Market Review: Stocks Close Lower As Retail Tanks

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Equity Market Recap
·      U.S. stocks fell after setting a record high Wednesday, but major averages once again pared losses, as the Dow Industrials ended down slightly in comparison to the -144 point decline earlier. Stocks were led lower by retail after disappointing earnings results from Macy’s, Kohl’s and Dillard’s, and ahead of Nordstrom after the close. SNAP shares fell over 20% after results of its first quarterly earnings report since going public missed expectations. Markets got a strong reading on the economy today after better-than-expected PPI and lower initial jobless claims (CPI data tomorrow morning). Rising inflation and a healthy labor market may give the Federal Reserve further cause to lift interest rates as early as June and potentially at a more rapid clip, which could be supportive to gains in the greenback against its currency rivals. After touching fresh all-time highs yesterday on semiconductor earnings strength yesterday, the NASDAQ slipped (though semi’s rallied again). The Bank of England offered no surprises at its rate meeting this morning, while the U.S. data leads to rising rate views. Defensive assets gain with gold, bonds and the yen all pushing higher while stocks remain weak.

Economic Data
·      Producer Price Index (PPI) for April rose 0.5%, well above estimates of a 0.2% rise, while core prices (ex food & energy) rose 0.4% MoM, topping 0.2% estimate (higher inflation); Final demand rose 2.5% YoY vs. est. up 2.2%, the largest increase since Feb. 2012 and final demand ex food, energy rose 1.9% YoY vs. est. up 1.6%
·      Weekly Jobless Claims fell 2K to 236K, below est. 245K; claims have now been below 300,000, a threshold associated with a healthy labor market, for 114 straight weeks; prior week claims unrevised from 238K; four-week moving average of claims rose 500 to 243,500 last week; continuing claims fell 61K to 1.918M in the week ending April 29
·      June WTI oil gained 50c, or 1.1%, to settle at $47.83 per barrel, adding to yesterday’s more than 3% gain as markets are hoping the latest hefty decline in U.S. crude inventories is a sign of future demand. Oil prices shot up more than 3% on Wednesday after data from the EIA showed U.S. crude stockpiles dropped 5.2M barrels in the week ended May 5, far exceeding market expectations. The reading marks the biggest weekly drawdown since December. Crude also got a bump as Iraq, Algeria say all OPEC members support an extension of output cuts, even as the cartel raised its 2017 estimate for supply growth from rivals by 64%, according to reports (note the next OPEC meeting is May 25th)
·      Gold futures posted its first back-to-back gains, rising by $5.30, or 0.4%, to settle at $1,224.20 an ounce as the U.S. dollar took a break from recent strength and U.S and European equities declined. The contract hasn’t closed higher in consecutive sessions since the two-day period ended April 28. July silver rose 4.3c, or 0.3%, to $16.25 an ounce.
·      The dollar was mixed; the euro hit a weekly low of 1.0839 following better economic data in the U.S. earlier (had topped 110 on Monday after the positive results of the French election Sunday evening), but has since traded rebounded to trade even on day around 1.0868. The dollar slid vs. the safe-haven yen to lows of 113.46 before bouncing off the lows. The dollar strengthened against the pound as economic data offered signs that the labor market is holding steady and inflation is picking up in the U.S. The pound slipped -0.4% to around 1.289 after the Bank of England kept its key interest rate at 0.25%, as expected, in a 7-1 vote. Policy makers reduced their 2017 economic growth forecast to 1.9% from 2%.
Bond Market
·      Treasury yields slipped as bonds gained ground (ever so slightly), despite reports showing rising inflation and better jobs data (PPI rose and continued jobless claims sank) likely setting up the Federal Reserve to hike rates in preparation for higher inflation. The yield on the benchmark 10-year slipped to 2.40% from 2.415% the prior day, after briefly trading below 2.4%). The yield for the 30-year bond slid to 3.04% while the 2-yr was little changed was down around 1.33%.
Sector News Breakdown
·      Retailers; Department store stocks decline after Macy’s (M) and KSS report 1Q comp sales that missed consensus estimates; DDS also reported 1Q net sales shortfall, with comps down 4% YoY; tonight after the close we get results from JWN and tomorrow morning from JCP; KSS EPS beat by 10c on weaker sales of $3.84B, while comps slid (-2.7%), while Macy’s (M) Q1 sales of $5.34B misses views and said comp sales fell (-4.6%) vs. est. (-3.5%); VSTO guidance trails views, while AOBC and RGR lower after VSTO noted slumping demand for guns and ammunition
·      Consumer Staples; WFM overhauls its board of directors and announces a new, long term strategic plan, but the company reduced its 2017 earnings and revenue forecasts; supermarket KRrises early after Ahold Delhaize said it expects inflation in the U.S. grocery market to return and bolster 2H sales growth; cosmetics company ELF falls on mixed results; PFGC extends yesterday earnings related gains, rises to new 52-week highs
·      Restaurants; YUM upgraded to neutral from sell at Goldman Sachs and up tgt to $65 from $57; FRSH the latest restaurant to disappoint as posts Q1 loss and lowers year outlook
·      Housing & Building Products; RH shares fall as said higher outlet sales in Q1 had a negative impact on margins and earnings guides Q1 revs $558M-$562M vs. est. $537.2M; HD was downgraded to neutral at Atlantic Equities on valuation; flooring company LL reversed earlier declines to push to new 52-week high following better earnings/analyst upgrade this week
·      Bank America cut its 2017 Brent crude forecast by $5per barrel as OPEC cuts are working at a slower pace than expected. Cuts average Brent forecast to $54 from $61 earlier for 2017 and to $56/bbl for 2018 vs $65 earlier
·      Energy; the group rebounded yesterday on biggest jump in WTI crude of year on inventory data – group one of few gainers today; Bank America/Merrill with several rating changes: upgraded XOM to buy from neutral as a strategic call that reweights energy exposure; COP cut to neutral from buy recognizing prior catalysts leave the outlook primarily a function of higher oil; NBL raised to buy from neutral, replacing MRO (cut to neutral from buy); COG raised to neutral from underperform with CHK cut to underperform from neutral; OAS, SM cut to neutral from buy as small/mid cap ratings are “generally de-risked”; PE, RSPP remain top ideas; PXD, CXO stand out among most defensive
·      Oil equipment names; PUMP small top-line beat as revenue totaled $171.9M/updated its fleet newbuild program; Johnson Rice said the long-standing overhang on FTK shares from the SEC inquiry has the potential to be resolved near-term, improving sentiment; GST Q1 results underscored by 6% production beat, Q2 guidance +3%; SD oil-driven EBITDA beat
·      Utilities active; group got a lift late day yesterday after the WSJ reported CPN is exploring a sale (shares up modestly today); PCG among top decliners in utility index after the CPUC’s new proposed decision shortening the agreement on cost of capital to 1 year from 2 years. Jefferies said concern on news yesterday the two ALJs issued a new PD on CA cost of capital reducing the settlement to just one year (from 2 years) and calling for a litigated proceeding in 2019 was overblown. Research downgraded EIX and PCG on the news
·      Large Cap banks; WFC hosted investor day today with several headlines out from presentation, including: said it would deepen its cost-cutting program, forecasting $4 billion in annual savings by the end of 2019 (up from view of $2B)/also said it would be unable to meet its previous goal for the efficiency ratio 60%-61% vs 2016 investor day 2-year target 55%-59%
·      In other banking news, Moody’s cuts 6 Canadian Banks on “challenging operating environment” – reflects ongoing concerns that expanding levels of private-sector debt could weaken asset quality in future (TD, BMO, BNS, CM, RY and NA); U.S. banks in general slipped with broader market and weakening of bonds yields (despite rising inflation fears after PPI data)
·      Insurance; Bond insurers MBI (higher) and AMBC (lower) both active after earnings results (KBW said MBI reported a beat to estimates due largely to lower losses than they were forecasting)
·      Asset managers/advisors; Credit Suisse said they are incrementally more bullish on the US Alternative Asset Manager as BX is top long, and they upgraded both the CG and ARES to outperform, while remain outperform rated on KKR
·      Mortgage finance; FNMA and FMCC active as FHFA Director Mel Watt testified before Senate Banking, Housing and Urban Affairs Cmte today (private mortgage insurer shares, such as RDN, ESNT, PHH, NMIH also somewhat active); ABR 9.5M share Spot Secondary priced at $8.20
·      REITs; weakness in department stores also effecting shares of Mall Reits (SPG, GGP, PEI, TCO); NYRT shares fall as liquidation estimate of $9.25 was less than expected
·      Large Cap Pharma; MRK said its Keytruda was approved in combination with chemotherapy for first-line lung cancer; specialty pharma/generic names mixed as TEVA beat 1Q EPS estimates and reaffirmed guidance – group fell on Tuesday after HZNP lowered outlook but bounced yesterday as VRX raised forecast and lowered its debt in 1Q, ENDP results beat and MYL results topped views; GBT falls as Reuters reported that Novo Nordisk’s offer for company has fallen short and the two parties disagree on valuation.; OMES downgraded at Cantor after quarterly Omidria revs missed estimates
·      Managed care; AET was upgraded to buy at Cleveland Research saying recent research indicates an expanding relationship with CVS likely beginning on January 1, 2018. A Delaware judge will rule Thursday on ANTM’s request to extend an order blocking CI’s exit from a $48B merger
·      Biotech movers; SGMO shares jump as signs pact with PFE for Hemophilia A Gene therapy; LXRX said it saw weight loss in added data from diabetes study of its experimental therapy Sotagliflozin
·      Healthcare suppliers, services and equipment; BDX $2.25B Secondary priced at $176.50; HOLX falls as Q2 results top views, but Q3 guidance falls short of consensus; ICUI rises to 52-week highs after earnings top consensus, revs higher as well; CFMS falls as earnings miss consensus
Industrials & Materials
·      Machinery & agriculture; SANW shares drop after cutting FY17 revenue guidance to $82.0M-$87.0M from prior view of $100.0M (est. $97.63M)/shares downgraded at Piper on cut; in machinery, Bank America upgraded CAT to buy as see shares grinding to $120 as monthly retail sales continue to accelerate and sees another beat and raise in July; BoFa also downgradedPCAR to neutral saying its buy thesis played out
·      Transports; in airlines, DAL reaffirms capacity growth capped at 1% in 2017 and sees 2017 operating margin in 15% range/sees 16%-18% op. margin range in next few years/also announces a $5B share buyback and boosts dividend by 50% – though airline shares fell; car rental names continue to weaken as HTZ (tgt cut to $12 today at Morgan Stanley) and CAR recent earnings results do little to help lift sentiment
Technology, Media & Telecom
·      Internet movers; SNAP shares get crushed, falling over 25% after Q1 revs fell short of views ($149.6M vs. $158.6M) while DAUs were 166M, below estimates of 168M; NTES slips as Q1 EPS and revs handily topped consensus on strong game revenue growth, but the decline in deferred revs weighs on Q2 guidance expectations; CTRP topped 4Q expectations across the board, with accelerating pro forma topline growth and relatively stable operating margin, but share slip; TTGT posted slight upside to Q1 on robust ITDA revenue; YELP was upgraded to buy at Citigroup following a -18% decline yesterday in shares after earnings/outlook
·      Telecom & Media VZ agrees to acquire STRP for $184 a share, or about $3.1B, VZ will pay a $38M termination fee to AT&T (T) who had made prior offer ; media stocks fell yesterday after DIS, NWSA mixed quarters, while FOXA overnight reported mixed as well as EPS beat, but revenue missed estimates; Vivendi (VIVHY) Q1 revs top highest estimates
·      Software; security maker SYMC slides after meeting Q4 earnings expectations, but announcing Q1 guidance below views (year revs also light)
·      Semiconductors; group (SOX index) touched 17-year highs yesterday on NVDA/MCHP earnings results; today, HIMX Q1 EPS missed forecasts and sees Q2 revs down about 5% to unchanged QoQ; TSM posts its lowest monthly sales since 2014 ahead of new iPhone; IDCC announces dispute settlement with MSFT/sees Q2 revs $130M-$135M
·      Hardware and component movers; After pulling back from all-time highs yesterday, AAPL shares take a breather; QTM reported a slight top line miss, but good cost control kept EPS on track/Q1 guidance is in line
·      Software movers; PEGA reported a big 1Q beat on all major metrics, sending shares higher; AYX solid 1Q17 beat and raise in the company’s first earnings report since its March IPO; CA to report earnings after the close tonight
·      Optical movers; ACIA downgraded to equal-weight at Morgan Stanley and cut tgt to $45 from $70 saying current valuation captures opportunity given volatility in the near term around China/DCI demand and contraction in multiples across optical componentry; AAOI mentioned positively at Raymond James (reit street high $100 tgt) after hosting investor meetings

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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