Market Review: Markets Stumble to End Otherwise Strong Quarter

eOptionDaily Market Report

Equity Market Recap

·      Directionless, quiet, slow, low volatility are some of the best words to describe stocks this week, as major averages were mixed, but capped the quarter with solid gains. The Dow Industrials underperformed major averages again today (similar theme this week), while the Nasdaq Comp and SmallCap Russell 200 outperformed (NASDAQ snapped its 5-day win streak, while the Russell extended its win streak to 7-days). For the first quarter, the NASDAQ posted a gain of around 10%, the S&P 500 about a 5.8% rise and the Dow about a 5% return for the quarter (sixth-straight positive quarter and the longest winning streak since Q4 of 2006). Economic data was positive this week (heading into monthly jobs report next Friday), helping push markets higher and erase last week’s declines. Gold gained 8% for the quarter, while oil slipped a little less than 6%, but stocks remain not far from record levels. Looking into the second quarter (outside of earnings), markets look to expectations for Washington to raise the debt ceiling, another possible rate hike by the FOMC (would be second this year), whether OPEC extends production cuts, and of course if any of the Trump administration policies pass through Congress/Senate after the Healthcare Bill failed last week.

Economic Data

·      Personal Income for February rose 0.4%, in-line with estimates while Personal Spending rose a slightly less than expected 0.1% (vs. est. 0.2%), while real personal spending fell (-0.1%) vs. est. up 0.1%. PCE core inflation rose 0.2% (in-line with 0.2% est.) and rose 1.8% YoY (vs. est. 1.7%). PCE prices rose 0.1% (in-line with estimate) and rose 2.1% YoY; the savings rate at 5.6% in Feb. vs 5.4% the prior month

·      University of Michigan Sentiment rose to 96.9 from 96.3 last month but below est. reading of 97.6; the expectations index unchanged at 86.5 and the current economic conditions index rose to 113.2 vs. 111.5 last month.

·      The Chicago PMI rose to 57.7 in March from 57.4 in February. The first-quarter average of 55.1 was the best showing since the fourth quarter of 2014. In March, 4 of the 5 components improved, with only employment falling, into contraction territory. The first-quarter average for prices paid is the highest since the third quarter of 2011, in a sign of inflationary pressure 

Commodities

·      WTI crude oil prices rise, managing a 25c gain on the day and settling at $50.60 per barrel, but posted a loss of about (-5.8%) for the quarter. Oil prices were unphased by a weekly rig report showing another 15 rigs were added online, bringing the total to 824 now (up 374 rigs from last year’s count of 450). Investor concerns about oversupply peaked in the quarter as inventory levels surged but losses were tempered amid renewed hopes OPEC producers may extend recent output cuts. WYI crude prices have gained nearly 5% after prices last week hit their lowest levels since before the deal between the OPEC and non-OPEC members.

·      Gold prices advanced on Friday, rising $3.20 or 0.3% to settle at $1,251.20 an ounce, snapping a 3-day losing streak. Gold logged a gain of more than 8% for the quarter, and 0.2% higher for the week, but dipped -0.2% for the month amid volatility in the currency markets. Silver prices inched higher on the day and are up around 13% in the quarter. Helping lift gold futures this quarter were concerns regarding French election outcomes, as well as the Fed outlook on rates.

Currencies

·      The U.S. dollar ended mixed on the day with the dollar index (DXY) trading little changed, but posted gains this week as bounces back from 2-weeks of selling pressure. However for the month, the greenback was down a little less than -1% and around -1.7% for the quarter (after rising over 7% in the prior quarter). The dollar got a boost from stronger economic data this week (jobs report coming up late next week), helping erase prior week gains as inflation expectations diminished following Fed commentary. Against the yen, the dollar fell to around 111.40 (but off lows of around 110.11 earlier in the week), while the euro slid late day (to lows of week), erasing earlier gains that send prices above 1.07 (weekly high was 1.0906)

Bond Market

·      Bonds were very quiet on Friday, with the 10-year yield sliding late session back below 2.4% (after holding steady most of the day just above) despite several economic data points. The 10-year fell slightly from last week’s closing levels of around 2.407% (but well off earlier week lows of about 2.34%). Several Fed speakers this week have made comments on rates, but today, the Fed’s Dudley today said expectations for two more rate rises in 2017 weren’t out of line (taken as a bit more dovish that counterparts comments earlier this week). Other Fed members comments have varied for between two-to-three rate hikes the remainder of the year. He also said that the higher consumer and business confidence numbers had yet to come through as “hard” data. The 2-year yield ended around 1.25% and the 30-yr just above the 3% level.

Sector News Breakdown

Consumer

  • Retailers; not much news in apparel or department stores today, but several names bounced off lows from earlier in week in bit of “bottom fishing” off beaten up sectors; BBBY shares were mostly lower ahead of earnings next week; CONN shares slipped after RCII said that Acceptance Now division informed Conn Appliances it won’t renew referral agreement between the parties upon expiration on June 6. Note among the top S&P 500 decliners in Q1 were UA -31%, LB -28%, UAA -27%, SIG -26%, TGT -23%
  • Housing & Building Products; KeyBanc said the latest regional U.S. permits data from Feb. continues to support our emphasis around Overweight-rated OC, BLD and DHI, which have greater exposure to more affordable, interior states where we see the strongest growth in new housing playing out (cautious n-t onTOL/LEN); OC was upgraded to outperform at Wedbush; building product names MLM, SUM (VMC) stronger most of the day after Cleveland research said sees strong volumes to end qtr

Energy

  • Weekly Baker Hughes (BHI) rig data showed the total U.S. rig count rose 15 to 824 (was up 20 rigs week prior), with oil rigs up 10 to 662 (prior week rose 21), gas rigs up 5 to 160 (fell -2 week prior) and miscellaneous held at 2.
  • Oil services/E&P; Seaport Global upgraded CRZO, LPI, WPX and OAS to buy from neutral, but downgraded PXD, XEC and RICE to neutral from buy – says on space they think it’s time to add to your E&P exposure and take on added risk with respect to oil weighted names citing oil macro review produced a surprisingly robust outlook, think uninspiring FY17 guidance is a case of massive industrywide sandbagging and their E&P capital efficiency report reveals that the majority of the E&P space is now profitable at current prices

Financials

  • Large Cap banks outperformed on Thursday on rising bond yields/improved sentiment to stocks after a few days of selling pressure – however, shares gave back gains today in a relatively quiet session – mostly lower on the week
  • In other news; BOFI under pressure again after the NY Post reports that the DOJ is looking at BofI for possible fraud https://goo.gl/5I827b; CIBC said it had raised its takeover offer for PVTB by 20% to about $4.9B, after some of shareholders opposed an initial bid https://goo.gl/Php2q3
  • Exchanges & Brokers; RBC Capital resumed coverage with CME with an outperform and $134 tgt as expects supportive volume levels with growth of 7% in 2017 versus consensus of 5%; resumed CBOE with outperform and $90 tgt saying proprietary product suite; resumed NDAQ with lower rating of sector perform on limited upside and resumed ICE sector perform on valuation

Healthcare

  • Large Cap Pharma; AKTX rises after the FDA granted one of its drugs a “fast track” designation. Akari’s drug, Coversin, is aimed at treatment of paroxysmal nocturnal hemoglobinuria; VRTX was upgraded to buy at Maxim saying it is making progress in building a foundation from which to dominate the cystic fibrosis (CF) landscape for years; INCY and MRK announced additional details of their clinical development program investigating the combination of epacadostat
  • Biotech movers; ACOR shares dropped after District Court finds all four Acorda Ampyra patents invalid for obviousness/though judge upholds validity of one patent that expires in 2018 for MS drug; FWP shares dropped after losing patent ruling in Tecfidera dispute with BIIB; SAGE tgt was raised to $103 from $65 ahead of two pivotal CNS readouts saying SRSE Phase 3 data is on track for 1H and believes impressive Phase 2 data bodes well for a positive outcome; UTHR said midday that the PTAB said all claims of “393” patent “not patentable”
  • Services and facilities; WBA has set a deadline of “roughly three months” for the FTC approve the proposed $9.7B merger with RAD or block it, the New York Post reports https://goo.gl/WFzzm7 ; CVS shares slipped after saying a specialty pharmacy services pact with the Blue Cross and Blue Shield Federal Employee Program (FEP) will terminate at the end of this year. (contract expected to generate ~$2.8b in 2017 revenue, doesn’t see material effect on 2018 operating profit)
  • Several companies selling shares to raise cash: ACIU 1.9M share Block Trade priced at $11.00; BLRX 29.4M share Spot Secondary priced at 85c; CARA4.45M share secondary priced at $18.00; CTSO 2.2M share Spot Secondary priced at $4.50; DRIO 1.45M share secondary priced at $3.10

Industrials & Materials

  • Transports; in a volatile week, Transports gained over 2.5% from Monday lows, led by rallies in rails, airlines and package delivery (FDX shares jumped on Friday); CAR and HTZ shares were higher early shares as MKM Partners said negative sentiment on car rental sector is overdone
  • Ag news; Soybean futures fell after the U.S.D.A said prospective plantings of the crop are likely to reach a record this year. Soybean planted area for 2017 is estimated at a record high of 89.5 million acres, up 7% from last year. Corn 8.616b bushels vs. 7.822b in same period a year ago
  • Materials & Mining; AA was upgraded to outperform at BMO Capital and also upgraded VALE to market perform while cutting PAAS rating; MOS reports production outage at Esterhazy K2 potash mine (sees loss of production 200K-300K tonnes), but not seeing material Q1 affect
  • Chemicals; DD and DOW announced several amendments to the companies’ transaction agreement involving the proposed merger of equals and intended subsequent separation into three independent publicly traded companies; FMC to acquire DD’s Crop Protection business it must divest to comply with the EC ruling related to its merger with DOW for $1.2B cash https://goo.gl/Hov1rr

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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