Market Review: Markets Continue to Consolidate into Mid-Week

eOptionDaily Market Report

Equity Market Recap
  • Stocks ended mixed as the Nasdaq Composite posted its 4th straight day of gains, touching a high above 5,900 led by tech, while the Dow Industrials and S&P 500 lagged behind. Beaten up sectors were among the top gainers in the S&P, with retailers (TGT, URBN, and JCP) higher on no specific news and energy (APA, MUR, and HAL) among the top performers. Crude oil prices closed higher by more than 2% on Libya and inventory data. The dollar jumped, weighing on gold prices while the British pound slipped on news out the UK. Several Fed speakers were in action today, talking up rate hikes and the economy which impacted markets. Overall the main driver for the broader stock market remains Washington and the hopes on tax reform, spending, and for another try at the Healthcare Bill which failed on Friday. Starting April, we will also start hearing rumblings of a possible government shutdown as debt ceiling approaches with no deal in place yet.
  • Outside the U.S. was news in the UK, as Prime Minister Theresa May sent a letter to European Council President Donald Tusk which invokes Article 50 of the Lisbon Treaty and officially notifies the European Union of the U.K.’s intent to withdraw (as expected). On 23 June last year, the people of the United Kingdom voted to leave the European Union.
  • There were a few Fed speakers today as: 1) Boston Fed President Eric Rosengren said a rate increase at every other FOMC meeting in 2017 “could and should be the committee’s default” unless data change, and its “important to avoid creating an over-hot economy.” He also said four hikes this year would still be gradual, yet “more regular.” 2) Fed President Charles Evans said over the next few years, economic growth should average a little above potential, which isn’t even as high as 2% and echoed similar comments about the amount of rate hikes this year

Commodities

  • Oil prices closed higher, ending near their best levels of the day by rising $1.14, or 2.4% to settle at $49.51 per barrel, closing roughly around 3-week highs. Oil prices were helped by another “risk-on” type attitude by investors, buying recently beaten up sectors (such as energy), as well as inventory data that was “less bearish” than anticipated. Disruptions to crude production in Libya added further support to oil prices the last few days.
  • Gold futures fell for a second straight session, falling from 1-month highs as the dollar gained, adding to the pullback struck to start the week. Gold for June delivery loses $2, or 0.2%, to finish at $1,256.80 an ounce, while April gold fell $1.90, or 0.2%, to settle at $1,253.70 an ounce. Gold remained slightly lower, though little moved as the U.K. government formally began its Brexit process.

Currencies & Bonds

  • Bonds gained early only to pare gains as the yield on the 10-year held around 2.39% (below yesterday’s 2.4%) most of the afternoon after another round of better economic data (strong pending home sales data) and ahead of tomorrow’ GDP reading
  • The U.S. dollar ended higher for a second straight day after two-weeks of declines; the dollar index (DXY) jumped back above the 100 level, rising against the euro and British pound (as Brexit triggered), while slides against the defensive Japanese yen. The dollar got a boost as well on more hawkish commentary from Evans and Rosengren today as the Fed has for the most part penciled in two more hikes for 2017 (with talk of another if data supports it)

Economic Data

  • Pending Home Sales for February rise 5.5% MoM, above the consensus view of up 2.5% (the highest level in close to a year). The NAR said the rising stock market and steady hiring helped, as did fears from homebuyers of rising interest rates.
  • Investor Intelligence poll shows bullish sentiment fell to 49.5%, lowest since Nov. 9, vs. 56.7% last week; the fall below 50% ends 18-week streak of readings above that mark, peaked at 30-year high of 63.1% on March 1; bearish sentiment rises to 18.1%, highest since Jan. 11, vs 17.3% last week; those expecting a correction rises to highest since Nov. 2 to 32.4% vs 26.0% last week
Sector News Breakdown

Consumer

  • Retailers; LULU expected to report earnings after the close today; SKX was downgraded at Susquehanna as expects domestic wholesale growth to fall short of Street expectations; OLLI traded to 52-week highs after solid same-store sales growth and mid-20% EPS growth
  • Restaurants; SONC Q2 EPS beat while sales missed and comp sales fell (-7.3%) vs. est. loss (-4.5%), while reaffirmed year; PLAY Q4 EPS beat by 4c on slightly better revs, but comps rose 3.2%, slightly below estimate of 3.2%; DNKN was downgraded to sell at Goldman Sachs from neutral and tgt to $47 from $48 citing comp sales and unit growth risks in U.S. Dunkin’ Donuts stores (cuts estimates);DRI downgraded at BTIG given their recent gains and our concern about integration risk for the Cheddar’s acquisition
  • Housing & Building Products; home furnishing store RH shares jumped after Q4 results in-line with prior forecasts while margins were down and mixed guidance; in building materials, USG was downgraded to neutral at Macquarie citing commentary from contacts at the INTEX Construction Expo that US wallboard price increases are fading to +2-3% (from +5-10%); MLM and VMC were both initiated at buy ratings at Citi
  • Consumer Staples; in tobacco, Barclay’s was positive on PM saying it has a 24- to 36-month competitive advantage in reduced risk products (RRPs) and is scaling this opportunity in F17E and F18E/raise estimates

Energy

  • Inventory data: Last night, the American Petroleum Institute (API) reported a rise of 1.9 million barrels in U.S. crude supplies for the week ended March 24, a decline of 1.1 million barrels in gasoline supplies and a fall of 2.0 million barrels in distillates. This morning, the Department of Energy (DOE) reported a weekly crude oil build of 867K barrels vs. estimate of +2.0M, while gasoline inventories fell a greater 03.7M vs. est. -2M barrels
  • Energy broadly higher – leading gains – refiners TSO, PBF, MPC outperform…gains in E&P MUR, APA, APCCVX among top gainers in the Dow and services also posting solid gains WFT, HAL up over 2% on jump in oil
  • Utilities; SCG shares fall to 52-week low after Westinghouse Electric Co., a major player in global nuclear construction, filed for bankruptcy protection on Wednesday/SO said it is working with Westinghouse to maintain momentum at Vogtle. Goldman Sachs said remain positive YieldCos on updated valuation views but downgrade NEP given outperformance; Goldman upgraded NRG to buy on cost cutting and FCF expectations…seeing upside to consensus; PPL was downgraded to neutral from buy at UBS
  • Other movers/news; CHK shares advanced again today7 (after 4.46% gain yesterday) as natural gas leveraged stocks outperform (RRC); XOM agrees to sell its operated upstream business in Norway to P-E firm HitecVision and oil company Point Resources for an undisclosed amount.

Financials

  • Large Cap banks/Brokers; COWN shares rise after CEFC China to buy 19.9% equity interest in Cowen for $18 per share/to provide Cowen with $175M in debt financing https://goo.gl/XzkVHg . In research, Deutsche Bank more positive on banks/brokers as upgraded MS to buy from hold and raise tgt to $47 from $43 with GS/WFC also top picks saying they still prefer market sensitive banks as reflects lower relative valuations vs. historical levels and potentially more leverage from a softening regulatory environment and better economy; FITB was upgraded to buy at Compass Point on sell-off and raisedZION to buy reflecting the company’s ability to benefit on numerous fronts as well as more attractive valuation following the recent sell-off in regional banks; CFG shares dropped late day after a Wall Street Journal report that employees fabricated meetings with customers to meet goals set by the bank. https://goo.gl/bM9diB
  • Cards, Lending and Services; COF was upgraded to buy at Nomura saying they now reached a point in the cycle where they believe COF’s subprime bet is about to pay off, handsomely (raised tgt to $105 from $97) – notes after two years of flat EPS growth, now has wind at its back.
  • Exchanges; The European Union’s antitrust watchdog formally blocked the planned $28 billion tie-up between Deutsche Borse AG and London Stock Exchange Group PLC after the parties failed to offer sufficient remedies to assuage antitrust concerns

Healthcare

  • Large Cap Pharma; opioid maker DEPO shares slipped after guiding Q1 revs to $95M-$100M, below consensus $114.64M and appointed former Bayer Healthcare CEO Arthur Higgins as new head, replacing James Schoeneck who resigned; PTX said it continues to analyze various alternatives, including strategic and refinancing alternatives/asset sales; TNXP shares jump on start of Phase 3 clinical trial of TNX-102 SL in PTSD; ATHX rises after receiving $11 price target by William Blair and outperform rating; Roche’s Rituxan receives backing of FDA advisory panel; specialty pharma stocks (VRX, ENDP, MNK) outperformed on no specific news
  • Biotech movers; VRTX the big winner today after saying it would seek regulatory approval for one of its experimental cystic-fibrosis drugs after the treatment met endpoints in two late-stage clinical studies and helped improve patients’ lung function in late-stage studies. SGMO up on presentation of new data demonstrating significant reduction of tau mRNA and tau protein expression using the company’s zinc finger protein transcription factor technology.
  • Hospitals declined late day (THC, CYH, UHS) after Bloomberg headlines reported that the House GOP said to weigh another try on Obamacare vote next week

Industrials & Materials

  • Transports; trucking stock tgts cut at Stifel saying it would be wise to be cautious heading into 1Q earnings season and also expects consensus to decline (cut tgts on CGI, CVTI, JBHT, KNX, MRTN, PTSI, SWFT, ULH, USAK and WERN); car rental tgts/estimates lowered on CAR (UW rated) and HTZ (EW rated) at Morgan Stanley. Transport index lower with only a few gainers in index (LSTR, CAR, KEX) – as airlines top decliners (ALK, LUV, DAL, UAL, AAL all off more than -1%)
  • Chemicals; CC upgraded to buy at Jefferies and raise tgt to $48 from $35 saying the company has done well as a trade on cyclical leverage and litigation relief; MEOH upgraded to outperform at CIBC following meeting with CEO saying was impressed with his focus on shareholder return/ROIC and “relative tightness of methanol markets despite the recent pull-back in oil”

Technology, Media & Telecom

  • Internet; note much in way of news, though Barclay’s initiated: OW rated on AMZN ($1,120 target), BABA ($130 tgt), EBAY ($41 tgt), FB ($154 tgt), GDDY ($45 tgt), GOOGL ($1,065 tgt), MELI ($250 tgt), WIX ($80 tgt)…Equal-weight rated on: BIDU ($195 tgt), SHOP ($64 tgt), SNAP ($24 tgt), WB ($22 tgt), WEB ($22 tgt)… and Underweight rated on: TWTR ($14 tgt), GRPN ($3.60 tgt)
  • Semiconductors; EXAR to be acquired by MXL for $13 per share in cash, or about $700M which represents 22% premium over EXAR’s $10.62 close on March 28 https://goo.gl/wFYBhU; CY mentioned positively at Pacific Crest as firm said they left day incrementally more constructive on the company’s long-term growth prospects in auto, IoT and USB
  • Software movers; VRNT shares rallied as Q4 EPS topped highest estimates on better revs of $299.5M; in security, FTNT was upgraded to outperform at Baird saying sales force restructuring is mostly behind it and the stock is attractive at current levels,
  • Hardware & Equipment; Samsung launches Galaxy S8 phone with new assistant, curved screen;FFIV was downgraded to sell at Deutsche Bank and tgt cut to $100 (calling for 30% drop) arguing for deceleration in Product and Services revenues into FY18; AAPL stock climbs to sixth record in March, and 12th record this year; ERIC was upgraded at Bernstein; CSC touched 52-week highs of 74.92 earlier following positive commentary from investor day
  • International Data Corp. (IDC) said it expects global spending on security technology to rise to $81.7 billion in 2017, up 8.2% from a year ago. Spending on security-related hardware, software and services is expected to “accelerate slightly” over the next several years, achieving a compound annual growth rate of 8.7% through 2020, with industry revenue projected to approach $105 billion
  • Media & Telecom; CRTO shares downgraded at Goldman Sachs on valuation; BuzzFeed said to mull IPO in 2018, Axios reported; SCWX shares slumped after earnings; CTL and LVLT resumed coverage at Morgan Stanley with overweight ratings

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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