Thursday, July 12, 2018
Equity Market Recap
· U.S. stocks end the day sharply higher, led by record highs in the Nasdaq Composite index, as markets focused on overnight reports that U.S. and Chinese officials considered restarting the trade conversations, which could culminate in a bilateral agreement. That, coupled with no immediate response from China in retaliation to the additional $200B in tariffs imposed by the U.S. yesterday was enough to lift global markets ahead of the unofficial earnings season kick-off tomorrow morning with big banks JPMorgan, Citi and Wells expected. The Nasdaq Composite index traded to a fresh all-time high today, as the Nasdaq-100 had touched record highs earlier in the session, led by gains in FB, MSFT, AMZN (all touch record highs) among others. There was one deal in the semi space with AVGO acquiring CA in an $18B acquisition (which sent AVGO shares plunging). Transports recover after yesterday’s AAL lowered guidance related pullback while DAL issued mixed results today with a softer outlook amid rising oil prices. Oil prices close little changed, failing to recover after WTI crude plunged 5%, while bonds and the dollar was steady. Somehow, U.S. stocks have managed to put behind the additional tariffs on Chinese goods last Friday (to the tune of $200B) and higher inflation readings the last 2-days (PPI and CPI), with the consumer price reading the highest in over 6-years, as major averages rise into earnings. President Donald Trump reaffirming the U.S.’s commitment to NATO this morning and commentary that everyone has agreed to “substantially up their commitment” in regards to NATO regarding defense spending also helped sentiment.
· European markets rebounded in solid fashion after yesterday’s losses amid heightened concerns of a global trade war. The Stoxx Europe 600 index rose 0.8% to close at 384.37, after falling 1.3% on Wednesday. The U.K.’s FTSE 100 index rose 0.8% to 7,651.33, and Germany’s DAX 30 index rose 0.6% at 12,492.97.
· Philadelphia Fed President Patrick Harker said Thursday he still favors only one more interest-rate hike this year even with fresh data released showing consumer price inflation rising at fastest pace in six years. Harker said he was open to supporting two interest-rate hikes this year, but only if inflation accelerates further.
· Fed Chairman Jerome Powell said it is uncertain how the Trump administration’s fight to lower trade barriers will turn out, and said he could imagine situations which could be “very challenging” for the Fed, for instance where inflation is going up and the economy is weakening.
· Consumer prices (CPI) for June rose 0.1%, smaller than the 0.2% estimate, a contrast to yesterday’s “hotter” PPI reading that topped views. Core CPI rose 0.2%, in-line with economist forecasts, while YoY, core CPI rose 2.3% (also in-line). Headline CPI for a 12-month pace of 2.9% from 2.8%, marking the highest level in more than six years, the government said
· Weekly Jobless claims fell 18K to 214K, well below the 225K estimate, back down near the 49-year lows; the 4-week moving average slipped by 1,750 to 223,000; prior week claims revised up to 232k from 231k; continuing claims fell 3K to 1.739M in the week ending June 30
· The 30-year fixed mortgage rate for week ended today rose to 4.53% from 4.52%, Freddie Mac said; 15-year rate avg 4.02%, up from 3.99% a week earlier; 5/1-year ARM rate avg 3.86%, up from 3.74% a week earlier.
· WTI crude ends the day down a nickel at $70.33 per barrel (highs $71.24 and lows $69.23), while Brent prices rally $1 after yesterday’s 7% declines. The move in crude came after a monthly report from the International Energy Agency hinted at a slowdown in crude demand and revealed an uptick in global supplies. Markets also looked to the resumption of Libyan oil exports and mulled the impact of the U.S.-China trade dispute on the global economy, and oil demand. Gold prices end higher, rising $2.20 or 0.2% to settle at $1,246.60 an ounce.
· The U.S. dollar index (DXY) ends little changed after yesterday’s broad outperformance on trade tensions and a pick-up in inflation (PPI). The dollar failed to push higher after the mixed CPI reading today as the Mom figure was lighter than forecasts (up 0.1% vs. est. 0.2%), though the YoY figure of 2.9% was the highest level in 6-years. The euro was unchanged from yesterday against the dollar at 1.1674. The dollar was also little changed vs. the British Pound just above 1.32. Bitcoin prices extend losses today, down another 2% trading under $6,200. The Mexican peso resumed its recent rally, trading to its best levels in about 10-weeks as the US dollar fell to lows down -1.6% at 18.75 (lowest levels since late April and off June 15 highs 20.96). The U.S. dollar advanced to a fresh six-month high against the Japanese yen, rising above 112.50 following the latest development in the trade dispute between the U.S. and China.
· Treasury markets end little changed, with the yield on the 10-year benchmark at 2.85% most of the trading session following slightly “hotter” inflation data the last two days, with PPI topping estimates yesterday and headline CPI YoY touching its highest level in 6-years of 2.9% (though CPI MoM rose 0.1%, less than the 0.2% est.) The 30-year Treasury bond was around 2.95% and the 2-year note yield edged 1.2 bps higher at 2.590%, retouching its loftiest rate since late July 2008. The U.S. Treasury sold $14B in 30-year notes at a yield of 2.958% vs. 2.954% prior to auction, with the bid-to-cover (demand) at 2.34 vs. 2.38 prior and indirect bidders awarded 61.9% of auction and 10.3% too direct bidders.
Sector News Breakdown
· Retailers; COST reported June comp sales ex: fuel up 7.7%, topping the 6.2% estimate while also guided 2019 EPS to $8.08, above the $7.75 estimate; LB reported Victoria’s Secret June comp sales down (-1%) vs. est. up 2.9%, while total L Brand comps rose 3% vs. est. 2.9%, helped by Bath & Body Works comps gain of 10%; OTR Global said UAA Q2 apparel and footwear growth facing headwinds; CATO June comp sales were flat vs. estimate of up 4%, sending shares lower; BKE June comp sales fell (-1.2%), below the up 1% estimate; ZUMZ missed comp the estimate by 120bps and was the first monthly comp miss (2.7% vs. 3.9%) for this brand since March of 2017
· Auto sector; RBC Capital raised tgts prices on AAP and ORLY as well as Sector Perform-rated GPC heading into the 2nd quarter; auto stocks failed to rebound (GM, F, DDAIF, FCAU) despite reports that China and the U.S. are open to resolving their differences
· Restaurants; PZZA announced founder John Schnatter resigned as the company’s chairman on Wednesday night after fallout over his use of the n-word during a conference call
· Oil services and equipment; Morgan Stanley shifts rating in favor of land drillers as upgrades NBR and PDS to overweight from equal weight as sees both companies continuing to realize strong pricing and activity levels in their U.S. businesses; reduces completions exposure, though not entirely with downgrades of CJ and SLCA to equal-weight, SPN to underweight
· E&P sector; Morgan Stanley initiates coverage on names, with top picks: COP, OXY, CLR, saying the stage is set for E&Ps to deliver attractive FCF and capital returns, supporting continued strength in the group. Oil transport bottlenecks in the Permian will slow US growth, reinforcing a bullish oil backdrop.
· Other top stories; COP expands its 2018 share buyback plan to $3B from $2B; WFT announced that it has entered into an agreement with ADES International Holding Ltd. for the sale of its land rig operations in Algeria, Kuwait and Saudi Arabia, as well as two idle rigs in Iraq
· Large Cap banks in focus ahead of earnings start for big banks JPM, WFC, C and PNC tomorrow morning; overnight OZRK reported in-line Q2 EPS, but lower net interest margin (NIM) of 4.66% vs. Bloomberg est. 4.69% weighed on shares; one analyst noted comments from OZRK suggesting that competitors in commercial real estate are getting more aggressive with credit structures and pricing (CFR, WAL, PNFP related names); CBSH rises after quarterly results beat; BK was downgraded to market perform at Raymond James on a lack of a near-term catalyst and as a disappointing DFAST/CCAR review will limit capital return over the next four quarters; SYF shares slipped late afternoon after Bloomberg reported WMT said to give SYF card deal to COF
· REITs; FPI rebounds after 30% slide yesterday, defended itself against short-seller call yesterday, while also defended at both B Riley (upgraded shares to buy) and Baird (named as “fresh pick”); SunTrust said mall operators (MAC, DRE, PEI) will be most impacted by the new accounting rule that requires REITs to expense certain internal leasing and legal costs that may have previously been capitalized and excluded from FFO
· Insurance; Raymond James comments on upcoming Q2 preview, upgrading HALL to outperform as they we expect consolidated results to improve over the next 24 months, while they downgraded CNFR and AFG both on premium valuation
· Asset managers; VRTS preliminary total assets under management rises to $91.6B as of June 30, 2018 from $89.1B at the end of March; IVZ preliminary month-end assets under management (AUM) of $963.3 billion, a decrease of 1.4% month over month; AB preliminary assets under management decreased to $540 billion during June 2018 from $541 billion at the end of May; APAM assets under management as of June 30, 2018 totaled $114.2 billion; TROW June Preliminary AUM $1.04 trillion
· Healthcare; JNJ was upgraded to neutral from sell at Goldman Sachs saying operational earnings revisions are now better understood by investors at current share levels, while the firm downgraded PRGO to sell as sees no meaningful risk to estimates but expects the business to drift due to a lack of meaningful new launches in the pipeline; ZGNX shares jumped after a successful outcome on a second Phase 3 clinical trial, Study 1504, evaluating ZX008 (low-dose fenfluramine hydrochloride) in children and young adults with rare and severe form of epilepsy called Dravet syndrome; GLMD rises after Cantor initiated coverage with an overweight and $59 tgt calling it an undervalued player in NASH field
Industrials & Materials
· AG & Machinery; VMI lowered its 2018 profit outlook (to $7.55-$7.65 from $8.00-$8.10) and said continued low net-farm income levels and uncertainty around impacts of tariffs and trade policies are causing farmers to delay irrigation purchase decision (AGCO, LNN active on news)
· Transports; airlines again in focus after DAL with mixed Q2 results as EPS beat by 5c, but sales slightly missed and also cut its year EPS forecast to $5.35-$5.70, from $6.35-$6.70 in March (est. $5.77) citing an extra $2 billion in costs from higher fuel prices this year. Recall that airlines sunk on Wednesday after lower CASM, TRASM guidance from AAL; JBLUJune traffic rose 7.8%, capacity up 5.9%, load factor was 87%, up 1.5 points YoY/sees 2Q RASM down about 1.2%. In package delivery, Citigroup positive on FDX after mgmt meetings and that trade concerns create a compelling entry point; SAVE rises on positive outlook
· Metals & Mining; commodities rebounded after a selloff yesterday that was triggered by renewed concerns about the U.S.-China trade conflict; gold miner ABX reiterated 2018 gold production (4.5-5.0 mn oz) and cash cost ($540-575/oz) guidance and continues to expect higher production and lower costs in the 2H18; RIO agreed to sell its interest in Grasberg , the world’s second-biggest copper mine, for $3.5B
· Defense related movers; FLIR’s Indigo presented evidence it had independently developed its ways to make infrared cameras and a jury “reasonably found” there was no theft of RTN trade secrets, a US court revealed; EGL shares up after Reuters reported the U.S. defense contractor is exploring a sale, amid a wave of consolidation in the U.S. government services sector, and that SAIC and CACI are both interested bidders https://yhoo.it/2L4GGkB ;
Technology, Media & Telecom
· Tech strength: 52-week highs for several names in tech today: AMZN, FB, CRM, MSFT, EA, ATVI, ACN, NTAP, FISV, CA, VRSN, PYPL (some at record highs)
· Internet; NFLX was downgraded to neutral at UBS following rally in shares; AMZN traded to a fresh intraday record highs as did shares of FB; overall Internet space was strong on the day as investors jumped back into high beta names; TWTRestimates raised at Goldman after checks
· Semiconductors; AVGO shares plunged as news that it would acquire CA for $44.50 per share, in a deal valued at $18.9B https://on.mktw.net/2L2QHio was not well received by Wall Street, with several analysts downgrading the stocks following the news; NXPI shares active after CNBC’s David Faber said the QCOM/NXPI deal is likely to be terminated if there is no Chinese approval by July 25 date, unlikely that it will be extended; overall semi index (SOX) bounces off early lows, as strength in several names (TXN, AMD, MU) helping offset the declines in AVGO
· Media movers; CMCSA raised its offer for Sky to GBP14.75 per share, valuing the company at $34 billion. That is a 5% premium to an offer FOXA announced earlier Wednesday and 18% above Comcast’s earlier bid. https://on.mktw.net/2zvpOz3 ; Intelsat (I) shares jumped after the FCC voted 4-0 to seek comments on rules for letting terrestrial services use airwaves long dedicated to the satellite services
· Software movers; video gamers rally with EA, ATVI trading to all-time highs, while TTWO also rallied; optical stocks (LITE, ACIA, AAOI) rally on hopes of easing tensions between China and the U.S. after Commerce Dept.’s announcement that it signed an escrow agreement with ZTE; CRM shares trade to another record high (up for a 6th straight session)