Jolted Awake by the Fed, And Now Back to Sleep: Taking Stock

(Bloomberg) -- Finally, something gave this market a jolt.

The S&P 500 whipsawed once the Fed decision hit the tape on Wednesday, eventually picking a direction in the last hour of trading with a straight selloff into the close.

But that was yesterday, and things are much sleepier today as the S&P futures are flattish, with no major movements off of the soft data from China (retail sales and industrial production both missed the mark) and little follow-through from the weakness in Europe, where the Stoxx 600 is down 0.5% ahead of the ECB decision.

The reaction to the hawkish Fed statement tweaks and the dot plot shift included a rip in the 10-year with a brief flick at the 3% level (though the entire move has already erased itself as of this morning), a surge followed by a reversal in the bank stocks, a wreckage in the homebuilders that began prior to the Fed decision (off a concerning survey from Zelman), a pullback in the FAANGs (except for NFLX, which closed up 4.4% for another record), and very slight moves in the yield-levered sectors like the utilities and the REITs.

Here’s some Fed takes from the Street:

• Goldman’s Jan Hatzius said the statement and projects were hawkish relative to market expectations, while Powell, in his presser, "downplayed several dovish arguments that are popular among investors, including concerns about taking the funds rate beyond neutral, an inverted yield curve, and the effects of trade tensions"; Goldman still expects 4 rate hikes in 2018 and 4 more in 2019 for terminal rate of 3.25%-3.50%
• Morgan Stanley’s Robert Rosener, in a note titled "A Hawkish Tune-Up," said he expects the front end of the yield curve to remain under pressure and challenges in emerging markets, tariff impacts, and a Fed intent on continuing to tighten policy remaining an overhang on risk sentiment
• Vanguard’s John Hollyer said the Fed now expects tighter policy than Vanguard anticipated prior to the announcement, which is further affirmation of expected strengthening in the U.S. economy over the next two years; additional rate hikes this year suggest "restrictive monetary policy sooner rather than later, which could ultimately impact investors in riskier assets, including high yield bonds and equities, in addition to sustained near-term strength in the U.S. dollar"
• Bloomberg Economics sees the statement not as a substantial hawkish shift among policy makers, "but rather a subtle recalibration of the policy course due to slightly firmer economic projections"; while the December hike is more likely now, it still remains far from certain with a lot of data to digest in the interim, particularly later this year as the balance-sheet contraction reaches full throttle. Bloomberg Economics is sticking to its forecast for only three hikes this year.

So Now What?

A giant chunk of this week’s major geopolitical-slash-economic catalysts are now out of the way, like that contentious G-7, the civil Trump-Kim summit, and the Fed hike. That leaves us with the ECB’s will-they-or-won’t-they decision over a QE exit plan later this morning (see our Decision Day Guide) and some sort of twist in the China trade saga over the next couple days (the China import target list is expected by Friday) or further out, as Trump has said that he’ll act "very strongly" against China in the coming weeks.

But the latest grandstanding on the topic of trade has been met with eye rolls and shrugs from market participants. And unless anything rash changes in regards to an actual deal or tit-for-tat change in tariffs, complete with retaliatory efforts, we shouldn’t see a whole lot of reaction in stocks as it appears that the conversation has tipped towards the Fed’s hawkish stance and the future trajectory of yields.

Meanwhile, risk arbs should have another busy session (see our story on the huge profits that rolled in Wednesday after the Time Warner/AT&T ruling) after Comcast made an all-cash offer for Fox, putting Disney on notice. But the event-driven desks are all waiting with bated breaths for the next developments in the ZTE Corp. story and how that impacts trading in NXP Semiconductors (hedge funds own almost half of the shares outstanding), which is already down more than 7% this week.

The red hot retail space (XRT ETF up 7% month-to-date got a dud of a report out of Tailored Brands (the old Men’s Wearhouse), which plunged almost 20% last night on some weaker-than-expected comps and gross margins -- though its fair to note that this stock has been on a tear for some time now, up 33% since the beginning of April and tripling over the past year.

And the FIFA World Cup kicks off today with the host country, Russia, taking on Saudi Arabia. See our big preview on which stocks and sectors to focus on throughout the games, like the bookies (Paddy Power Betfair), the sports apparel retailers (NKE), and the livestreamers (TWTR).

Rip-Roar in Tech IPOs

And whoever is still holding on to gains from the recent tech-ish IPOs that can’t stop exploding higher -- the latest being Pivotal Software (PVTL), which soared by 33% yesterday on a solid earnings debut -- good on you, because the momentum hasn’t slowed down a tiny bit.

In the month of June, we’ve seen HUYA and ZS both soar ~50%, IQ and ZUO rip more than 30%, DOCU rise 28% and BILI gain 24%. And it’s not only happening here in the U.S., but everywhere around the world: Just yesterday we saw PayPal competitor Adyen briefly double in its first day of trading in Amsterdam before closing up with a 90% gain, while China’s Foxconn Industrial hasn’t had one down day since its debut last week. Also note that we have three IPOs on tap to price tonight, including a China-based education services company (sound familiar given Muddy Waters’ latest call?) called Puxin Ltd, whose ticker is NEW.

Notes From the Sell Side

Here’s your biggest calls so far..

Goldman raised its view on the engineering & construction sector to attractive and upgraded KBR to a neutral: "We forecast an organic growth inflection in 2Q2018 for the first time in nearly five years driven by accelerating activity off trough in mining and energy engineering/early construction activity, with continued growth in government services markets contributing." Goldman also downgraded TEX to a sell on peaking aerial platform supply additions.

UBS bumps up its price target on CAT to $185 (vs Street average $174) as it expects the mining business to ramp up: "As a result, we view CAT’s 2018 EPS to be below mid-cycle, with 2019 approximating mid-cycle."

Deutsche Bank starts coverage on SPOT with a hold rating and a price target of $155, which is one of the lowest on the Street; analyst Lloyd Walmsley says he is positive on the music industry, but struggles with the bull case on Spotify ("we do not think Spotify is Netflix 2.0") given its lack of content differentiation or visibility around long term margins. Note SPOT has had a big run lately (like the other tech IPOs mentioned above), rallying close to 14% over the past three weeks.

JPMorgan downgrades ORCL to neutral ahead of earnings next week as specific metrics in the bank’s CIO survey, namely spending plans, "have arced over into negative territory." It’s also worth mentioning that the biggest bull on the Street, Nomura Instinet, lowered its price target as it expects volatility in the quarter given "many moving parts."

And the most bearish analyst on Tesla, Vertical Group’s Gordon Johnson (who also recommends selling a host of solar and steel stocks), has gotten even more bearish after slashing his price target on the stock from $99 to $93, implying downside of about 73% from Wednesday’s close.

Tick-by-Tick Guide to Today’s Actionable Events

• Today -- IPO lockup expiry: TCG BDC (CGBD)
• 7:00am -- MIK earnings
• 7:45am -- ECB decision
• 8:30am -- Retail Sales, Initial Jobless Claims
• 8:30am -- Draghi holds press conference after ECB meeting
• 9:00am -- Gary Cohn discusses China Trade at Washington Post event
• 9:00am -- NVMI analyst day
• 9:15am -- Michael Milken and Apollo Global’s Josh Harris at Wharton Global Forum
• 9:45am -- Bloomberg Consumer Comfort
• 10:15am -- UTX at UBS Industrials and Transportation conference
• 10:20am -- CVNA, GDOT at William Blair Growth Stock Conference
• 10:30am -- EIA natgas inventories
• 11:00am -- AXL, AVT investor days
• 11:00am -- HON at UBS Industrials and Transportation conference
• 11:00am -- World Cup: Russia vs Saudi Arabia
• 11:40am -- CBLK, ZBRA, ALGN at William Blair Growth Stock Conference
• 12:15pm -- CODI investor meeting
• 12:20pm -- FTNT at William Blair Growth Stock Conference
• 1:30pm -- RNG investor day
• 1:47pm -- Tiger Woods tees off at the U.S. Open
• 4:01pm -- FNSR earnings
• 4:02pm -- JBL earnings
• 4:05pm -- ADBE earnings
• 4:15pm -- VNCE earnings
• 4:15pm -- York’s James Dinan, Apollo Global’s Marc Rowan, and Chiron’s Marc Spilker speak at a panel at the Wharton Global Forum
• 5:00pm -- ADBE earnings call
• 6:00pm -- FCC Chairman Ajit Pai discusses net neutrality at Cato Institute
• Tonight -- IPOs to price: Puxin (NEW), Avalara (AVLR), Verrica Pharma (VRCA)

To contact the reporter on this story: Arie Shapira in New York at ashapira3@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Steven Fromm

©2018 Bloomberg L.P.