Monday, July 2, 2018
Equity Market Recap
· U.S. stocks sputtered early, with major averages falling sharply lower amid ongoing trade concerns between the U.S. and trading partners China, EU, Canada and Mexico. However, stocks ended firmly higher, closing near the best levels, with some noting President Trump’s rejection of taking any action on leaving the WTO, as well as commentary that they are very close to making fair trade deals (which is not necessarily new) as positive for market. Technology started the rebound with the Nasdaq Composite jumping more than 100 points off its intraday lows of 7,443 (holding just above its 50-day moving average support 7,439). Overall, trading desks are lighter than normal with U.S. stock markets closing 1:00 PM EST tomorrow due to Independence Day holiday and then are closed on Wednesday. Investors also brace for U.S. tariffs on $34 billion of Chinese goods which are set to take effect on Friday, while China has said it plans to retaliate on the same value of U.S. goods. Energy, raw-material and real-estate sectors lead losses in the S&P 500, while tech and financials gain. Economic data was mixed (see below), while the dollar gained, sending commodity prices lower.
· ISM Manufacturing for June rises to 60.2, topping the 58.5 estimate and above the 58.7 last month; new orders fell to 63.5 vs 63.7, employment fell to 56 vs 56.3 and prices paid fell to 76.8 vs 79.5; backlog of orders fell to 60.1 vs 63.5 and new export orders rose to 56.3 vs 55.6
· Construction Spending for May rose 0.4%, slightly below the 0.5% estimate while April was revised to up 0.9% from 1.8% gain; Private construction rose 0.3% in May while Private residential construction rose 0.8% and Private nonresidential construction fell 0.3%
· Markit Manufacturing PMI for June reported at 55.4 vs. Flash Reading and estimate of 54.6; the index falls to 55.4 from 56.4 in May (but up from year ago reading of 52); new export orders fall vs prior month to lowest reading since July 2017
· Oil prices slipped late day after briefly turning positive, with WTI crude falling 21c, or 0.03% to settle at $73.94 per barrel, snapping its 4-day win streak. The small pullback came after a strong month of June, as WTI crude remains not far off its 4 ½ year highs around $74 per barrel. Oil prices fell early after Donald Trump tweeted over the weekend that he had asked Saudi Arabia to boost its oil production to help soften prices. Last week WTI crude gained about 8.5%, 11% for the month, and about 16% for the quarter in what has been a bullish run.
· Gold prices end lower, sliding -$12.80, or 1% to settle at $1,241.70 an ounce, lowest level since December and extending losses into the close as the metals sector in general was broadly lower. The decline in precious metals was across the board, with spot silver prices falling to lowest levels since December while Reuters reported spot platinum prices fell more than 3% to $820 an ounce, lowest levels since January 2016 citing the stronger dollar. The broad decline in metals came amid a surging US dollar, rising vs. nearly all major counterparts.
Currencies & Bonds
· The U.S. dollar end higher, rising vs. most counterparts; the Mexican peso fell more than 1% against the US dollar following political news in Mexico as leftist front-runner Andrés Manuel López Obrador won the presidency (though peso pared losses). Meanwhile the euro slides back to the 1.16 level, down -0.8% vs. the dollar as Germany’s leadership spat over immigration. Bitcoin prices surge, up over 12% topping $6,600; the dollar approached the 11 level vs. the yen, while the British pound sank -0.6% off overnight highs above 1.32 to 1.3125 late day. Trade concerns weighed on emerging market currencies, while boosting the dollar.
· Treasury prices reversed course late afternoon, slipping into negative territory as yields inched higher; the rally in U.S. stock prompted the pullback in bonds ahead of the shortened equity and bond market closures tomorrow due the Independence Day holiday on Wednesday when markets are closed. The 10-year yield rose above 2.86% late day off lows around 2.82%.
Other Interesting tidbits
· IPO markets remains strong: Bloomberg noted since Memorial Day, 37 U.S. IPOs have raised more than $7b for companies and selling shareholders. Despite some rockiness in the market, advisers were usually able to gauge investor interest with a high degree of accuracy. Just three deals priced below their respective offering ranges, while 26 priced within-range and 6 priced above. At least 18 of June’s IPOs were upsized, while just 4 were downsized. In the aftermarket, June’s IPO class has risen an average 16% from their offering prices (weighted by offering size), according to Bloomberg data. Just nine of these are now trading below their offering price.
Sector News Breakdown
Retailers; PERY shares rise after Randa Accessories confirms a prior WSJ report that they are making a $28-a-share competing bid for the company, slightly topping the prior bid from the brand firm’s founder George Feldenkreis of $27.50 ; JWN was downgraded to market perform and tgt cut to $51 from $56 at Cowen on a number of concerns, among them same-store sales at the off-price Rack chain that lag behind other off-price retailers; NKE shares slide as much as 3% (move comes after touching fresh 52-week highs last Friday of $81 after earnings and outlook beat)
· Consumer Staples; NSRGY in talks to buy majority stake in Canada Champion Petfoods for over $2B from the closely held company’s owners including Toronto buyout firm Bedford Capital, WSJ reported ; in the UK, Tesco entered into a long-term, strategic alliance with Carrefour SA that will cover relationships with global suppliers, the joint purchasing of own brand products and goods not for resale
· Auto industry; TSLA shares rallied initially after saying it produced 5,031 Model 3s and 1,913 Model S and X vehicles in the last seven days of the second quarter, with total 2Q production 53,339 vehicles, and its 2018 target of 100,000 Model S and X deliveries vehicles is unchanged – the stock later fell more than 30 points off earlier highs; auto industry remains pressured amid concern that the ongoing trade riff will curb profit margins (recall Daimler lowered forecasts more than a week ago citing tariff impact); monthly auto sales data for June expected tomorrow morning; auto suppliers (BWA, AWL, DLPH) mixed over the tariff battles between the U.S. and EU nations, China, Canada and Mexico
· Casino and gaming sector weak (WYNN, MLCO) after Macau June Casino revs rise 12.5% YoY to 22.5B patacas, below the Bloomberg 18% est. rise. Separately, LVS was downgraded to neutral at Bank America and tgt cut to $80 from $85 saying June was the second month of weaker than expected GGR growth, there are continued mixed reads from the firm’s Macau Macro Activity Tracker, and weaker FX and trade fears have increased uncertainty
· Oil prices slip then recover, back to 4 ½ year highs; stock news; CLB shares fall as lowered its Q2 EPS view to 57c-59c on revs $174M-$175M, below prior view of 64c-66c and $177M-$179M on delayed international revs; BP says it has started operating the $28B Shah Deniz 2 gas pipeline in Azerbaijan to supply gas to Turkey and elsewhere in Europe; After outperformance last week on the sharp spike in oil prices, E&P stocks giving up some of those gains, with 2% declines for FANG, MUR, EOG, PXD, NFX, CXO
· Utilities reverse earlier gains to move lower midday – after ten straight days of gains for the UTY, index falls a 3rd day as markets continue to pare gains in defensive stocks; PCG shares outperformed the broader utility group; AES weak after Bank America downgraded shares citing concern about a more difficult backdrop in Europe
· Solar stocks outperform after Roth Capitol noted last Friday, the IRS issued construction-start guidance for solar projects seeking to qualify for the ITC. This effectively extends the runway for installers to claim the 30% ITC by four years and provides two methods for qualification: (1) incurring 5% of the expected project cost or (2) beginning “physical work of a significant nature.” They believe resi/C&I/utility developers and installers such as RUN, VSLR, FSLR, CSIQ, and SOL could benefit by purchasing inventory early in order to qualify for the ITC before it steps down.
· Large Cap banks seeing mixed results as bond yields remain off 2018 highs despite increased rate hike rhetoric from the FOMC in recent weeks; banks also failing to get a lift following all 35-banks passing stress tests last week (though a few had their buyback/dividend increase requests denied or altered (MS, GS, DB); in research, BLK was removed from the JPM focus list, STI was upgraded to buy at Argus following 2018/2019 CCAR results, which are allowing for better capital returns than we anticipated and WFC upgraded at Morgan Stanley after stress test, coupled with 70% higher capital return approval y/y, eliminates one of our major downside concerns; 52-week lows today for BHF, BEN, AMG, MET in the financial space
· Other movers; in insurance, JPMorgan raises 2Q18 and 2018 EPS forecast for several companies in life insurance to reflect stronger than assumed equity market performance, lower cat losses, and higher accretion from share buybacks, partially offset by the strengthening of the; SoFi is trying to raise $500M for deals, the WSJ reported; COF upgraded to outperform at Credit Suisse; IBKR said June highlights included 799 thousand Daily Average Revenue Trades (DARTs), 17% higher than prior year and 2% higher than prior month and ending client equity of $134.7 billion, 29% higher than prior year and about even with prior month
· Large Cap Pharma; ADMP rises after announcing a distribution and commercialization pact with NVS’ Sandoz unit for its version of the EpiPen (Symjepi)/Sandoz to obtain U.S. commercial rights for upfront fee and potential milestones; ALKS said the FDA approved its long-acting injectable atypical antipsychotic for the treatment of schizophrenia in adults; SUPNslips after Piper said a proprietary survey showed a mixed bag for Trokendi XR amid new competition
· Biotech movers; FBIO said the FDA has granted Fast Track status for Phase 3-stage CUTX-101 (copper histidinate) for the treatment of classic Menkes disease; some companies developing treatments for nonalcoholic steatohepatitis (NASH) continue to see positive money flow as bullish investors see continued upside (MDGL, ICPT, CNAT, VBLT, GALT)
· Healthcare suppliers and services; MDXG shares plunge after announcing its Chairman and CEO Petit resigned while President and COO Taylor also steps down as accounting investigation continues; WBA downgraded at Mizuho and tgt cut on it and CVS at Guggenheim after AMZN announced the acquisition of PillPack last week, weighing on the services industry; BLFS shares rise as reports an increase in Q2 revenues
· Medical equipment and devices; IART downgraded to neutral at Citigroup citing full valuation; NVTR shares drop over 20% after saying the FDA recently requested that the company provide more information on any changes to the Virtis device, labeling and manufacturing; DXCM upgraded to outperform at Raymond James as expect 2Q results to be above consensus and upward estimate revisions to drive the stock higher; NVRO was cut at Morgan Stanley
Industrials & Materials
· Industrials & Machinery; Airbus (EADSY) will miss its delivery target for Pratt & Whitney-powered A320neo narrow-body jets this year, after problems with the engines caused an almost three-month halt in shipments, people familiar with the matter said – Bloomberg; URI announces that it signed a deal to acquire BakerCorp for ~$715M in cash; 52-week lows today PCAR, CMI in the industrial space (ahead of the monthly class 8 truck data); PCAR was downgraded at Baird
Technology, Media & Telecom
· Software, Hardware and Services; Dell technologies said it would buy the tracking stock of VMW in a cash and stock deal (DVMT), where VMware will pay DVMT shareholders an $11 billion special cash dividend and Dell will offer more shares — or cash . Michael Dell in CNBC interview said wants VMW to remain independent company
· Telecom and Media; BAND downgraded at Morgan Stanley arguing that its IPO price embedded a meaningful discount but that the stock’s 90% appreciation since then has closed the gap with the peer group; NLSN downgraded to sell at Goldman Sachs as believe the company’s Buy segment revenue growth will remain pressured over the near-to-intermediate term; ACXM is nearing a deal to sell its marketing solutions division to IPG for around $2.2B ; AABA shares slip early after top holder TCI Fund reduced stake to 7.1% from 9.6%