After Hours Summary: QCOM +7%, EBAY +6.5%, MAT +3.2% on earnings/guidance, LGIH +3.1% on S&P SmallCap 600 addition news... KMI -5%, INTC -3%, AXP -1% on earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: URI +9.1%, SPKE +7.5% (expects Q2 adjusted EBITDA of $10.0 -12.0 mln - far exceeding co's expectations), QCOM +7%, EBAY +6.5%, (also announces $2.5 bln buyback), TBI +5.3%, PTC +3.8%, MAT +3.2%, IMAX +2.9%, HXL +2.9%, FFIV +2.6%, NEM +2.1%, CCK +1.2%, DWCH +1% (light volume - reports Q3 results, also initiates process to explore and evaluate a broad range of strategic alternatives)
Companies trading higher in after hours in reaction to news: BLDP +9.9% (signs follow-on technology solutions agreement with leading global automotive OEM), LGIH +3.1% (LGI Homes will replace Krispy Kreme Doughnuts in the S&P SmallCap 600 July 27 after the close), JOY +2.4% (ticking higher; Nucor to acquire Joy Global's steel plate mill), GM +0.5% (slightly higher after declaring unchanged Q3 dividend of $0.38/share and ahead of earnings tomorrow July 21 before the open), TSLA +0.3% (Elon Musk expected to reveal 'master plan' tonight at 8 PM ET on Tesla's website)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: SCSS -7.1% (also increases share repurchase to $300 mln), KMI -4.9%, INTC -3.1%, VMI -3.1%, MLNX -2.7%, TSCO -2.3% (also Senior VP & Controller Kurt Barton to replace Anthony Crudele as CFO upon his retirement in 1Q17), AXP -1.1%, PLXS -0.5% (ticking lower)
Companies trading lower in after hours in reaction to news: BDC -6.6% (commences offering of 4.5 mln depositary shares, each of which represents a 1/100th interest in a share of its Series B Mandatory Convertible Preferred Stock), BKEP -6.5% (commences 3 mln unit offering of common units representing limited partner interests of the Partnership, FMSA -3.9% (commences underwritten public offering of 25 mln shares of common stock), UBA -3% (commences 2.75 mln common stock offering), CTO -2% (Consolidated-Tomoka Land announces Board has 'not received any expressions of interest in acquiring the Company that contained an indication of value that would provide a meaningful premium for shareholders'), OPTT -1.6% (modestly lower in after hours following another day of huge gains -- up more than 70%), LPI -1.3% (Laredo Petroleum expects to report a loss on derivatives of ~$68.5 million, including ~$45.0 million net cash received on settlements of matured derivatives, net of deferred premiums paid), HAWK -0.9% (intends to offer $425 million aggregate principal amount of convertible senior notes due 2022 through a private placement; to enter into an amended and restated credit agreement for a $700 mln credit facility)
Closing Market Summary: Averages Notch Highs as Technology OutperformsThe stock market ended the midweek affair on a higher note as above-consensus quarterly results from Microsoft (MSFT 55.91, +2.82) facilitated a bid in the heavyweight technology sector (+1.4%). Investors maintained a decidedly risk-on approach, bidding cyclical sectors and the beleaguered biotechnology sub-group. The S&P 500 (+0.4%) and the Dow Jones Industrial Average (+0.2%) each carved out new all-time closing highs while the Nasdaq Composite (+1.1%) notched a new 2016 closing high.
Equities began the day on a modestly higher note as investors responded to a positive bias in global bourses. Germany's DAX (+1.6%) paced the advance as participants examined better-than-expected corporate earnings reports. German software company SAP (SAP 83.71, +4.39) outperformed after topping analysts' estimates for the quarter and reaffirming its outlook. The company also stated that it has yet to see any impact from last month's surprise Brexit vote. On that note, the European Central Bank is scheduled to meet Thursday, marking its first meeting since the referendum. The central bank is widely expected to leave its policy stance unchanged.
The major averages ratcheted higher after the first hour of trade, corresponding to a reversal in crude oil. WTI crude erased an early loss as investors weighed the latest inventory data from the Department of Energy. The EIA reported that crude oil inventories fell by 2.34 million barrels (estimate: -2.10 million barrels) while gasoline inventories rose by 0.91 million barrels (estimate: -0.83 million barrels). The benchmark index finished off its session high with six sectors in positive territory. In front of the pack, technology (+1.4%), health care (+0.9%), and consumer discretionary (+0.4%) led while energy (-0.2%), utilities (-0.4%), and consumer staples (-0.5%) rounded out the board.
The technology sector (+1.4%) paced today's advance as Dow component Microsoft (MSFT 55.91, +2.82) rallied 5.3%. The stock finished on top of the price-weighted index after impressing investors with its cloud service business. The high-beta chipmakers also outperformed as Marvell (MRVL 11.23, +1.38) surged 14.1% after beating bottom-line estimates. Separately, Qualcomm (QCOM 55.82, +0.68) and Intel (INTC 35.69, +0.54) gained a respective 1.2% and 1.5% ahead of this evening's quarterly reports.
In the health care space (+0.9%), biotechnology displayed relative strength, evidenced by the 2.4% gain in the iShares Nasdaq Biotechnology ETF (IBB 276.54, +6.55). In the group, Mylan Labs (MYL 47.20, +2.27) jumped 5.1% after announcing the launch of its Crestor generic in the United States. In the broader sector, Intuitive Surgical (ISRG 703.05, +31.15) rallied 4.6% after reporting above-consensus quarterly results and receiving several price target increases.
Media names underperformed in the consumer discretionary space (+0.4%) as Dow component Disney (DIS 98.22, -1.25) weighed. The stock slipped 1.3% after it was downgraded to "Hold" from "Buy" at Stifel. Elsewhere, 21st Century Fox (FOXA 27.00, -0.75) fell 2.7% amid uncertainty regarding Fox News CEO Roger Ailes. Reports indicated that 21st Century Fox is reviewing allegations of sexual assault after a lawsuit was filed against Mr. Ailes.
The U.S. Dollar Index (97.11, +0.05) finished modestly higher as it gained against the euro, commodity currencies, and the yen. The euro/dollar pair ended lower by 0.1% (1.1014) while the dollar ticked higher by 0.3% against the commodity-sensitive Canadian dollar (1.3062). Separately, the dollar jumped 0.8% against the safe-haven yen (106.93).
The Treasury complex settled off its session low, but the yield on the 10-yr note rose two basis points to 1.58%.
Today's trading volume was below the recent average as fewer than xxx million shares changed hands on the NYSE floor.
Today's economic data was limited to the weekly MBA Mortgage Index:
- The weekly MBA Mortgage Index showed a seasonally adjusted decrease of 1.3% in mortgage applications after rising 7.2% in the prior week.
Tomorrow's economic data will include weekly initial claims (consensus 265k) and the July Philadelphia Fed Survey (consensus 5.0), which will both be released at 8:30 ET. Separately, the FHFA Housing Price Index for May will cross the wires at 9:00 ET. Finally, the day's data will be capped off with Existing Home Sales (consensus 5.50 million) for June and June Leading Indicators (consensus 0.3%), which will both be reported at 10:00 ET.
- Dow Jones +6.7% YTD
- Russell 2000 +6.5% YTD
- S&P 500 +6.3% YTD
- Nasdaq +1.7% YTD
GLOBAL EQUITY STRATEGY: Most economic variables are consistent with higher yields. Many financial market variables also suggest that bond yields should rise. If bond yields rise, then financials and cyclicals should outperform, while consumer staples and utilities should underperform (this is similar in both Europe and the US). While fundamentally we have always been in favour of dividend yield with growth as a style, we would warn that this style has outperformed very strongly YTD (5%) and mostly follows the bond yield.
DANONE (UP, TP EUR59.0): We believe Danone's primary rationale for wanting to acquire WhiteWave is a belief that plant-based milk alternatives offer a long-term structural growth opportunity. In our view, the rest of WhiteWave's portfolio offers neither the growth, nor the synergies, nor sufficient 'strategic alignment' to justify the premium Danone is paying. Having initially been developed for lactose intolerant consumers, if plantbased milk alternatives are on the cusp of becoming mainstream lifestyle products, then the advantages of buying the market leader in N America/Europe are obvious, particularly given the scope for Danone to accelerate the roll-out of the Alpro brand in Europe.
EUROPEAN BANKS: The ECB published the July 2016 (Q2) Bank Lending Survey (BLS) indicating further improvement in loan supply conditions for loans to enterprises and households. A positive is continued increase in loan demand for both corporate and retail. Key negative is margin, -21% for mortgages and -31% for corporates for Euro area and saw deterioration in all major countries. In addition, we argue, there has been limited positive effects from TLTRO II. We remain selective and look at EU banks along the lines of (i) weak/strong capital, (ii) weak/strong economy and (iii) EU/non-EU exposure.
Italian Bank Stocks: No Rebound in Store
Shares of Intesa Sanpaolo, Unicredit and others have sold off sharply as nonperforming loans balloon. Why bailout efforts might backfire.
European banks are too risky for many investors, and Italy’s hold more danger than most, even after a sharp drop in their share prices in 2016.
In the aftermath of the United Kingdom’s decision to quit the European Union, and with economists trimming their forecasts for economic growth, risk awareness is back in focus—and Italian banks are hogging the limelight. Italy’s banking sector is weighed down by an eye-popping 360 billion euros ($400 billion) in nonperforming loans. That is equal to 18% of outstanding loans in the country, and one-third of the estimated €1 trillion of nonperforming loans in the euro zone.
As Italy is the euro zone’s third-largest economy, a full-blown crisis there could be much more damaging than prior events in Portugal, Ireland, Greece, and Spain.
The retreat from European bank stocks has quickened since June 23, the day of the U.K. vote. The Stoxx Europe 600 index’s banking shares have declined more than 13%, taking losses for the year to more than 25%.
Most of Italy’s beleaguered institutions have been hit hard by selling. Shares of UniCredit (ticker: UCG.Italy) and Banca Monte dei Paschi di Siena (BMPS.Italy), Italy’s second- and third-largest lenders, have plunged by 20% and 37%, respectively, since the U.K. vote. Shares of Intesa Sanpaolo (ISP.Italy), Italy’s biggest bank, are down 15%.
There are many reasons for the high level of nonperforming loans at Italian banks. Italian companies are over-indebted; corporate restructurings and insolvencies are legally complex; capital buffers are low, and the tax system, until recently, discouraged write-offs.
Banks appear unable to resolve the issue without assistance. Economic growth in Italy is forecast at just 0.9% this year, and interest rates remain at record-low levels, which is putting pressure on net interest margins. The banking sector is fragmented and needs to consolidate, but the high rate of nonperforming loans is an obstacle.
The Italian government and the E.U. appear to be at odds about how to tackle the problem. Italian Prime Minister Matteo Renzi apparently favors using state aid to bail out the country’s banks. He has mooted a €40 billion rescue, although that may be woefully inadequate.
But such intervention would go against the E.U.’s so-called “bail-in” rules that first require imposing losses on investors, including bondholders and uninsured depositors.
Since retail investors in Italy hold tens of billions of euros worth of subordinated bonds, which have helped to fund Italy’s banks for years, the pain would be felt acutely in Italian households. That makes the decision a tough one for Renzi, who likely would face a backlash at the ballot box. It “would be political suicide,” says Steve Hussey, head of credit research at AllianceBernstein.
It is a gamble that Renzi can ill afford to take. He faces a referendum in October on planned constitutional reforms. Even now, the vote seems to be too close to call. Renzi has indicated he will quit if the referendum is defeated, but there could be broader implications. Italy’s anti-establishment Five-Star Movement, which is gaining support, could seek a referendum on the euro, potentially dealing another blow to European unity.
Things could come to a head before then. European authorities are due to disclose on July 29 how Italian banks fared in stress tests, which are designed to assess their ability to withstand economic shocks. They are widely expected to require Italy’s lenders to raise huge amounts of capital. That will be a problem for some.
Monte dei Paschi is likely to fare worst. Its pile of nonperforming loans at the end of last year was €46.9 billion. The European Central Bank is requiring the bank to reduce that amount to €32.6 billion by 2018. Monte dei Paschi’s share price has fallen more than 70% in 2016 and its market capitalization now is just €1 billion. “There seems to be no possibility of the bank funding the cleanup on its own,” notes Christopher Whalen, senior managing director at Kroll Bond Rating Agency.
It is up to the E.U. to take the lead in sorting out this mess, because the implications go way beyond Italy’s borders. The sooner that happens, the better.
In the meantime, European banks might be too risky for many investors. “The pressure on bank profitability across the euro zone is such that we don’t see reasons that would encourage us to become exposed to the sector,” says Alan Mudie, head of investment strategy at Société Générale Private Banking.
THE TERRORIST ATTACK in Nice, France, drew a muted response in financial markets, as did an attack in Paris last November. Shares of tourism companies and travel operators were among the worst affected—hotelier Accor’s (AC.France) shares fell 3.6%—as investors weighed the long-term impact of a decline in visitor numbers to France.
But Paris’ benchmark CAC 40 index lost just 0.3% Friday, and ended the week ahead 4.0%.