Friday, August 24, 2018
Equity Market Recap
· U.S. stocks close the week higher, with the S&P 500, Nasdaq Composite and Russell 2000 all hitting record intraday highs while the dollar weakened following the dovish tone of Federal Reserve chair Jay Powell’s comments at the central bank’s conference in Jackson Hole today. Powell said gradual interest-rate hikes remain appropriate but also said he was prepared to “do whatever it takes” to avoid another financial crisis. Powell also took a more relaxed approach regarding inflation, giving markets the push higher it needed. Powell said inflation has recently moved up near 2% but “we have seen no clear sign of an acceleration” above that level. Gains were across most asset classes with stocks surging, commodity prices rebounding on the declining dollar (gold and oil prices post first weekly returns in nearly 2-months – while dollar posts worst week since February), and bonds were little changed. Tech stocks got a push from software stocks on better earnings (SPLK, ADSK, VEEV), as well as semis (NVDA, AMD 52-week highs) and Internet (NFLX rises 5% on an analyst upgrade). Industrials and materials also rebounded as trade/tariff concerns took a backseat today with the Fed grabbing all the attention. Concerns about Turkey, trade issues with China, Mexico and Canada, and political drama subsided this week as stocks pushed to record. Late day, President Donald Trump cancelled a trip to North Korea that his secretary of state Mike Pompeo was due to take next week, citing insufficient progress in his bid to secure the country’s denuclearization.
· Fed Chairman Powell, in his prepared comments at the Jackson Hole central bank meeting, said gradual path of interest-rate hikes remains appropriate as there does not seem to be “an elevated risk of overheating.” Powell said inflation has recently moved up near 2% but “we have seen no clear sign of an acceleration” above that level. “My colleagues and I believe that this gradual process of normalization remains appropriate,” he said.
· St. Louis Fed President James Bullard said earlier he would like the central bank to stand pat and wait for developments before raising rates any more. In an interview on CNBC, Bullard said the Fed should not push short-term rates up so that the spread between short-term bonds and long-term bonds inverts. Bullard said former Fed chairmen Alan Greenspan and Ben Bernanke both downplayed an inverted yield curve and were wrong.
· Cleveland Fed President Loretta Mester said earlier in an interview that she’s been increasing her growth forecast for this year to around 3% and signaled the central bank’s gradual interest-rate increases should continue. Third-quarter growth is coming in strong so far, helped by fiscal stimulus, she said in interview on CNBC on Friday. Economy offers a very compelling case for Fed action she said. While some asset values are elevated, she said she doesn’t see signs of an overheating economy
· Oil prices close higher, but off the session highs; WTI crude rose 89c to $68.72 per barrel (highs $69.31 and lows $67.78) ending the week higher by 5.4%. Energy futures posted a strong week of gains on bullish inventory data, a pullback in the US dollar, and fears of sanctions on Russia and Iran impacting global supply. WTI crude booked its first weekly gain in nearly two months. Brent logged roughly a 6% weekly advance, after three weeks of declines.
· Gold prices surged $19.30, or 1.6% to settle at $1,213.30 an ounce, its highest settlement in three weeks and posted its first weekly rise in seven weeks, as the benchmark dollar index dropped. For the week, gold settled higher by up about 2.5%.
· The U.S. dollar slides, ends the week lower; the dollar index (DXY) suffered its biggest weekly percentage loss since February (down over 1%) following U.S. Federal Reserve Chairman Jerome Powell’s speech at the annual Fed symposium in Jackson Hole, Wyoming. Powell said gradual interest-rate hikes remain appropriate but also said he was prepared to “do whatever it takes” to avoid another financial crisis. The yuan rose overnight as China reintroduced the counter-cyclical factor,” a measure intended to fight depreciation pressure that had been driving the currency down against the strong greenback. The Euro held near afternoon highs vs. US dollar, up 0.75% at 1.1630 (overnight lows 1.1535). The Argentine Peso fell to new record low vs. the US dollar. The dollar slid vs. the Canadian dollar, British pound and Japanese yen.
· Treasury markets ended the day surprisingly calm despite volatile moves in stocks, currencies and commodity prices, with the 10-yr yield holding steady at 2.82% and 30-yr under 3%, though the shorter-term 2-yr yield up about 2 bps today to 2.62%. Treasury prices trimmed losses Friday, pulling yields down from their intraday highs, after a speech by Federal Reserve Chairman Jerome Powell was viewed as taking a more cautious tone on monetary policy. Powell said policy makers saw “no clear sign” inflation was due to accelerate above the Fed’s 2% target. Powell also highlighted that overseas factors could affect the Fed’s policy response, in perhaps an acknowledgment of the ructions in emerging markets.
Sector News Breakdown
· Retailers; GPS Q2 topped estimate and guidance was reaffirmed, but overall report was mixed as Old Navy remains strong but did slightly decelerate on a 2-year basis while Gap brand issues are lingering into 2H (comp sales fell -5% for Gap brand) and Athleta slowed; ROST Q2 EPS and sales topped consensus on better comp sales of up 5% vs. est. 2.5%, but shares were pressured on gross margin concerns (several analysts defended shares); BKE posts earnings beat as comps rose 1.4% and online sales gained 8.6% to $21.2M
· Sporting goods/footwear apparel space pressured after FL and HIBB quarterly results; HIBB shares plunge as slashes its profit outlook after unexpected Q2 EPS loss; expects comparable sales to be -1.0% to +1.0% in FY19 and EPS $1.57-$1.75 below prior $1.65-$1.95; meanwhile, FL shares fall as Q2 EPS of 75c beat by 5c on slightly better sales of $1.78B but comp sales only rose 0.5% vs. est. 0.7% (shares of DKS, UAA, NKE active on report)
· Consumer Staples; Bloomberg reported that top alcohol producer Diageo Plc (DEO), aiming to boost growth and fend off competitors, is in discussions with at least three major Canadian producers to add cannabis-infused beverages to its portfolio (notes TAP and STZ have already moved into the space) – shares of TLRY, CRON, WEED among movers on reports; SAFM upgraded at Stephens to overweight and raised tgt to $130 (22% upside); HRL downgraded at Barclay’s; in restaurants, PZZA shares jumped after Reuters reported they hired Bank of American and Lazard as financial advisors to help find ways to stabilize the restaurant chain
· Tobacco stocks weak as MO and PM both downgraded at Jefferies saying reduced risk products in the tobacco industry seen reaching only 40% market share by 2026 in both the U.S. and initial launch markets, compared with a previous estimate of 50%-60%. In the segment, vapor products seen as being more popular than heated-tobacco versions, which will need more time to build awareness as they’re newer; also lowers tgts on Imperial Brands and BTI
· Energy stocks ended the day and week higher, rising in solid fashion as oil prices traded back above $69 per barrel and snapping its 7-week losing streak (longest streak since 2015) as the dollar declined and inventory data provided bullish sentiment this week. The Baker Hughes weekly rig report showed the total U.S. rig count fell -13 to 1,044 rigs, with oil rigs down -9 to -869 (biggest weekly cut since May 2016), gas rigs down -4 to 182, and miscellaneous rigs unchanged at 2.
· Top movers; in pipeline sector SEP to be acquired by ENB for a sweetened deal of $3.3B, raising its offer to 1.111 of its common shares for each Spectra unit, compared with its previous offer of 1.0123 of its shares ;TUSK downgrade to Market Perform at Raymond James as company’s work in Puerto Rico looks to be slowing, which is driving confusion regarding the totality of the opportunity; PSXP was downgraded to neutral at JP Morgan; Solar stocks higher, led by gains in JKS after signs solar module supply agreement with Powerchina Huadong Engineering Corporation
· Bank movers; were steady as rates held in a tight range following Fed speaker commentary at Jackson Hole central bank meeting; In insurance, CIA shares advanced after the insurance services company said the SEC concluded its investigation and did not recommend an enforcement action; in finance and lending, PYPL, shares trade higher after positive analyst comments, with Wedbush raising its target to $99; JHG was downgraded to underperform at Credit Suisse on valuation in investment space
· Pharma movers; CBPO shares fell after the company rejected a $3.9 billion offer from a consortium led by its former CEO and said an affiliate of CITIC Capital had also withdrawn a competing bid ; AZN said China National Drug Administration has approved its LYNPARZA (olaparib) for the maintenance treatment of recurrent platinum-sensitive ovarian cancer, the first targeted therapy approved there for the indication/company is co-developing the PARP inhibitor with MRK; MYL was upgraded to outperform at Evercore/ISI and $47 tgt noting the company’s revenue trajectory being tied to “one of the most comprehensive biosimilar programs under their coverage
· Medical equipment, devices and services; BRKR said it expects to acquire an 80% majority interest in Hain LifeScience GmbH in Germany, with options for the remaining 20% that can be exercised after 2021; CMO sector tgts raised at Credit Suisse, upping tgts for ICLR to $159 from $144, IQV to $137 from $128, LH to $197 from $195, MEDP to $62 from $61, PRAH to $115 from $107, and SYNH to $54 from $53 saying healthy funding momentum in the biotechnology sector bodes well for contract research organizations
Industrials & Materials
· Industrial & Machinery; CMI downgraded to underweight at JPM and slashed tgt to $137 from $156 citing concerns that the North America truck cycle had peaked and as demand from China slows/said a recent surge in Class 8 truck orders is a result of dealers ordering to stock inventory, which expects will lead to a “steeper decline” for the industry when fundamental turn; overall industrials nice rebound today as trade/tariff concerns that hit names yesterday (MMM, CAT, UTX) subside for the moment
· Transports; overall transport index rebounds, putting in solid performance this week with record highs on Wednesday; airlines LUV downgraded to peer perform and JBLU to underperform at Wolfe Research, trimming estimates but cut mostly on valuation for both
Technology, Media & Telecom
· Software mover; ADSK rises after reported a strong 2Q, driven by across-the-board strength as ARR better than expected +28% yr-yr, driven by continued upward inflection in ARPS and reaffirmed FY19 ARR guidance for +28-30% YoY; INTU announced CEO Brad Smith will step down at the end of December, and posting first-quarter guidance that missed estimates; SPLK rises after reported sizeable Q2 top line beat and raised guidance for the year as expects 550 net new customers (versus 500 2Q18 and 450 last quarter)/ noted that it is tracking ahead of this year’s 65% target for its subscription/renewable revenue mix and is nearing next year’s target of 75%; VMW Q2 beat consensus expectations on revenue, margins and earnings and also increased revenue guidance for FY19 with continuing strong growth…but shares slipped on total billings deceleration to 13% y/y (from 17% y/y in F1Q19) vs Street at 14% y/y; SCWX shares fall after UBS downgraded to sell as noted shares are +53% YTD as valuation has expanded off trough levels
· Hardware & Component news; HPQ reported a solid jump in quarterly profit amid gains in both its printing and personal systems divisions and raised midpoint of FY18 outlook…but Printing margins were flat sequentially, despite the company saying prior that it “expected margins to improve” in the near-term; UBNT Q4 results that beat on revenue with an 18% Y/Y growth but met on EPS while guidance missed mid-point (revenue of $1.1B-$1.2B (est. $1.12B) and EPS of $4-$4.80 (est. $4.23); ANET rises after replacing GGP in the S&P 500 index
· Internet movers; NFLX was upgraded to buy at SunTrust with their Subscriber Tracker through July pointing to 3Q Domestic/Int’l subs solidly in-line/ahead (recent Japan price increase, app store billing tests may also suggest positive subscriber trends) and with 4Q consensus reasonable; DBX shares active on the expiration of the IPO lockup period today
· Media & Telecom movers; TMUS and its Metro PCS unit notified customers yesterday about a potential security breach that might have exposed certain personal information of 2M customers; LBTYA was upgraded to buy at UBS as expects increased operating cash flow ahead and points out that shares are at their lowest point in six years
· Semiconductor stocks extend gains, as AMD rises to best levels in about 12-years after positive analyst comments this week and NVDA also trades to record highs