Market Review: DOW Closes At Session Lows Ahead Of Long Weekend

eOptionDaily Market Report

Equity Market Recap

  • Stocks ended the day (and week) lower, falling for a 3rd straight day in another lackluster trading session ahead of the three-day holiday weekend, as investors prepare for the earnings onslaught over the next month. Markets got a little taste of earnings today, with large cap banks Citi, WFC, JPM and PNC all reporting quarterly results better than consensus, on some strong trading revs, but mortgage originations/lending came in weaker. However, financials ended the day lower as bonds remain strong, forcing yields lower (which weighed on banks), and stocks end near lows.
  • Weakness was broad based, with energy among the top declining sectors despite oil prices ending the day up slightly (and up roughly 2% for the week). Transports end the week down over 2.5% since Monday and about 300 points off Tuesday’s highs above 9,200. The underlying theme of the week was defense, as investors rotated into “safe-haven” defensive related assets, with big gains in gold (up over 2%), and bonds, while the dollar was broadly lower given the geopolitical developments from France (elections) to Russia and North Korea.
  • Influential bond investor Bill Gross on Thursday stepped up his warning to investors not to be tempted into buying equities, high-yield junk bonds and other asset classes, given the possibility that U.S. President Donald Trump might fail to enact policies that fuel economic growth.
  • In yet another piece of geopolitical news, the U.S. Air Force has deployed a so-called GBU-43/B Massive Ordnance Air Blast bomb (MOAB), known as the “Mother of All Bombs” in Afghanistan, according to reports citing military personnel. The more-than-20,000-pound bomb was dropped Thursday by an MC-130 aircraft, operated by Air Force special operatives, NBC reported.
  • Despite all the reports this week of concerns with Russia after U.S. retaliated against Syria in response to chemical gas launch, the ongoing tensions with North Korea, and today’s news in Afghanistan, the S&P 500 index still only remains about 3% from its all-time highs…even with a rising interest rate environment by the FOMC and mixed economic data (recent jobs report miss)

Economic Data

  • Weekly Jobless Claims fell 1K to 234K, below the 245K estimate; the four-week claims average drops 3,000 to 247,250; the prior week claims revised up to 235k from 234k; continuing claims fell 7k to 2.028m in the week ending April 1
  • Producer Prices for March fell (-0.1%) vs. est. for unchanged (prior month rose 0.3%); final demand ex food, energy was unchanged MoM below estimate for a 0.2% rise, while final demand rose 2.3% YoY vs. est. up 2.4% and core year PPI was 1.6% vs. est. 1.8%
  • Michigan Sentiment prelim April reading rises to 98. From 96.9 prior month and above est. 96.5; the current economic conditions index rose to 115.2 (highest since Nov 2000) vs. 113.2 last month and expectations index rose to 86.9 vs. 86.5 last month

Commodities

  • Gold prices advanced for a 3rd consecutive session, rising $10.40, or 0.8% to settle at $1,288.50 an ounce, its highest close since around the Presidential election. Gold has strengthened the last few sessions on a weaker dollar and increased tensions overseas, raising demand for safe-haven investments for traders (for the week, gold gained 2.5% and up nearly 12% in 2017)
  • Oil prices ended modestly higher, rising 7c to settle at $53.18 per barrel, helped after the IEA said the global oil market was “very close” to reaching a balance between supply and demand. Oil prices were also buoyed by reports mid-week of increased expectations that major oil producers will extend their output cuts. Oil prices pared gains after weekly rig data showed active oil rigs were added for a 13-straight week. For the week, crude settled higher by just under 2%

Currencies & Bonds

  • Bonds stayed strong, holding near 5-month lows, with the yield on the 10-year trading around 2.22% late day. Bonds have enjoyed a surprise rally over the last few weeks (despite the FOMC recently raising rates) given geopolitical unrest with Syria, North Korea and Russia. The Treasury market appeared to largely shrug off a batch of better economic data (lighter PPI, better jobless claims and improved sentiment). Note the yield on the benchmark 10-year is now down around 40 bps from highs of 2.61% after the FOMC rate hike a few weeks back, and just recently traded below its 2017 low of 2.31% heading into the holiday weekend. For the week, the 10-yr yield is down 14 bps, its biggest weekly decline since Jan 8th
  • The U.S. dollar had a rough week, falling to a five-month low against the Japanese yen (low of 108.73 overnight from earlier week high of 111.58), while the dollar index (DXY) dropped to a two-week low after Trump’s comment yesterday. “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me,” Trump told the Journal. The euro ended the week higher vs. the dollar despite sliding today, while the British Pound ended near the lows. The upcoming French elections will have an impact on the euro.
Sector News Breakdown

Consumer

  • Retailers; HBI reported prelim 1Q results in-line with consensus estimates (no warning in sector a positive for retail); video game retailer GME positive mention at Mizuho as sees upside from Nintendo Switch; DEST a mover on earnings; in auto news, TSLA spiked on a tweet late day from CEO Musk saying Tesla Semi truck unveil set for September
  • Consumer Staples & Restaurants; grocers got a boost (SVU) after March food PPI data look good for the sector and especially for wholesalers, RBC Capital said; DTEA downgraded to hold at LakeStreet noting while Q4 sales results exceeded expectations, weak margins led to an EPS miss; TWNK1M share Secondary priced at $15.25; in restaurants, YUM will restate its financial results due to a change in the fiscal year calendar and a reclassification of some non-service cost components; BLMN was downgraded to neutral at OTR Global
  • Housing & Building Products; furnishing store PIR shares fall as says it sees flat to slightly negative sales growth for Q1 after Q4 sales miss; APOG Q4 EPS/revs top consensus, but year guidance midpoint misses estimates; homebuilders were modestly higher on lower rates; also he number of foreclosure filings, which include default notices, auctions and bank repossessions, dropped 19% nationwide from a year ago during the first quarter, citing one report

Energy

  • Energy stocks underperformed the broader market, as well as oil prices, with big declines on oil drillers/service stocks on no specific news; Baker Hughes (BHI) weekly rig count rose another 8 to 847 rigs, while oil rig count was up 11 to 683 (13th straight week of adds), and gas rigs down -3 to 162. According to Bloomberg, without Nigeria and Libya — both exempt from OPEC’s supply cuts, group’s production in March dropped 170k b/d to 29.76m b/d, for compliance with agreed-upon cuts rising to 104% of target, IEA says in monthly report.
  • Other news; COP agreed to sell its interests in the San Juan Basin to an affiliate of Hilcorp Energy Company for up to $3.0B of total proceeds; Reuters reported CVX is exploring the sale of Canadian oil sands stake, which could fetch about $2.5B; In coal sector, HCC666M share IPO priced at $19.00 (but opened lower at $17.50);
  • Services/E&P sector; WFT was downgraded at Goldman Sachs to neutral following strong YTD performance (shares up 26%), positive developments saying catalysts played out; oil driller tgts slightly lowered for some (RIG, SLB, NE) at Deutsche Bank though noted international and offshore markets are still experiencing their normal cyclical lag while working through structural issues but both appear to at least be bottoming
  • Utility sector; after outperforming yesterday on lower bond yields/rotation into defensive higher dividend paying sectors, the group saw profit taking today; NEE proposed $18B takeover of Oncor denied by the Texas PUC.

Financials

  • Large Cap banks; earnings from several large cap names: 1) JPM EPS beat by 5c as topline beat on higher fee income & NII & better NII outlook; 2) WFC EPS beat by 4c but missed on revs (on mortgage lending slowdown) as 1Q expenses were elevated QoQ, driven by typically-higher 1Q personnel-related expenses, while credit results improved and the bank benefit from lower income tax expense; 3) Citi (C) results top expectations, helped by a jump in fixed income trading (highest totals in 3-years) as overall revs rise 19% YoY; 4) PNC EPS beat by 13c driven by higher fee income and NIM of 2.77% was up 2 bps YoY and provides upbeat guidance; 5) FHN reported in-line quarterly earnings on weaker-than-expected revenue (down 15% annualized, missed by $0.05), due to mortgage warehouse loan shrinkage – earnings from MS, BAC, GS next week
  • News outside of earnings: Berkshire Hathaway Inc. said it sold more than 7M shares of WFC between April 10 and April 12, and it intended to file a report with the SEC to reflect that sale. Berkshire plans to sell nearly 2 million shares of Wells Fargo in the “near future,” solely motivated by the desire to return to a percentage ownership below the 10% notification threshold; in insurance, RNR shares fell analysts lower EPS estimates after the reinsurer said Wednesday that it expects a ~$30m pretax impact on carried reserves in 1Q from the Ogden rate change
  • Asset managers; AB reports preliminary AUM $498B as of March 31, (same as end of Feb); MN said prelim AUM $31.6B as of March 31, vs. $32.1B end of Feb

Healthcare

  • Pharma/biotech movers; OCRX rises after saying data from investigator-sponsored preclinical study of ornithine phenylacetate (OCR-002) will be presented in poster session at EASL meeting on April 20; AERI reported the successful six-month topline safety and efficacy results of its Rocket 4 Phase 3 clinical trial for product candidate Rhopressa; NVET to be acquired by ZTS for $6.72 per share in $85M deal https://goo.gl/TAhqyT; TOCA5M share IPO priced at $10.00
  • Medical devices & equipment; DXCM falls on reports AAPL has team working on tool to check blood sugar levels, which might compete with the maker of continuous glucose monitoring systems; GKOS shares fall after Noridian, a Medicare Administrative Contractor, proposed to cut the physician reimbursement for its iStent procedure for glaucoma treatment

Industrials & Materials

  • Industrial & Machinery; MTZ was upgraded to buy at Davidson citing approaching Q1 earnings: bookings momentum, communications customer initiative developments, and/or potential M&A
  • Transports; SKYW upgraded to strong buy at Raymond James saying pullback creates attractive entry point; group failed to rally, with transport index falling back below the 9,000 level, led by a sharp decline in airlines (DAL, ALK, LUV), while rails outperformed
  • Metals & Mining; no bounce at all in steel/metals sector, with sharp declines across the board (X, AKS, STLD, NUE, CLF); group fell sharply yesterday after iron ore suffered its worst one-day loss in almost a year, as price for the benchmark 62% fines iron ore plunged almost 9% to $68.04 a ton; RIO $2.45B coal mine sale to Chinese-led group cleared by Australia

Technology, Media & Telecom

  • Internet; AMZN cautious comments at Barclays saying 1Q earnings report expected to be another mixed bag (says checks point to AWS rev deceleration from S3/EC2 price cuts); BABA cloud oppty could be worth $20B in 5 years according to MKM partners; WIX was downgraded at Raymond James citing valuation after outperformance; Instagram stories sees 200M daily users (up from 150M in January), surpassing Snapchat (weighed on SNAP shares)
  • Semiconductors; sector in rebound mode ahead of some earnings next week and after recent pullback (down nearly 4% from 16-year high on March 21st for SOX), led by gains in AVGO (top decliner yesterday), CAVM, SWKS and XLNX; MOSY announces restructuring, will cut 60% of workforce after failing to get proposals; AVGO active after Bloomberg reported Toshiba said to temporarily halt meetings on chip sales/slowed by WDC concerns https://goo.gl/8VR5Um
  • Software movers; Guggenheim Initiates software sector, with buy ratings on ZEN Tgt $33, ULTI $230, HUBS $70, ADBE $155 (neutral on TEAM, PTC, ADSK)
  • Optical sector jumps; AAOI guides higher as sees Q1 EPS $1.00-$1.02, above prior view of 80c-88c and est. 83c; guides prelim Q1 revenue approximately $96.2M, above consensus $89.77M; shares of other optical names OCLR, ACIA, NPTN, LITE, FNSR rallied in reaction
  • Hardware & Equipment; CTSH was upgraded to buy at SunTrust; INFY said revenue growth for the current fiscal year would likely slow after in-line quarterly results
  • Media & Telecom movers; Dow component DIS touches 52-week high after RBC comments today/speculates AAPL could buy; YEXT5M share IPO priced at $11.00 (opened at $14). The FCC said that TMUS (bid $8B), CMCSA (bid $1.7B), DISH (bid $6.2B) and USM were among the largest buyers of spectrum in a $19.8 billion broadcast airwaves auction – said VZ didn’t bid.

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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