After Hours Summary: LAKE +8.9%, JBL +4% following earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: ROX +9.9%, LAKE +8.9%, JBL +4%
Companies trading higher in after hours in reaction to news: HTGM +33.3% (HTGM entered into a statement of work with QIAGEN Manchester for Master Assay Development, Commercialization and Manufacturing Agreement), IDXG +13.8% (still checking; was down more than 20% on the week), ADMP +10.7% (Adamis Pharma rebounding in after hours trade ahead of tomorrow's PDUFA date for Epinephrine Pre-filled Syringe), AVXS +6.1% (announces alignment w/ the FDA on its Good Manufacturing Practice commercial manufacturing process for AVXS-101 following the receipt of minutes from the Type B CMC meeting; expects to have the data ready to submit to the FDA in the August timeframe), PSDV +5.7% (modestly rebounding from this week's decline; Pres/CEO disclosed the purchase of 56,700 shares at avg price of $1.763/share), HAIN +2.4% (confirms will conduct a call to discuss its financial results on Thursday, June 22, 2017 at 8am ET and expects to file Annual Report and Quarterly Reports on that day)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: JRJC -5.8% (thinly traded)
Companies trading lower in after hours in reaction to news: WRLD -8.8% (ticking lower; files to delay 10-K due to internal investigation of its operations in Mexico; expects to file the Form 10-K by June 29), PACB -8.7% (to offer and sell shares of its common stock in an underwritten public offering), LNTH -5.8% (announces public secondary offering of 3 mln shares of common stock by selling stockholders), ARNA -5.2% (stockholders approve 1:10 reverse split), OAKS -5.1% (commences 4 mln common stock offering),
Closing Market Summary: Averages Settled Mixed Following Rate HikeEquity indices finished Wednesday's session mixed after the FOMC voted to raise interest rates for the second time this year, as expected. The S&P 500 and the Nasdaq settled lower by 0.1% and 0.4%, respectively, while the Dow closed higher by 0.2%.
The Fed's decision to raise the fed funds target range by 25 basis points to 1.00%-1.25% was nearly unanimous with Minneapolis Fed President Neel Kashkari being the lone dissenter. The rate hike was attributed to realized and expected labor market conditions. In other words, it sounds as if the Fed is still expecting tight labor market conditions to produce stronger wage inflation that will presumably drive broader price inflation.
According to the Fed's dot plot, the median FOMC member expects one additional rate hike in 2017. However, the market doubts that a third rate hike will happen before the year's end with the CME FedWatch Tool assigning an implied probability of 47.0% to said event. In addition, the U.S. central bank plans to begin implementing a balance sheet normalization program sometime this year.
Going into the Fed's decision, equities were fairly flat as big losses from the financials, energy, and materials sectors were mitigated by modest gains from the remaining eight groups. The materials (-1.1%) and energy (-1.8%) groups never recovered, eventually settling the session at the bottom of the leaderboard.
Crude oil weighed on the energy group, dropping 3.5% to $44.79/bbl, after the Energy Information Administration (EIA) reported a smaller than expected draw of 1.7 million barrels (consensus -2.5 million barrels) in crude stocks and a build of 2.1 million barrels in gasoline inventories for the week ended May 9. The energy component settled at its lowest mark since mid-November.
Conversely, the heavily-weighted financial sector (+0.2%) retraced its earlier loss of 1.3% following the FOMC decision, settling higher for the sixth-consecutive session. However, a flattening of the yield curve, which is seen as a negative for the financial industry's bottom line, didn't make things easy on the sector.
Treasuries moved solidly higher following a weak batch of economic data, which included May CPI and May Retail Sales. Total CPI declined 0.1% (consensus 0.0%) in May while core CPI, which excludes food and energy, increased 0.1% (consensus 0.2%). On a year-over-year basis, total CPI is up 1.9% and core CPI has increased 1.7%.
Separately, May retail sales decreased 0.3% (consensus +0.1%) while the prior month's reading was left unrevised at 0.4%. Excluding autos, retail sales decreased 0.3% (consensus +0.2%) while the prior month's reading was revised higher to 0.4% from 0.3%.
The 10-yr and 2-yr yields traded at 2.11% and 1.29%, respectively, ahead of the Fed's policy statement, but ticked up from that level in the aftermath. The 2yr-10yr spread declined by four basis points with the 10-yr yield settling six basis points lower at 2.15% and the 2-yr yield dropping two basis points to 1.35%.
Back on Wall Street, the equity market was a little jumpy in the afternoon session, but eventually settled at the level it took into the FOMC rate decision. As noted above, the heavily-weighted financial sector flipped from negative to positive in the afternoon, however, the top-weighted technology sector did the opposite, exchanging a modest gain for a notable loss.
In conclusion, regardless of how Wednesday's session began, it ended with a risk-off tone as countercyclical sectors generally outperformed their cyclical peers, especially following the Fed's policy statement; the health care, consumer staples, utilities, telecom services, and real estate groups finished with gains between 0.3% and 0.6%.
Reviewing today's economic data, which included May CPI, May Retail Sales, April Business Inventories, and the weekly MBA Mortgage Applications Index:
- Total CPI declined 0.1% (consensus 0.0%) in May while core CPI, which excludes food and energy, increased 0.1% (consensus 0.2%). On a year-over-year basis, total CPI is up 1.9% and core CPI has increased 1.7%.
- The key takeaway from this report is that it shows a softening trend in consumer inflation, which should presumably be some cause for concern among Fed members.
- May retail sales decreased 0.3%, which is below the consensus of +0.1%. The prior month's reading was left unrevised at 0.4%. Excluding autos, retail sales decreased 0.3% while the consensus expected an increase of 0.2%. The prior month's reading was revised higher to 0.4% from 0.3%.
- The key takeaway from this report is that consumers clearly remain guarded with their discretionary spending activity, which is likely the result of seeing little, if any, wage growth.
- Business Inventories declined 0.2% in April while the consensus expected a downtick of 0.1%. The prior month's reading was left unrevised at 0.2%.
- The key takeaway from the report is that business inventories remain elevated relative to sales, which is standing in the way of restoring pricing power.
- The weekly MBA Mortgage Applications Index rose 2.8% to follow last week's 7.1% increase.
Tomorrow, investors will receive a slew of economic reports, including Initial Claims (consensus 240,000) at 8:30 ET, June Philadelphia Fed (consensus 26.0) at 8:30 ET, June Empire Manufacturing (consensus 6.0) at 8:30 ET, May Import/Export Prices at 8:30 ET, May Industrial Production (consensus 0.0%) and Capacity Utilization (Briefing.com consensus 76.7%) at 9:15 ET, and June NAHB Housing Market Index (consensus 70) at 10:00 ET.
- Nasdaq Composite +15.1% YTD
- S&P 500 +8.9% YTD
- Dow Jones Industrial Average +8.2% YTD
- Russell 2000 +4.5% YTD
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Speculation that Gemalto had been approached by Atos has been circulating in the market for over a month, the sources said. But, the companies’ usual external advisers have not been asked to look into a deal, they said. Atos management has also privately denied that there are deal talks when pressed by potential advisers, the first source added.
While the recent pitching of such a deal by bankers cannot be ruled out, Atos has not approached Gemalto, the person familiar said.
Atos declined to comment.
The takeover talk was likely stoked by a sharp drop in Gemalto's share price following a profit warning in March that warned 1Q revenues would be down year-on-year, the sources and sector bankers said.
The list of bidders for Gemalto is short, with Atosbeing the most likely strategic, sector bankers said. Even so, Atos would only be interested in certain parts of Gemalto, the bankers and sources said.
Atos’s payment division Worldline [EPA:WLN] would have synergies with Gemalto’s banking and payment division, bankers said. Specifically Worldline’s payment terminal services would complement Gemalto’s smart card chip business, the first banker said.
On paper a deal would therefore make sense, but in reality the extent of the overlaps between these two businesses could be problematic when it comes to integrating them, the second source said.
Gemalto’s security technology would also be of interest to Atos’s wider non-transactional business, the second source said. Atos, which provides cloud, data management and online platform solutions, claims it is the European ‘number one’ in cybersecurity.
But, Gemalto’s SIM card business would be of less interest to Atos, the first source and first banker said. Atos does have a smartphone business, which could be complementary, but concerns over the longevity of SIM cards has put pressure on Gemalto’s share price, the banker said. Gemalto’s 1Q results show 62% of its revenues come from payment and identity services, and 38% from mobile products. SIM sales were down 14% year-on-year.
Gemalto’s diverse collection of technologies means there are few strategic suitors who would want the whole business, this banker said.
A large-cap private equity firm such as KKR or Blackstone could be a better fit, a second sector banker said. PEs could be potential bidders but might need reassurance on the lifespan of some of Gemalto’s core business, such as contact payment cards, the first banker said.
Any bidder may have to take into account potential French government scrutiny for takeovers in ‘strategic’ sectors, bankers said. But this is unlikely to be a significant stumbling block, the second source said.
In any case, Gemalto is not expected to make any big M&A decisions at least until its strategic plan is announced in 4Q17, a second person familiar with the situation said. Gemalto is due to disclose a three-year plan, which could give details of its M&A strategy, such as expansion in the US, the person added.
The payments space generally has been the subject of several rumours recently. In March, Atos was forced to deny its Worldline division was preparing to bid for Ingenico [EPA:ING]. Bankers briefed have also said a tie-up between Ingenico and Wirecard [ETR:WDI] was being pitched, as reported.
Gemalto declined to comment.