Closing Recap

Monday, June 17, 2019

Equity Market Recap

·     U.S. stocks finished higher on Monday with investors awaiting the upcoming two-day FOMC meeting that starts tomorrow and concludes Wednesday with expectations for the Fed to likely lower economic projections given the recent bout of weak economic data but likely keep rates steady for at least one more meeting (rate cut expected for July). Next week’s G20 meeting of world leaders also highly anticipated, with hopes for trade talk between President Trump and Chinese leader XI, though Commerce Secretary Wilbur Ross earlier played down the likelihood of a major deal at the Group of 20 summit later this month. Until then, stocks were active today (though on light volumes), given several M&A deals on a busy Monday. There was a large deal in the Pharma space (PFE/ARRY), the oil sector (CJ/FRAC), the banking sector (LTXB/PB), and a PE deal (for BID). The US dollar slipped along with Treasury yields after weaker than expected economic data, as housing data missed views and as manufacturing in New York fell into negative territory for the first time since 2016. The focus on central bank policy theme will continue all week with the Fed, BOJ, BOE, Brazil central bank meetings later this week, as well as RBA minutes (after recently cutting its interest rates). Energy stocks rebounded, while transports were mostly lower; biotech outperformed behind the $11B deal in the space (PFE for ARRY); technology led behind large cap FAANG strength; defensive sectors such as utilities, staples and REITs pared some recent gains; homebuilders underperformed after a weaker NAHB Housing market index data point missed; crypto-currency rally in 2019 continues as Bitcoin topped the $9,000 level (up roughly 140% YTD).

Economic Data

·     The New York Fed’s Empire State manufacturing unexpectedly fell in June, moving into negative territory for the first time in more than two years, plunging 26.4 points to negative -8.6 in June, well below the expected reading of +11.0. The last time the index was negative was in October 2016. New-orders index, sank 21.7 points to -12 in June, while shipments fell -6.6 points to 9.7 and unfilled orders also fell sharply and inventories sank into negative territory.

·     U.S. Home Builders’ Confidence index (NAHB) in June falls to 64 vs 66 last month, and came in below the economist estimate of 67; the present single family sales falls to 71 vs 72 last month, while future single family sales falls to 70 vs 72 last month

Commodities

·     Oil prices remained weak, as WTI crude futures prices fell by 58c, or over 1.1% to settle at $51.93 per barrel (sliding into the close, but off the $51.77 per barrel lows) as markets remain worried on demand concerns given the trade dispute with China as well as weaker global forecasts late last week from the IEA. On Friday, the International Energy Agency downgraded its 2019 forecast for global oil demand for a second straight month, citing, in part, a global economic slowdown. The agency cut its oil demand growth forecast to 1.2 million barrels a day from 1.3 million barrels a day the previous month. OPEC meeting headlines also grabbed attention as Iran said to move OPEC meeting from June 25 to July 10-12. The attack on two tankers in the Middle East’s Strait of Hormuz last week triggered concerns about disruptions to the global flow of oil and prompted a late-week rally in prices briefly, but that has since been erase. Gold prices slipped -$1.60 to settle at $1,342.90 an ounce, just off recent 2019 highs as the dollar slipped, as markets look for next clues from the Fed on direction of interest rates in the next few days.

Currencies

·     Understandably, the U.S. dollar pulled back to lows this morning after the awful monthly Empire Manufacturing report showed the first negative reading since 2016, raising concerns about the health of the U.S. economy and raised expectations that the Fed will begin easing interest rates in the next two-months to help stimulate growth. The dollar index (DXY) fell to lows of 97.34 before paring losses as the British Pound dropped vs. the greenback to its lowest levels since early January, though the euro climbed and the Japanese yen was little changed.

Bond Market

·     Treasury prices were little changed, with the 10-year yield holding around the 2.08% level, up and down slightly on the day (hi’s 2.113% and lows 2.076%) but not too much volatility expected ahead of the 2-day FOMC meeting this week (along with other central bank meetings); the 2-year yield down at 1.85%; the 3-month/10-yr yield curve still inverted, but better than 2-weeks ago (now inverted by about 10 bps – vs. about 26 bps 2-weeks ago).

Sector News Breakdown

Consumer

·     Retailers & Staples; relatively quiet on news; HIBB shares fell after late Friday delayed filing its 10-Q; KDP was upgraded to outperform at BMO Capital on valuation with $34 tgt as its widening valuation discount relative to non-alcoholic beverage peers has become too large to ignore; WHR shares active after monthly AHAM 6 shipments (washers, dryers, dishwashers, refrigerators, freezers, ranges and ovens) rose 9.9%

·     Restaurants; SBUX tgt raised to $96 at Jefferies as analysis of Questmobile’s China mobile app data suggest concerns around negative impact to SBUX from any potential souring toward US brands in China are overdone; PZZA said current board member Shaquille O’Neal has closed on an investment in nine Atlanta-based Papa John’s restaurants; DNKN announced a partnership with GRUB for a new Dunkin’ Delivers service, with first step in the rollout is the launch of delivery at more than 400 Dunkin’ restaurants throughout New York City’s

·     Casino & Leisure movers; BID to be acquired by BidFair USA for $57 per share, an entity wholly owned by media and telecom entrepreneur as well as art collector, Patrick Drahi, in a deal valued at about $3.7B https://on.mktw.net/2Ko0y2c ; VICI and CNTY acquired three regional gaming properties from ERI for $385M; TSLA shares rise for the 3rd straight day, and 5th out of last 6 as sentiment has improved from lows of $176.99 on 6/3

Energy

·     Energy stocks tried to rebound despite oil prices hovering near multi-month lows. Iranian Oil Minister Bijan Zanganeh denied reports that he had disagreements with President Hassan Rouhani, adding that he will not back off from his duties as criticism mounts over his ability to sell Iranian oil despite U.S. sanctions. An Iranian lawmaker last week said that Zanganeh and Rouhani had fought in a cabinet meeting. Regarding upcoming OPEC meetings, Iran said to move OPEC meeting from June 25 to July 10-12.

·     Equipment and services; CJ and FRAC announce a merger of equals, creating a well completion and production services company worth ~$1.5B. In the all-stock deal, C&J shareholders will receive 1.6149 shares of Keane common stock for each common share of C&J owned https://on.mktw.net/2KljRJH; Utility stocks lagged broader markets after recent outperformance, though a pullback in treasury yields kept a floor under the sector; EPD slipped on reports it is weighing an exit from the joint venture with terminal operator PAA after proposing to build its own offshore port near Houston

Financials

·     Bank movers; SF agreed to acquire substantially all of the capital markets business of GMP Capital, a Canadian independent investment banking franchise, which excludes the U.S. cannabis and certain clearing businesses for cash consideration to be determined at closing; DB is preparing a deep overhaul of its trading operations including the creation of a bad bank to hold tens of billions of euros of assets – the Financial Times reported https://bloom.bg/2KlTR0y ; in an M&A deal, LTXB to be acquired by PB in a cash and stock deal valued at $2.1B where LTXB holders to receive 0.5280 Prosperity shares and $6.28 in cash ($41.78 per share), a 9.3% premium https://on.mktw.net/2MRMG2s

·     Monthly Master Trust credit card data showed: 1) SYF May charge-offs for May of 4.91% vs. 5.26% YoY while May delinquencies +2.24% vs. +2.73% YoY; 2) COF May charge-offs 4.89% vs. 5.15% last month while 30-plus day performing delinquencies 3.29% vs. 3.42% last month; 3) ADS May net charge offs 6.3% vs. 6.4% last month and delinquency rate 5.0% vs. 4.9% last month; 4) JPM May credit card delinquency rate of 1.14% improves from 1.18% in April and 1.23% in March while charge-off rate of 2.46% falls from 2.51% in April and 2.55% in March; 5) DFS May net charge-offs 3.48% vs. 3.4% YoY and delinquency rate 2.33% vs. 2.2% YoY; 6) AXP May charge offs 2.5% up from 2.4% MoM and vs. 1.3% YoY; while delinquency rate steady at 1.4% from April

Healthcare

·     Pharma movers; ARRY to be acquired by PFE in a deal worth $10.64B ($11.4B including debt), as the company looks to expand its pipeline of cancer therapies; ARRY holders to receive $48 for each of its shares outstanding in cash. https://on.mktw.net/2RjAUfF; CASI signed a license agreement for exclusive worldwide rights to an anti-CD19 T-cell therapy product (CNCT19) from Juventas Cell Therapy Ltd., a China-based domestic company; ENDP was downgraded to neutral at Citigroup and slashes its tgt to $5 citing the ongoing lawsuits in industry related to the U.S. opioid epidemic; AMPE slides after 30M shares deal priced at 40c; VYGR said it is gaining worldwide rights to the VY-HTT01 Huntington’s disease program and ex-U.S. rights to the VY-FXN01 Friedreich’s ataxia program

·     Biotech movers; QURE said it is exploring options including a potential sale amid interest from pharmaceutical companies looking to expand in gene therapy/working with advisers as it weighs options including a sale or partnerships, Bloomberg https://yhoo.it/2FdbL1w ; CALA said a mid-stage study for its kidney cancer drug showed its experimental drug telaglenastat in combination with the chemotherapy everolimus in patients with advanced renal cell carcinoma doubled the time the cancer could be kept under control; CTRV shares jumped after compelling positive results reported from human liver experiments with its NASH drug candidate CRV431; VBIV shares fell after two doses of its Sci-B-Vac hepatitis B vaccine failed to best three doses of GSK Engerix-B in adults 18 and over more than 5.5 months after the first vaccination; INCY rises as its ruxolitinib cream met the primary goal of a mid-stage study in vitiligo

Industrials & Materials

·     Industrial & Machinery; machinery stocks DE and TITN upgraded to outperform at Baird (DE tgt to $175 from $129 and TITN to $24 from $18) saying favorable weather conditions trump trade war concerns; CR said today it has begun a cash tender offer to buy all outstanding shares of CIR for $45 a share ($1.7B), a 47% premium over the undisturbed market close May 20 (Crane originally made public its offer of Circor on May 21); AEM’s board approves plan to pursue a spin-off of Management Services segment into standalone government services company and reiterates 2019 views; EMR said trailing 3-Month orders through May up 1%, May Automation Solutions orders up 3% and May Commercial & Residential Solutions Orders down 2%

·     Transports; in rails, UNP was downgraded at Bernstein as they make the case that a down truck market will make it harder for rail stocks to work; in airlines, Lufthansa (DLAKY) warned 2019 EBIT margin will be 5.5% and 6.5% vs. a prior forecast of +6.5% to +8.0% as the European market remains challenging;

·     Aerospace & Defense; few highlights/reports/orders form the airshow in Paris: 1) UAL has firm orders in for 20 Embraer (ERJ) E175 jets and options on 19 more, which is valued at $1.9B; 2) Virgin Atlantic Airways CEO said that the British carrier would introduce 14 Airbus SE (EADSY) A330-900s, with options for six more/deal is part of a wider Virgin Atlantic fleet renewal; 3) Airbus (EADSY) said Air Lease Corp. (AL) ordered 27 of the A321XLR as part of a larger 100-plane contract worth $11 billion at list prices

·     Metals & Materials; steel producer NUE guides Q2 EPS $1.20-$1.25, below consensus of $1.49 as performance of the steel mills segment expected to decrease vs. Q1 (steel producers active on guidance – X, STLD, AKS)

·     Materials & Chemicals; CTVA upgraded to buy at Deutsche Bank as sees Corteva well positioned to benefit from higher corn prices and the expected increase in U.S. corn acres in 2020; MOS was upgraded to buy at Bank America with $30 tgt citing recent decline in the stock price, along with the company’s significant growth expansion potential in Brazil; DOW was downgraded at BMO Capital and reduced estimates, taking into account current commodity fundamentals including weakness in Silicons, MDI/TDI, and PE and assuming limited recovery through the bulk of 2019

Technology, Media & Telecom

·     Internet; FAANG stocks outperformed broader tech, led by gains in NFLX, and FB; AKAM shares down for a 5th straight day, off -2.5% (prior 4-days were minimal losses) – weakness follows its Edge World conference last week; NFLX shares rallied with Piper saying today analysis of Netflix search trends (Google) points to a solid Q2’19, with potential for domestic subscriber upside and in-line international subs

·     Semiconductors, Software movers; SYMC was upgraded to buy at Mizuho citing the positive risk/reward and tgt upped to $23; AMD underperformed broader semi names after Morgan Stanley said the chipmaker could risk H2 estimates thanks to the higher than expected pricing for the Navi graphics chips.

·     Media & Telecom movers; DIS pulls back after hitting all-time highs Friday ($142.95), slipping today on analyst downgrade at Imperial Capital

·     Hardware & Component news; Raymond James reduced estimates in their more cyclical industrial technology names including IPGP, APTV, CGNX, LASR, TRMB and VC and are now materially below consensus and at Street lows across most of the names; sensor stocks APH, ST and TEL were downgraded to neutral from buy at Longbow; hard disk drive stock tgts cut at Susquehanna as STX tgt cut to $36 from $40 and WDC tgt cut to $35 from $44