMA weak) – the peso did pare losses midday after another FX auction by central bank.
· Bonds reversed earlier gains, as yields jumped late day; with the 10-yr yield topping 2.85% after data showed core inflation hit the Fed’s 2% target for the first time in six years. The yield on the 2-year yield was little changed at 2.52%. The May PCE, index showed core inflation, which strips out food and energy, hit 2% over the past 12 months, matching the Federal Reserve’s long-run target for the first time since April 2012. So far, the 10-year Treasury yield has fallen nearly 30 bps from its highs a month ago above 3.10%, but is still up over 40 bps this year, while the 2-year yield is up over 65 bps this year.
Sector News Breakdown
· Retailers; Dow component NKE breathes new life into footwear and sports apparel sector after Q4 earnings topped consensus estimates and raised its outlook for full-year sales growth, sending shares up more than 10% – shares of FL, UAA, DKS were among movers on results; TGT rises after MKM reiterated buy and remains top pick for 2018 as continue to see a number of drivers/catalysts and believe we are still on the early end of the benefit cycle; OSTK rises after saying that its cryptocurrency subsidiary, TZero, signed a letter of intent with Hong Kong private-equity firm GSR Capital under which GSR will buy $160 million of TZero tokens at $10 apiece
· Auto movers; GM shares fell more than 2% in the afternoon after earlier warnings the Trump Administration that U.S. tariffs on imported vehicles would lead to “a smaller GM; the commentary weighed on shares of Ford (F), and auto suppliers as well (BWA, LEA, AXL)
· Consumer Staples; in beverages, STZ shares slump as Q1 EPS missed by 23c on slightly better sales of $2.05B, amid weaker gross margins of 50.8%, while affirms year outlooks; CALM shares no rally after falling nearly 10% yesterday after Cleveland Research downgraded shares to underperform and slashed its FY19 EPS forecast to $1.26 from $2.99
· Housing & Building Products; the strong earnings results in homebuilder space continues this week, with KBH positive results last night following those of LEN mid-week (KBH double upgrade at Bank America to buy today as well on earnings); KBH beat was based on better closings, gross margins and SG&A, though one analyst said order growth was a bit lighter
· Casino, Lodging & Leisure; casino stocks outperformed, with gains in WYNN, MLCO, MGM and LVS; Jefferies said monthly Macau results through 2Q18 were somewhat mixed, with increased supply, the World Cup, high expectations and further migration to Cotai pricing some impact; in regional gaming, Barclay’s said based on GGR results through May, we see continued strength in regional gaming markets except for a few regions impacted by short term issues (Louisiana, Atlantic City) – with PNK, BYD, PENN leveraged to commentary
· Baker Hughes (BHGE) weekly rig showed total rig data fell -5 rigs to 1,047, with oil rigs down -4 to 858 (fell for a 2ndstraight week after falling for the 1st time last Friday in 12-weeks), and gas rigs down -1 to 187 while miscellaneous rigs unchanged at 2
· Oil equipment; Wells Fargo downgraded CJ, FTSI, FRAC, and SLCA to Market Perform from Outperform and in an effort to further tilt towards offshore/ international leverage, upgraded NBR to Outperform saying with multiple factors pointing to downside risk in Lower 48 D&C spending and completions in 2H18/1H19 and recent data points suggesting that the pressure pumping market is already weakening, they are lowering Lower 48 D&C spending, completions and rig count forecast and cutting EBITDA estimates for our NAM (North America) services
· In news, HES and CNX agree to sell their 50-50 joint venture in the Utica shale play in eastern Ohio to Ascent Resources for $400M/the divestiture consists of ~39K net acres including 26K net undeveloped acres; net production is forecast to average 14K boe/day this year
· Coal sector; JPMorgan raised its tgt on BTU to $53 from $48 citing improved outlook for the seaborne coking and thermal coal prices after taking into account the reduced share count, due to share buybacks; they cut ARCH tgt to $85 from $94 as also benefits from the better metallurgical prices but with its Q1 results announced lower production targets for its PRB operations and that it was struggling with rail and port logistics for its export met coal and cut ARLP tgt to $23 from $26
· Utilities; the UTY down for a 2nd straight day after snapping its 10-day win streak yesterday; SCG was upgraded to buy at Mizuho and up tgt to $46 as believe SCANA represents good value pricing in the effects of the 15% mandated rate reduction by the South Carolina legislature.
· Large Cap banks: all about reaction to Comprehensive Capital Analysis and Review (CCAR) tests last night from the Fed: Several banks announced plans to return capital to shareholders late Thursday after the Federal Reserve released results of its annual stress test.
· Large cap banks: JPM boosts dividend to 80c from 56c and to buy back up to $20.7B, in stock; BAC quarterly dividend up by 25% to 15c a share and buy back up to $20.6B in shares; C raised dividend to 45c and buy back up to $17.6B in shares; DB failed CCAR stress tests due to “widespread and critical deficiencies” in the bank’s capital planning controls; WFCraised quarterly dividend to 43c from 39c a share and buy back up to $24.5B in stock
· Regional banks: FITB raised its quarterly dividend to 22c from 18c a share, and said it would buy back up to $1.65B in shares; HBAN raises quarterly dividend 25% to 14c a share and announced up to $1.07B in buybacks; KEY boosted its quarterly dividend 42% to 17c a share and announced up to $1.23B in buybacks; PNC hikes quarterly dividend by 27% to 95c a share and buy back up to $2B in stock; RF raises dividend to 14c a share and buy back up to $2.03B in shares.
· Other banks: STT raised quarterly dividend to 47c from 42c a share and buy back up to $1.2B in stock. The Fed limited the capital plans of MS as they hike their quarterly dividend to 30c from 25c and buy back up to $4.7B in stock, and also limited GS, which will boost its quarterly dividend to 85c from 80c and announced a $5B stock buyback
· Consumer finance; Janney upgraded ALLY and SC to buy from neutral noting the Fed did not object to the capital plans for either SC or ALLY, both of which included a material increase in capital distributions in the form of repurchases and dividends; AXP quarterly dividend 11% to 39c share and buy back up to $3.4B in shares (AXP also upgraded to buy at Buckingham); COF maintained its quarterly dividend at 40c and said it would buy back up to $1.2B in shares; SC boosts dividend to 20c and to buy back $200M in shares; ALLY raises dividend to 15c from 13c and includes $1B share repurchase
· Large Cap Pharma; ACAD reports FDA approval of new capsule dose formulation and a new tablet strength for Nuplazid (pimavanserin) to treat hallucinations and delusions associated with Parkinson’s disease psychosis; NVS said it will spin off its Alcon eye-care unit while using proceeds from the $13B sale of its stake in a consumer-health joint venture with GSK to repurchase as much as $5 billion in shares; GEMP shares double as phase 2b trial for gemcabene, a treatment for severe hypertriglyceridemia (SHTG), achieved the primary endpoint; DERM rises after its excessive-sweating drug won FDA approval/investor focus turning towards Phase IIb data for lebrikizumab in atopic dermatitis, due in 1H19
· Biotech movers; GLPG shares fall as the company said that ABBV was pulling out of development plans for a potential cystic fibrosis drug after results of the PELICAN trial with both results coming lower than expectations. Analysts said ABBV’s decision not to proceed with the second triplet combo using the Potentiator GLPG3067 with C1 GLPG2222 and C2 GLPG2737 is somewhat surprising, but still good for VRTX as it removes an overhang; CELG and partner XLRNannounced positive results from the phase III MEDALIST trial of luspatercept in low-to intermediate risk MDS; PBYI receives positive CHMP opinion of NERLYNX; XON 7.479M share Secondary priced at $13.37
· Healthcare services; shares of WBA, ESRX, MCK, CVS among those names active yesterday and today after the announcement of AMZN’s purchase of PillPack, as the deal presents a large overhang for the retail pharmacy sector (WBA downgraded at Jefferies and Baird on news); hospital provider THC downgraded to at Jefferies saying the stock’s valuation at 7.5x FY19 EBITDA adequately reflects THC’s growth prospects; CYH falls a 3rd straight day as hospitals remain weak
Industrials & Materials
· Transports; Dow Transport index up rises over 1% midday, pushing back above its 200-day MA average of 10,391 earlier (after falling below that threshold for the 1st time since August of last year), following a rebound in airlines (UAL, JBLU) and rails (NSC, UNP); in rail cars, GBX rises after earnings results (shares of TRN, ARII, WAB move in reaction); GATX also higher on the GBX results as well as positive initiation at Mizuho with a buy and $88 tgt
· Metals & Mining; metals were mostly higher, led by industrials; Morgan Stanley revised its near-term metals/bulks forecasts higher, raising price targets on FCX, TECK, CLF, and HCC; RYI traded higher after guiding Q2 revenue $1.04B-$1.05B vs. est. $1.03B; gold miners outperformed, with strong gains in NEM, ABX, AEM
Technology, Media & Telecom
· Semiconductors; Philly semi index (SOX) bounces off lows, above 1,320 – recovering after breaching its 200-day MA support yesterday of 1,306 (traded low 1,295 yesterday); today’s gains led by equipment names AMAT, MKSI, TER, LRCX; RMBS announced its Board of Directors has terminated Dr. Ron Black as CEO, effectively immediately. The termination follows an incident unrelated to the company’s financial and business performance
· Hardware, software, component movers; SNX said it would buy CVG in a $2.43B cash-and-stock deal, paying $26.50 per share offer, as deal includes $13.25 per share in cash and 0.1193 SYNNEX common shares (shares of SNX fell on Q3 guidance as well); NTAP tgt raised to $88 at Bank America citing benefit from shift to AI-driven storage workloads and leadership in all-flash-array platforms; DOMO priced its 9.2M shares IPO at $21 a share, near the top of its range of $19-$22 a share
· Media movers; FOXA announced that it has set July 27, 2018 as the new date for the special meeting of its stockholders to, among other things, consider and vote on a proposal to adopt the amended merger agreement with DIS; CMCSAsuffered nationwide issue, saying one of its large backbone network partners had a fiber cut that we believe is also impacting other providers. It’s currently affecting our business & residential internet, video & voice customers