Market Review: The Fed Comes Through. Next Up June.

eOptionDaily Market Report

Equity Market Recap

·      Stocks push higher! It was a buying frenzy initially, as stocks, bonds, and commodity prices all gained after the Fed raised interest rates for the third time since the financial crisis (in 2008) and continued to project two more increases this year, signaling more patience as inflation approaches its 2% target. Interest rate sensitive stocks surged as bonds gained/yields fell as the FOMC was in-line with most expectations for 2 more hikes for 2017 (vs. some thinking 3 more a possibility) & 3 for 2018 – shares of utilities, gold miners, REITs and other dividend paying sectors jumped on the report while banks reversed to the downside. Commodity prices jumped given the sharp pullback in the dollar, with gold and oil getting a late day lift. Yellen comments in her press conference were positive on the economy and noted the gradual rate of increases. With today’s strong closing levels, major averages ended a “stone’s throw” from record highs.

·      Takeaways from FOMC showed: The Federal Reserve raised its benchmark lending rate a quarter point and continued to project two more increases this year. Fed calls inflation goal `symmetric’ …posture shifts to containing inflation vs wanting faster inflation….14 officials now see 3 or more 2017 hikes vs 11 in Dec…regarding the Dots: a net three officials moved to three 2017 hikes from two hikes…rate hikes to be `gradual,’ prior statement said `only gradual’…Kashkari dissents in favor of no hike – all in all a very dovish outlook/statement from the Fed after the in-line rate increase. Note the S&P 500 and Dow Industrials have now gone 106 straight trading sessions without a decline of 1% or more.

Economic Data

·      Empire state index slips to 16.4 in March from 18.7 in February (which was a 2-year high) but was above consensus reading of 15.0; prices paid fell to 31 from 37.8 the prior month, new orders rose to 21.3 (best level in several years) from 13.5 and the number of employees rose to 8.8 vs. 2.0 MoM; unfilled orders index rose to 14.2, its highest level in more than a decade

·      The Consumer price index (CPI) rose by a seasonally adjusted 0.1% last month, slightly above the estimate of unchanged, but was the smallest increase since last July. Excluding the volatile food and energy component, CPI rose an in-line 0.2%. The increase in inflation over the past 12 months advanced to 2.7% in February from 2.5% in January, the highest level since early 2012

·      Retail Sales for February rose a modest 0.1%, which was in-line with expectations, while retail sales ex: autos rose 0.2% in Feb, slightly above the 0.1% estimate. Still, sales were 3.7% higher in the first two months of 2017 vs. the same period a year ago.

·      Business Inventories rose 0.3% MoM, in-line with estimates while Business sales rose 0.2% in January after rising 2.1% the prior month; Dec business inventories rose 0.4% MoM

·      The U.S. Home Builders’ Confidence index (NAHB) in March rises to 71 vs 65 last month, its highest level since June 2005; the present single family sales rise to 78 vs 71 last month, future single family sales rise to 78 vs 73 last month and prospective buyers traffic rises to 54 vs 46

Commodities

·      Oil prices ended higher, with WTI crude snapping its 7-day losing streak, helped by weekly bullish inventory data from the API and DOE. WTI crude finished higher by $1.14, or 2.4% to settle at $48.86 per barrel after the API reported a decline of 531,000 barrels in U.S. crude supplies for the week ended March 10th and the DOE said weekly stockpiles fell -237K barrels, compared to an expected build of 3.3M barrels. Inventory data has fanned recent weakness in WTI crude, slipping to 3-month lows yesterday as oversupply issues have overshadowed OPEC reports of reduced output/sticking to compliance levels. Note U.S. oil prices have fallen more than 10% this month and Brent prices have also dropped nearly 9% on those oversupply issues/stronger dollar. Oil got an extra boost late day as the dollar plunged post FOMC statement.

·      Gold prices settle lower ahead of the FOMC meeting results at 2:00 PM EST; gold dropped -$1.90, or 0.2% to close at $1,200.70 an ounce. After the FOMC announcement, gold futures spiked to highs on the slightly dovish statement/interest rate dot plots.

Currencies

·      The U.S. dollar was the biggest casualty of the Fed statement and decision, falling broadly vs. other rival currencies. The Fed raised rates to 0.75%-1% as expected while the Fed’s “dot plot” still signaled two additional rate hikes in 2017 (where some investors had speculated that the U.S. central bank may have been on track to raise rates by four times this year). Prior to the rate decision, the dollar was at 113.84 (overnight high 114.88) vs. the yen and down slightly vs. the euro…but afterwards, the dollar fell over 1% vs. the yen to lows below 113.35 and the euro topped the 1.07 level, up 1% to a five-week high.

Bond Market

·      Bonds jumped and yields plunged as the FOMC was “less hawkish” than some had feared after raising rates for the second time in four months and pointed to two more rate rises in 2017. Yields had hit multiyear highs earlier this week (10-yr highs above 2.61%), driven in part by concerns the Fed could signal a more aggressive approach to future rate increases. The yield on the shorter-term 2-year note fell 6.5 bps to 1.3197%, after trading near 1.3848% ahead of the decision, while the 10-year yield fell over 7bps to 2.5295% versus 2.5695% earlier.

Other Interesting tidbits

·      Investor Intelligence weekly poll showed bullish sentiment dropped to 53.4% from 57.7% last week; it’s the second drop from a 30-year high of 63.1% reached on March 1. Those considered bearish rose to 3-week high 17.5% from 17.3% last week and those expecting a correction jumps to 29.1% from 25.0% last week, remains at highest since mid-November.

Sector News Breakdown
Consumer

·      Retailers; Adidas AG said it expects to increase its North American sales nearly 50% by 2020; the EUR5 billion  forecast for sales in North America in 2020 is up from the EUR3.41 billion in sales rung up in 2016; FTD shares fell after being downgraded at Sidoti after quarterly results miss; NKE shares led the Dow early after recent bounce in shares; GES reports tonightDG reports tomorrow in the dollar store sector

·      Housing & Building Products; homebuilders jump early (LEN, PHM, DHI, TOL) after the NAHB housing market index rises to 71 vs 65 last month, its highest level since June 2005 – however shares of builders reversed lower – group has been on a tear of late; in appliances, WHR shares slipped midday after monthly AHAM data was released; WSM reports tonight

Energy

·      For a change, oil prices edged higher after weekly inventory data was actually bullish (has been overwhelmingly bearish the last few months). The American Petroleum Institute (API) reported a decline of 531,000 barrels in U.S. crude supplies for the week ended March 10; a fall of 3.9 million barrels in gasoline supplies and a drop of 4.1 million barrels in distillates. The DOE reported a weekly draw vs. an expected build

·      Movers on news; SWN was upgraded to buy from neutral at Citigroup noting shares have fallen by >50% since reaching a recent peak in September last year, sharply underperforming gas-focused peers since winter’s beginning; JP Morgan said after hosting BP CEO in London that recent press reports of an XOM mega-merger scenario were downplayed; XCO says amended credit pact establishes borrowing base of $150M

·      Utilities; one of the surging sectors after the FOMC statement – coming in less hawkish than some feared, raising interest rate sensitive names (UTY index jumped). Potential reforms to federal tax policy could adversely affect the investor-owned regulated utilities sector, according to a new report from Moody’s Investors Service that examines the financial implications of cuts to the corporate tax rate, elimination of the interest deduction and an acceleration of the capital expenditure deduction.

Financials

·      Large Cap banks were rising early ahead of the FOMC announcement (JPM, MS, GS); however, after the FOMC statement, banks erased gains after the Fed left forecast for rate hikes in 2017, 2018 unchanged and raised forecast for 2019; CBF is working with advisers to explore a sale after receiving an unsolicited approach, Bloomberg reported https://goo.gl/fo678v

·      Monthly Master Trust credit card data: Capital One (COF) said February net-charge offs (NCOs) were 5.09% vs. 4.91% MoM and the delinquency rate was 4.04% vs. 4.13% MoM; Synchrony (SYF) Feb NCO’s 5.48% up from 4.59% MoM and credit card delinquencies rose to 3.14% from 3.09% last month; JPM Feb NCO’s 2.28% vs. 2.29% MoM and credit-card delinquencies 1.23% vs. 1.19% MoM; Alliance Data Systems (ADS) Feb NCO’s 6.5% vs. 6.1% MoM and delinquency rate unchanged at 5.1%; Discover Financial (DFS) Feb net-charge offs (NCOs) 3.1%, up from 2.6% MoM, while delinquencies unchanged at 2.1% MoM (total card loans $59.9B vs. $60.7B MoM); American Express (AXP) Feb NCO’s 1.8% vs. 1.5% MoM and delinquencies unchanged at 1.2%

·      REITs; after several days of selling pressure on fear tenants leaving (JCP/M)/those remaining will look to negotiate prices, shares of mall REITs (SPG, MAC, SKT, GGP) with little bounce early; group got a bigger jump late day with other interest rate sensitive sectors

Healthcare

·      Pharma movers; ARNA shares jumped as Q4 earnings and revenues surprise to the upside; CPRX reported positive data from a trial of a treatment for a form of myasthenia gravis, a rare neuromuscular disease; ENDP remained weak after late yesterday, an FDA Advisory Committee voted 18 no, versus 8 yes as to whether the benefits of its reformulated Opana ER continue to outweigh its risks

·      Biotech movers; several analyst weigh in mixed on TSRO and CLVS, two big movers after AZN’s final-stage study demonstrated that its ovarian cancer therapy has broadly similar efficacy to Tesaro’s rival treatment, reducing expectations; CXRX reports Q4 loss and says won’t provide year forecast; AKAO declined on earnings results

·      Medical equipment and devices; Agilent (A) upgraded to overweight at Morgan Stanley with increased tgt to $62 saying the cyclical recovery and execution driving higher multiple; KOOL rises as reports positive data from small study of platelet rich plasma to treat chronic ulcers; ALR said it won’t be able to meet tomorrow’s deadline for the company to file its 10-K after it sought an extension earlier this month

·      Services & Suppliers; ESRX was downgraded to underperform at Wells Fargo and tgt cut to $52-$56 from $79-$85 as expect drug pricing, supply channel political scrutiny to continue this year; CYH’s latest definitive agreement to divest four hospitals in Pennsylvania continues its recently expanded restructuring plans

Industrials & Materials

·      AG & Machinery; FLS upgraded to neutral at Baird saying 1Q order trends should improve y/y and estimates have likely bottomed (remains outperform onITT, FLOW and neutral on CFX, EMR)

·      Airlines; news plentiful with various updates: JBLU sees April RASM adjusted for Easter up vs March (sees 2Q RASM, adjusted for Easter, up more than 1Q);UAL boosts year capacity views to up 3.5%-4.5% vs prior view 1.5%-2.5%, sees year international capacity up 1%-2% vs prior 0.5%-1.5%, while cuts year total CASM to 5.6%-7.2%, from 6.6%-8.2%; SAVE cuts 1Q total revenue per available seat mile forecast in 8-k filing to down (-4%-5%) from down (-2.5%); DAL said in slides that sees greatest margin pressure in March quarter, but sees return to margin expansion in 2H and revenue improving, but not fast enough to offset costs

Technology, Media & Telecom

·      Internet; NFLX was upgraded to hold at Jefferies and raised tgt to $135; TWTR confirmed a third party hacking overnight after pro-Turkey attacks featuring swastikas; SNAP was initiated with an underperform and $18 tgt at Cantor (still no buy ratings on stock); GRUB customers can now order with AMZN Alexa; GOOGL touched 52-week high today

·      Information services; MSCI jumped on reports it rejected a takeover bid from SPGI https://goo.gl/6JGle2  (however later MSCI released a statement saying it is not in talks with any third party and hasn’t received any offer or indication of interest) – as the stock pared gains; SCOR is working as expeditiously as possible toward filing all required periodic financial reports with the SEC, according to filing

·      Semiconductors; NVDA active after WSJ report that its teaming with Bosch on driverless car; INTC was downgraded to neutral at Credit Suisse and cut tgt to $35 from $45; MU volatile after South Korea’s Financial News reported that Samsung Electronics plans to invest 10t won in a new DRAM production line

·      Optical sector; group has been slammed over the last 2-weeks on weaker earnings and outlooks; last night, NPTN shares active after lower Q1 guidance of loss (20c-30c) on revs $67M-$73M, well below consensus 5c/$98.04M (follows recent softer updates from CIEN and FNSR); FNSR was upgraded to buy at Jefferies saying recent weakness in shares (stock fell 23% on Friday) provide an oppty/weakness is due to product issues expected to be resolved in 1-2 quarters

·      Media & Telecom; European Commission approves AT&T’s $85 billion acquisition of TWX; movie theater rating changes at Credit Suisse as upgraded NCMIon recent pullback but downgraded AMC to underperform and cut tgt to $26 ; in advertising, RUBI shares plunge after issuing disappointing 1Q forecast; TRCO rises as NY Post reported SBGI is nearing a media deal with TRCO https://goo.gl/H8Y1Va

Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P.  Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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