Monday, July 23, 2018
Equity Market Recap
· U.S. stocks end the day mixed, getting a boost from financials amid a decline in bonds, lifting Treasury yields across the board (long and short end of the curve), while technology rebounded off earlier declines. Markets dealt with another round of tweets from President Donald Trump aimed at Iran, as he lashed an all-caps tirade against Iranian President Hassan Rouhani, warning him never to threaten the U.S. — or else. Over the weekend, Rouhani warned Trump not to pursue a hostile policy toward Iran, saying that “war with Iran is the mother of all wars.” The news lifted oil prices overnight, though ended the day lower by about -0.5%. The dollar bounced from Friday declines, but the big moves came in the Treasury market, as the 30-yr yield rises 15 bps from Friday morning lows, while the 10-yr tops 2.96%, best levels in over a month. A busy week of earnings upcoming, with Google parent Alphabet reporting tonight, along with some 180 names in the S&P 500 index expected to report earnings later this week.
· Regarding trade, Finance ministers and central bankers of the G-20 group of countries ended their weekend meeting warning that “heightened trade and geopolitical tensions” along with other factors pose as downside risks for global economic growth, which at this point “remains robust.” U.S. Treasury Secretary Steven Mnuchin said that the European Union, China and Japan must remove tariffs and subsidies before the U.S. discusses trade agreements with those regions. Mnuchin also said “it’s definitely a realistic possibility” that U.S. President Donald Trump will follow through on a threat to put tariffs on all $500 billion worth of Chinese imports into the U.S.
· U.S. existing home sales for June declined (-0.6%) to 5.38M, below the 5.4MM estimate and marked a third straight monthly decline, after falling (-0.7%) to 5.41M in May (revised from 5.43M); single family sales declined to 4.76M following May’s slip to 4.79M; months’ supply rose to 4.3 from 4.1 in May; median home price rose 5.2% from last year to $276,900
· Oil prices initially rose following a harsh exchange between U.S. and Iranian leaders that raised fears about the potential for disruptions to output in the Middle East and tighter global crude supplies…but prices reversed lower, with WTI crude falling -37c to settle at $67.89 per barrel (off earlier highs $69.31). Iranian crude exports have dropped to a six-month low so far in July, according to one report. Trump on Sunday tweeted an all-caps message to his Iranian counterpart, Hassan Rouhani, warning that threats against the U.S. will be met with “consequences…few in history have suffered before. Gold prices slippedon Monday, falling -$5.50 or 0.5% to settle at $1,225.60 an ounce as the dollar rebounded off lows.
· The U.S. dollar rebounded off earlier lows, as the dollar index ended near its best levels late day. The pound at $1.3104, down from an intraday high of $1.3159 and down from $1.3132 late Friday, having recovered nicely after last week’s drop below $1.30 for the first time in 10 months after weak U.K. retail sales data. The euro slipped to afternoon lows, dropping to 1.1684 against the dollar, down from earlier highs of 1.175 as the dollar recovered its losses. Meanwhile, emerging market currencies pared recent gains, as the Mexican peso fell more than 1% vs. the US dollar, its biggest decline in a month as little was achieved at the G20 regarding trade. The dollar was little changed against the Japanese yen around 111.50.
· Treasury markets slump as yields surge higher across the board, with the 10-year topping the 2.96% level, up about 7 bps (best level in weeks), while the 2-yr inches rises 4 bps above 2.63% and the 30-yr yield extends last week’s late rise, jumping to 3.09% (had climbed 5.6 basis points Friday to 3.023%, marking its highest level this month). There are high expectations ahead of this Friday’s Q4 GDP reading, which is forecast to top 4.2%, leading to an increase in rate hike expectations by the FOMC ahead of their meeting next week. Ultra-low interest rates by the Bank of Japan and the European Central Bank have also driven investors into U.S. government debt.
Sector News Breakdown
· Auto sector busy; TSLA falls as has asked some suppliers to return a portion of its payments to them in an attempt by the electric-car maker to turn a profit, the WSJ reported, citing a memo sent to a supplier last week. ; RACE shares fall as CEO Marchionne steps down following complications from shoulder surgery last month that meant he could not resume his duties; in addition, FCAU’s slides as Alfredo Altavilla is said to step down as head of the company’s European operations following the decision to name Mike Manley as the new CEO; Automotive spinoffs offer exposure to autonomous, electric future according to Barron’s (ALV/VNE and DLPH/APTV); DLPH upgraded to outperform at Oppenheimer as believes fundamentals have not meaningfully deteriorated
· Restaurants; PZZA shares slipped after board members voted to adopt a “poison pill” on Sunday to prevent its controversial founder from gaining a controlling interest in the pizza chain, and was also downgraded to sell at Stifel saying the company is in “precarious position,” with brand damage growing after the chain’s founder used a racial slur
· Toy retailers rise after HAS reported Q2 net sales that topped the highest Street estimate despite admitting an overhang due to the Toys R Us liquidation (MAT, JAKK also active)
· Energy stocks got a boost early after the harsh word back and forth between US President Trump and Iran’s Rouhani sent oil prices higher as he warned Trump not to pursue a hostile policy toward Iran, saying that “war with Iran is the mother of all wars.” However, prices reversed with WTI crude falling -0.5% to settle at $67.89 per barrel.
· Oil services; HAL posted a Q2 operational miss (profit $789M vs. est. $816M) though revs of $6.15B beat; last week, BHGE shares slipped after missing Q2 earnings expectations, as demand fell for its oilfield equipment, while SLB reported in-line Q2 earnings and revenues; HCLP raised its quarterly distribution to 75c from 22.5c and agreed to acquire FB Industries, a manufacturer and marketer of silo-based frac sand management systems, for ~$60M
· Top stories; XOM and HES say they now expect the Stabroek oil block offshore Guyana to contain ~25% more recoverable resources than previously estimated/the project partners raise their estimate of gross discovered recoverable resources for the Stabroek
· Banks and other financials among the top gainers today as bonds slide and Treasury yields increase to best level in a few weeks, with the 10-year yield above 2.92%; Bank stocks tend to benefit in a rising-rate environment as it boosts their net interest margin, or the difference between the interest they earn on the loans they make and the interest they pay out; the bulk of large cap bank and regional earnings now behind us, with mostly mixed results; shares of BOH, CBU, ONB were active after earnings results
· Consumer finance and lending; PYPL and SQ shares active after Snapchat shut down its Snapcash, one analyst noted Square’s own Cash App is a “better play for them” than the back-end work it’s doing on Snap’s service; PYPL shares bounced as Third Point discloses new stake; TSLX upgraded to Overweight at JPMorgan as believes TPG is well positioned to benefit from industry tailwinds as banks decrease their participation in the middle-market lending space as a result of Basel III regulations
· Large Cap Pharma; AGN said the FDA designated its Phase 2-stage AGN-241751 for Fast Track review for the treatment of major depressive disorder; CBMto acquire Halo Pharma for $425M, a leading dosage form Contract Development and Manufacturing Organization; RETA said Phase II data show statistically significant improvement in kidney function maintained in Alport Syndrome patients after 48 Weeks of treatment; LLY to report earnings tomorrow
· Biotech movers; RGNX downgraded to neutral at Bank America on valuation; potential catalyst driven weak for BIIB with Q2 results tomorrow morning (7/24) along with AD presentations at AAIC that include promising BAN2401 data (July 25), which was recently top-lined
· Hospital providers; LPNT to be acquired by private equity firm APO in a deal valued at $5.6 billion, including debt, paying $65 per share in cash (1 35% premium to Friday close) (shares of CYH, UHS, HCA also active on news); THC tgt raised to Street high $44 (from $37) at Citigroup noting heightened expectations, particularly around a potential Conifer sale, but believe there is an underappreciation for additional upside within the hospital segment citing margin improvement
· Healthcare services and suppliers; WBA downgraded to Market Perform at Cowen as they view it as poorly positioned in the move toward value-based care/they increasingly believe ownership (CVS acquisition of AET) rather than partnership (WBA’s open health hub) is necessary to realize the benefits of cost trend improvements; PETS Q1 EPS and revs fall short of consensus views; dental related stocks PDCO, XRAY, HSIC all jumped mid-afternoon on no apparent news
Industrials & Materials
· AG & Machinery; GE was downgraded to hold at Argus as have been disappointed with the steady flow of bad news from the company, not to mention management’s decision to cut the dividend late last year; ITW shares fall after earnings match, but cut its full-year outlook citing a negative currency impact and trimmed its margin guidance sees year EPS outlook to $7.50-$7.70 from $7.60-$7.80 and cut 2018 op margin guidance range to 24% to 25% from 25.0% to 25.5%, to reflect higher raw material costs
· Metals & Mining; CLF upgraded to overweight and tgt raised to $15 at JPMorgan given the strong, steady performance of CLF’s core remaining asset USIO, USIO’s leverage to high steel prices, the removal of the overhang of APIO with the sale of the business expected to close next quarter, and the growth prospects from HBI
· Chemicals; NTR to sell all of its equity stake in Arab Potash to SDIC Mining Investment for gross proceeds of $502M; PAH was downgraded to neutral at Goldman Sachs; SHW expected to report earnings tomorrow morning in the coatings sector
Technology, Media & Telecom
· Internet; GOOGL kicks off earnings for tech this week, reporting after the close; BABA and TCEHY are involved in talks to buy a minority stake in WPP’sChinese unit, according to Reuters, citing Sky News. Companies are said to be in early stage discussions about buying about 20% of WPP China in a deal that would value the business between $2B-$2.5B ; SPOT rated new buy and street high $230 tgt at BTIG; AMZN shares slipped after Trump tweets about the company’s deal with the post office; BIDU downgraded at OTR Global
· Semiconductors; MU shares fall after Morgan Stanley said tariff uncertainty could be a risk to demand that leads to an inventory unwind and a correction in the semiconductor stocks/said expects fundamentals for the quarter to be OK after a recent survey suggested strong business conditions, “but recent tariffs increase the risk of Analog/MCU stock underperformance in 2H; NXPI slipped ahead of Wednesday’s QCOM deal deadline
· Software & Hardware movers; DATA tgt raised to $130 from $110 at Goldman Sachs noting it has been in focus during his conversations with investors recently after a 20% move post Q1 earnings and a 60% move year to date; ROKU tgt raised to a Street-high $60 from $50 at Needham, citing potential earnings upside from strong U.S. viewing trends toward streaming; NTGR reports Q2 beats and downside guidance
· Telecom and IT Services; SYNT was acquired by Atos SE of France for $3.4B deal, paying $41 a share in cash; including debt, deal valued at $3.57B