Closing Recap

Friday, June 14, 2019

Equity Market Recap

·     U.S. stocks were under pressure most of the trading session following disappointing data overseas and negative headlines overnight, but investors looked past that late afternoon, turning markets higher ahead of next week’s FOMC meeting. Tech stocks underperformed, led by weakness in chip stocks after AVGO slashed its sales forecasts sinking chip stocks. Strong US data (retail sales and industrial production) this morning lowered chances of a June FOMC rate cut next week, though expectations are still for a cut in July…but the pushout helped push the dollar higher on the day and week. In negative news, China reported its slowest growth in industrial production in 17 years in May (China’s factory output rose 5% YoY, missing estimates for growth to remain steady at 5.4%). Oil prices rebounded from multi-month lows to close higher, but still fell nearly 3% for the week, not helped today after the IEA in its monthly report cut its outlook for oil demand growth in 2019 estimate. It was a strong week of returns for defensive sectors with Staples, utilities and REITs leading stocks higher. The FOMC meeting next week and the G20 summit at the end of the month may yet yield more progress on a trade deal which could help. Online pet products retailer Chewy Inc. (CHWY) rose over 60% in its IPO debut today, the third company to surge this week on its first day of trading (CRWD and FVRR as well).

Economic Data

·     Retail sales better: Retail Sales MoM for May rise a less than expected 0.5% vs. est. 0.6%, (but prior month was upwardly revised to +0.3% from -0.2%) while Retail Sales Ex: Autos for May beat estimates rising 0.5% vs. est. 0.4% (prior month upwardly revised to 0.5% from 0.1%)

·     University of Michigan Confidence, June-P reported at 97.9, mostly in-line with est. 98.0 while current economic conditions index rose to 112.5 vs. 110.0 MoM and the expectations index fell to 88.6 vs. 93..5MoM

·     Business Inventories for April rose 0.5%, in-line with est. 0.5% while March inventories were unchanged; business sales dipped -0.2% in April after rising 1.3% in March

·     Industrial Production for May rose 0.4% vs. est. 0.2% (prior month revised to -0.4% from -0.5%), while Capacity Utilization for May rose to 78.1% from 77.9% prior and vs. est. 78.0%

Commodities

·     Oil prices were up slightly, as WTI crude rose 25c or 0.4% to settle at $52.51 per barrel, but closed the week lower by roughly 2.7% amid a lower demand outlook for the IEA, bearish weekly inventory reports from both the DOE and EIA and ongoing concerns for demand given the trade impact/implications of the China/US tensions. Another decline in the weekly rig count helped support oil prices that have fallen sharply, and has pushed service and drilling stocks lower. Reports yesterday of attacks on two oil tankers in the Strait of Hormuz also lifted prices.

·     August gold rises 80c to settle at $1,344.50 an ounce, finishing well off the earlier highs as the dollar rebounds. Earlier in the session, gold prices had hit its highest since April last year (touched highs about $1,358 an ounce) amid intensifying political concerns in the Middle East and weak economic data from China. For the week, gold posted a modest decline of -0.1%, snapping tis 3-week winning streak given the late day pullback. Gold has been rallying into next week’s FOMC meeting where there is a small chance for a Fed rate cut, though most indications point to a move being made at the July meeting. Recent soft U.S. economic readings have boosted expectations of a Fed rate cut, though today, data was stronger than expected.

Currencies

·     The U.S. dollar closed out the day and week near the highs, up roughly 0.5% on the day and 1% for the week, rebounding after last week losses on rising expectations for an FOMC rate cut this summer. After today’s better retail sales and industrial production data, chances narrowed for a rate cut at the FOMC June meeting next week, giving the dollar a bit of a relief rally. The British Pound slips to lows vs. the dollar, dropping below the 1.26 level (down -0.85%) to lowest levels since late May while the dollar peaked at 108.59 vs. the Japanese yen on the data. The euro slumped over 0.5% vs. the dollar above the 1.12 level (down from midweek highs 1.1343)

Bond Market

·     U.S. Treasury prices ended the day down slightly (and were little changed on the week after plunging the prior two-weeks), but off earlier morning lows ahead of the FOMC rate meeting next week where there is a small chance for a rate cut (as per Fed fund futures). However, the likelihood narrowed of a cut given today’s better economic data readings for retail sales/IP. Treasury yields for the two-year yield fell below 1.8% (it’s lowest since Dec 2017) while the 10-year yield fell to lows of 2.056% before rebounding.

Sector News Breakdown

Consumer

·     Retailers, Restaurants and Consumer Staples; CHWY opened at $36 per share (traded as high as $41.34) after having its 46.5M share IPO price at $22 (prior range was $19-$21); MNST shares fell yesterday as KO’s lock up on MNST shares expired yesterday; BJRI was upgraded to outperform at Oppenheimer ahead of the company’s attendance at the firms conference on 6/19, as analysis highlights a risk-reward too attractive to ignore.

·     Lodging and Leisure sector; BXG upgraded to buy at Stifel noting since May 22, the day BBX Capital terminated its merger with BXG, shares have traded off over 46.0% and believe shares are oversold and should bounce after reaching an agreement with Bass Pro

Energy

·     Energy stocks feeling extended pain on higher inventory builds over the last few weeks, the negative implications/fallout from the ongoing China/U.S. trade dispute as it continues to take a toll on overall commodity demand/weigh on global growth concerns. Not helping today, the International Energy Agency (IEA) cut its outlook for oil demand growth in 2019, saying economic sentiment is weakening and the consequences for oil demand are becoming apparent. The IEA revised down its 2019 demand growth estimate by 100K barrels to 1.2M barrels per day (bpd), but said it would climb to 1.4M bpd for 2020. Saudi output shrank by 110K barrels from April to 9.7M barrels. That is the lowest since 2015 and 610,000 barrels below its OPEC+ target

·     Baker Hughes (BHGE) weekly rig count report showed the total U.S. rig count dropped -6 rigs to 969, with oil rigs falling -1 to 788 while gas rigs declined dropped -5 rigs to 181

·     Energy stock movers; ROAN slightly raises its guidance for Q2 production to exceed 50K boe/day from 49K boe/day previously, with plans to turn 14 gross operated wells to first sales during June and July and also forecasts Q2 capex to come in ~10% below original guidance of $155M; penny stock LGCY rises after the company executes board approved global restructuring support agreement with its lenders and noteholders; RIG downgraded to neutral at Citigroup and tgt to $6.70 saying organic cash burn analysis implies the drillers will burn cash until "at least" 2021

·     Utilities & Solar; utilities push higher on the day led by gains for PEG, AES, FE, EXC, CNP, as the higher dividend paying sector once again helped by lower T-yields; Reuters reported NEE, ED and CPN are appealing U.S. bankruptcy judge’s decision regarding PCG power contracts worth $42B

Financials

·     Bank movers; news was sparse in the banking sector, with all eyes on the FOMC meeting next week and the small possibility of a Fed rate cut; SCHW monthly May activity report showed core net new assets brought to the company by new and existing clients in May 2019 totaled $17.3B, total client assets were $3.53 trillion as of month-end May, up 5% from May 2018 and down 4% compared to April 2019in REITs; AHT shares dropped after the company halved its quarterly dividend to 6c from 12c to “preserves capital for more advantageous purposes including strengthening our balance sheet and enhancing our ability to pursue more opportunistic growth”

Healthcare

·     Pharma movers; KURA shares rise after saying it saw positive results from its Phase 2 trial of tipifarnib in peripheral T-cell lymphoma. The company said in a release that the primary endpoint was achieved with 45% and 42% ORR in AITL and CXCL12+ AITL/PTCL-NOS expansion cohorts; Janssen Pharmaceutical’s Phase III DISCOVER 1 and 2 studies evaluating the safety and efficacy of guselkumab in adults with active moderate to severe psoriatic arthritis met their primary endpoints of American College of Rheumatology 20% improvement; MCRB 26.66M share secondary priced at $2.25 (below yesterday close of $2.83)

·     Biotech movers; ARQL shares jump after saying preliminary data from an early trial show its experimental drug ARQ 531 demonstrates substantial anti-tumor activity and a favorable safety profile/is testing ARQ531 in a small group of patients with hematologic malignancies who are resistant to existing drugs; ENTA said EDP-938 cut the amount of virus detected in the body and the drug achieved its primary and secondary endpoints in the phase 2a human challenge study; REGN announced positive early-stage data for REGN1979 in patients with relapsed or refractory (R/R) B-cell non-Hodgkin lymphoma (B-NHL); BLUE shares fell after Zynteglo EU launch delayed to end of 2019

·     Medical equipment and devices; TNDM shares pressured, down over 7% as drops below its 50-day MA $64.78 – on 6/13, BTIG noted that DCLP3 study data on its Control-IQ technology was a major focus. While this seems acceptable enough to allow for robust adoption, particularly since many patients are well below this in the real world (we heard levels of ~45-50% discussed), we sense most investors were underwhelmed given the expectation for mid-70s plus time-in-range

Industrials & Materials

·     Industrial & Machinery; Volkswagen AG (VWAGY) said that it would offer up to 15% of its truck unit Traton AG in a range of EUR27 ($30.5) to EUR33 a share, making the IPO worth up to EUR1.9 billion. The share offering values all of Traton at about EUR16.5 billion; FAST shares slid after having estimates cut at Buckingham to factor in April and May sales results and following visit with management (shares of GWW, MSM, WCC, WSO also weaker today)

·     Aerospace & Defense; SunTrust downgraded its view of the commercial aerospace OEM sector to negative as they believe ongoing 737 MAX related unknowns and related risks will cause a ripple through effect across the sector over the next 12-24 months producing downward revisions to outlooks and 2019/2020 estimates. Firm downgraded ratings on ATRO, B, DCO, SPR and WWD.

·     Metals & Materials; steel producer SCHN guides Q3 EPS 58c-62c vs. est. 58c, down from $1.26 YoY reflecting significantly higher ferrous and nonferrous selling prices; gold miners move to their best levels in three months as gold prices rise above $1,350 an ounce (GOLD, NEM)

·     Containerboard and chemical sector; BMO Capital upgraded LYB and OSB to outperform from market perform saying announcements to idle OSB mills remove 5% of industry capacity, which should ease supply overhang and help OSB prices. Overnight, a second significant indefinite OSB mill closure in a week, as LPX said is indefinitely curtailing production beginning early in Q3 at its Peace Valley Mill in Fort St. John, B.C. due to "declining housing starts and cost pressures."

·     Paper sector; KeyBanc lowered 2019/20 estimates for IP and UFS to reflect lower pulp prices, and in IP’s case, the May $10/ton benchmark containerboard price reduction. KeyBanc said while they had already assumed a $15-$20/tonne sequential decline in pulp prices in 2Q, prices have fallen significantly more since

Technology, Media & Telecom

·     Internet; FB shares were active after the WSJ reported the company is changing its consumer-facing strategy that could more than double its advertising spending in 2-3 years – also gaining as WSJ reported a group of payments and other companies (PYPL, MA, UBER, V among them) agreed to invest about $10 million each in a consortium to oversee the digital coin Facebook plans to unveil next week; NFLX briefly breached its 200-day MA support of $337.30 (hasn’t been below 200-day since late January) – as shares slide for a 5th day; FVRR shares dropped after shares jumped 90% yesterday in IPO debut

·     Semiconductors; sector sinks in reaction to lower outlook from AVGO overnight as reported a Q2 EPS beat of 3c, but revs missed views ($5.52B vs. est. $5.69B) and cuts FY19 revenue view to $22.5B from $24.5B (below est. $24.41B) saying they "currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers" – shares of chip makers weak after lower guidance/outlook (sector hurt: MXIM, NVDA, MU, INTC, AMD, SWKS, QRVO)

·     Media & Telecom movers; DIS shares hit all-time highs near $143 per share before paring gains; CMCM Q1 results beat revenue estimates ($161.8M vs. est. $159.6M) but featured weak adjusted EBITDA of $3.77M, below $9.96M consensus and down 86% Y/Y, while mobile MAUs totaled $434.8M (lower Q2 revs $137M-$142M vs. est. $157.5M); SNE shares higher after activist investor Dan Loeb disclosed a $1.5 billion stake in Sony Corp. and pushed the company to make changes, including spinning off its semi-business and listing it in Japan

·     Hardware & Component news; HLIT was upgraded at Raymond James to Outperform based on belief that it benefits from the evolution of Cable TV networks and the transition of its business toward virtual CCAP and software; GLW held investor day today as expects growth investments to drive 6-8% sales and 12-15% eps compound annual growth rates in 2020-2023 and tgts shareholder distributions of $8B-$10B with dividend increases; VMW bought closely held Avi Networks, a player in multi-cloud application delivery services (FFIV fell in reaction as Piper said raises concerns for FFIV as combination creates a new application delivery controller product with strong backing