Thursday, July 5, 2018
Equity Market Recap
· U.S. equities end higher, paring gains briefly after FOMC meeting minutes cited a very strong U.S. economy (raising chances of rising rates), though rebounded late day as global stock markets prepare for a busy day ahead. The monthly non-farm payrolls report for June is to be released Friday morning while markets also await the imposition of U.S. tariffs on $34Bb worth of Chinese goods staring tomorrow, while China is expected to counter with corresponding tariffs on U.S. imports. Stocks started on a positive note led by gains in the auto sector after reports the U.S. had proposed zero tariffs on auto imports and exports between the U.S. and the European Union. The NASDAQ index led the market on strength in chipmakers, led by gains in MU, SWKS, and QRVO on positive stories, while volumes remained muted during the U.S. holiday week. Jobs data was slightly weaker with ADP private payroll data showing 177K added jobs vs. the 190K estimate while weekly jobless claims inched higher to 231K (highest in 6-weeks but continuing claims remain at decade lows). Bonds prices were little changed, while the dollar slides.
· The Dow Industrials bounced, rising as high as 24,372, topping closing above its 200-day moving average of 24,353 (snapping a 7-day streak below). When the Dow first closed below the 200-day MA on June 25, it was the first close below that technical benchmark since June 27, 2016, to snap a 501-session streak above it, the longest such streak since 1987. The Nasdaq Composite traded up more than 1%, its biggest one-day gain since June 1st.
· European markets advanced as a softening in U.S. trade rhetoric lifted the car sector, but overall markets remained cautious ahead of a U.S. deadline to impose tariffs on Chinese goods. The Stoxx 600 index gained 0.4% for its third straight positive session while the German Dax outperformed led by automakers.
· Minutes form the June FOMC meeting showed U.S. central bankers discussed whether recession was around the corner and expressed concerns global trade tensions could hit an economy that by most measures looked strong. The minutes, which described a meeting in with the Fed raised interest rates for the second time this year, also suggested policymakers might soon signal that the Fed’s rate hiking cycle was advanced enough that policy was no longer boosting nor constraining the economy.
· Weekly Jobless Claims rose 3K to 231K (a 6-week high), slightly above the 225K estimate, while the 4-week moving avg. rose 2,250 to 224.5K in the latest week ending June 30; prior week claims revised up to 228K from 227K; continuing claims rose 32K to 1.739M in the week ending June 23 but still remains near lowest level in decades
· ADP said private-sector employment remained solid in June, as employers added 177K jobs, though came in below the 190K estimate by economists. May’s gain was upwardly revised to show 189,000 growth instead of a previously estimated 178,000.
· June ISM Non-Manufacturing rises to 59.1 vs. 58.6 last month and above the 58.3 estimate; business activity rose to 63.9 vs 61.3 prior month, while new orders rose to 63.2 vs 60.5; employment fell to 53.6 vs 54.1 and prices paid fell to 60.7 vs 64.3; backlog of orders fell to 56.5 vs 61; imports fell to 51.5 vs 54.0
· Challenger, Gray & Christmas announced 37,202 job cuts in June; 245,179 year to date; said employers have announced 245,179 cuts through June, 8% more than the 227,000 cuts announced through June of last year
· The 30-year fixed mortgage rate for week ended today fell to 4.52% from 4.55%, Freddie Mac said in statement; 15-year rate avg 3.99%, down from 4.04% a week earlier
· Oil prices sunk, with WTI crude sliding -$1.20, or 1.62% to settle at $72.94 per barrel (lowest level in a week) following bearish weekly inventory data as domestic crude supplies mark first climb in four weeks; the EIA reported that crude stockpiles rose by an unexpected 1.2M barrels for the week ended vs. an expected decline of over -4M barrels; also weighing on prices, President Trump in a tweet over the 4th of July demanded OPEC move to counteract a rally that has prices near 3 ½-year high also contributed to pressure on oil prices.
· Gold futures advanced on Thursday, rising $5.30, or 0.4% to settle at $1,258.80 an ounce, settling at more than 1-week highs. The move follows a 1% Tuesday rebound that helped pare losses and rise off 7-month lows. Gold also inched higher ahead of the expected imposition of tariffs by the U.S. against China and the retaliation of Beijing as well. Concerns about the U.S. and its longstanding trade partners in the European Union, Canada and China, have lifted the dollar and have weighed on commodities priced in the monetary unit.
· The U.S. dollar was lower most of the trading session, but pared losses after the text of the FOMC June meeting minutes were released, painting a strong picture of the economy, though expressed concerns about global trade tensions. The dollar index (DXY) touched lows of 94.17 (and off recent 2018 highs of 95.53 on 6/28) before rebounding to around 94.50. The euro slipped back below 1.17 after overnight highs 1.1720, while the dollar extended gains vs. the yen. Bank of England governor Mark Carney said he is increasingly confident that the UK economy can bounce back after a slow start to 2018, sending the pound higher…though the British Pound later pared its gains after touching highs of $1.3275 overnight. The Mexican peso rallied with strength in general Mexican assets, rising to 5-week highs.
· Bond markets were mixed as yields on short-dated rates higher while the long end was unchanged to slightly lower; the 2-yr yield edged higher to around 2.55%, while the long bond 30-yr yield was down at 2.95%; the benchmark 1o-year was up slightly at 2.835%; the minutes from the June FOMC meeting failed to move bonds, with yields remaining mixed. Busy week upcoming with the Treasury is selling $69B in notes next week
Sector News Breakdown
· Auto sector; shares of U.S. and European auto makers rise after a U.S. official said it would be prepared to back off stiff tariffs on cars imported from the EU if the trading bloc eliminates duties on U.S. cars. The news was reported by German daily Handelsblatt, citing unnamed sources; shares of GM, F, as well as auto suppliers BWA, LEA, AXL, and DLPH were higher early. European autos also rising handily, also helped after FCAU and DDAIF were upgraded at Jefferies
· Retailers; BKS reaffirms prior EBITDA guidance of $175M to $200M for FY19/after the market closed on the 3rd said that CEO Demos Parneros was being let go for a policy violation; PERY recommended shareholders to vote for the buyout offer of $27.50 from the company’s founder instead of a higher bid made by men’s accessories maker Randa of $28
· Casino, Lodging & Leisure; ISCA rises early after earnings results beat by a penny on higher revs and in-line guidance; Morgan Stanley noted Macau casino monthly gross gaming revenue (GGR) missed estimates for two straight months, causing gaming stocks with operations in that region to drop…but firm said the May and June shortfalls came on rising expectations intra-quarter, a weaker RMB, and analysts “not properly factoring in seasonality/the World Cup.” (WYNN, MLCO)
· Inventory data: WTI crude slumped following bearish inventory data, as the EIA reported an unexpected weekly build of 1.245M barrels vs. an expected drawdown or -5.0M barrels, though Cushing crude fell -2,113M barrels (lowest since Dec 2014); gasoline stockpiles a bigger -1,505M draw vs. est. -750K, while distillates rose +134K barrels vs. -685K barrels. Late Tuesday, the API said U.S. crude supplies fell by -4.5M barrels for the week ended June 29, showed supply declines of roughly -3.1M barrels in gasoline and -438,000 in distillates
· The WSJ reported that Saudi Aramco and the country aren’t ready for an IPO that could raise $100b but also bring unprecedented scrutiny to the kingdom’s crown jewel, citing Saudi officials and people close to the process.
· Refiners decline; HFC, DK, MPC, ANDV were broadly lower initially after Goldman Sachs said gasoline margins by U.S. refiners have come in below expectations so far this summer amid “elevated refining utilization, high gasoline yield, slowing demand trends, and the lag between higher Brent prices and product realization
· Clean energy sector; Raymond James downgraded shares of CLNE citing concerns over valuation after the “excessive euphoria” over the equity investment made by TOT noting shares have jumped over 90% since strategic partnership; the firm also downgraded NEP to market perform buy upgraded AEIS to outperform; AMSC shares tumbled as settles commercial disputes with Chinese wind turbine maker Sinovel Wind Group Co
· In other news; COP said it will buy BP’s interest in the Greater Kuparuk Area, an oil field located 40 miles west of Prudhoe Bay on Alaska’s northern coast, as well as BP’s 38% share of a pipeline operator, the Kuparuk Transportation Company. COP will also sell BP a subsidiary that will hold a 16.5% share of the Clair Field, which is around 46 miles west of the Shetland Islands off Scotland. In Canadian Energy space, MEG.CN and HSE.CN both downgraded at Raymond James
· Biotech/Pharma; ZYNE shares slide as its ZYN001 THC-prodrug patch Phase 1 study top line results show the target blood levels of 5 to 15 ng/ml THC were not achieved; BMY said the expanded indication to include treatment of children with Philadelphia Chromosome-Positive Chronic Myeloid Leukemia in chronic phase; WCG tgt raised to $275 from $235 at Cantor; CLVS Rubraca gets EMA validation for new indication in recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer with complete or partial response to platinum based chemotherapy.
Industrials & Materials
· Industrial and Machinery; heavy duty truckers (CMI, PCAR, NAV, ALSN) with positive news as ACT Research for Class 8 trucks in June showed truck orders were 42,200 units (vs. estimates 30K-33K), up 133% YoY. This was one of the best months ever, despite the fact that June is typically a seasonally weak period. ACT Research believes that backlog could reach the highest levels in 20 years, once full industry data is released later this month. Class 5-7 orders were up 23% YoY. In industrials, GE shares tumbled as Brazilian police arrested its CEO for Latin America Speranzini Jr., as part of a probe into fraud in medical equipment tenders overseen by health authorities in Rio
· Aerospace & Defense; ERJ and BA have signed a preliminary agreement to form a joint venture consisting of the latter’s commercial aircraft and services business and the U.S. planemaker’s commercial development, production, marketing and lifecycle services operations. The deal values Embraer’s commercial aircraft operations at $4.75B, while Boeing’s 80% ownership stake in the JV will be valued at $3.8B; HXL upgraded to buy from hold and increasing price target from $70 to $80 as believe HXL represents favorable exposure to the commercial OE cycle (~71% of sales, with greater content on the newer programs), is seeing an acceleration in its 2018-2019 top-line growth, is poised for steady margin and FCF improvement
· Materials, Chemicals; PX said it agreed to sell the majority of its European gases business to Taiyo Nippon Sanso Corp. (4091.TO) for about 5B euros ($5.83 billion) to ease regulatory concerns in Europe over its proposed merger with Germany’s Linde AG
· Paper and containerboard sector; Stephens lowered its tgt prices for IP and WRK to reflect weaker prospects for earnings and cash flow growth, as elevated containerboard prices encourage more supply/ firm sees about 3% capacity growth annually through 2022, while box demand has grown at just 1.6% YTD and long-term growth rate is 0.1% CAGR
· Tankers and Shipping; ANW shares jumped after saying it will explore a global strategic partnership with the Cyprus-based Mercuria Energy, including operational services, trading and hedging arrangements, and other support. Mercuria to provide a $1 billion a trade finance facility, as well as increased liquidity of at least $30 million
· Metals & Mining; AU forecasted a 25% increase in FY 2018 production to ~300K oz. at its Sunrise Dam gold mine in Australia, citing improved recoveries, increased mining volumes and a range of productivity enhancements; GLNCY rises as announces plan to buy back up to $1 billion in shares; U.S. materials sector outlook lowered to modestly bearish by Jefferies saying thinks sector will find it difficult to perform on China risk
Technology, Media & Telecom
· Internet; FB rises after BTIG raised its price target to $275 from $175 as firm particularly upbeat about Instagram, which recently launched a new YouTube-like product called IGTV. Instagram Stories, meanwhile now has 400 million daily active users, twice what SNAP has; CTRP shares slipped early after Morgan Stanley cut tgt saying likely to reach low end of Q2 forecast
· Semiconductors; MU rebounds after the company said that it only sees a 1% revenue hit on quarterly revenue from China ban/noted two Chinese subsidiaries of the company were notified of a preliminary injunction against those entities in patent infringement cases filed by UMC and Fujian Jinhua Integrated Circuit/reaffirmed its year rev outlook; ZTE Corp. has named a slate of new top executives, including a new chief executive; QRVO was upgraded at KeyBanc saying quarterly Asia supply-chain findings left them incrementally more positive on fundamentals at AVGO, CY, IDTI(increasing price target to $39), MLNX, MPWR, MU, ON, QRVO (upgrading to Overweight and $95 price target), SIMO(increasing our price target to $60), TXN, and XLNX.
· Software & Hardware; TIVO said CEO Enrique Rodriguez has resigned, after less than a year in the role, leaving to assume a position of CTO at LBTYA a long-time TiVo customer; XPLR to be acquired by ZBRA for $6.00 per share, with total consideration, including some debt, expected to be less than or equal to $90M
· Optical stocks recover; William Blair noted weakness in the sector Tuesday following a preannouncement from BE Semiconductor Industries, though firm says it sees “no evidence to draw any parallel to the 3DS supply chain from the Besi preannouncement – defended shares of LITE, IIVI, FNSR, VIAV