Mid-Morning Look: June 13, 2018

Terrie AmengualDaily Market Insights

Mid-Morning Look

Wednesday, June 13, 2018

Equities mixed as markets await the Federal Reserve rate decision later this afternoon, where they are widely expected to increase rates by 25 bps and offer details on path forward for monetary policy (current market expectations a total of four hikes in 2018). Telecom sector declines led by AT&T after winning clearance to buy TWX (which is also boosting several media related stocks – FOXA, LGF/A, CBS, VIAB). Healthcare stocks also rising as the decision by Washington judge overnight on TWX/T now lays the groundwork for current deals that have antitrust issues (CVS/AET and CI/ESRX). Inflation data came in “hotter” than expected for a 2nd straight day, as PPI jumped in May (follows rise in CPI yesterday), raising the case for Fed to continue gradual rate hikes. Despite the big macro stories this week (G7, CPI/PPI data and the U.S. and North Korea summit yesterday), major U.S. markets have been holding in fairly tight ranges considering. If the three central banks this week (FOMC, ECB, BOJ), don’t shake things up, there’s always triple witching expiration of futures and options on Friday that could stir volatility. The dollar is modestly lower vs. most counterparts, while oil slips and both gold and bonds steady heading into the FOMC meeting results this afternoon and the ECB meeting tomorrow morning.


Treasuries, Currencies and Commodities

· In currency markets, the U.S. dollar slips to morning lows, with the dollar index down a little over -0.1% despite an expected rate hike from the FOMC later today of 25 bps and its “dot-plot” which should give Wall Street a view of future rate hikes; the dollar slides to lows vs. Japanese yen at 110.37 (off overnight highs 110.72) as stocks pullback

· Precious metals little changed as well ahead of the FOMC rate decision today, with futures holding around the $1,300 level the last week

· Energy futures active after the IEA laid out for the first time its oil demand forecast for next year, saying it expects demand to grow by 1.4 million barrels a day in 2019, on par with this year. Meanwhile inventory data overnight bearish as API showed supplies rose by 833,000 barrels for the week ended June 8; showed an increase of 2.3 million barrels in gasoline stockpiles, while inventories of distillates climbed by 2.1 million barrels). EIA data coming up this morning

· Treasury markets stay the course, holding around 2.95%-2.97% the last few days despite a jump in inflation readings (CPI yesterday and PPI today), as markets still await the FOMC rate decision later today and ECB comments as it related to future of QE purchase program


Economic Data

· Producer Price Index (PPI) for May jumped 0.5% vs. est. 0.3%, while final demand ex food, energy (core) rose 0.3% MoM vs. est. up 0.2% – both coming in above the consensus views; final PPI demand rose 3.1% YoY, topping the 2.8% estimate and was the largest YoY rise since Jan. 2012; lastly, PPI core YoY rose 2.4% vs. est. up 2.3%


Sector Movers Today

· Managed care & service movers; space very active in reaction to the approval of the TWX/T $85B deal last night as a judge ruled in favor; Leerink noted court decision is in favor of the companies and against the DOJ, meaningfully increasing the probability that the two vertical mega-mergers will close (CI offered to buy ESRX for $67B on March 8th, while CVS agreed to buy AET for roughly $69B on December 3rd); IQV 12M share Spot Secondary priced at $103.50

· Semiconductors; RBC Capital upgraded ASML to outperform and downgraded AMAT and LRCX to sector perform based on belief in lower than expected WFE spend in 2019, positive stance on EUV deployments (ASML), potential for estimate reductions in CY19E for semicap equipment in our coverage (ex: ASML), 4and positive long-term stance on the industry if we were to take a 3-5 year view (emphasis on our ratings being 12-month in nature)

· Cruise lines (NCLH, RCL, CCL); Nomura boosted target prices for the cruise line group, which now imply ~40% upside for their Buy-rated stocks as rolling our target drivers forward to 2019E EPS from 2H18/1H19E EPS. Raises NCLH target to $72 from $69 (37% upside), RCL’s target goes to $156 from $152 (48% upside), and CCL’s target is now $86 from $82 (38% upside). Remain positive on the group as ~18% EPS growth, low leverage, and the potential for increasing capital returns in 2019E drive outperformance

· Media & Telecom; AT&T (T) $85.4B acquisition of TWX is now set to close on or before 6/20/18 after Judge Richard Leon’s decision on the DOJ suit against the deal ruled in favor of AT&T/Time Warner. The favorable ruling for T/TWX came with no conditions, and the Judge urged the DOJ not to seek a stay pending appeal. FOXA shares jumped as analyst note it opens the door to a bidding war between CMCSA and DIS for some of its assets after Fox previously agreed to sell its entertainment unit to DIS for $52B

· Following the TWX/T news, Sprint (S) was upgraded at Raymond James reflecting a 65% probability of the proposed merger with T-Mobile being approved with a YE19 closing, while the firm downgraded CMCSA to market perform following a favorable ruling on AT&T/Time Warner, increasing the likelihood Comcast will make a formal FOXA offer


Stock GAINERS

· AET and ESRX rises in reaction to the passing of the TWX/T merger deal last night in Washington, raising expectations their deals with CVS and CI respectively will proceed

· ENPH +32%; to acquire SPWR’s microinverter business for $25 million in cash and 7.5 million shares of Enphase common stock https://yhoo.it/2LNmrF4

· FDC +3%; after several analysts raise tgt following its analyst day yesterday

· FOXA +7%; another movers after T/TWX deal as open the door to a bidding war between CMCSA and DIS for some of its assets after Fox previously agreed to sell its entertainment unit to DIS for $52B

· KFY +15%; as Q4 EPS and revs top consensus and guides next quarter EPS 67c-75c on revs $450M-$470M, above the 66c/$$438M estimate

· NFLX +2%; target to a Street-high $490 at Goldman Sachs and sees significant positive cash generation in 2022

· PVTL +15%; strong Q1 beat on headline metrics, and posting its first quarter of positive FCF; also guided F2Q ahead of street and raised FY19 guidance in excess of the F1Q beat

· SYK +5%; after the company said it is not in talks with BSX regarding a potential acquisition


Stock LAGGARDS

· BSX -3%; after SYK said in an 8K filing it is not in talks with BSX regarding a potential acquisition

· CMCSA -2%; downgraded to market perform at Raymond James following a favorable ruling on AT&T/Time Warner, increasing the likelihood Comcast will make a formal FOXA offer

· FLKS -66%; terminated its Phase 2 clinical trials evaluating lead drug FLX-787 in amyotrophic lateral sclerosis (ALS) and Charcot-Marie-Tooth (CMT) due to oral tolerability concerns

· HRB -19%; beat on the top and bottom line for quarterly results, but shares plunge as revenue outlook of $3.05B-$3.1B was below the consensus estimate of $3.14B, and guidance for the company’s FY19 EBITDA margin of 24%-26% compared to FY18 EBITDA margin of 29.6%

· HSY –3%; as Credit Suisse cut to underperform as believes the shift in shopping patterns to more convenient methods like online and click-and-collect will materially reduce the number of impulse purchase occasions for confectionery products merchandised at traditional checkout aisles

· SCPH -21%; after the FDA failed to approve the company’s edema treatment, Furoscix, which was intended for edema, or fluid overload, in heart failure patients

· T -3%; as its $85B acquisition of TWX is now set to close on or before 6/20/18 after Judge Richard Leon’s decision on the DOJ suit against the deal ruled in favor of AT&T/Time Warner. The favorable ruling for T/TWX came with no conditions, and the Judge urged the DOJ not to seek a stay pending appeal

· YELP -3%; downgraded to sell at Aegis and lowered estimates for 2018 and 2019 on belief that the lifetime value of Yelp’s account base is diminishing by as much as 25%


Syndicate

· Circor (CIR) 3.283M share Secondary priced at $44.25

· Immunomedics (IMMU) 11.5M share Secondary priced at $24.00

· Iqvia (IQV) 12M share Spot Secondary priced at $103.50

· Mackinac Financial (MFNC) 1.613M share Spot Secondary priced at $15.50

· USA Compression (USAC) 5M share Spot Secondary priced at $16.20

 

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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