Closing Market Summary: Busy Week Starts on a Lower NoteStocks retreated from record highs on Monday as investors took some profits following four weeks of nearly nonstop gains and ahead of a busy week that will feature President Trump's first State of the Union address (Tuesday), the Fed's latest policy directive (Wednesday), the Employment Situation Report for January (Friday), and a host of tech earnings.
The S&P 500 dropped 0.7% to 2853.53, the Dow Jones Industrial Average tumbled 0.7% to 26439.48, and the Nasdaq Composite declined 0.5% to 7466.51. All three major indices opened the session modestly lower and kept within a pretty narrow range for much of the day. However, a wave of selling in the final hour of action pushed the averages to new lows, approximately doubling their earlier losses. All three indices finished near their worst marks of the day.
11 of 11 sectors declined on Monday, with the top-weighted technology group (-0.9%) showing relative weakness. Apple (AAPL 167.96, -3.55) lost 2.1% after the Nikkei Asian Review reported over the weekend that the tech giant plans to slash its iPhone X production for the first quarter by 50% following a disappointing holiday season. Conversely, Twitter (TWTR 25.18, +0.91) jumped 3.8% after Fox Business reporter Charlie Gasparino tweeted that the company is trying to sell itself.
The telecom services space (-1.3%) struggled early following reports that the Trump administration wants a federal takeover of the nation's 5G wireless network, but trimmed losses later in the day after the White House clarified that such a plan is not currently in place. Verizon (VZ 54.13, -0.59) and AT&T (T 37.26, -0.56) lost 1.1% and 1.5%, respectively.
The rate-sensitive utilities (-1.3%) and real estate (-1.2%) sectors finished with telecom services at the bottom of the sector standings as selling in the Treasury market pushed yields to multi-year highs; the yield on the benchmark 10-yr Treasury note climbed three basis points to 2.70%--its highest level since April 2014.
On a positive note, Amazon (AMZN 1417.68, +15.63) jumped 1.1% to a new all-time high after Citigroup raised its target price of AMZN shares to $1600 from $1400. The consumer discretionary sector, which houses Amazon, was among the top-performing groups, but still lost 0.3%.
In earnings news, Lockheed Martin (LMT 351.42, +6.52) and Seagate Tech (STX 55.11, +0.17) climbed 1.9% and 0.3%, respectively, after reporting better-than-expected earnings and revenues. Lockheed Martin also raised its profit guidance for fiscal year 2018.
On the M&A front, Dr Pepper Snapple (DPS 117.07, +21.42) spiked 22.4% after agreeing to merge with Keurig Green Mountain. Under the agreement, DPS shareholders will receive $103.75 per share in a special cash dividend and will retain 13% of the combined company. Meanwhile, VMware (VMW 125.05, -24.95), which Dell previously acquired, dropped 16.6% after CNBC reported that VMware could buy Dell in a reverse merger, potentially allowing Dell to be publicly traded without going through a formal listing.
As a reminder, VMW shares rallied 9.0% on Friday following a Wall Street Journal report that Dell was exploring options regarding VMware.
Elsewhere, equity indices in the Asia-Pacific region opened the week on a mostly lower note, with China's Shanghai Composite (-1.0%) leading the retreat, while the Euro Stoxx 50 slipped 0.2%. The U.S. dollar climbed 0.4% against the euro (1.2380), 0.6% against the pound (1.4073), and 0.4% against the yen (108.98).
Reviewing Monday's economic data, which included Personal Income, Personal Spending, and the PCE Price Index for December:
- Personal income climbed 0.4% in December (consensus +0.4%) following an unrevised increase of 0.3% in November.
- Personal spending rose 0.4% in December (consensus +0.5%), down from a revised increase of 0.8% in November (from 0.6%).
- The PCE Price Index increased 0.1% in December (consensus +0.2%), while the core PCE Price Index, which excludes food and energy, increased 0.2% ( consensus +0.2%). Year-over-year, the core PCE Price Index is up 1.5%, which is still a ways below the Fed's target of 2.0%.
- The inflation data isn't going to alter the market's expectation that the Federal Reserve is likely to raise the fed funds rate again at its March meeting. That's one key takeaway from the report. The other key takeaway is that the personal savings rate dropped from 2.5% to 2.4%, which is its lowest level since 2005, underscoring the notion that consumers might be saving less because they are feeling better about their job/income prospects.
On Tuesday, the S&P Case-Shiller Home Price Index ( consensus 6.4%) and the Consumer Confidence Index for January (consensus 124.0) will be released at 9:00 AM ET and 10:00 AM ET, respectively.
- Nasdaq Composite: +8.2% YTD
- Dow Jones Industrial Average: +7.0% YTD
- S&P 500: +6.7% YTD
- Russell 2000: +4.1% YTD
L
Under Armour: Canaccord Genuity braces for another reset lower as no stabilization is in sight
Canaccord sits at Sell, $8 tgt on UAA noting their cautious view on UAA as they believe 2018 will be another year in which the company will seek to stabilize its NA business. Thus far, they see little in the way of traction, which portends that initial 2018 guidance could dramatically disappoint. Firm is lowering their 2018 ests further below consensus and now call for $70.9M in EBIT and 5c in EPS vs. $137.7M/16c previously. Their negative stance is based on three main factors: (1) the long duration needed to engineer a turnaround of this magnitude, (2) product improvements likely not tangible until 2019, and (3) no macro benefits such as tax reform to boost earnings. At minimum, firm believes it could take UAA another 12-18 months to fully regain its footing and begin to grow profitably. As such, they expect 2018 guidance to come in well below street expectations. For 2018, they are projecting total revenue growth of 1.6% vs. +4.6% consensus (with NA -6.8% and intl +30%).
Correction Detection; the risks of a drawdown within a bull market
* The S&P 500 and MSCI World Index have entered their longest n period without a
correction of more than 5%.
* This has been the strongest start for global equity markets in any year for at
least 30 years, and is even more extreme on a risk-adjusted basis. This
‘melt-up’ has occurred despite the already strong returns last year. The S&P 500
had its second-highest risk-adjusted returns in more than 50 years and MSCI
World ($) had its second-highest risk-adjusted returns since the index began in
1970. The year-to-date sharp rise in equity returns has also continued even as
bond markets are experiencing sharp risk-adjusted losses.
* There remain good reasons to be bullish equities for the year. We remain
overweight and think that bear market risks are low.
* But a correction is becoming increasingly likely. Our GS Risk Appetite indicator is
near its highest level ever, pointing to a sharp rise in optimism. Our GS Bull/Bear
Market Indicator (GSBLBR) is at elevated levels, although the continuation of low
core inflation and easy monetary policy (which are components of the indicator)
suggests that a correction is more likely than a bear market.
* Drawdowns within bull markets of 10% or more are not uncommon (we find 22
since 1945). The average bear market experiences falls of 30% over 13
months and takes 22 months to recover to previous levels (in nominal
terms). The average bull market ‘correction’ is 13% over 4 months and takes
just 4 months to recover.
* 2018 has begun with the S&P 500 and VIX both rising. The increase in volatility
amid a market rally may, in part, reflect increasing risks, and may also reflect a
bullish willingness to spend premium to add to upside exposure. We would buy
the equity market on a correction and, while we recommend being fully invested,
would look to hedge downside risks. Our options strategists have suggested
doing this through various structures, including put spreads.
Category
Winner
European Equity - under $500m
Gladstone Lasker
European Equity - over $500m
Kairos Pegasus
Global Equity - under $500m
SR Global Opportunities
Global Equity - over $500m
SR Global International
Specialist Sector Equity
Tosca
Small-Cap Equity
Pelham Long/Short Small Cap
Emerging Market Equity
SR Global Emerging Market Equity
UCITS Equity
Polar Capital UK Absolute Equity
Equity Market Neutral & Quantitative Strategies
GSA QMS
Convertibles & Volatility
Polygon Convertible Opportunity
Event Driven
Copper Street Capital
Distressed
VR Global
Credit – under $500m
Serone Key Opportunities Fund
Credit – over $500m
Selwood Liquid Credit
Credit – over $500m
East Lodge Capital Credit Opportunities
Fixed Income
Nykredit MIRA
Specialist Credit & Fixed Income
Cheyne Total Return Credit
Commodity & Currency
GZC Strategic Commodities
Macro
TT International
Emerging Markets
AQS Emerging Markets Corporate Debt
Multi Strategy
Cheyne Global Equity
Managed Futures – under $500m
Insch Kintore
Managed Futures – over $500m
Systematica Alternative Markets
Emerging Manager & Smaller Fund – Equity Strategies
Edale Europe Absolute
Emerging Manager & Smaller Fund – Macro, Fixed Income & Relative Value
Argo Distressed Credit
New Fund of the Year - Equity Strategies
Man GLG UK Absolute Value
New Fund of the Year - Macro, Fixed Income & Relative Value
Caius Capital
Long Term Performance (5 Years) – Equity Strategies
Covalis Capital
Long Term Performance (5 Years) – Macro, Fixed Income & Relative Value
Clareant Structured Credit Opportunity Fund II
Management Firm of the Year
Pharo Management
Management Firm of the Year
Sloane Robinson
Fund of the Year
Kairos Pegasus
Nice try. Novo Nordisk, looking to pep up its biopharma offering, attempted to initiate talks with Belgium’s Ablynx by going public with a takeover proposal. The target, which makes blood treatments inspired by camel proteins, rightly got the hump.
On Monday Ablynx said it had agreed a higher offer from French pharma group Sanofi. Novo Nordisk, which has historically relied upon organic growth rather than acquisitions, backed away.
The cost of drugs to treat rare but life-threatening conditions tends to be high. So too, the value of companies that develop them. Sanofi is paying €45 a share for Ablynx, whose main product treats acquired thrombotic thrombocytopenic purpura, a blood disease. Six months ago, Ablynx traded at less than €15. Sanofi is offering almost 50 per cent above Novo Nordisk’s bid, which was itself a 44 per cent premium to the Ablynx undisturbed price.
The French group, also hunting growth as existing franchises come under pressure, says returns on capital will exceed the cost of that capital within three years. It said the same of Bioverativ, a haemophilia specialist which it agreed to acquire last week. Markets appreciate the scientific and commercial logic of both deals, if not the eye-popping valuations.
Novo Nordisk, meanwhile, has less immediate need of a deal. It has had more success at managing pricing pressure by launching newer diabetes treatments. There are high hopes for its oral treatment for the condition, with trial data due out this year.
The biopharma unit, about a fifth of sales, does look sickly. If Novo wants to bulk it up, it will need to be rather less cautious than it was with Ablynx. The group has net cash of DKr18.9bn (€2.5bn) and a market value of €114bn. Its shares are richly rated. Sober Scandinavians may balk at the bets being placed by flamboyant Gallic rivals. But valuations are not about to mean-revert and, in the longer term, remaining aloof carries risks of its own.
Bank-based blockchain projects are going to transform the financial services industry
Cryptocurrencies are constantly evolving, with popular currencies such as Bitcoin and Ethereum maintaining their popularity despite recent market corrections.
At the core of both technologies is the cryptographically secure digital ledger known as the blockchain. It’s a digital ledger where cryptocurrency transactions are recorded chronologically and publicly. Indeed, as the popularity of cryptocurrencies has grown, so has the banking industry’s interest in blockchain for fintech, with an increased and focused push on bank-backed blockchain projects.
Some of the largest projects underway include the IBM-backed Hyperledger Fabric project, the Utility Settlement Coin, and R3’s blockchain consortium, signifying a growing acceptance in institutional policy to support blockchain growth
How does it work?
Currently, banks transact with each other by creating agreements, as one would when purchasing an item from a store. A common example would be a bank agreeing to purchase a specific amount of stock for a specific cash price from another. This process, often cumbersome and slow, takes up to several days and incurs the risk that one party may default or renege on the agreement. This period of time, known as settlement, is such an issue that an Oliver Wyman report identified it as costing the financial industry anywhere from $65-$80 billion a year.
Blockchain projects have the potential to reduce, and possibly eliminate, settlement times due to their digital nature, ensuring the timely and secure processing of these operations. Other uses for bank-backed blockchain projects would include secured global currency exchange rate speeds and increased transaction security, among other benefits, eventually allowing for an overhaul of the banking industry, replacing traditional back-office clearinghouses and other outdated mediums that exist between asset sellers and buyers.
IBM’s Hyperledger Fabric
The IBM-backed Hyperledger Fabric project is a trade finance platform aimed at international payments utilizing blockchain, with seven of its largest supporters including Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale and Unicredit. IBM’s blockchain platform will run through the IBM Cloud, allowing for interconnectivity between all parties in a particular secure transaction.
This project is designed to be highly scalable, allowing for multiple entrants to easily integrate into the entire financial supply chain process through the secure blockchain, allowing for an unprecedented amount of transaction transparency. In mid-October, IBM revealed a partnership with blockchain startup Stellar, spreading the influence of the Hyperledger Fabric project to global levels unseen before.
The Utility Settlement Coin
Six of the world’s largest banks, Barclays, CIBC, Credit Suisse, HSBC, MUFG, and State Street, have announced backing of the UBS and Clearmatics-spearheaded Utility Settlement Coin, joining other industry heavyweights who have already pledged their support for the project, including BNY Mellon, Deutsche Bank, and Santander.
The UTC specifically tackles the use of blockchain technologies by traditional banks, utilizing it as a tool for more efficient transactions. Additionally, the UTC addresses the issue of currency backing, with the UTC being backed by cash at a central bank, preventing default and credit risk. These safeguards play a huge role in why the UTC has so much pledged interest, allowing banks to take part in the relatively young digital currency ecosystem. The UTC is definitely a sign of fintech adoption in the banking industry, ensuring the eventual wide-scale use of blockchain technologies on a standardized level across the globe.
R3
Blockchain consortium R3 is another player in the bank-based blockchain space, raising $107 million in May, with four of its backers being Temasek, SBI Group, Bank of America Merrill Lynch, and Intel, with further support pledged from industry heavyweights such as Wells Fargo and ING. One of R3’s primary projects has been the development of their Corda platform, with future plans for an infrastructure network specifically geared toward financial institutions to build their own ledger-based applications and services, implying that these banks currently have and will grow their own teams of blockchain developers. R3 is also focused on governmental acceptance of blockchain, with buy-in from these institutions signifying a drastic shift in terms of governmental compliance and usage of such fintech.
By presenting credible potential resolutions of current-day issues, these projects represent large-scale efforts by the banking industry to fully embrace and integrate blockchain into their current infrastructures. Industry consumers and participants alike should be excited to see how the industry develops in the next coming months.