Market Review: July, 09, 2018

Terrie AmengualDaily Market Report

Closing Recap

Monday, July 9, 2018

Equity Market Recap

· It was a robust market rally, as major US averages moved back near 3-week highs, led by gains in financials and industrials, while defensive asset classes (utilities, bonds) declined. With today’s gains, the Dow Industrials, S&P 500 Index and Nasdaq Composite closed higher for the 6th time in the last seven sessions, as the Dow Industrials traded up more than 300 points. Recent strong economic data (jobs report on Friday) and high expectations ahead of quarterly earnings season (starts Friday) appears to overshadow worries about rising trade tensions (for now) after China and the U.S. each implemented trade tariffs on Friday. The financial sector posted its biggest one-day advance in a month, led on rising Treasury yields, while utility stocks plunged, falling over 3% on the day. With the move, the Dow turned positive for 2018, and closes above its 50-day moving average (24,634) for the first time in nearly three weeks. The dollar rose, while the pound fell as U.K. Foreign Secretary Boris Johnson’s resignation increased the risk British Prime Minister Theresa May will face a leadership challenge. Sterling pared losses after it was announced a vote was not imminent. Treasuries slipped while metals climbed; gold, copper and aluminum were all trading higher, while oil also turned positive late day.


· Oil ends little changed, bouncing off lows; WTI crude ends higher by 5c at $73.85 per barrel (off earlier lows of $72.99), while Brent oil prices advanced more than $1 above $78 per barrel. Recent concerns of possible disruptions in Libya, Canada, Iran, and Venezuela, fears 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 -0.5% last week. Bloomberg noted Canadian disruption has been instrumental in helping stockpiles at the key storage hub of Cushing, Oklahoma, to fall by 18% in the last three weeks to a three-year low. Gold prices close at 2-year highs; August gold prices rose $5.90, or 0.5% to settle at $1,261.70 an ounce, its highest settlement since June 25th.


· The U.S. dollar was mostly higher as the dollar index (DXY) ended higher, topping the 94 level (overnight lows 93.71), led by a gain against the British Pound. Outside of the volatility in the pounds, currency markets were little changed. The dollar ended little changed vs. the euro at 1.175, while rising against the yen and Canadian dollar, but the action was in the UK. The Pound fell off overnight highs of 1.3363 to end lower around 1.325, down -0.2% following the resignation of Brexit official David Davis and as Boris Johnson resigned from the U.K. government, tipping Prime Minister Theresa May deeper into crisis.

Bond Market

· Treasury prices weakened, sending yields higher as money rotated out of defensive and safe haven assets such as bonds, and into equities which extended last week’s gains. Markets (for today at least) ignored escalating trade tensions and focused on upcoming earnings and market momentum. The yield on the benchmark 10-year Treasury note rose 3.7 bps to 2.856%, while the 2-year note yield rose over 3 bps topping 2.56%. Yields are bouncing off Friday’s decline after a stronger-than-expected rise in June nonfarm payrolls was offset by a rise in the U.S. unemployment rate rose to 4% from 3.8% while wage gains remained subdued.

Other Interesting tidbits

· S&P 500 companies are on track to repurchase up to $800B in shares this year – a total that would top 2007 record, the WSJ reported. A full 57% of those companies, however, are trailing the S&P 500’s 3.2% advance in 2018 – that’s the highest ratio underperforming since 2008.

Sector News Breakdown


· Retailers; TIF was removed from the US 1 list at Bank America following the expiration of its 12-month term on the list; overall, consumer discretionary, apparel retailer names underperformed in the context of overall market gains as JWN, M, AEO, ANF, URBN, GPS all down over 1%

· Consumer Staples; HELE shares jumped after Q1 sales and adjusted EPS beat estimates this morning; Dow component PG was downgraded to hold at Jefferies and tgt cut to $79 citing slowing market growth, volatility in emerging markets, U.S. retail difficulties, and FX; PEP to report earnings tomorrow morning in the beverage sector

· Housing & Building Products; TOL mentioned positively in Barron’s saying shares could climb 24%, according to an RBC Capital Markets analyst saying the company appears significantly undervalued next to its peers after dropping 23% this year

· Casino, Lodging & Leisure; in parks, Wells Fargo downgraded shares of SEAS and SIX valuation, negative seasonal trading patterns and incremental FX related UK/Brazilian headwinds, despite ongoing favorable consumer fundamentals and the key Q3 just starting; in cruise lines, RCL with positive mention in Barron’s saying cruise industry concerns seem overdone; in gaming/casino space, group looks to rally (WYNN, MLCO) after soft Macau June numbers last week as Morgan Stanley issued a Q2 forecast for gross gaming revenue of $9.2B (+17% Y/Y, -6% Q/Q)

· Auto’s; DLPH was upgraded to overweight at Morgan Stanley with $55 PT, and is now OW both powertrain suppliers, with a preference for BWA/notes both stocks have traded off recently on trade dispute concerns and WLTP, but believes these concerns create an opportunity; auto complex rebounded with trade tariff fears easing on the day, with gains in autos and suppliers


· Oil services; Citigroup reduced estimates for the SMID frac companies incorporating a range of rate deflation (5-10%) and extra-ordinary downtime (3-10%) which should end newbuild orders (based on payback math). The result is sizable EBITDA reductions given operating leverage with cuts of 9%/29% to 2018/19 on average across the pumpers. They downgraded CJ to neutral given limited free cash generation in 2019, while LBRT and FTSI (both Buy) are preferred names

· E&P sector; APC boosted its stock buyback by $1B, as adds $500M to debt reduction plan/says moves raise the aggregate equity and debt-buyback programs to $5.5 billion, in addition to recent boost of about $400 million to its common dividend; RRC splits its CEO and Chairman roles, naming current independent director Greg G. Maxwell chairman, and will name two others to the board immediately

· Utilities in general fall as defensive stocks take a breather following recent market outperformance; the UTY at lows down -2.6% as bond yields inch higher and investors rotate into financials and industrials (and out of defensive) UTY down from 2018 highs around 680, holding just above the 658.83 200 day MA support; FE, XEL, DTE, AEP shares down over 3%


· Large Cap banks rise to start the week strong, with solid gains for large caps JPM, C, GS, WFC, BAC early, ahead of earnings this week for a few large cap; in lending and services, SC was downgraded to neutral at JPMorgan as believes higher oil prices represent an increasing risk for the U.S. consumer and thinks the stock’s upside is limited; COF was upgraded to Outperform at Oppenheimer with a $113 tgt as the delinquency formation is improving and Q2 expectations seem too low


· Managed care stocks (UNH, AET, CI, HUM, AMTM) shares active after the Trump administration halted billions of dollars in payments to health insurers under the Obamacare healthcare law, saying that a recent federal court ruling prevents the money from being disbursed. The Centers for Medicare and Medicaid Services, which administers programs under the Affordable Care Act, said the action affects $10.4B in risk adjustment payments

· Biotech movers; PTCT reports data from its Translarna Phase 2 study showed safety and pharmacokinetic profile of Translarna in children from two to five years with nonsense mutation DMD was consistent with that for older children; KMPH said results from its efficacy and safety trial of KP515 showed statistically significant improvement

· Pharma space; SPRO announced preliminary positive results from its single ascending dose and multiple ascending dose Phase 1 clinical trial of oral Carbapenem antibiotic SPR994; CTIC shares fell after PIXUVRI combined with rituximab in comparison to gemcitabine combined with rituximab in patients /aggressive B-cell non-Hodgkin lymphoma didn’t meet primary endpoint; DOVA downgraded to Market Perform from Outperform at Leerink noting the stock has performed strongly (+23%) and has outperformed the market since the approval of Doptelet; ACAD slides after a report by the Southern Investigative Reporting Foundation’s Roddy Boyd raised major concerns about the benefits and risks of the company’s sole drug, Nuplazid, as well as Acadia’s sales tactics

· Healthcare suppliers and services; BVX to sell its core business segment and Bovie brand to Symmetry Surgical for gross proceeds of $97 million in cash; in services, CVS was resumed coverage with a buy at Citigroup while assumes WBA with a neutral; DEPO shares jumped after a court filing shows the company reached a settlement in its patent dispute against closely-held Purdue Pharma

Industrials & Materials

· Industrials & Machinery; Wells Fargo said their U.S. HVAC channel check was the strongest in 5 years, with 75% of respondents indicating demand was better than expected in June and the bulk of respondents indicating that price realization is high (said results positive for IR, LII, EMR); ADM upgraded to neutral at JPMorgan ahead of what they expect to be a very strong Q2; agricultural stocks DE and CAT were early leaders in the S&P 500 index

· Transports; Dow Transports outperformed major averages, rising more than 2% or 200 points, topping the 50-day resistance 10,678 – as all 20-components in the index were higher, led by CAR, KEX, EXPD; in rails, Canadian rail CPupgraded to strong buy at Raymond James on recent pullback while CNI was raised to buy at Deutsche Bank; airlines also outperformed

· Metals & Mining; in the steel sector, Deutsche Bank downgraded AKS and RYI shares noting preference remains for mini-mills over integrated/says the steel sector is underappreciated and ~15% too cheap as an overall group, however the recent up-cycle won’t be sustainable; CDE boosts full-year production guidance due to higher grades at its Palmarejo operation as boosts silver production guidance to 13.2M-14.6M ounces from 12.2M-13.8M ounces and also raises gold production guidance; ABX unveils a strategic cooperation plan with China’s Shandong Gold, including potentially working together on acquisitions; copper futures bounce off year lows

Technology, Media & Telecom

· Internet; GRPN shares rallied after a report over the weekend from recode that the discount-selling website is actively seeking a buyer ; BIDU upgraded to overweight at KeyBanc as the firm said its quarterly China market findings left us incrementally more positive on fundamentals at BIDU and JD, while mixed on BABA and TCEHY; TWTR suspends over 70M suspicious accounts in May-June in an attempt to crack down on phony accounts; NFLX tgt was raised to $450 at Barclay’s, latest in many tgt price hikes lately

· Semiconductors; group will be in focus this week ahead of Semicon West meeting for major chip and equipment names; the Philly semi index (SOX) underperformed the NASDAQ today; SOX index holding below the 100-day MA resistance of 1,350…TXN, SLAB, MLNX top decliners

· Internet security; FEYE was upgraded to overweight at Piper and raised tgt to $20 saying channel checks showed a “significant improvement” in demand trends for the company; Piper overall said vendor results this quarter were stronger than Q1, with 9 of 11 vendors having net positive results, whereas only 6 of 10 vendors had net-positive results in 1Q18 (PANW, CYBR, FTNT PFPT top results this quarter); PANW to offer $1.5B aggregate principal amount of convertible senior notes due in 2023 in a private placement

· Media & Telecom; in tower space, AMT was downgraded at Raymond James on valuation, FX trends, Tata and other headwinds; ATUS was upgraded to buy at Guggenheim and raised tgt to $24 on valuation, though remains bearish on the overall trend of heightened direct and collateral pricing pressure from competitive virtual video providers; GOGOshares fell after Guggenheim lowered estimates ahead of the company’s business plan update scheduled for Friday morning


Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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