Tuesday, July 3, 2018
Equity Market Recap
· U.S. stock slumped late day, erasing earlier gains, with the NASDAQ leading markets lower this holiday abbreviated market session, while the Dow & S&P also slumped late day. The Dow Industrials fell more than 300-points from its intraday high, back below its 200-day moving average of 24,344. Defensive assets led today’s gains, with interest rate sensitive Telecom, Utilities and REITs the top gainers while Technology declined. Market volumes were light ahead of U.S. market closures tomorrow and as the U.S. is set to place tariffs on $34 billion of Chinese goods on July 6, with an expected retaliation from Beijing. Energy stocks were volatile as WTI crude topped $75 per barrel for the first time since November 2014, while gold prices rallied off 7-month lows following a retracement in the U.S. dollar. Fears that the Peoples Bank of China (PBoC) was using the yuan as a tool in trade issues with the U.S. weighed as well on sentiment, though a member of the bank said the yuan’s recent depreciation is not due to central bank guidance, but a result of changes in market expectations as external uncertainties rise. Technology shares, specifically chip makers, declined late day on a Bloomberg report that a Chinese court temporarily banned MU chip sales, sending those shares down over 7%, while FB shares dropped 2% on reports of increased gov’t questions on Cambridge Analytica controversy.
· Oil prices volatile; WTI crude topped the $75 per barrel mark for the first time since November 2014 (high of $75.27) before prices tanked on reports from Al Arabiya that Saudi Arabia has affirmed its “readiness” to use its spare oil production capacity to maintain market balance (offsetting production disruptions from Canada and Libya). The headlines gave markets an opportunity to book profits ahead of the 4th of July holiday tomorrow. The early gains came after Iran appeared to threaten to disrupt oil shipments from the Middle East Gulf if Washington pressed ahead with sanctions. WTI crude later reversed its losses to trade higher
· Gold prices managed a gain, bouncing of 7-month lows, benefitting from the pullback in the U.S. dollar, with gold prices rising more than 1.25% back above the $1,255 an ounce level (off early morning lows $1,238.80 an ounce). A softer U.S. dollar generally decreases the cost of dollar-denominated bullion for investors paying in other currencies. Platinum touched fresh 10-year lows on concerns that trade sanctions could hit demand for the metal (before recovering).
· The U.S. dollar declined after strong gains on Monday, dropping vs. its euro rival as the risk of a major political crisis in Germany eased after Chancellor Angela Merkel struck a deal on immigration. Merkel late Monday reached a last-minute deal for tighter immigration control, coming after Interior Minister Seehofer had threatened to quit in protest over Merkel’s migrant policy. The dollar slipped against the Japanese yen, British Pound and emerging markets such as the Canadian dollar and Mexican peso. The Turkish Lira declined after Turkey’s faster-than-expected June inflation data overnight.
· Bonds prices advanced as yields slipped with the yield curve hovering at its flattest level in nearly 11 years as China pledged to keep its currency stable. The yuan fell to an 11-month low against the dollar as trade tensions grew between the United States and China. The White House is prepared to impose tariffs on $34 billion of Chinese goods on July 6 while Beijing has said it will respond with duties on American-made imports. The yuan’s recent depreciation is not due to central bank guidance, but a result of changes in market expectations as external uncertainties rise, the PBOC said today. The 10-year yield slipped under 2.84% from 2.87% late yesterday. Bond markets close at 2:00 PM EST today ahead of the Independence Day holiday tomorrow.
Other Interesting tidbits
· Factory orders for May rose 0.4%, topping the estimate of unchanged while April was upwardly revised to -0.4% from -0.8%; new orders ex-trans. for May rise 0.7% while new orders ex-defense for May fall 0.1% after falling 0.6% in April. Capital goods non-defense ex aircraft new orders for May rise 0.3% after rising 2% in April
· U.S. IBD/TIPP July Economic Optimism Index rose to 56.4 after June’s 53.9; the Economic outlook rose to 53.4 vs 51.2 last month, personal finance rose to 62.8 vs 62.1 last month and Federal policies rose to 52.9 vs 48.3 last month
Sector News Breakdown
· Auto’s; monthly auto sales data for June out today, with 1) Ford (F) saying June light vehicle US sales up 1% to 230,635 vs. est. 1.2%. Ford June car sales down 14% to 45,335 vehicles; truck sales up 3.2% to 100,683 vehicles; 2) FCAU June US auto sales rose 8% to 202,264 vs. est. 7.4%; 3) TM said June U.S. auto sales up 3.6% to 209,602 vs. est. 2.2%; 4) NSANY said June U.S. auto sales rose 1.2% vs. an expected decline of (-7%); 5) GM Q2 Auto sales rose 4.6% vs. est. 4.5%; TSLAextends losses, falling again after yesterday’s more than 2% decline, with Goldman Sachs noting while Tesla did achieve its 5k/week production target for the Model 3, the company’s Model 3 deliveries did miss the analyst’s bearish estimates
· Gun stocks; shares of AOBC and RGR active after the adjusted FBI NICS background check data for the month of June showed a decline of (-12.2%), worse than the (-9%) decline in May on a YoY basis. While the June comp of -11% appears to be significantly easier than the +6.5% of May, this was mostly due to the 29% growth seen in June 2016 according to Wedbush.
· Retailers; WMT bounce after yesterday’s decline after Cleveland Research said 2Q sales tracking above Street expectations while margins also well managed; ROKU was upgraded at Oppenheimer as believe The Roku Channel is 0.63% of domestic time-spent on Roku’s platform or the 12th most-watched app by viewing hours; in furniture retail MLHR shares jumped as reported a Q4:18 top and bottom line beat, while guiding to Q1:19 revenue and EPS mostly in line with consensus expectations (HNI, SCS, KNL moved in sympathy)
· Consumer Staples; CPB rises after the NY Post reported that Third Point’s is in talks with family members who control about 41 percent of Campbell’s shares and with independent Campbell investors about supporting a plan that would result in hiring a bank to explore a possible sale ; PEP was downgraded to hold at Deutsche Bank noting outperformance over the last month vs. KO and multinational peers and see the market now better pricing in relative stabilization in NAB as a base case alongside continued strength in Frito business; PBH sale of its household cleaning business is dilutive to FCF, said Davidson analyst
· Casino, Lodging & Leisure; BEL shares decline after Barclays downgraded; casino stocks tried to bounce after yesterday’s sharp downturn on weaker Macau data (Macau June Casino revs rise 12.5% YoY to 22.5B patacas, below the Bloomberg 18% est. rise). This morning, Bank America noted Macau room rate survey, which measures y/y change in weekly internet room rates, shows “relatively stable and solid growth” in 2Q and “positive momentum” in July (WYNN, MGM, LVS)
· Energy prices jump early before slipping late (and later recovered), as WTI crude topped the $75 per barrel level for the first time since November 2014 before fading. Saudi Arabia and Russia reaffirmed an agreement between OPEC and its allies, which they say will mean increasing oil production by 1 million barrels a day, Bloomberg reported. Reports mid-morning from Al Arabiya that Saudi Arabia has affirmed its “readiness” to use its spare oil production capacity to maintain market balance took a bite out of oil prices, but energy stocks hung on to gains.
· In stock news, JPMorgan outlined a few cases where PE could attract $1.2B-$1.6B for its ~7k net royalty acres in the Permian over time; LPI FY18 guidance reiterated despite a battery tank fire in Glasscock County yesterday; NBL gets added Delaware oil takeaway firm sales pact with an additional five-year firm sales agreement for gross sales of at least 10,000 barrels of oil per day starting in July, and rising to 20,000 barrels per day in October; in utility news, SCG rises after Dominion CEO Thomas Farrell told South Carolina Governor Henry McMaster that the power giant would not pull its offer for Scana because of the temporary rate cut, Bloomberg reports
· Healthcare services; analysts positive on home health names after CMS announced a proposed +2.1% rate reimbursement increase update in 2019, the best update since 2007 following nine consecutive years of cuts according to one analyst; shares of AMED were upgraded at Bank America and tgt up to $97 on the CMS news, while firms also positive on LHCG; IQV was upgraded to strong buy at Raymond James as believe IQVIA is poised to show bookings momentum reflective of a strong biotech funding backdrop and NextGen initiatives
· Large Cap Pharma/Biotech; JNP entered into a definitive agreement to be acquired by CTLT at a price of $11.50 per share in cash ; AVXL rises after receiving approval from Australian regulators to launch a Phase 2b/3 clinical trial assessing ANAVEX 2-73 in patients with early-stage Alzheimer’s disease; ORMP raises $18.1M in gross proceeds from institutional investors for issuing 2.89m shares and warrants in registered direct offering at a combined price of $6.25 per unit; EPZM downgraded at Leerink citing later expectations for approval of Epizyme’s tazemetostat in non-Hodgkin’s lymphoma (NHL) and mesothelioma; ESPR rises ahead of its Analyst and Investor Event on Tuesday, July 10, in NYC
Industrials & Materials
· Industrial & Machinery; AYI surged more than 15% after the lighting company blew past Q3 estimates on both earnings and sales, driven by shipments of the company’s Atrius-based luminaires, as well as higher shipments of products for infrastructure and utility projects; AZZ another beneficiary of better earnings as shares advanced
· Transports; airlines AAL, DAL & UAL were all downgraded to hold from buy at Deutsche Bank citing headline risk, lack of near-term catalysts and cut tgts on AAL to $43 from $60, DAL to $53 from $64 and UAL to $74 from $8 noting in a world of heightened macro and geopolitical risks, economically-sensitive, high beta stocks such as airlines typically underperform. Separately, DAL provided its monthly update, reaffirming its Q2 EPS forecast and pre-tax margin views while said June total system traffic rose 3%
· Metals & Mining; GLNCY shares were under pressure after they received a subpoena from the US DOJ dated yesterday regarding potential violations of the Foreign Corrupt Practices Act and US money laundering statutes. The company must provide authorities with documents relating to its dealings in the DRC, Nigeria and Venezuela since 2007
· Distributors; Baird downgraded the industry, cutting ratings on GWW to neutral as they see the industrial supply cycle maturing with downside more likely than upside; firm also downgraded FAST, BMCH, GMS, POOL, SITE and WSO on same rationale saying it isn’t a recession call, adding that the market has shown signs of strength and the broader economy is on solid footing
Technology, Media & Telecom
· Internet; FB shares fell after saying the SEC and FBI join the Justice Department and Federal Trade Commission in probing how the political analytics firm Cambridge Analytica; NTES shares were upgraded to overweight at JPMorgan saying lackluster earnings growth should begin to recover in 2Q and peak in 1Q 2019; AMZN announced its annual “Prime Day” on July 16th, while EBAY announced it would offer thousands of deals on July 17th
· Semiconductors; Philly semi index (SOX) bounces off the lows initially, only to slide late day on negative MU headlines; TER shares outperform early after Citigroup a catalyst watch on TER and expect management tone to be most positive among peers on fundamentals with Apple (22% of sales) expectations now derisked; MU shares tumbled early afternoon after Bloomberg reported China court temporarily bans Micron chip sales
· Software movers; ACXM shares rally a second session after confirming it would sell its Acxiom Marketing Solutions unit to IPG ; ASUR guided year revs to $93M-$96M, above prior view $90M-$93M and reaffirms year adjusted Ebitda view
· Hardware and Components; Citigroup upgraded VSH and AVX to buy as they expect the capacity companies to beat (AVX and VSH) as well as some of the EMS companies notably SANM and FLEX/said given the demand strength due to the overall economy they do not expect any companies to miss
· Telecom sector; The U.S. has moved to block China Mobile Ltd. from entering its telecommunications market on national security grounds, adding to already increased tensions between the U.S. and China. The FCC should deny state-backed China Mobile’s seven-year-old application to offer international voice traffic between the U.S. and foreign countries, the National Telecommunications and Information Administration said