Market Review: May 17, 2018

Terrie AmengualDaily Market Insights

Closing Recap
Thursday, May 17, 2018

Equity Market Recap
· U.S. stocks end lower in a day of market fluctuation as investors focus turns to trade amid several comments/speakers related to Nafta today as well as the ongoing trade dispute with China. Dow components CSCO and WMT were the two biggest drags on the index after quarterly results and mixed guidance while rising borrowing costs (10-year touched 3.11% today) and the surging dollar also weigh on market sentiment. Inflation data recently (CPI and PPI) both came in tamer than expectations, but oil prices keep moving higher, something investors will likely keep an eye on (prices at the pump offset the benefits of tax plan?). Energy stocks among the day’s best performers as Brent crude pushed through $80 a barrel (before paring gains) and WTI tops $72 per barrel (before slipping to end flat). The S&P 500 Index briefly fell to session lows mid-afternoon after President Trump raised doubts about the outcome of talks between his trade representatives and China’s negotiator, while also saying would have to wait and see regarding North Korea and peace talks.
· Standing out again today, the small-cap benchmark Russell 2000 index which hit a fresh all-time intraday high (after best record close of 1,616.37 yesterday) as small caps still seen as resilient in rising dollar environment and trade fears as revenues largely domestic. Healthcare sector in focus today after big cancer meeting ASCO (early June) abstracts released last night – moving shares of LOXO, DVAX, JNCE, NKTR among others. Also lots of M&A related news in the energy sector, specifically the MLP Pipeline area (details of three deals below).
· Trade becomes the next market catalyst: Regarding NAFTA, Canadian Prime Minister Justin Trudeau said the sticking point to renegotiating the North American Free Trade Agreement is the U.S. demand for a sunset clause. Canada and Mexico both reject the sunset clause idea. Otherwise, however, the three sides are close to a deal, he said. Of course the talks between the U.S. and China and their ongoing trade dispute also remains a key focus.

Economic Data
· Weekly Jobless Claims rose 11K to 222K above last weeks unrevised 211K and the est. 215k; the 4-week moving average fell by 2,750 to 213,250 (and for the second week in a row these claims were at the lowest level since 1969); continuing claims fell 87K to 1.707M in the latest week
· Philly Fed manufacturing index rises to better-than-expected 34.4 in May, handily topping the 21.0 estimate; general business conditions were 23.2 in the prior month: component break-down: May prices paid fell to 52.6 from 56.4 while new orders rose to 40.6 vs 18.4 and employment rose to 30.2 vs 27.1; shipments rose to 25.8 vs 23.9 prior
· U.S. Q1 Household debt rose 0.5% from prior quarter to $13.21 Trillion; Mortgage delinquency rate improved to 1.22% from 1.27% prior quarter; student loan delinquency rate decreased to 10.66% from 10.96% prior quarter; the lowest since 2nd quarter 2012; student loan debt total at $1.407T from $1.378T in 4Q a change of $29b
· The 30-year fixed mortgage rate for week ended today rose to 4.61% from 4.55% according to data from Freddie Mac; the 15-year rate avg 4.08%, up from 4.01% a week earlier; the 30-year rate of 4.61% matches highest level since May 2011

Commodities

· Oil prices end flat as WTI crude settles at $71.49 per barrel, holding near its best levels since December 2014. Brent pares gains after surging past the $80 per barrel level earlier (highs $80.50), settling at $79.30 an ounce. Oil prices have remain elevated as global supply tightens and the U.S. moves to restrict oil exports from Iran. Gold futures slump another -$2.10, or 0.2% to settle at $1,289.40 an ounce, posting its lowest finish since late December as the dollar holds

Currencies
· The U.S. dollar was fairly quiet after its recent push to 2018 highs, rising slightly off earlier lows (Dollar index “DXY” low 93.11), helped by better economic data readings today. The euro trades back below 1.18 (steady most of the day), while the dollar rises to 110.75 vs. the yen; the Pound back above 1.35
· Bonds slipped as yields extended their recent gains with the 10-year yield bouncing above 3.11% before slightly paring gains. Bonds dipped after stronger than expected manufacturing data (raising expectations the Fed may get more aggressive on pace of rate hikes amid surging economy); the 2-yr yield down the last 2-days at 2.56%, while the 30-yr above 3.23%. The U.S. Treasury sold $11B in 10-year when-issued TIPS notes at a yield of 0.934% vs. 0.924% w/I prior to auction; the bid-to-cover was 2.42, below the 2.56 prior and indirect bidders awarded 64.3%.

Sector News Breakdown

Consumer
· Retailers; Dow component WMT posted Q1 EPS beat by 2c on better revs $122.7B on slightly better comps (said Q1 e-commerce sales rose 33% y/y vs 4Q’s 23% gain); BJ’s Wholesale Club Inc., the retailer which was taken private by Leonard Green & Partners LLP and CVC Capital Partners in a 2011 buyout, filed for an IPO; PLCE shares fall as Q1 EPS and revs miss by wide margin and posts unexpected comp sales decline (-1.8%) vs. est. up 2.5%, though guides Q2 above views; DDS rises after earnings as reports a 2% increase in total merchandise sales and comparable sales during Q1/while revs and EPS for Q1 top views; JCP shares fall after cutting its profit forecast for the year after sales trailed estimates during an unseasonable cold spell (follows stronger results from Macy’s yesterday), while comp sales rose a smaller 0.2% vs. est. above 2%
· Consumer Staples; KO was upgraded to overweight at Barclays saying company’s transformation should drive sustainably better growth (Citi also said pullback brings compelling valuation); in beer space, TAP downgraded to hold at Stifel as expects beer consumption per capita to decline and an unfavorable shift for Molson in consumer preferences to wine and high-end beer; FLO shares slumped after mixed Q1 earnings results; JACK falls early after Q2 EPS and system-wide comp. sales that missed estimates and failing to provide long-term forecasts
· Auto sector; Goldman Sachs reiterates sell and $195 tgt on TSLA as they say Tesla will need to raise more than $10 bln in capital raises and debt refinancing by 2020; Ford (F) resuming production of F-150 pickup at Dearborn Truck Plant on Friday/reaffirms 2018 adj. EPS guidance of $1.45-$1.70, sees adverse impact of 12c-14c per share in 2Q due to lost production
· Non-apparel retail; Staples-owner Sycamore offers to buy workplace wholesaler ESND/offering to buy the rest of the company for $11.50 per share https://cnb.cx/2rM29Eg

Energy
· MLP sector; lot of news in pipeline space today: 1) ENB said it would bring its sponsored vehicles and all liquids and gas pipeline assets under a single listed entity. Enbridge said it would buy in outstanding shares of its various corporate units, including SEP for a value of C$11.4B ($8.94B) https://reut.rs/2Kx8KcE ; in another deal, 2) WMB to buy WPZ in all-stock deal valued at $10.5B deal will mitigate negative impact from recently amended tax rules that removed a tax allowance for MLPs, add cash available for dividends; https://reut.rs/2KwupBT ; Lastly, 3) LNG proposes buying all outstanding shares of Cheniere Energy Partners LP Holdings (CQH) it does not already own in a stock-for-stock exchange that would value CQH at ~$6.54B; LNG offers to exchange 0.45 of its shares for each outstanding CQH share in a deal that would value CQH at $28.24 per share https://on.mktw.net/2L67I8y ; ETE upgraded to buy at Bank America and raise tgt to $20
· Refiners; the refining sector upgraded to attractive from in-line at Morgan Stanley saying refining margins are expected to expand 30% through 2020. However, supply struggles to keep up with robust demand as the world needs three refineries every year to match demand growth, and it will fall short by one refinery each year through 2020; said PBF, VLO (which was upgraded to OW) and PSX would see greatest benefit from the IMO 2020, almost doubling EBITDA levels on average in its coverage (said MPC and VLO top picks)
· E&P sector; RRC was named a new best idea long at Hedgeye saying sees 65%-100% upside in shares; CVE was upgraded to outperform at BMO Capital on valuation; COG was added to Evercore ISI tactical outperform list; KOS was downgraded at Barclay’s; CHK shares rise along with energy, brings 7-day rally to 32%, outperforming other nat gas leveraged names; 52-week highs today for several energy names in the S&P 500 today: EOG, PXD, HES, COP, NOV, MRO, VLO, NBL, PSX, APC, OKE

Financials
· Large Cap banks were quiet as financials have rallied of late amid rising rates/yield, but not much in way of news; in the insurance space, AIG was upgraded to buy with $65 tgt at UBS as sees AIG stock starting to perform closer to its peers as it starts to regularly meet or beat earnings estimates and return to growth; CNO upgraded to equal-weight at Morgan Stanley after sizable stock price underperformance saying prior concerns are appropriately are priced; ALL says April catastrophe losses included 10 events at estimated cost $195M pretax; PGR cut to market perform on valuation at KBW

Healthcare
· ASCO abstract winners: IMMU rises after an ASCO abstract showed sacituzumab govitecan (IMMU-132) induced objective responses in heavily pre-treated hormone-receptor positive/HER2-negative metastatic breast cancer patients; LOXO rises after an abstract of preliminary data for LOXO-292 impressed Wall Street (Stifel raises tgt to $190 on data); ECYT rises as Jefferies noted an abstract for its study of PSMA-617 for prostate cancer featured results from an additional 20 patients and looked “very promising”
· ASCO abstract losers: JNCE shares drop after updated safety and efficacy data from its Phase 1/2 ICONIC study evaluating lead candidate JTX-2011 across four solid tumor types will be presented as ASCO (downgraded at Wells Fargo following abstracts); NKTR falls after ASCO abstracts posted last night showed lower response rates than previously reported for Nektar’s NKTR-214 in combination with BMY’s Opdivo for melanoma; BPMC falls on LOXO data after Stifel said confident that discrepancy in overall response rate (ORR) between data of LOXO-292 and Blueprint Medicines’ BLU-667 will meaningfully narrow as Loxo’s results mature; CTMX after release of ASCO abstracts on its Phase 1/2 PROCLAIM-072 study assessing PD-L1-targeting Probody therapeutic CX-072 in solid tumors; DVAX as RBC Capital noted ASCO abstract for SD-101 data continue to show potential activity, though open-label nature continues to make interpretation challenging; SNDX falls after results for entinostat in combination with Merck & Co.’s Keytruda failed to reach their own hurdle said one analyst

Industrials & Materials
· Industrial & Machinery; USCR shares slumped after short seller Spruce Point Capital releases “strong sell” report on company saying it expects a 60-90% downside for stock; PNR was downgraded at KeyBanc on valuation post spin-off; GE shares rise, now up roughly 18% since closing at a 9-year low on April 9; DE to report earnings tomorrow morning
· Shipping and tankers; the Baltic Dry Index Falls 7.0% to 1,305 Points in London; TK shares dropped after saying subsidiary Teekay Tankers may face weak tanker rates for most of this year
· Transports; Transport index outperforms broader averages, as much as 1% at 10,800; top gainers truckers and rails (CHRW, CAR, NSC, LSTR, JBHT), while airlines lag (AAL, ALK)
· CNI double upgrade to buy from underperform at Bank America saying it is experiencing a significantly faster rebound in service and volume growth than expected
· Metals & Mining; Steel stocks upgraded at Macquarie, raising NUE to outperform noting widening metal spreads haven’t fully been priced into the stock, while they upgrade CMC to neutral citing rebar prices, which are expected to stay strong on improving construction activities
· Chemicals; Tianqi Lithium Corp. is buying a stake (62.5M shares) in Chile-based lithium producer SQM from NTR for about $4.07B, for consideration $65 per share https://on.wsj.com/2IrllkY

Technology, Media & Telecom
· Networking sector active after Dow component CSCO reported Q3 profit and revenue that topped analysts’ estimates but tepid guidance for Q4 weighs on shares as analysts disappointed that strong spending climate/switching product launch did not allow to exceed a low bar (shares of supply chain for CSCO include: FLEX, JBL, APH among others)
· Technology services and technology; TDC was upgraded to buy at Stifel saying the risk/reward setup is too compelling to remain on the sidelines; in government services, Wells Fargo upgraded MANT to outperform with $58 tgt as believe investors over-reacted to CQ1 FCF news while also downgrade SAIC to market perform after recent outperformance/see limited upside
· Software movers; ACXM shares fall initially after Q1 revenue guidance missed estimates though some analysts note connectivity growth strong; TTWO reported mixed March quarter results, with revenue below the Street and EPS above while also offered initial FY19 guidance below consensus (follows high expectations after ATVI and EA recent beats)
· Semiconductors; NXPI shares active after China approves Toshiba’s sale of $18B chip unit to Bain consortium (helping raise chances its deal with QCOM will go through) https://yhoo.it/2rKTbX0 ; AMAT to report tonight – big name for semi-equipment sector; MLNX boosted its Q2 and full year outlook (raises year revs to $1.05B-$1.07B from $1.03B-$1.05B); AMBA fell after Reuters reported Intel’s Mobileye has signed a contract to supply 8m cars at an unidentified European automaker with its self-driving technologies
· Media movers; CBS shares plunged as much as 6% midday after a Judge rules in favor of the Redstone family (VIAB) & National Amusements in battle with CBS Corp to undercut control of company; CBS downgraded to neutral at Bank America saying the lawsuit brought by CBS and the special committee alleging a breach of fiduciary duty by the National Amusements Inc. is a significant overhang for shares; WWE shares rise as Guggenheim said reports pertaining to the UFC’s new TV rights continue to bolster their confidence that our outlook for WWE’s U.S. TV rights renewal is not only achievable but appears increasingly conservative
· Internet movers; China’s NTES falls as Q1 misses profit view by wide margin though beats revenue estimates/Q2 net income decreased nearly 44% YoY; SPOT and P were weaker to start after GOOGL’s YouTube said it was entering the subscription music-streaming business starting May 22nd

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Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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