Closing Market Summary: Financials Influence Averages Modestly Higher on ThursdayThe financial sector (+1.2%) nudged the broader market into positive territory on Thursday as the bulls couldn't resist bank stocks in light of last week's dip. The three major U.S. averages settled with gains of 0.3% apiece while the small-cap Russell 2000 (+0.8%) outperformed.
In a day short on headlines, investors kept an eye on crude oil as the energy component moved back above the psychologically important $50.00 mark. WTI crude finished 1.7% higher at $50.30/bbl after Kuwait voiced support to extend OPEC/non-OPEC production cuts beyond June. In addition, Kuwaiti oil minister Essam al-Marzouq said that several other nations are in favor of the extension. However, despite crude oil's positive performance, the energy sector (+0.5%) struggled to stay ahead of the broader market.
In addition to the financials and energy sectors, the industrial group (+0.5%) also outperformed the broader market as its components settled higher across the board. Most of the remaining cyclical sectors closed the day with modest gains while the countercyclical groups finished mixed.
The rate-sensitive utilities sector (-0.7%) settled at the bottom of the leaderboard as selling pressure within the Treasury market left yields in positive territory. However, the pressure wasn't applied equally across the yield curve with the front end holding up a bit better than the back end; the 10-yr yield (2.41%) finished four basis points higher while the 2-yr yield (1.28%) added only one basis point.
Elsewhere on the defensive side of the market, the consumer staples (-0.2%) and health care (unch) groups finished with the utilities sector in the red while the telecom services space (+0.4%) closed in the green. Biotechnology names weighed on the health care sector, evidenced by the 0.4% downtick in the iShares Nasdaq Biotechnology ETF (IBB 293.39, -1.03).
On the corporate front, lululemon athletica (LULU 50.76, -15.54) plunged 23.4% after reporting worse than expected earnings and issuing disappointing guidance. The negative influence seeped into the broader athletic apparel market, leaving Nike (NKE 56.04, -0.64) and Under Armour (UAA 20.09, -0.53) with respective losses of 1.1% and 2.6%.
On the data front, investors received the third estimate of fourth quarter GDP and Initial Claims:
- The third reading of fourth quarter GDP pointed to an expansion of 2.1%, while the consensus expected a reading of 2.0%. The third estimate of fourth quarter GDP Deflator came in at 2.0%, which is in line with the consensus.
- The key takeaway from the report is that despite the upward revision, growth trends remains subdued amid soft business spending.
- The latest weekly initial jobless claims count totaled 258,000 while the consensus expected a reading of 245,000. Today's tally was below the unrevised prior week count of 261,000. As for continuing claims, they rose to 2.052 million from the revised count of 1.987 million (from 2.000 million).
- The key takeaway from this report is that while claims have increased notably from this year's low of 223,000, they are still at encouraging levels, having held below 300,000 for 108 weeks in a row.
Tomorrow, investors will receive a slew of economic reports, including February Personal Income ( consensus 0.4%), Personal Spending (consensus 0.2%), and PCE Price Index ( consensus 0.1%) at 8:30 ET, March Chicago PMI ( consensus 55.8) at 9:45 ET, and the final University of Michigan Consumer Sentiment reading ( consensus 97.6) at 10:00 ET.
- Nasdaq Composite +9.9% YTD
- S&P 500 +5.8% YTD
- Dow Jones Industrial Average +4.9% YTD
- Russell 2000 +1.9% YTD
Beijing considers merger to create $230bn energy group, say reports
Friction over coal contracts prompts talk of tie-up between Shenhua and Datang
Contract negotiations between Chinese coal group Shenhua and power generators have led to reports that Beijing will force the miner to merge with one of its largest electricity companies as rising prices create friction within China’s state-owned economy.
A merger of state-owned Shenhua with power group Datang would, if completed, result in a utility company with an estimated Rmb1.6tn ($232bn) in assets.
Shenhua, which earlier this month posted its first profit in four years, has threatened to cut coal supply if state-owned power plants do not agree to higher prices for the second quarter. Seven power generators in the coal-dominated province of Ningxia were so irate that they sent a letter to the regional government demanding that Shenhua should instead be forced to lower prices.
The proposed merger between Shenhua and Datang “creates a company that has no coal price risk”, said Laban Yu, analyst for Jefferies in Hong Kong. “As long as power prices are set at a level that covers the coal price then there is no change in revenues or profits.”
The State-owned Assets Supervision and Administration Commission, or Sasac, has a political mandate to merge China’s centrally owned companies and create internationally competitive champions. But many of the mergers have resulted in bloated behemoths that are, in the Chinese phrase, “big but not strong”. Some powerful state-owned companies, including oil groups Sinopec and PetroChina, have successfully fought Sasac’s efforts.
Hong Kong-listed shares in Datang Power closed up almost 7 per cent on Thursday following the reports in Chinese media. Datang said in a statement to the exchange that it had no information about a proposed deal. Shenhua’s Hong Kong-listed shares fell 1 per cent. Sasac has not confirmed the reports.
The dispute comes as coal prices recover from a four-year slump. An employee with the Huaneng power plant in Ningxia, another of the disputants, said on Thursday that the contract had not been signed. The Ningxia government was helping with negotiations, he said.
The Chinese power sector relies on government-brokered supply contracts with state-owned coal miners and, in return, generates power at government-set prices. The arrangement led to electricity shortages when the Chinese economy began to boom, opening the door to private investment in both power and coal. Soaring spot prices were kept aloft by the limited supply provided by state-owned miners under term contracts.
However, restrictions on loans to private miners and falling prices as economic growth has slowed in the past few years has reconsolidated much of the sector in state hands.
In the past two years, as coal prices slumped, Beijing ordered mines to reduce operating days in an effort to prop up returns for groups such as Shenhua. It also ordered power generators to source more of their coal supply through term contracts, in effect freezing the spot market. The output restrictions helped fuel a spike in the futures market beginning in August.
Audi has offered to purchase premium US car rental service Silvercar as it seeks to expand its presence in mobility services and apply the start-up’s software expertise to other platforms for car-sharing.
Silvercar, founded in 2012, is an airport car rental service exclusively featuring silver Audi A4 models. The Austin, Texas-headquartered company now operates in 15 US cities.
The two companies declined to give details on the transaction size, but said the deal is expected to close in the first half of this year.
Audi has had a partnership with Silvercar since its founding and last year it purchased a minority stake for $28m in a series C funding round. Other investors have included Facebook co-founder Eduardo Saverin.
The purchase follows a long line of investments by car companies in recent years, including GM buying a stake in Lyft, as manufacturers turn to providing services in a market being upended by the prospect of self-driving cars and a proliferation of ride-hailing apps. Analysts at Barclays have predicted that vehicle ownership could decline by 50 per cent before 2040.
Luke Schneider, Silvercar chief executive, said the car market is “on the verge of the most profound changes in the 120-year history of modern personal transportation.”
Moritz Drechsel, an Audi spokesman, said the company has no interest in the rental car business per se, but that Silvercar had developed impressive technology for simplifying the customer experience of sharing vehicles. One programme in particular held Audi’s interest: Dealerware, a digital service of managing dealer fleets.
Audi, a unit of Volkswagen, has already been experimenting with five different car-sharing concepts. These comprise on-demand concierge services (Audi on demand), a small circle of friends ownership model (Audi Unite), a leasing model with access to multiple vehicles (Audi Select), a car-hiring option for business (Audi shared fleet), and a sharing rental programme for select residences (Audi at home).
Unlike luxury rival BMW, which hopes to launch an “Airbnb for cars” service allowing car owners to rent out their own vehicles, all of Audi’s mobility services are based on Audi owning the vehicles it rents out.
“Audi and Silvercar share the same vision,” Dietmar Voggenreiter, Audi boardmember, said in a press release. “We want to open up a new, flexible way to access mobility for our customers while offering premium quality in every respect.”
Trump administration draft letter seeks changes to NAFTA, but not scrapping deal altogether - Washington Post - suggests a much more diplomatic tone than President Trump has threatened to use during NAFTA renegotiations
Fed’s Mester (hawkish, non-voter): supports starting to trim bond portfolio this year; supports further rate hikes but not at each meeting
- Fully supported raising rates in March; further interest rate hikes will be needed
- Economic expansion is sound; weak Q1 was only transitory
- Inflation has picked up over last year and is moving in the right direction
- Firmer inflation data, stable inflation expectations, labor market strength and economic growth supports return to 2% inflation
Gapping down
In reaction to disappointing earnings/guidance:
In reaction to disappointing earnings/guidance:
- CRTN -25.2%, LULU -20.1%, GEVO -16.2%, FRTA -8.4%, WOR -6.3%, WRD -4.7%, SIGM -3.4%, EXFO -3.4%, SAIC -0.5%
M&A news:
- CVE -9.2% (Cenovus Energy acquires ConocoPhillips' 50% interest in the FCCL Partnership and also purchases the majority of ConocoPhillips' Deep Basin conventional assets in Alberta and British Columbia for a total consideration of $17 bln; immediately accretive; enters into a bought-deal financing agreement)
- AKAM -0.8% (to acquire SOASTA in an all-cash transaction for an undisclosed sum; co expects the SOASTA acquisition to be slightly dilutive to its adj FY 17 EPS in the range of $0.06-0.07 and to become accretive in 2018)
Other news:
- TNXP -13.8% ( commences common stock offering)
- SA -6.8% (announces CAD$14.3 million bought deal offering of common shares and concurrent CAD$20.0 million bought deal offering of flow-through shares )
- OFS -5.2% (commences an underwritten offering of 3,500,000 shares of its common stock)
- CARA -4.5% (commences $80 mln common stock offering)
- PGNX -4.1% (Phase 2b trial of AZEDRA has achieved its primary endpoint)
- CBIO -2.9% (New Enterprise Associates increases active stake)
- CRBP -2.8% (positive topline data from its Phase 2 study evaluating multiple doses of anabasum)
- CAB -2.2% (coming off of late spike on reports that it may sell its finance unit to Synovus)
- UAA -1.1% (LULU sympathy)
Analyst comments:
- CY -2.7% (downgraded to Underweight from Equal-Weight at Morgan Stanley)
- FSC -2.1% (downgraded to Underperform from Mkt Perform at Raymond James)
- UTHR -2% (initiated with a Sell at UBS)
- RH -1.6% (downgraded to Neutral from Buy at Goldman)
- GT -0.7% (downgraded to Neutral from Buy at Goldman)
Gapping up
In reaction to strong earnings/guidance:
In reaction to strong earnings/guidance:
- IDXG +48.6%, NLST +18.3%, KGJI +18.3%, LNN +12.8%, BCLI +6.5%
- RXII +5.8%, NAVB +4.8%, AFMD +2.1%, VRML +1.4%
M&A news:
- COP +7.5% (Cenovus Energy acquires ConocoPhillips' 50% interest in the FCCL Partnership; COP will add $3 bln to repurchase authorization; also upgraded to Buy from Neutral at UBS)
Other news:
- BVXV +44.1% (receives grant from Israel's Ministry of Economy and Industry to build facility for production of universal flu vaccine candidate M-001)
- EXTR +20% (Broadcom enters agreement to sell its data center center switching, routing, and analytics business to Extreme Networks for $55 mln in cash; transaction contingent on Broadcom closing its proposed acquisition of Brocade)
- ANTH +14% (announces the findings from the Extension Period of the Phase 3 SOLUTION; demonstrates comparable maintenance in key measurements of height, weight, and BMI)
- OMER +8.4% (data from its Phase 2 clinical trial of OMS721)
- HTGM +7.6% (rebounding from recent offering related pullback; also higher despite GlaxoSmithKline lowering active stake / disclosing the sale of 300k shares)
- AVXL +5.5% (announces that the dismissal of the appeal in the Cortina v. Anavex Life Sciences Corp lawsuit)
- HSKA +5.2% (light volume; will replace Wintrust Financial in the SmallCap 600)
- INCR +4.9% (will replace CEB Inc. in the S&P MidCap 400),
- GMO +4.3% (continued strength)
- MICT +3.2% (receives 3 purchase orders in the last two weeks from a large private Aerospace & Defense contractor)
- NVTA +1.7% (announces an expansion of its genetic testing services)
Analyst comments:
- ESPR +5.3% (upgraded to Buy from Neutral at UBS)
- FDX +0.8% (upgraded to Positive from Neutral at Susquehanna)
Early premarket gappers
Gapping up:
- IDXG +48.6%, EXTR +16.9%, ANTH +16.3%, KGJI +12.7%, NAVB+9.2%, PRGS +9%, IT +8.7%
- NLST +7.5%, BCLI +6.5%, COP +6.4%, SGMO +5.4%, INCR +4.9%,HTGM +4.6%, DRYS +4%
- CLNE +3.8%, CBIO +3.7%, FCEL +3.7%, HSKA +2.9%, TEAR +2%,TEAR +2%, ANGO +1.8%
- VRML +1.4%, X +1.3%, VRX +1.3%, CCL +1.1%
Gapping down:
- CRTN -25.2%, LULU -18.9%, TNXP -16.5%, GEVO -14.5%, CVE-9.8%, WOR -6.3%, CARA -5.2%, WRD -4.7%
- OFS -3.9%, SA -3.8%, SIGM -3.4%, EXFO -3.4%, DB -2.7%, CAB-2.5%, FSC -2.1%, SBGL -1.9%, CY -1.7%
- AU -1.6%, BBVA -1.2%, RXII -1.2%, MYL -1%, AKAM -0.8%, CWH-0.7%, BPMC -0.6%, NKE -0.5%, SAIC -0.5%