Friday, July 20, 2018
Equity Market Recap
· U.S. stock ended Friday little changed, pulling back from earlier highs as Dow component Microsoft’s stronger earnings and guidance results helped offset escalating tariff worries after President Donald Trump said he was ready to impose levies on $500 billion worth of goods from China. In the end, President Trumps comments about tariffs, currency manipulation by the EU and China, and yesterday voicing his displeasure about the pace of interest rate increases by the Fed was too much for the dollar and bonds, which both turned lower today. Long-dated U.S. government bond yields rose on worries that the president’s comments would encourage Fed Chairman Jerome Powell to slow the pace of rate hikes by the U.S. central bank, which could increase inflationary pressure.
· Busy week of earnings upcoming with nearly 180 S&P companies expected to report next week, and the potential impact from tariffs will be closely watched. Just this week, GE said it expects tariffs on its imports from China to raise its costs by up to $400 million and Alcoa said the tariffs led to an extra $15 million in costs. Investors remain worried about the impact on earnings should the United States’ trade war with China and other major trading partners escalate. So far, 87 companies of the S&P 500 have posted results, of which over 80% have beat consensus estimates, though some have issued cautious outlooks.
· Oil prices end the day higher, bouncing off multi-week lows yesterday and closing back above the $70 per barrel level on reports Saudi Arabia expects to reduce exports in August, easing some concerns of coming oversupply in the market. WTI crude rose $1.00, or 1.44% to settle at $70.46 per barrel (but still down -0.8% for the week – 3rd straight weekly decline) while Brent oil rose 49c to $73.07 per barrel. Also helping support oil prices, a decline in the dollar (lifting beaten up commodity prices) and a weekly rig report showing that oil drillers pared back rigs last week. Rising U.S./China trade war tensions, however, raised expectations of a slowdown in commodity.
· Gold prices end the day higher, with August gold rising $7.10, or 0.6% to settle at $1,231.10 an ounce, bouncing off 1-year lows yesterday (of around $1,210 an ounce) as the dollar slumps for a second day. U.S. President Donald Trump criticized the strength of the dollar and interest rate increases by the Federal Reserve, pushing the greenback sharply lower and making metals more attractive. Still, for the week, gold prices dropped roughly -0.8% along with weakness in copper and silver as well on the week as trade tariffs also weighing on metals.
· The U.S. dollar tumbles to one-week lows, with the dollar index (DXY) dropping more than -0.7% below 94.50 (just one day removed from tapping its highest level of 2018 at 95.65) pressured after President Donald Trump called China and the European Union currency and interest rate manipulators in a tweet. Trump said that “while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day,” China and the EuroZone were robbing the U.S. of its “big competitive edge.” The dollar started its slide yesterday after other comments by Trump, stating that he is not happy about seeing rates go up (referring to the Fed rate hike cycle).
· Moves in currency markets were volatile with the Japanese yen falling -0.9% to 111.50, in part of media reports suggesting the Bank of Japan was weighing changes to its interest rate targets and asset-purchase programs; the euro to highs of 1.173 late day vs. the euro; the Canadian dollar spikes on strong inflation, retail readings as inflation hit its highest level in nearly 6½ years in June, lending further credence to the Bank of Canada’s case for hiking interest rates last week. After taking a drubbing on Thursday in the wake of UK retail sales data (falling below $1.30), the pound was calmer on Friday, holding comfortably above $1.31.
· After a brief spike to highs of $7,679, Bitcoin prices slipped to intraday lows below $7,400 and ending the day lower, snapping its 6-day win streak. If Bitcoin had closed in positive territory, it would mark a 7th straight day of gains, a feat not seen since June of 2017. Bitcoin prices have rebounded of a yearly low last month of $5,791.19.
· Treasury yields jumped on the long-end of the curve, as the 10-year yield topped 2.89%, its highest level this week, while the 30-year yield topped 3% for the first time in a few weeks, though shorter term 2-yrs were steady at 2.59% (down about 3 bps from earlier week highs and best levels in 10-years). The curve yield has steepened by nearly 30 bps vs. the 10 and 2’s, widest in 2-weeks. Comments from Trump about currency manipulation (from EU and China), the fact he didn’t like the Fed on an aggressive rate hike cycle, and that he is ready to go” with tariffs on $500 billion of Chinese imports, all playing a part in bonds moves today.
Sector News Breakdown
· Retailers; SKX shares sink more than 25% following a disappointing outlook and weaker than expected Q2 earnings, prompting downgrades by at least two analysts which say they no longer have confidence in SKX’s earnings trajectory; FIVE was downgraded to neutral at Credit Suisse citing the rally in shares; VFC shares rise after Q1 results topped vies and boosted its FY19 EPS to $3.52 to $3.57 from $3.48 to $3.53 and said direct-to-consumer year rev. is now expected to increase between 11% and 13%, up from previous forecast of up 8% to 10%
· Autos; industry under pressure with F, GM, FCAU, DDAIF, TM falling on trade war concerns and tariffs on auto industry (suppliers BWA, LEA, AXL fall) auto parts/supplier GNTX shares slipped after missing Q2 forecasts saying light vehicle production in North America declined about 3% during the quarter, resulting in lower-than-expected shipments and revenue; HOG sales decelerated in June, citing Goldman Sachs channel checks show, pointing to a slight 2Q EPS miss
· Consumer Staples; PM was downgraded at Cowen as lack of visibility into the potential for accelerating declines in Japan or more deceleration in South Korea gives them pause (stock has rebounded more than $7 off lows yesterday after lower guidance); NHTC shares were down 14% yesterday after reports of alleged China probe/NHTC said this morning they are unaware of any investigation
· Restaurants; YUMC downgraded to underperform at Bank America and cut EPS as expect continued underperformance given 1) a likely peaking trend for KFC, 2) a prolonged process to turn around PH with heavy cost, and 3) headwinds from China’s macro uncertainties
· Housing & Building Products; NVR shares dropped after quarterly results in a week that has been tough for housing and building stocks after weaker housing data earlier in the week sunk shares; a jump in Treasury yields also weighing on the interest rate sensitive names; lumber prices have plunged more than 10% from recent peak highs on tariff concerns
· Casino, Lodging & Leisure; Morgan Stanley updates ests to reflect the latest Macau, Vegas, and state reported data saying broadly 2Q revenue has come in slightly ahead of their forecasts (including Macau) and they raise 2Qe EBITDA for LVS, BYD, and WYNN, leave PENN unchanged, and lower MGM for Macau share (also lower PT to $38). Notes Macau GGR increased 17% in 2Q, above our estimate of 16%, driven by stronger than expected mass (+21%) on weaker VIP (14%); in leisure, SIX was downgraded at Wedbush after FUN guidance last week
· Oil services; two earnings reports today as BHGE shares slipped after missing Q2 earnings expectations, as demand fell for its oilfield equipment/said while overall revenue rose 2% Y/Y and 3% Q/Q to $5.55B, revenue from BHGE’s oilfield equipment business, which includes deepwater drilling, fell 9% Y/Y and 7% Q/Q to $617M, missing estimate around $648M; SLB reported reporting in-line Q2 earnings and revenues, swinging to an unadjusted net income of $430M ($0.31/share) from a loss of $74M YoY/sees Q3 EPS growth of 10%-15% QoQ
· Utility movers; Goldman Sachs upgraded three names and cut one as ETR upgraded to buy from neutral as the stock “continues to trade at a diversified merchant utility multiple despite nearing its transformation to a pure-play regulated utility; AEP upgraded to buy from neutral as sees strong growth at transmission and distribution (T&D) to drive upside; WEC upgraded to neutral from sell on recent renewable project announcements; PEG downgraded to neutral from buy, saying upside looks limited after recent outperformance. Citigroup upgraded DUK to neutral saying with $1.6B equity completed and an additional $350m in DRIP planned for 2018-2022, DUK has dealt with their primary concern about its credit following tax reform
· Some top movers; Bloomberg reported RDS/A is in talks to sell two oil licenses in Nigeria for $2 billion; ESV was awarded a number of new contracts and extensions, with most of the new deals in jack-up rigs, according to its latest fleet status report; Baker Hughes (BHGE) weekly rig count showed total rigs fell -8 to 1,046, with oil rigs down -5 at 858, gas rigs down -2 to 187, and miscellaneous rigs down -1 to 1
· Banks; Trust banks extend losses, falling yesterday after BK mostly in-line Q EPS and revs but said FX and real estate costs impacted expense growth by 2%, while today, STT drops as much as 8% as expects to suspend about $950M of share repurchases and issue equity to finance deal as they plan to spend $2.6B to acquire investment firm Charles River Systems; C raised its quarterly dividend to 45c from 32c; in regional banks, STI helps bounce regional banks as Q2 EPS beat by 18c on lower NCO’s and provisions while NIM of 3.28% was slightly better; INDB jumps on 5c EPS beat, GBCI Q2 core EPS beat estimates; SBNY downgraded at JPMorgan as believes net interest margin pressure will limit share upside (also downgraded at BMO Capital)
· REITs; BDN reported a 2Q18 FFO beat that included a previously discussed land sale gain and unchanged 2018 FFO guidance at the midpoint; EGP posted a clean 2Q18 FFO beat and increased guidance by $0.05/sh at the midpoint
· Card services; industry weak yesterday after AXP revenue numbers missed views, while COF rises today after reported Q2 EPS of $3.22, well ahead of the $2.63 Street forecast, driven by lower credit costs and OpEx, offset somewhat by lower net interest margins.
· Brokers; ETFC Q2 EPS and revs topped views following better SCHW results earlier in week; AMTD reports earnings on Monday in online broker space
· Biotech and Pharma; RHHBY said the FDA has granted Breakthrough Device Designation for its Elecsys Amyloid (1-42) cerebrospinal fluid (CSF) and Phospho-Tau (181P) CSF; ZYNE 4M share Spot Secondary priced at $8.00; ABBV extended losses from yesterday after Citron Research out with cautious comments; TLRY extends gains, rising as much as 30% on second day as public company, after 9M shares IPO priced at $17 (shares rose 31% yesterday); MRSN fell as much as 10% today, adding to yesterday’s 31% pullback after the FDA placed the Phase 1 study of XMT-1522 (downgraded at Leerink today)
· Medical devices & equipment; ISRG shares rise to record highs as Q2 revenue of $909.3M easily tops estimates of $876M and raised procedure growth guidance of 14.5%-16.5% (from 12%-15%); RGEN tgt raised to $56 at Citigroup as remain positive on the outlook as the company pushes further into a healthy bioproduction end market
· Medical services and suppliers; ALGN tgt raised to $425 at Piper as reiterate thesis that competition will not dampen ALGN’s growth profile; ESRX downgraded to neutral at Baird saying PBMs have been under heavy political attack in recent weeks and the stand-alone trajectory is almost impossible to model right now
Industrials & Materials
· Industrial & Machinery; HON shares advanced on Q2 beat and raised both its year profit and sales forecast and now expect organic sales growth to be 5%-6%, segment margin expansion to be 40 to 60 basis points; GE shares fell as Q2 EPS and revs topped views bu said slumping demand for gas turbines will continue to weigh on results for some time, leading it to cut expectations for 2018 free cash flow
· Transports; rails have been active this week on earnings, with CSX and CP jumping mid-week on better results/guidance, while UNP shares slipped as results were not as stellar; this morning KSU mixed quarter as EPS beat by a few pennies while revenue fell short of consensus
· Metals & Mining; CLF Q2 EPS handily topped consensus while revs of $714M also topped ests., sending shares higher; but the move in currency markets and the impact tariffs will have due to trade conflict between US and others continues to weigh on the metals market; softer China data early in the week also taking its toll along with lower year forecast from AA on Thursday
· Chemical sector; PAH agreed to sell its Arysta LifeScience Inc. unit to India’s UPL Ltd. for $4.2B, separating its agricultural and industrial businesses more than a year after first weighing the move; CE shares rallied behind better earnings results
Technology, Media & Telecom
· Semiconductors; sector bounces off lows as SWKS shares dropped as results weighing on sector– as quarter results and guidance ahead of estimates on strong content growth at Apple, improving China market and continued strength in SWKS’ broad markets business, while Craig Hallum said believes guidance would have been even higher if not for significant weakness at Samsung
· Software movers; MSFT trades to all-time record high after quarterly results top expectations and raised guidance on strength across cloud, servers, and PCs (Azure grew a strong 85% CC versus 89% last quarter. Commercial Cloud grew 50% CC versus 55% last quarter); CTXS was downgraded at Baird
· Media & Telco movers; CMCSA added to franchise picks list at Jefferies saying shares remain attractively valued, in our view, with fundamentals stable to improving; SunTrust says remain bullish n towers (AMT, CCI, SBAC) saying despite lowering estimates for AMT and SBAC for transitory (FX) and non-recurring (Indian consolidation churn) issues, they reiterate our Buys on CCI, AMT and SBAC as believe fundamentals remain strong; FOXA downgraded at UBS; DIS shares lower, snapping its 9-day win streak (longest in 5-years)
· Hardware and components; AXE upgraded to buy at Longbow and raise sales forecasts following a sharp acceleration in spending on North American enterprise and industrial projects and improved pricing traction; ERIC downgraded to underperform at Raymond James as believe the shares have overshot fair value in a difficult environment
· Optical stocks plunge, led by weakness in LITE; Craig Hallum noted Win Semi (Taiwan: 3105), which is LITE’s manufacturing partner for VCSEL arrays for 3DS, reported 2Q results and offered 3Q sales guidance of -10% q/q, well below consensus growth of +20% q/q, blaming it on inventories (shares of FNSR, AAOI, IIVI, ACIA also fell)