Friday, July 6, 2018
Equity Market Recap
· U.S. stocks closed out the week with positive momentum, led by a mixed jobs report which offset the negative news overnight that the U.S. imposed tariffs on $34 billion of Chinese imports Friday, while China began to levy 25% retaliatory tariff on 545 categories of US goods, ranging from agricultural products to automobiles. Particularly, the tariff covers a total of $16.6B of US agricultural exports to China. While the news was disappointing to industrials, farm, food, technology and auto sectors, it came as no surprise. The jobs data however was a positive development for markets as it provided some good and some mixed views, allowing the Fed to likely keep its current course of gradual rate hikes (no need to speed up or slow down its pace). The nonfarm payroll headline job additions were positive for this month/prior revisions, though the unemployment rate ticked back up to 4% while wage increases of 0.2% missed the 0.3% estimate, causing the dollar slide and bond rally. In the end, markets closed out the abbreviated holiday week with gains, as fear subsided with the CBOE Volatility index (VIX) falling nearly 20% this week, down from highs of 18.08 on 7/2. European markets close the day and week higher as the Stoxx Europe 600 index has risen for four straight sessions, up 0.6% on the week (first advance in three weeks, leaving it down 1.8% for the year). Germany’s DAX rose 0.3% to end at 12,496.17 and the FTSE 100 index closed up 0.2% to end at 7,617.70.
· Nonfarm payrolls for June rose 213K, topping the 195K estimate while the government raised the number of new jobs created in May and April by a combined 37K (244K new jobs were created in May instead of 223K and April’s increase was raised to 175K from 159K). The unemployment rose to 4% from 3.8% (3.8% was also the estimate), as the participation rate rises to 62.9% from 62.7%. Hourly wages rose 5c, or 0.2%, to $26.98, slightly below the expected 0.3% increase
· U.S. trade deficit for May narrowed to (-$43.1B) from ($46.1B) in the prior month and below the (-$43.6B) estimate; imports rose 0.4% in May to $258.38B from $257.32B in April, while exports rose 1.9% in May to $215.33B from $211.24B in April
· Energy futures were mixed, with WTI crude rising 86c or 1.18% to settle at $73.80 per barrel, while Brent prices slipped again on global trade tensions and increased Saudi production, narrowing the spread between the two. WTI crude got a lift after reports the Syncrude oil sands project could be offline longer than expected, potentially until the end of August, providing a boost for Canadian crude oil prices. One firm (Haywood Securities) noted based on their ‘‘boots on the ground’ contacts, they believe the timeline to ramp back to full capacity is now likely September, which would add continued support (and potentially upside) to current oil prices. Also supportive of oil prices, Bank America in a note today suggested that an Iran oil export halt could send prices to $120 per barrel. The concerns of possible disruptions in Libya, Canada, Iran, and Venezuela, a fear that maybe things are going to get tight, has rallied oil to recent 4 year highs…but concerns that Saudi Arabia was pumping more oil led prices lower by -0.5% this week.
· Gold prices slipped on Friday, down -$3.00 or 0.2% to settle at $1,255.80 an ounce after a mixed jobs report reading (added more jobs than expected last month, while the unemployment rate edged slightly higher on slower wage increases). For the week, gold prices eked out a small 0.1% gain, bouncing off its 2018 low earlier this week.
· The U.S. dollar was broadly lower, falling against most major counterpart currencies, logging a decline for the week as the dollar index traded as low as 93.92 before edging back above the 94 level. The euro held gains all day vs. the dollar, up 0.4% at 1.174 (off overnight lows of 1.168); the yen also gains ground against the dollar as the greenback falls despite the stronger jobs report reading (though unemployment rate ticked higher and wages missed estimates). The Canadian dollar added to recent gains, as the U.S. dollar falls to 3-week lows at $1.3085 (first move below $1.31 since the middle of June), as oil prices rise. The Mexican peso has bounced the last few days after new President-elect Andres Manuel Lopez Obrador made market-friendly commentary, sending the peso toward its 200-day moving average, and close to the 19 level.
· Treasury market’s rise early, sending yields lower (though pares losses); the benchmark 10-year yield fell as low as 2.81% before partially bouncing; the shorter-term 2-yr yields also dipped 2 bps to 2.54% despite the bullish jobs report reinforcing expectations for the Fed to remain on track for its 4-rate hikes this year. The German 10-year bond yield dropped to its lowest in over 5-weeks at 0.281%, tracking US yields. The jobs data was mixed as the bullish headline job adds was accompanied by a rise in unemployment to 4% from 3.8% on slowing wage gains. The gain in bonds also follows an escalation of a tit-for-tat tariff dispute between China and the U.S. that took a more substantial turn earlier in the day.
Sector News Breakdown
· Retailers; PSMT shares slumped as quarterly earnings missed by 2c on revenue beat, while June club sales rose 5.9%; FIVE tgt raised to $110 at Guggenheim from $75 despite the shares’ doubling over the past year—including a 50% one-week gain; LULU positive mentions after analyst meeting as KeyBanc said company remains on track to reach its 202 goals; HELE to report earnings next Monday
· Auto’s; TSLA shares fell early after Barclay’s said they think fundraising is in the works as it seems that Tesla has been much more aggressive in its push to communicate positive data points. After a good day for autos (FCAU, GM) and suppliers (BWA, LEA) as the U.S. 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, group giving back some gains as tariffs between China and U.S. kick in today; German luxury automaker BMW said that it will be unable to “completely absorb” a new Chinese 25% tariff on imported U.S.-made models and will have to raise prices on the vehicles it makes
· Casino, Lodging & Leisure; it has been a rough week for casino stocks after softer than expected Macau June GGR data, hitting shares of LVS, WYNN, MGM and MLCO (group mixed today despite rally in broader market); in cruise lines, CCL was downgraded to hold at Argus as believe that the company faces a range of near-term challenges, including difficult prior-year comparisons, unimpressive advance bookings, and rising fuel costs
· Baker Hughes (BHGE) weekly total rig count showed total rigs rise 5 to 1,052, with oil rigs up 5 to 863 (adds rigs for the first time in three weeks) with gas rigs steady at 187 while miscellaneous rigs unchanged at 2
· Refiners; sector was pressured yesterday MPC, HFC, ANDV) after news of sector friendly Scott Pruitt departure from the EPA, on fears it could create uncertainty and place an upward bias on RINs prices near-term (one analyst noted refiners most exposed to RIN price fluctuation are PBF, VLO, HFC), though notes given Pruitt is immediately succeeded by his deputy Andrew Wheeler, the agenda likely remains the same
· Oil services; Guggenheim downgraded CJ, CVIA, HCLP (and removing as our Best Idea), PTEN and SLCA to neutral from buy and no longer assigning a price target, to reflect weakening fundamentals in U.S. completions. Firm said although they have cut their 2018/19 EBITDA estimates for HAL, FTSI, and FRAC as well, they believe they already discount the revision risk, and that they are well positioned to benefit from a 1Q-4Q19 re-acceleration in U.S. onshore activity – lowered PTs for FRAC, FTSI, HAL, WFT to $21, $20, $55, $6 (from $24, $32, $65, $7); TUSK tgt was raised to $49 at Barclays reflecting increased confidence in the duration and probability of TUSK’s contracts with Puerto Rico Electric Power Authority
· Utility stocks continue to extend recent gains, with the UTY rising to around the 680 level (best levels since December), as investors rotate into defensive and interest rate sensitive names as bond yields have pulled back over the last few weeks. The UTY up from the 615 lows in June to 680 as the index rises for 14 of the last 16 trading session (52-week highs today for EXC, FE, NEE)
· Large Cap banks have been under a great deal of pressure the last few weeks, failing to move higher as bond yields have slowly sunk to more than 1-month lows, with the 10-year yield down over 30 bps from its 2018 highs after the FOMC raised rates at its last meeting. The next major catalyst for banks will be earnings, which kick off next Friday morning, as results from C, PNC, JPM and WFC are all expected, followed by mid-cap and regional bank results the week after.
· Consumer finance and lending/payments; SQ was reiterated sell at BTIG saying the company’s withdrawal from applying for an industrial loan company charger with the FDIC highlights its dependence on credit to generate growth; Morgan Stanley on SQ, says its withdrawal of its ILC application does not indicate a reduced commitment to obtaining a bank charter, but refiling with a more robust application, along with improved Balance Sheet post recent debt raise could increase the odds of success; SYF estimates adjusted at Susquehanna as increase our RSA ratio (the ratio of RSA payments vs. total loan receivables) to 4.0% vs. our previous rate of 3.7%, raise NCO assumption to ~5.9% vs. our prior forecast of ~5.6%, and lower EPS to $0.83 (still above consensus) to reflect the RSA and NCO rate changes
· Biotech movers; he biotech sector (IBB) outperformance (rises more than 3%) led by gains in BIIB after positive results led the index to best levels since mid-March; BIIB advanced sharply after the company and Eisai announced positive topline results from final analysis of Phase 2b clinical study of BAN2401 in 856 patients with early Alzheimer’s disease. The highest dose tested (10mg/kg biweekly) demonstrated statistically significant slowing of disease progression as well as plaque reduction compared to placebo at 18 months; RGLS plunges after announcing a strategic update and restructuring that will see it cutting about 60% of its head count; ACIU shares rise, benefits from BIIB positive Phase 2 data on early Alzheimer’s candidate BAN2401, as one of its Alzheimer’s candidates is crenezumab, in Phase 3 development by licensee Genentech
Industrials & Materials
· Transports; Transport index advanced with major averages, rising to around the 10,500 level, holding firmly above its 200-day MA support 10,408 (its 100-day is 10,566), led by early gains in rails (UNP, NSC, KSU), while freight names FDX and UPS lagged
· Wallboard stocks CBPX, EXP, USG had estimates raised at Longbow as their survey indicates at least a portion of the ~10-15% July price increase is expected to stick. Given a more favorable price/cost relationship, wallboard is our preferred category within the building product space over the next 1-2 quarters
Technology, Media & Telecom
· Internet; BABA positive mention at both Susquehanna (remain positive and $305 tgt) but tgt cut to $215 from $235 at SunTrust as firm maintains buy and bullish long-term thesis, but tweak estimates to better account for Ele.me consolidation (later closing than expected) and more reasonable growth expectations for Cloud; IQ shares fell after Chinese news platform Toutiao highlighted a July 2 filing that said Baidu registered to sell part of its stake in the firm, Bloomberg reported; overall, strength in Internet space (NFLX, BABA, TWTR)
· Semiconductors; semi index (SOX) gained, but underperformed the broader NASDAQ; SIMO falls as sees Q2 revenue near the midpoint of $134.3M-$140.8M prior view (below est. of $138.24M) while saying gross margin is also expected to be near the midpoint of the company’s original guidance range of 46.5% to 48.5%
· Software & Hardware; Samsung reported preliminary June-quarter revenue of KRW 58T, below the consensus of KRW 60.3T with the shortfall driven by weaker GS9 demand, weaker LCD OP and weaker Foundry business; MANT upgraded to buy at SunTrust based on superior positioning to further accelerate market share gains and capitalize on federal budget increases; CHKP upgraded to Positive from Mixed by OTR Global following checks that indicate strong Q2 sales trends year-over-year; BBOX rises after company was awarded $10M data center project
· Media movers; GCI was downgraded to underweight at JPMorgan given ongoing concerns regarding print circulation and ad trends, while the firm also cut LKSD to underweight following a strong recent rally and amid ongoing concerns about the health of the core business and are concerned LKSD may not be able to realize promised cost synergies from recent acquisitions which could lead to earnings risks; WWE trades to all-time highs after tgt raised to $92 at BTIG today citing the recent announcement of a U.S. media rights licensing plan with Fox and NBC; SATS said that it doesn’t intend to make an offer for Inmarsat PLC (ISAT.LN), shortly before a deadline set by regulators expired.