Mid-Morning Look

Thursday, June 20, 2019

U.S. equities surge to record highs (though has since pared gains), with the S&P 500 topping the April 30^th closing record of 2,945.83 as well as the prior intraday high of 2,954.13 on May 1^st in what has been a straight shot up the last few weeks on reduced interest rate hopes by the Fed (confirmed in their dialogue yesterday) and on improving trade hopes between the U.S. and China ahead of the G20 meeting next week. The Fed gave markets the extra boost it needed Wednesday when they signaled it was ready to cut interest rates, fueling an equity rally worldwide. Energy stocks leading markets higher as oil prices jump over 4% after Iran shot down a U.S. military drone, raising fears of a military confrontation with Washington. The Bank of England declined to join the central bank bandwagon towards looser monetary policy, voting unanimously to keep the bank rate at 0.75%, but signals future rate hikes if there’s a smooth Brexit and if the economy develops as expected. Gold prices tops $1,385 an ounce, its best levels since 2013 and on course for their biggest one-day advance since October, surging on the combination of escalating tensions in the Middle East and the Fed’s fresh rate-cut signal yesterday. Defensive sectors at or near all-time highs on lower yields (Utilities, REITs, Staples), while Financials lag on lower yields. Weaker economic data today (Philly manufacturing 4-month lows, missing tgts) helps rate cut case for Fed. Markets currently as euphoric as you can get into the G20 with stocks, bonds, oil, gold all higher!

Treasuries, Currencies and Commodities

·     In currency markets, the dollar down again after the dovish outlook on interest rates from the FOMC yesterday, with the euro topping the 1.13 level (rebound from 2-days ago when it slumped on dovish comments from ECB President Draghi on stimulus); the Turkish Lira slumped vs. the US dollar after the country threatened the U.S. with retaliatory sanctions .

·     Commodity prices enjoying the benefits of a weaker US dollar, potential low rate environment and hopes of positive trade dialogue with China next week at the G-20 meeting. Oil also getting s spike after increased tensions with Iran after they shot a US drone down overnight. Gold prices trade to their best levels in over 5-years.

·     Treasury market’s rally as the 10-year yield at 1.99%, down over 2 bps, while the 2-yr yield is down another 2 bps (after falling 11 bps yesterday) to 1.71% – lowest since November 2017. The dovish Fed, geopolitical concerns with Iran, slowing global growth all supporting bonds.

Economic Data

·     Weekly jobless claims fell 6K to 216K, below the 220K estimate while the prior week was unrevised at 222K; continuing claims fell 37K to 1.662M in the week and the 4-week moving averages stood at 218.75K

·     The Philadelphia Fed Index for June fell to 0.3 from 16.6 last month (follows the weak Empire Manufacturing report the other day) and was below the 10.4 estimate; prices paid fell to 12.9 vs 23.1 prior and new orders fell to 8.3 from 11.0; also declines in employment to 15.4 vs 18.2 prior and shipments fell to 16.6 vs 27.6 while inventories rose to 2.4 vs -3.1

·     The current account deficit for Q1 narrowed to (-$130.4B) from (-$143.9) in the prior quarter and compared to the estimate of (-$124.3B); balance of goods and services deficit narrowed to $154.6b compared to $171.1b prior quarter

Sector Movers Today

·     Bank movers; next catalyst for banks are for Fed stress tests starting tomorrow (DFAST) which should lead to record capital return, capital payout and cash-back yield, while next Thursday’s CCAR (part 2) should lead to cash-back yields (est. 10%) that are 2x the S&P500 and a record relative to 10-year treasury yields according to Wells Fargo; broad weakness in regional bank stocks amid an expected declining interest rate environment that will reduce net interest margins (CFG, BBT, STI, ZION, RF weak)

·     Software movers; ORCL leads to recent software strength as reported better-than-expected Q4 earnings and revenue and gave an outlook that pointed to ongoing momentum driven by database/middleware license; ORCL results follow better ADBE numbers the day prior; WORK pursued a direct listing, rather than a traditional initial public offering and set a reference point of $26 per share, trading today for the first time

·     Materials & Chemicals; OLN 2Q19 EBITDA estimate reduced from $238MM to $229MM at SunTrust saying US caustic soda index prices weakened more than we previously anticipated during 2Q, due to ample supply despite industry turnarounds; in paper sector, KeyBanc reduced estimates for WRK and PKG on account of falling pulp and containerboard prices

·     Auto sector; TSLA tgt cut to $158 from $200 at Goldman Sachs saying they see a lower likelihood of hitting his upside volume scenarios, as demand is likely below estimates and unsustainable; MEI shares dropped after Q4 results that missed revenue and earnings estimates and guided FY20 EPS of $3.25-$3.55 on revs $1.13-1.17B vs. est. $3.57/$1.13B

Stock GAINERS

·     ACM +2%; after activist hedge fund Starboard Value LP says ACM should thoroughly evaluate strategic alternatives and that an outright sale of its Management Services segment may be preferable to a spin-off – revealed a 4% stake in the company

·     AOBC +1%; after Q4 sales of $175.7M topped the $169.2M estimate on better earnings having now beaten topline estimates for five straight quarters and bottom line estimates for seven

·     CMC +8%; boost steel producers after Q3 EPS/sales topped estimates – group had seen three straight steel names lower numbers into today (STLD, NUE, X)

·     EDSA +121%; after getting FDA green light for its clinical investigation of EB01, a sPLA2 inhibitor, which Edesa is developing for chronic allergic contact dermatitis

·     ORCL +8%; as reported better-than-expected Q4 earnings and revenue and gave an outlook that pointed to ongoing momentum driven by database/middleware license

·     TACO +2%; said it is expanding its partnership with BYND and will offer two new burritos containing that company’s plant-based protein.

Stock LAGGARDS

·     CCL -10%; after Q2 results topped views but lowers year EPS outlook to $4.25-$4.35 from prior view $4.35-$4.55 as sees lower ticket prices in 2H of the year

·     DRI -1%; after mixed Q4 results as EPS beat on mostly in-line revs, but comp sales of 1.6% missed the 2.4% est. and guided year outlook below views (FY20 revs $8.961B-$9.047B vs. $9.09B est.

·     KR 1%; reported in-line Q1 top/bottom line results while backed its earnings outlook/comp sales rose 1.5% and profit margins decreased

·     MEI -1%; after Q4 results that missed revenue and earnings estimates and guided FY20 EPS of $3.25-$3.55 on revs $1.13-1.17B vs. est. $3.57/$1.13B

·     RF -2%; amid broad weakness in regional bank stocks amid an expected declining interest rate environment that will reduce net interest margins (CFG, BBT, STI, ZION weak)

·     SCS -11%; after Q1 results missed (EPS 15c/$824.3M vs. est. 18c/$839.07M) saying results just short of revenue estimates because order growth was weighted toward the 2H of the quarter

Syndicate

·     Akero Therapeutics (AKRO) 5.75M share IPO priced at $16.00

·     Atreca 7.35M (BCEL) share IPO priced at $17.00

·     Cryoport (CYRX) 3.75M share Spot Secondary priced at $17.00

·     Genocea (GNCA) 10M share Secondary priced at $3.50

·     Gladstone Land (LAND) 1.1M share Spot Secondary priced at $11.73

·     Grocery Outlet (GO) 17.19M share IPO priced at $22.00

·     Personalis (PSNL) 7.922M share IPO priced at $17.00

·     Prevail Therapeutics (PRVL) 7.35M share IPO priced at $17.00

·     Zymeworks (ZYME) 5.56M share Secondary priced at $18.00