Wednesday, July 11, 2018
Equity Market Recap
· Stocks sunk on Wednesday, snapping the 4-day winning streak for the Dow Industrials and S&P 500 as renewed trade war fears hurt stocks and commodity prices. Overnight, the U.S. issued an additional $200 billion of Chinese goods up for U.S. tariffs, sending many sectors lower. Metal prices slumped across the board (copper and gold to 1-year lows), as concerns grow about the impact of US tariffs on the Chinese economy, while autos (GM, F), handbags (KORS, TPR), industrials/agriculture (CAT, MMM), semis (NXPI, MU) also slumped on the potential impact from the trade wars. Transports were among the hardest hit, led by airline weakness as AAL lowered its Q2 outlook. However, the energy sector fell the most, as WTI crude fell 5% and Brent 7% amid a surging dollar, reports Nigeria production back online and the trade fears. The SmallCap Russell 2000 index fell to lows 1,683 after briefly touching record highs of 1,708.56 yesterday.
· Currency markets were volatile as the U.S. dollar posted sharp gains vs. rival currencies, while bonds edged higher. Trade/tariffs remains a key market driver, but the start of quarterly earnings in the next few days likely to garner much attention. Economic data today showed rising inflation (PPI), while wholesale inventory data was stronger. Utilities outperform amid sizable selloffs in materials and industrials. European stocks fell as the latest in the U.S.-China trade conflict and concern about the future of Prime Minister Theresa May’s Brexit plans after two cabinet ministers resigned halted a six-day advance.
· Producer Price index (PPI) hotter than expected as wholesale cost of goods and services rose in June at the highest yearly rate in almost seven years. The producer price index rose 0.3% June, topping the 0.2% estimate while core prices (ex: food & energy) also rise 0.3% vs. the 0.2% estimate). The 12-month rate of wholesale inflation climbed to 3.4% from 3.1%, marking the highest perch since the waning months of 2011. Core inflation rose 2.8% YoY vs. est. 2.6%
· Wholesale Inventories rose 0.6% in May, topping the 0.5% estimate; May wholesale inventories increased to $633.5B vs $629.9B in prior month, while April inventories unrevised at 0.1%; wholesale sales rose 2.5% in May after rising 1.4% the prior month
· Oil prices tumbled -$3.73, or nearly 5% to settle at $70.38 per barrel, even after the EIA reported the biggest weekly supply drop in nearly 2 years. The Energy Information Administration said domestic crude supplies plunged by -12.6 million barrels for the week ended July 6, well above the expected -3.7M barrel draw…but that failed to lift oil prices as global factors weighed. Prices dropped overnight after President Donald Trump escalated a trade war with China, heightening fears that global economic growth could be caught in the cross-fire. Also news that Libya’s state oil company said it would reopen four export terminals, lifting its force majeure on eastern oil ports after the ports were handed back from an armed faction added to glut fears. OPEC also said earlier expects there will be more than enough new oil supply from outside the group to meet extra demand next year, as U.S. shale continues to grow. Oil prices had risen to over 3-year highs last month as disruptions from Canada to Venezuela, along with renewed U.S. sanctions on Iran, stoke fears of a supply crunch despite a pledge by OPEC and its allies to boost production.
· Gold prices fell sharply late day in response to the spike in the US dollar; gold futures fall -$11.00 or 0.9% to settle at $1,244.40 an ounce, back near lowest levels in a year. The precious metal has failed to get lift with defensive rotation in stocks, as the potential demand due to the trade tariff impact on metals has overshadowed its safe haven status. Copper futures another casualty, logging its lowest settlement in almost a year as well, down about $2.744 a pound, or 9.6c, or 3.4%, to mark the lowest finish since late July 2017.
· The dollar surged midday, as the buck moved higher vs. most counterpart currencies. The euro round tripped on the day, initially bouncing off overnight lows (1.1695) after Reuters reported that policymakers are split over when the ECB might raise interest rates next year, with some officials saying an increase is possible as early as July 2019 and others rule out a move until autumn. However, the euro fell to fresh session lows (off highs 1.1758) down more than -0.5% as the dollar rallied late day on trade fears. The Canadian dollar also round tripped, erasing early losses after the Bank of Canada raised benchmark overnight interest rate to 1.5% (as expected)…but the dollar regained momentum late day vs. the CAD, rising above 1.316 (after lows 1.3065) on tariff concerns. The Turkish Lira fell more than 3% vs. the USD after Erdogan said sees lower rates ahead. The dollar touched 6-month highs vs. the yen, rising as high as 112.17.
· Treasury market’s rise slightly as yields remain above its earlier lows following the surge in wholesale sales, which followed hotter PPI (inflation) data earlier and the downdraft in stocks. The 2-year yield above 2.57% from under 2.55% prior, the 10-year 2.84% from 2.825% lows (off 2.86% highs) and the 30-year held near 2.95% from 2.935% lows. The U.S. Treasury sold $22B in 10-year notes at a yield of 2.859% (vs. 2.862% prior to auction) with the bid-to-cover (demand) at 2.57 vs. 2.59 prior auction and indirect bidders awarded 65% of auction and 10.5% to direct bidders. Not too exciting of an auction, but better than the lousy 3-year yesterday.
Sector News Breakdown
· Retailers; KORS, TPR, M among hardest hit retailers as latest round of tariffs by the US include items such as handbags; CONN was upgraded to buy at Stifel as came away from mgmt meetings confident that the recent indications of improvement in the credit segment should continue; SHOO downgraded to neutral at Wedbush saying Street expectations price in optimism and have risen above management’s guidance; WDFC rebounded after cutting its year forecasts
· Restaurants; DNKN named David Hoffmann CEO and said he will remain president of Dunkin’ Donuts U.S., while Nigel Travis, who became CEO in January 2009, is retiring and will become executive chairman; DPS positive mention by OTR Global saying checks indicate strong demand for leading value deals, continued growth of Rewards; MCD downgraded at Cleveland Research; JACK was added to the best ideas list at Wedbush; PZZA shares fall to 52-week lows
· Housing & Building Products; furniture and home product stocks also hit by new tariffs announced, with Goldman Sachs saying shares of WSM, RH, HOME could be hit as all furniture imported from China ($28B) will be covered vs. Goldman economists’ initial expectation of $11B, adding adds that China supplies 65% of furniture imported into U.S.
· Casino, Lodging & Leisure; amusement park names fall, led by FUN after it reported preliminary net revenues through July 8 fell 2% y/y to ~$563M, on a 3% decline in attendance (shares of SEAS and SIX also moved in sympathy)
· Inventory data bullish; overnight the API reported U.S. crude supplies fell by -6.8M barrels for the week ended July 6, showed supplies of gasoline down -1.6M barrels, while distillate stockpiles climbed by nearly 2M barrels. The EIA data even more bullish, as weekly crude stockpiles fell -12,633M barrels, more than the -3.78M draw forecast, while Cushing crude fell -2,062M barrels; EIA did show Distillate inventories rose a greater than expected 4.125M barrels vs. est. 1.0M
· Utilities; sector has been very volatile the last few days, falling with the UTY falling over 3% on Monday as investors rotated out of defensive assets and into riskier ones…but utilities have rebounded off the Monday low of 651.28 (briefly below the 200-day support 658.70), having since moved back above 670, rising 1% today; FE, DTE, ETR, AES, AEE among gainers; SRE priced 9.75M shares at $113.75 per share
· Integrated oil; Barclay’s with sector call as they replace CVE with COP as Top Pick following strong share performance by CVE (up 26% YTD vs. Canadian majors +13%)…upgrades PBR/PBRA to overweight (from UW and EW prior, respectively) given the steepest valuation discount in analysis, which they believe more than outweighs the underlying political risk…upgrade HSE and IMO to EW given more pronounced than previously estimated discounts to NAV, while downgrade HESto underweight given the steepest premium in our study to NAV
· E&P sector; sector broadly lower with oil price decline, as equipment, E&P, drillers fall; Susquehanna initiated coverage of CXO, FANG, and PE with Positive ratings and CDEV with a Neutral. Overall, we think concerns about Permian bottlenecks have resulted in attractive risk/reward in names exposed largely to in-basin prices; CRK rises as obtained commitments from a syndicate of thirteen banks for a new five year reserve-based revolving credit facility with an initial borrowing base of $700M
· Large Cap banks were modestly lower as bond yields held steady, as markets prepare for the start of earnings season; OZRK reports tonight, CBSH tomorrow and then big banks JPM, C, WFC, and PNC on Friday morning. In the insurance sector, RBC Capital said insurance stocks are poised for a potential rebound, as valuations have fallen to a level where expectations are low and worries are priced in. Asset managers; BEN preliminary month-end assets under management of $724.1 billion at June 30, 2018, compared to $732.8 billion at May 31, 2018; CNS preliminary AUM $602B as of June 30th, an increase of $938M from May 31, 2018
· Large Cap Pharma; PFE said will organize into three businesses creating a new hospital unit and that the changes are not expected to impact 2018 financial guidance; PFE also said that it would “defer” some recent drug-price increases, reversing course after President Donald Trump criticized the company of raising the prices of more than 40 drugs last week (shares of other Pharma names moved lower early on PFE drug price news: LLY, BMY, MRK, NVS); ABBV shares fell after an update on a phase 3 study evaluating the addition of ibrutinib to a chemotherapy regimen failed to meet its primary endpoint of improving event-free survival
· Healthcare services and suppliers; Pharmacy benefit managers (CVS, ESRX) active after Pfizer deferred drug price hikes after President Trump’s criticism; MYGN surges after being upgraded to Overweight at Morgan Stanley after raising estimates by more than 20% given his view that its earnings profile is “dramatically changing/raise tgt to $55; ANGOshares fell after earnings
· Biotech movers; BCRX raised its forecast for 2018 net operating cash use and operating expenses as a stand-alone company based on development plans and costs from the terminated merger pact announced last night with IDRA; BCRX and IDRA announced that their proposed merger will not proceed because a majority of BCRX shareholders did not vote in favor; JAZZ was downgraded to Equal-weight at Morgan Stanley
Industrials & Materials
· Transports; Airlines fade after AAL lowers its Q2 CASM view to 2.5% ex-fuel from prior 3.5% and lowers TRASM Q2 guidance to 1%-3% from prior 1.5%-3.5% view citing lower-than-expected domestic yields; BMO Capital positive on rails UNP and CP ahead of earnings and see favorable set-up for CSX and CNI; in truckers, JPMorgan downgraded WERN to underweight saying estimates appear too high in 2019 unless the company can boost rates and productivity while growing the fleet, while upgraded CHRW to neutral noting pullback in shares
· Chemicals stocks such as LYB, WLK, OLN active in response to new trade war; diversified chemical stocks such as HUN, DWDP, EMN also move; Citigroup Q2 preview for chemicals as raises 2Q estimates for nearly 50% of coverage led by commodity chemicals (>3%). Heading into 2Q, ALB, MOS, APD, and PX’s results could be better, while see downside risks for PPG/AXTA; WLK was downgraded to neutral at Nomura saying risk/reward now balanced
· Industrial distributors active after earnings results from MSM and FAST; FAST gross margin performance slightly higher than anticipated and June daily sales accelerating more than expected/said it expects a return to more typical organic growth levels after a couple of quarters; MSM shares slide as it forecast 4Q earnings and sales below analysts’ estimates ($829M-$844M vs. est. $848.7M) after mixed Q3 results (EPS beat/sales miss); comps GWW, WCC active
· Aerospace & Defense; TDG was upgraded to Outperform at Cowen and raise tgt to $408 saying fundamental threats to TransDigm’s aftermarket/M&A playbook are abating; AIR reported mixed results that were generally in line with the co’s preannouncement while all aspects of the FY19 outlook were reaffirmed, but Q4 aviation services revenue growth decelerated sharply
· Metals among hardest hit sectors after the U.S. slaps additional $200 billion tariffs on Chinese goods. Nickel, copper are underperforming the group as intensifying trade war increasing investors’ fear that increasing protectionism will hurt global raw-material demand (CENX, AA, FCX, BHP, VALE, X, STLD, CLF among movers)
Technology, Media & Telecom
· Internet; TRIP was upgraded to overweight at Barclay’s with street high $70 tgt saying they believe fundamentals are starting to turn around now and we see a compelling path for the company to grow revenues; Internet giants AMZN, NFLX, GOOGL, FB held up well on the day
· Semiconductors; sector slides after the White House said it will impose 10% tariffs on $200B of Chinese-made products, ranging from television parts to refrigerators (AMD, MU, NVDA); NXPI shares fall after the WSJ reports China is reviewing plans to retaliate against U.S. with additional measures as it doesn’t import enough from the U.S. to match tariffs on a dollar for dollar basis; TXN upgraded to buy at Longbow as expects CY2 industry organic sales and CY3 guidance to come in ahead of consensus
· Hardware and software movers; MSI rallies to 52-week highs after Cowen upgraded to outperform as meeting with management underscores Avigilon acquisition likely to drive greater growth and margin acceleration; JNPR upgraded at OTR Global as checks indicate router and switch sales improved at Juniper partners during Q2; CRM traded to 52-week highs
· Media movers; FOXA significantly lifted its offer price to consolidate ownership of Sky PLC, heating up a bidding war with Comcast Corp. for the British TV broadcaster. Fox raised its bid for the roughly 61% of Sky it doesn’t already own by more than 30%, to GBP14 a share, in a deal that values all of Sky at GBP24.5 billion ($32.5 billion). ; NXST shares jumped after Reuters reported Apollo Global has approached Nexstar about possible acquisition (shares of GTN, SBGI also moved on headlines)
· Telecom; DISH missed deadlines to offer mobile coverage using airwaves it has accumulated, and as a result faces accelerated deadlines to build systems, the FCC said; USM and TDS both downgraded at JPMorgan; large cap telco names T (weaker) and VZ (steady) were mixed after analyst comments