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.
Equity Market Recap
· Stocks managed to climb again, rising for a 5th consecutive session, and holding near all-time highs as markets have fully recovered from their biggest one day decline in 8-months last Wednesday. The S&P 500 topped 2,400 again but failed to top its intraday record high of 2,405.77 set last Tuesday (today high 2,403.42). Political uncertainty remains a concern for broader markets, but fears put to the “back-burner” for now, as markets digested comments from the FOMC (release of the Fed Minutes late day), and prepare for confirmation by OPEC on 9-month extension of production cuts (official meeting results expected tomorrow). Volatility has dried as the CBOE Volatility Index (VIX) posts its longest losing streak of the year, with a 33% five-day drop, the biggest since election in November (nearly traded back to single digits today after highs of 16.30 last Wednesday). In other news, Moody’s Investors Service cut China’s rating overnight to A1 from Aa3, the first downgrade of the country since 1989. The Shanghai Composite initially fell more than 1% after the downgrade, but closed up 0.1%.
· Stocks were mixed with retail lagging markets once again, following weakness in AAP, TIF, LOW, CHS after earnings and/or guidance disappoint (more earnings tonight/tomorrow – GES, PVH, ANF, BBY). Energy markets waiting patiently for confirmation of extending oil production cuts out of OPEC (tomorrow official meeting), while housing data in the U.S. disappoints for a second consecutive session. Other laggard groups included asset managers, telecoms, autos, while defensive names rally again (utilities, staples) as well as industrials, and tech
· According to FOMC minutes, Federal Reserve officials were in broad agreement at their meeting on May 2-3 on a general approach to shrinking the bank’s massive balance sheet. Nearly all Fed officials said they were content with a plan to end the reinvestment of principal of maturing securities – the main approach favored to shrink the balance sheet instead of asset sales- in slow, ever-increasing, stages, rather than ending the reinvestment all at once. Most Fed officials said it would “soon” be time to raise rates again (June expectations). But the discussion of the outlook showed widening divisions among Fed officials, with “several” seeing a possible need to start raising rates at a faster pace, while a few others thought a slower pace was more advisable.
· WTI crude oil futures snapped their 5-day win streak, slipping -11c to close at $51.36 per barrel (off earlier highs of $51.88) despite bullish inventory data (EIA reported U.S. crude stockpiles dropped for 7-straight weeks, with crude inventories falling -4.4M barrels vs. est. -2M draw) as market attention remains firmly on OPEC and non-OPEC joint committee, which appears to show a consensus (based off several members speaking prior to meeting) for an extension of existing production cuts by 6 to 9 months.
· Gold futures for June settlement fell -$2.40, or 0.2%, to settle at $1,253.10 an ounce, closing prior to the FOMC meeting minutes release (gold rallied following the minutes release at 2:00 PM EST). Gold slipped a second day after touching 3-week highs Tuesday amid a rotation back into riskier assets (oil and stocks), which weighed on defensive gold prices the last few days. Copper prices dipped after China’s credit rating was downgraded by Moody’s.
Currencies & Bonds
· The U.S. dollar erased earlier gains, slipping further following the FOMC minutes in the afternoon after saying “a sharp decline in such valuations could pose risks to financial stability”. The euro bounced back above the 1.12 level vs. the dollar (had been in tight range all day – 1.169 low-1.1216 high), while the dollar lost gains, sliding to around 111.60. Canadian loonie gains after Bank of Canada kept interest rates unchanged. Bitcoin trades above $2,400 for the first time, rising more than 9% to highs of $2,429 before slightly paring gains.
· Bonds gained as yields slipped from 1-week highs (10-yr was above 2.29%) following the release of the FOMC Minutes from its May 2-3 meeting. Treasury yields slipped after minutes showed there was broad agreement among senior Fed officials to start shrinking its $4.5 trillion balance sheet. Yields jumped yesterday by over 3 bps on the 10-yr, the most in two weeks on Tuesday after President Donald Trump’s new budget raised prospects of higher growth and inflation; bonds weakened early as stocks climbed.
· Existing-home sales for April fell (-2.3%) to 5.57M, below est. of 5.65M, after rising 4.2% prior month; there was 4.2 month’s supply in April vs. 3.8 in March; said inventory rose 7.2% to 1.93M homes; said 1st-time buyers 34% of total sales; all cash 21%; investors 15%; median home price rose 6% from last year to $244,800
Sector News Breakdown
· Retailers; TIF leads luxury retail/watch names lower after reporting an unexpected decline in 1Q comp sales (-2% vs. est. up 1.7%); shares of SIG, MOV, FOSL active on report today; SIG was downgraded to neutral at Buckingham and cut tgt to $65; CHS plunges as misses profit and sales expectations, provides downbeat outlook; DSW upgraded to neutral at Susquehanna saying concerns reflected in valuation; TLYS rises on earnings beat; very busy day of earnings tomorrow in retail: AM reports – ANF, BBY, BURL, CBK, DLTR, GCO, MOV, SHLD, SIG…tomorrow night from COST, DECK, CAL, ULTA; ANF spiked midday after WSJ reported Cerberus and AEO work on joint did for the apparel retailer https://goo.gl/j1rusR
· Auto movers; another bad news day for auto retailers after AAP Q1 EPS misses along with revs, while comp sales fall (-2.7%) more than the est. (-0.7%) – note the group fell sharply yesterday after AZO quarterly miss; ALV was upgraded to overweight at Morgan Stanley saying mid-teens EPS growth from FY18e looks strongly underpinned as 2015-16 order wins come into production
· Consumer Staples & Restaurants; after a busy day in the food/beverage sector yesterday, very quiet for staples today; BF/B was downgraded to hold at Citigroup saying a deal with STZ very unlikely at any price (after CNBC report yesterday of interest); MCD said franchisee cash flow growth is at or near records; little breather overall for consumer staples after outperformance
· Housing & Building Products; home improvement retailer LOW disappoints, with EPS missing by 3c on lower sales, while comps rose 1.9%, below est. 2.6% (underperforms results from HD last week); homebuilder TOL downgrade to neutral at Buckingham Research after better earnings, as recent gains have resulted in a more balanced risk-reward; home product store TCSshares surge after quarterly results beat and announces initiatives for 2017, including plans for continued cost reductions across TCS and Elfa
· The OPEC meeting finally starts tomorrow with expectations for them to extend production output cut deal 6 or 9 months; production ceiling will continue but not clear whether for 3,6 or 9 months; Saudis trying to drive up oil prices; Iran’s oil production will not decrease
· Inventory data; last night, the API reported a decline of 1.5 million barrels in U.S. crude supplies for the week ended May 19; also showed a drop of 3.2 million barrels in gasoline supplies, while inventories of distillates were down 1.9 million barrels. The DoE reported Crude oil inventories posted -4.43M draw vs. consensus of -2.0M draw, while gasoline inventories 787K draw vs. consensus of 1.08M draw and distillates 485K draw vs. consensus of 493K draw
· Utilities active; PJM capacity auction results for 2020/2021 fell to $76.53MW/day from $100MW/day year over year. EMAAC (Eastern Mid-Atlantic Area Council) zone pricing cleared at $188MW/day, up from $120MW/day, which should benefit PEG, CPN and EXC according to Goldman Sachs and said DYN faces the strongest headwinds as it’s highly exposed to regional transmission organization (RTO) zone. Credit Suisse said PEG and CPN “net beneficiaries,” while DYN, NRG and FE will “bear the brunt of a poor RTO showing” – the UTY up for a 6th day
· E&P news; AXAS buying 2,008 net acres and 33boe/d in Ward County, Texas for $22.2M; BRS shares plunged more than 30% after earnings miss
· Large Cap banks; story today was DB as Bloomberg reported the German bank may be close to settling a U.S. Federal Reserve inquiry into how billions of dollars moved through the bank and out of Russia. But it’s still waiting for U.S. prosecutors to resolve a potentially more consequential investigation; in insurance, one M&A deal as FGL to be acquired by CFCO for $31.10/$1.84B deal https://goo.gl/2vxVmd
· Asset managers/advisors; EV Q2 EPS/revs/AUM top consensus; TROW was downgraded to sell from buy at UBS as they see higher distribution costs and sustained pressure on organic growth weighing on EPS forecasts and the multiple. Note uncertainty around fiduciary rule heightened as the DOL did not delay the fiduciary rule further, which should keep uncertainty high and sustain an overhang around asset manager stocks (Nomura cut tgt and estimates on RJF, SF, LPLA)
· Pharma movers; NBIX fell after said Ingrezza did not meet its primary endpoint of change-from baseline in YGTSS score at week 6 vs. placebo in its phase 2 T-Force GREEN study in pediatric patients with Tourette’s; ATNM said the European Medicines Agency (EMA) has granted orphan designation to its Actimab-A; SBPH shares jumped after the company’s phase IIa study on chronic Hep B drug met endpoints (Chardan boosted tgt to $34 following data); BMY said the FDA assigned Opdivo a Sept. 24 action date on its application for the drug as a treatment for prior-treated hepatocellular carcinoma
· Biotech movers; INO surged after saying Pennvax-GP elicited immune response rates among the highest ever seen in human study of an HIV vaccine (71 of 76 people using had response);GLYC 7M share Secondary priced at $11.50; ALNY 5M share Spot Secondary priced at $71.87; PBYI won FDA panel backing as advisers vote 12 to 4 that the drug’s risk-benefit profile supports its use as treatment for early-stage HER2-overexpressed/amplified breast cancer in patients previously treated with Roche’s Herceptin
· Healthcare services, suppliers; UHS shares slip on reports the FBI and Defense Department have expanded probes into the hospital operator into whether UHS directed hospitals to keep patients for as long as insurance would cover rather than for medical need
· Medical equipment/devices; ABT launches a recall of the Thoratec HeartMate II LVAS Pocket System Controller due to the risk of serious injury or death when users exchange the controller outside of a hospital setting; NVCR upgraded to outperform at Wells Fargo
Industrials & Materials
· Industrial & Machinery; EMR said trailing 3-month orders rose 2% in April; DY shares plunge as sales, profit outlook misses views (guides Q4 $1.35-$1.50 vs. $1.79 estimate) – shares of MTZamong those moving lower in sympathy with DY results; GE CEO Immelt said hitting 2018 goals will require more cost contingencies
· Shipping and tankers; ANW plunges as Q1 results missed estimates by wide margin/downgraded at Stifel as increasing competition appears occurring in several of ANW’s markets, impacting margins and profitability; DRYS took delivery of previously announced 159,855 deadweight tons newbuilding Suezmax tanker May 19; the Baltic Dry index falls 1.6% to 934 Points in London; STNG 50M share Spot Secondary priced at $4.00 after announces merger with Navig8
· Metals & Mining; the U.S. Steel sector was upgraded to overweight at Credit Suisse and upgraded NUE, STLD and X to outperform saying prior cautious investment thesis on the sector has played out, prices to recover by late 3Q this year; said HRC prices to bottom near $580/ton this summer, recover by late 3Q as demand trends remain strong, inventories are low
· Aerospace & Defense; French aerospace supplier Safran SA said it cut its bid price for Zodiac Aerospace SA about 15% to EUR7.3 billion ($8.2B) after renewed profit headwinds came to lighthttps://goo.gl/Sf3HnV; TGI jumps on EPS beat, though sales and sales guidance misses views, but settles with Bombardier; HEI Q2 EPS topped highest estimates but revs missed views/raised year sales and net income outlook; 52-week high for GD
Technology, Media & Telecom
· Internet; 52-week highs in S&P 500: AMZN (20th record high in 2017) and GOOGL; TTD 4.32M share Secondary priced at $52.00; SNAP was mentioned cautiously by Carson Block in Bloomberg interview; GRPN replaces Ernst & Young with Deloitte & Touché as auditor
· Semiconductors; Japan’s SoftBank has built a $4 billion stake in NVDA https://goo.gl/TpjYxy ; 52-week highs for SWKS, QRVO, LRCX, NVDA; SGH 5.3M share IPO priced at $11.00
· Software movers; tax software company INTU advanced amid better tax numbers amidst an unusual tax season, a reacceleration in QBO subscriber growth, and a boost to desktop revs;MOMO was cut to neutral at JPM, while also upgraded at Deutsche Bank; video gamer TTWO advanced after positive analyst comments as Jefferies upped tgt to $91 (follows recent earnings)
· Hardware and Comm Equipment moves; CIEN was downgraded to hold at Deutsche Bank; HPQ set to report earnings tonight after the close; WDC among top S&P outperformers on reports offers nearly $18B for Toshiba chip unit
· Media & Telecom; OOMA reported better-than-expected Q1 EPS, but revs miss and guided revenue down for F2Q18 and FY18 (downgraded by a few analysts), sending shares lower; cable names were much stronger, with CHTR outperforming