Tuesday, June 12, 2018
Equity Market Recap
· U.S. equity markets ended mixed, as the Nasdaq Composite touched a fresh intraday high (7,708.247) before paring gains, and the S&P 500 index edged higher though the Dow Industrials ended lower as investor’s position themselves ahead of upcoming central bank policy meetings this week. Markets were moving steadily higher all morning, take news of the meeting between U.S. President Donald Trump and North Korean leader Kim Jong Un well. However, markets slumped late afternoon as markets readied for central-bank meetings this week that could impact equity, currency and bond markets. The Federal Reserve’s two-day policy meeting kicked off today, with a 25-bps hike widely expected tomorrow afternoon, while the European Central Bank convenes on Thursday with an expected announcement related to the timing of a QE reduction. The Bank of Japan is scheduled to issue updates to their monetary-policy plans Friday.
· Inflation data in the form of CPI added to expectations of gradual rate hikes by the FOMC, as inflation in the U.S. continued to advance in May. The consumer price index rose 2.8% in the last 12 months, the largest year-over-year gain since February 2012, as gasoline prices and shelter costs kept rising (monthly PPI data tomorrow morning). One of top news stories today is the expected decision in Washington related to the AT&T $84B bid for TWX and whether the deal is allowed to proceed (has implications for wide ranging future potential anti-trust M&A deals), with a decision expected after the close tonight. Bonds steadied as the dollar gained, while gold prices dropped back below $1,300 an ounce.
· Consumer price index (CPI) increased 0.2% in May, in-line with economist estimates, while the core reading which strips out food and energy also rose 0.2% last month (also in-line); The consumer price index has risen 2.8% in the past 12 months, up from 2.5% in April. That’s the fastest rate since early 2012. The yearly increase in the core rate edged up to 2.2%.
· The National Federation of Independent Business small-business optimism index rose 3 points in May to a reading of 107.8, its second-highest level in 45 years and strongest level of the recovery. That’s just a touch under the record level of 108 reached in July, 1983.
· Oil prices end higher, as WTI crude settles at $66.36 per barrel, rising 26c (high $66.70 and lows $65.87) ahead of weekly inventory data tonight (API) and the EIA report tomorrow morning. The real catalyst in 2-weeks at OPEC meeting starting June 22nd. Gold prices slipped, falling -$3.80, or 0.3% to settle at $1,299.40 an ounce, its lowest level in just more than a week as defensive assets slip in the wake of the U.S.-North Korea developments, muting demand for haven metals; also, expected rate hikes from the FOMC tomorrow and likelihood the ECB announces policy change to start paring QE also weighs on gold prices.
· The U.S. dollar advanced mid-afternoon after spending most of the morning mixed vs. other currencies, getting a lift from a “hot” CPI report this morning, leading to rising expectations the Fed will remain on course to gradually raise rates at least four times this year. Currencies also await results from three central bank meetings in successive days, with the FOMC tomorrow, the ECB Thursday and the BoJ on Friday. The euro reversed morning gains, falling more than -0.3% late afternoon to 1.1740 (off earlier highs 1.1809), while the greenback also rallied to weekly highs vs. the Canadian and Aussie dollars as trade concerns linger after a tumultuous G7 meeting this weekend. The British pound fell from highs of 1.3425 to end little changed at 1.3375. Sterling tumbled Monday after data showed a sharp decline in U.K. factory output, casting doubt on future interest-rate increases from the Bank of England. Bitcoin prices fell late day, dropping over 4% below $6,500, its lowest levels since April.
· Treasury markets end little changed, paring early losses as yields pulled back from highs ahead of several central bank decisions. The hotter CPI reading pointing to more rate hikes (now likely on track for four total hikes in 2018) with the PPI data tomorrow. The 10-yr yield inches up to highs above 2.97% before paring gains while the shorter-term 2-yr yield up at 2.54%. The U.S. Treasury sold $14B in 30-year notes in a reopening with a yield of 3.10% compared to 3.099% when issued prior; the bid to cover (demand) was 2.38, same as the prior auction with indirect bidders awarded 62.2% of the auction and directs 10.3%.
Sector News Breakdown
· Retailers; URBN active following the company’s filing that indicated its quarter-to-date comps are tracking up mid-teens and ahead of expectations; LE shares jump after Q1 revs of $299M up 12% and tops the $285M estimate, though comp sales fell sharply; OXMearnings tonight; FIT rises early after rising 14.5% yesterday on positive Citron comments (FIT shares up 7 of last 8 days); MOV falls after Sidoti downgraded to neutral citing valuation; 52-week highs for COST, SYY, AAP, CMG, EL, TJX, ROST, PVH, KSS, FL, LVS in consumer related sectors
· Consumer Staples; DTEA reported weaker-than-forecast adjusted EBITDA on in-line comps of -7.0% in F1Q19; CASY falls as Q4 revs ($2.09B vs. $2.12B) and comps (2% vs. 3.1% est.) miss views; WTW initiated overweight and $105 tgt at JPMorgan saying recent changes will help drive mid-teens+ sales growth and 20%+ earnings growth; PM seeks prices increases in Japan – Bloomberg; LMNRshares declined following quarterly results
· Restaurants; PLAY shares jump following the company’s better than expected 1Q results, reflecting stronger comps and restaurant margins; BLMN positive at BMO Capital saying market appears to be overlooking the duration to which Outback US comps should remain strong, creating an attractive setup for BLMN’s stock;
· Housing & Building Products; RH rises on strong quarterly results as one analyst noted 7.5% in gross margin expansion and a positive 1% comp in spite of the 4% promo headwind last year/company guided 2Q18 comps to 8% – 10%, well ahead of expectations; HOME8M share Spot Secondary priced at $37.90
· Casino, Lodging & Leisure; SEAS downgraded to sell at Citigroup saying currency moves could pressure international attendance while new competition from Star Wars attractions could hurt SeaWorld’s results; in lodging, Nomura rolled forward tgt price drivers to 2019E EBITDA from 2H18E/1H19E EBITDA and in some cases marking our target multiples to market – they see the most upside in Buy-rated stocks: HLT (25%), MAR (19%), HGV (31%), STAY (17%), PLYA (28%)
· Auto’s; TSLA estimates raised at KeyBanc after checks with sales centers indicate Model 3 deliveries are tracking ~50% higher than their prior estimates for the quarter; ADNT downgraded at Wells Fargo as feel company is a near-term value trap until there is better direction/progress with new CEO coming in; there were reports late day that TSLA was laying off 9% of workforce
· Energy movers; SLB shares sank mate morning after saying that due to “prolonged market weakness” in Russia and the Middle East, its “revenue quality at present is below our international average; XOM started drilling development wells off the coast of Guyana as the oil major gears up for first production from one of its five major global projects by 2020.
· MLP’s; Barclays downgraded TRGP to equal-weight and DCP to underweight while upgrading ENBL to equal-weight as they pull back growth rates for G&P volumes in the Permian as they believe natural gas takeaway constraints and limitations on flaring may likely force a slowdown of completions, posing a risk to inlet volumes in the region.
· Utilities and power generation; utility index ended higher despite rising bond yields and rate hike expectations, but a few names touching 52-week lows today (ES, PNW, ED, AEP, DUK, DTE, WEC); BLDP rises after signs contract extension with Audi AG valued up to $100M
· Banks and financials; CMA active following slides ahead of investor presentation which showed better Q2 loan growth, but weaker deposits; HTGC 6M share Spot Secondary priced at $12.15
· Asset managers; monthly AUM data released: 1) BEN preliminary month-end assets under management of $732.8B at May 31, 2018, compared to $732.5B at April 30, 2018; 2) AB preliminary AUM increased to $541B during May 2018 from $538B at the end of April; 3) LM preliminary assets under management were $747.2B as of May 31, 2018, down 0.7% from $752.3B at the end of April; 4) APAMprelim AUM as of May 31, 2018 totaled $115.0B; 5) CNS prelim AUM of $59.3B as of May 31, 2018, was an increase of $769M from April 30; 6) IVZ monthly AUM of $977.3B was an increase of 0.5% MoM; 7) TROW May Preliminary AUM $1.04T as of May 31/says Client transfers for the quarter-to-date period ended May 31 was $2.5B
· Large Cap Pharma; GLMD shares nearly triple after a phase 2b trial of its treatment of non-alcoholic steatohepatitis achieved the endpoints necessary to support a phase 3 trial and an FDA marketing application 9other NASH related drug makers ICPT, MDGL, VKTXalso active in sympathy); AZN and LLY agreed to scrap the two late-stage trials of an experimental Alzheimer’s drug they were co-developing; the decision was taken after an independent data monitoring committee concluded that trials associated with lanabecestat, the experimental drug, wouldn’t achieve their original goals; shares of AET, CI will likely be active given the government decision related to AT&T/TWX deal later day – as sets stage for other deals with anti-trust fears; 52-week highs for managed care names UNH, HUM, CNC
· Biotech movers; SAGE surged on news they now plan to expedite development of its SAGE-217 drug in two areas of depression, major depressive disorder and postpartum depression after meeting with FDA; IDRA falls as the clinical trial for its dermatomyositis treatment didn’t meet the study’s primary endpoint of statistically significant reduction of Cutaneous Dermatomyositis Disease Area and Severity Index for IMO-8400 versus placebo
· Gene-editing sector (NTLA, CRSP, EDIT) defended by a few analysts saying concerns over cancer risk from gene editing were highlighted yesterday by an article published by STAT news based on two Nature Medicine papers was overblown
· Medical devices, equipment and services; DXCM announces that the company has received CE Mark for its Dexcom G6 System for people with diabetes ages two years and up; ENZ shares dropped early after Q3 results missed both top and bottom line estimates;SYK adds to yesterday declines after WSJ reports that they could be looking at BSX ; 52-week highs for several in sub-sector: EW, ISRG, IDXX, RMD, ILMN, BSX, ABMD, ALGN, LH
Industrials & Materials
· Industrial & Machinery; Longbow said underlying demand for Class 8 trucks remains robust as freight levels climb higher and freight rates remain elevated (PCAR, NAV, RUSHA, CMI);
· Transports; Dow Transports trade to best levels since late January, topping 11,100 (all-time high 11,423 on 1/16) – with 52-week highs for EXPD, NSC, CSX, JBHT; in airlines, JBLU May load factor rose to 85.8% from 84.7%, as increased passenger demand outpaced growth seat supply. Traffic for the month rose 8.9% from a year ago to 4.34 billion revenue passenger miles, while capacity increased 7.6% to 5.06 billion available seat miles (follows better UAL data Friday and positive mention of LUV in Barron’s over weekend)
· Defense & Aerospace stocks slip early, with declines in LMT, RTN, GD after positive summit between US and North Korea; HXLestimates refined for C18-19 ests at Cowen (now 5% below C19 consensus) given tweaks to Airbus’s production outlook. We’d wait for a better entry point to emerge, perhaps as 2019 estimates come into greater focus
· Chemicals; KMG rises as much as 12% after better earnings and raised guidance, with shares trading at all-time highs; shares of CF, IPI, MOS, NTR, DE, AGCO active after monthly WASDE report showed U.S. corn inventories on Aug. 31, 2018, may be less than analysts expected, as record exports draw down supplies. Report showed stockpiles may be 2.102 billion bushels, lower than any forecast made in a Bloomberg survey of analysts
Technology, Media & Telecom
· Internet; TWTR tgt raised to $50 from $39 at JPMorgan saying it believes advertising momentum is strengthening, particularly among large marketers; sees ad revenue growth accelerating in 2Q, 3Q, with +21% projection for 4Q likely conservative
· Media & Telecom movers; today marks the expected court decision on whether AT&T (T) $85B deal with Time Warner (TWX) proceeds or if the federal judge in Washington will grant the U.S. Justice Department’s request to block the takeover on antitrust grounds
· Semiconductors; equipment stocks have been pressured over the last week on cautious check on LRCX shipments, though JPMorgan defends today saying they don’t disagree that there is some downside risk to estimates in C2H18, but believe the services business (recurring revenue) that is 25% of their overall business and deferred revenue backlog translate to minimal downside in 2H; NXPI shares fall after Senate pushback on ZTE ban lift
· Optical sector active after Axios reported that Senate lawmakers today attached a new provision to a “must-pass defense authorization bill” that would will undo any deal for Commerce to reduce its original punishment against ZTE Corp. (AAOI, ACIA, LITE, OCLR)