Market Review: June 14, 2018

Terrie AmengualDaily Market Insights

Closing Recap

Thursday, June 14, 2018

Equity Market Recap

· U.S. stocks end mixed, as the technology heavy Nasdaq Composite traded to new all-time record highs (7,768.60 high), lifted by momentum driven Internet and semiconductor sectors, while stronger than expected May retail sales (up 0.8% for the biggest gain since November) once again showed the economy remains very healthy, validating yesterday’s FOMC rate hike. The ECB decided to keep interest rates unchanged, as expected, and laid the groundwork for ending its asset purchase program by pledging that rates in the EuroZone would not start to rise at least until next summer. The commentary weighed heavily on the Euro, dropping as much as 1.6% to trade below the $1.16 level vs. the dollar. Meanwhile the dollar index traded to its best levels of 2018, higher vs. the euro, along with continued gains against emerging market currencies as the Mexican Peso and Argentine Peso decline. Yields fell despite yesterday’s 25 bps hike by the Fed to 1.75%-2% range and raised its outlook for four rate hikes this year from prior view of three. The Dow Industrials dropped after rising as much as 130 points earlier (highs 25,332), while the S&P posted small gains. Regarding trade, CNBC reported late day that the White House tomorrow plans to roll out tariffs on about 800 to 900 Chinese export products, lower than the original list of about 1,300 products published by the U.S. Trade Representative in April, easing some concerns. One more central bank meeting, with the Bank of Japan out tonight.


Economic Data

· Retail sales for May month-over-month rose a greater than expected 0.8%, topping the 0.4% estimate while the prior month was upwardly revised to 0.4% from 0.3%; retail sales less autos rose 0.9% in May, topping the 0.5% estimate. Retail sales have risen a solid 5.9% over the past 12 months, and sales are rising at a more than 5% yearly pace even if gas is excluded.

· Weekly Jobless Claims fell 4K to 218K and below est. 223K; the 4-week moving avg. falls 1,250 to 224,250; continuing claims fell by 49,000 to 1.69 million in early June to touch the lowest level since the end of 1973

· Import prices for May rose 0.6% MoM after rising 0.6% in April and topping the 0.5% estimate; import prices rose 4.3% y/y in May while import prices ex-fuels rose 0.2% after rising 0.2% in April. The increase in import prices over the past 12 months rose to 4.3% from 3.6%. If fuel is omitted, the increase in import prices over the past year was a more modest 1.9%.

· The 30-Yr Fixed Mortgage rate rose to 4.62% this week from 4.54%, while the 15-year rate avg 4.07%, up from 4.01% a week earlier;


Commodities

· Oil prices closed higher, with WTI crude up 25c to settle at $66.89 per barrel, its 4th gain in a row, and extending its climb to 2-week highs, while Brent prices slip as sentiment remained upbeat following a weekly inventory report on domestic supplies showed the largest one-week drop since the end of March. All eyes on upcoming OPEC meeting starting next Friday the 22nd. Earlier, Saudi Arabia’s oil minister said it’s “inevitable” that OPEC and its allies will agree to boost oil output gradually, giving the most definitive signal yet that the cartel will alleviate high prices for consumers. “I think we’ll come to an agreement that satisfies most importantly the market,” Khalid Al-Falih told reporters – Bloomberg. The OPEC meeting starts next week. Gold prices climbed $7.00, or 0.5% to settle at $1,308.30 an ounce, getting a boost despite strength in the dollar, its highest finish in a month in the wake of monetary policy decisions by the European Central Bank and U.S. Federal Reserve


Currencies

· Currency markets focused on the euro weakness, falling more than 1.6% to lows below $1.16 (off overnight highs 1.1851), back to 2-week lows after the ECB laid out plans to taper its program of monthly bond purchases later this year, aiming to bring them to a halt by the end of 2018. The British Pound dropped below 1.33 (lows 1.3284) after reports Senior European Union officials have informally discussed whether the U.K. might need to stay in the bloc past March 2019 if Brexit negotiations don’t accelerate. The dollar was little changed vs. the yen while the Argentine Peso dropped amid reports that a group of central bank directors will leave the institution and as truck unions begin a strike in the country. Bitcoin bounces 5% after falling to February lows yesterday, holding at $6,600.


Bond Market

· Treasury market’s gained as yields declined as the European Central Bank laid out a schedule for paring back is asset-purchase program. The ECB indicated that it would end in December and signaled that it would join the Federal Reserve in tightening its benchmark interest rates at least until the summer of 2019; 10-yr yield falls back 4 bps below 2.94% after rising briefly yesterday above the 3% level after the Fed rate hike, while the 2-yr yield at 2.55%. Rising inflation data this week (CPI, PPI), a rate hike by the Fed and positive words about the strength of the economy has failed to weigh on bonds this week.


Sector News Breakdown

Consumer

· Auto sector; auto parts supplier AXL boosted its 2018 sales view to $7.1B-$7.2B, up from about $7B forecast in January, given the launch schedule programs in its new and incremental business backlog/confirmed both its 2018 adjusted Ebitda Margin and Adj. Free Cash Flow targets; also in auto parts, MPAA shares fall as Q4 EPS missed by 12c on weaker margins and as mid-point of year sales guidance ($465M-$474M) missed estimates ($471.5M);

· Retailers; KSS was downgraded to neutral from buy at Citigroup noting the stock is up +27% (vs the group median +10%) since the day they reported what they considered to be underwhelming top line results on 5/22 and has passed their tgt; MIK shares fall as Q1 comp sales rose 0.4%, missing the consensus estimate of +0.8% (notes a higher average ticket offset a drop in customer transactions during the quarter); TLRD shares fall despite mostly in-line EPS and revs as mid-point year guidance ($2.35-$3.50 vs. $2.49 est.) and weaker margins hurt shares; DEST jumps on earnings as comp sales fell (-0.1%)

· Casino, Lodging & Leisure; cruise liner RCL agreed to acquire a 66.7% stake in Silversea Cruises based on an enterprise value of ~$2B/purchase price of the equity stake being acquired is approximately $1B; casinos were mixed (WYNN, LVS, MLCO); lodging stocks were mostly higher


Energy

· Oil stocks were under pressure, led by declines in E&P (NFX, CXO, PXD), drillers (NE, ESV, DO), while refiners advanced (MPC, PBF); WTI shares upgraded to buy at Seaport Global saying in note there’s a free cash flow “storm brewing” in the Gulf; PXD agreed to sell Raton Basin Assets for $79M; Natural gas prices were little changed despite bearish weekly inventory data amid a larger 96 bcf build (vs. 90 bcf estimate)


Financials

· Large Cap banks reversed yesterday gains, leading the declines in the S&P 500 index as bond yields slump; in brokers; ETFC said daily average revenue trades for May were 253,649, a 1% increase from April and 20% increase YoY/added 40,261 gross new brokerage accounts in May, and ended the month with about 3.9 million brokerage accounts; SCHW core net new assets brought to the company by new and existing clients in May 2018 totaled $19.4 billion. Net new assets excluding mutual fund clearing totaled $18.4 billion; COF upgraded to Overweight at Piper and increasing price target to $116 from $98 as credit profile has improved at a faster rate than initially anticipated

· REITs; ACC was upgraded to buy at Bank America citing valuation saying here has been better-than-anticipated pricing on recent asset sales; UNIT was downgraded at Morgan Stanley citing strong YTD performance, UNIT’s dividend yield has declined ~300 bps to 10.4%


Healthcare

· Large Cap Pharma; in generics, MYL shares dipped after saying the FDA will issue a complete response letter this month on its application for a generic version of GlaxoSmithKline’s asthma medicine Advair Diskus; GSK’s ViiV Healthcare announced “positive headline results” from its phase III Gemini study program; MRK’s KEYTRUDA (pembrolizumab) received FDA approval for the treatment of pediatric and adult patients with refractory primary mediastinal large B-cell lymphoma (PMBCL) who have received at least two prior lines of therapy; TLGT receives FDA approval of its topical corticosteroid ointment, Diflorasone Diacetate 0.05%

· Biotech movers; ARGX announces results from its Phase 1 clinical trial evaluating a subcutaneous (SC) formulation of efgartigimod (ARGX-113) in healthy volunteers; NITE rises after the FDA granted regenerative medicine advanced therapy (RMAT) designation to the company’s lead product, NSR-REP1, for treatment of choroideremia; in equipment, WAT shares fell after a downgrade to underperform by Cleveland Research


Industrials & Materials

· Metals & Mining; in steel space, NUE guides Q2 EPS $2.05-$2.10 above the est. $1.72, reiterating its view of substantial growth on higher average selling prices and increased profitability across all its steel mill product groups; in research, KeyBanc said the steel sector’s valuation remains fair based on 2019 estimates, even as equities seem cheap on this year’s assumptions, and downgraded STLD on valuation while remains overweight on RS due to its exposure to potential infrastructure spending and M&A opportunities; TMST is also rated overweight


Technology, Media & Telecom

· Internet; ETSY raises 2018 revenue growth to 32%-34% from prior view 22%-24% after saying transaction fee charged when a seller makes a sale will change to 5% from 3.5%, and it will also apply to the cost of shipping; also raises GMS growth view to 16%-19%; GRUB tgt raised to $130 from $100 at Oppenheimer, saying it sees large opportunities for off-platform growth; Pandora (P) said it has a new partnership with Snapchat parent SNAP; 52-week highs TWTR, NFLX

· Media & Telecom; M&A dominating media/telco space last two days after CMCSA offered FOX $35 a share in cash for assets that it had agreed to sell DIS/the offer is a 19% premium over Disney’s offer and values Fox at $65 billion ($52.4B offer from DIS) https://bloom.bg/2LOdPhm ; the moves comes after the government approved AT&T’s (T) $85B deal bid for TWX

· Software movers; ORCL downgraded to neutral from overweight at JPMorgan and lowers the price target from $55 to $53 citing valuation; ASUR 2.5M share Spot Secondary priced at $17.50; ADBE to report earnings after the close tonight

· Hardware and components; ROKU initiated Outperform and $49 tgt saying Roku’s smart TV penetration is growing rapidly thanks to its licensed Roku OS, which drives higher viewership and leads to growth in ad impressions; in optical space, FNSR to report earnings after the close

 

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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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