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.
Monday, March 5, 18
Equity Market Recap
· U.S. stocks rebound after falling sharply last week, with the Dow Jones Industrial Average snapping its 4-day losing streak, trading in a 500-point range from lows to highs (rising more than 400-points late session, led by industrials CAT, GE, BA). All 11-S&P sectors gained, led by Utilities and REITs, though strength was broad based. Political headlines helped today’s markets, as commentary out of Republican’s (Raul Ryan) indicated they think that a trade war is a bad idea, rising market hopes that President Trump may back off his the 25% tariffs for global steel and 10% for aluminum he suggested last week that sunk industrials, energy and autos on fears of rising costs (along with hurting ties with many trade partners).
· President Trump did say, “No, we’re not backing down,” when asked about House Speaker Paul Ryan urging him to drop plans for tariffs. Says that steel tariffs could be part of renegotiated Nafta. “If they aren’t going to make a fair trade deal, we’ll leave it this way,” saying every country is making it hard for U.S. to trade. “If they want to do something, we’ll just tax their cars,” which they send to U.S. “like water,” he said -Bloomberg
· U.S. stocks rose while bonds declined mid-afternoon, sending the yield on the benchmark 10-yr up as high as 2.89% (off earlier lows around 2.83%) while the dollar was mixed. The tech heavy Nasdaq Comp traded as high as 7,337, more than 125 points off its morning lows of 7,205 with strength in Internet (record highs NFLX), biotech and hardware. In Europe, markets end higher, snapping recent declines though Italy’s stocks and bonds were the standout losers as anti-establishment political groups surged in Sunday’s election.
· Last week, stocks logged posted weekly losses, with the Dow Jones Industrial Average dropping -3% and notching its fourth-straight-session loss, while the S&P 500 declined -2% for the week and the Nasdaq Composite Index posted a weekly loss of -1.1%. The implementation of the steel and aluminum tariffs announced by President Donald Trump on Thursday could signal a harder line by the White House on other trade issues, including leaving the North American Free Trade Agreement, Goldman Sachs said today.
· Oil prices end higher, with WTI crude rising $1.32 (its biggest one-day gain in about 3-weeks) to settle at $62.57 per barrel (session high $62.79 and low $61.10). Prices were supported by a reports of supply disruptions in Libya over the weekend as its largest oil field halted production yesterday after problems with a pipeline feeding a major refinery. Markets also chewed on comments from the International Energy Agency on U.S. production and global demand growth. Oil prices also rose amid a meeting between OPEC and U.S. shale firms in Houston. Oil prices recover after falling last week, where both WTI and Brent suffered weekly losses of nearly 4%.
· After two straight weeks of losses, and down about 3% from January highs, gold prices settled lower by -$3.50 to end at $1,319.90 an ounce as dollar strengthens, and U.S. stocks gain in another move back into riskier assets and out of defensive ones.
· The U.S. dollar started the week slightly higher, with the dollar index (DXY) posting gains of about 0.15% and trading back above the 90 level after last week’s slide. The dollar was generally mixed, rising against the safe-haven Japanese yen, but falling against the euro and Pound. The dollar, which had been in focus over Trump’s comments on impending steel and aluminum tariffs late last week, has quieted down amid the political news out of Europe, but likely will come back into to focus late week with the monthly jobs report. Bitcoin prices up over 5% at $11,600.
· Treasury prices fell, sending yields higher, reversing safe-haven-related buying that was driven by results from an Italian general election and continued trade concerns following President Trumps steel and aluminum tariff proposals. The yield on the 10-year benchmark rose 3.5 bps to 2.892% (bouncing off earlier lows around 2.83%), while the 2-yr yield rose slightly to 2.24%. Bonds saw an early bid, pulling yields lower, before reversing mid-morning.
· The ISM Non-Manufacturing index for February fell to 59.5 from 59.9, but mostly in-line with estimates for a reading of 59; the employment index down 6.6 points to 55, the largest drop in four years, while business activity rose to 62.8 vs 59.8 prior month; new orders rose to 64.8 vs 62.7; prices paid nudged lower to 61.0 vs 61.9 and backlog of orders rose to 56.0 vs 51 prior
· The IHS Markit U.S. Services final PMI 55.9 in February vs. 53.3 and was in-line with estimates
Sector News Breakdown
· Retailers; FL partially rebounds after declining over -12% on Friday following earnings; DECK announced late Friday its CFO would be stepping down; overall, quiet day of news for discretionary sector, with stocks mixed ahead of some earnings later this week (DLTR, ANF, TGT, COST, ASNA, SHLD to name a few)
· Consumer Staples; BRFS shares volatile after police confirm company involved in new phase of so-called Weak Flesh investigation, https://goo.gl/CtYpcX;APRN shares drop after WMT announces to introduce meal kit plans at 2K stores ; MNST was added to Citigroup’s U.S. focus list amid pullback in shares and removed NWL from the list; in poultry space, Jefferies expect a 3.5% increase in chicken production in ’18 driven mainly by growth in the breeder flock, down from prior estimate of 4% growth but ahead of USDA/market expectations of 2% growth (SAFM, PPC)
· Casino, Lodging & Leisure; in RV sector, Stifel lowered estimates on THO to reflect industry wholesale shipment data which was below our prior model, up 18% y/y in Nov-Jan; in boating space, BC was upgraded to buy at CL King; in education space, CPLA and STRA both upgraded to overweight at Piper; hotels weak as Goldman said after PK share stake cut by holder HNA Group, noted could cause an overhang for HLT and HGV, as shares become unlocked over the next year
· Energy names mixed; CVX hosts its analyst day tomorrow in New York, with XOM hosting one on Wednesday. Oil prices rose following the news that Libya’s largest oil field halted production yesterday after problems with a pipeline feeding a major refinery, while the dollar is little changed. Oil prices also rise ahead of a meeting between OPEC and U.S. shale firms in Houston. Energy stocks higher as oil posts its biggest one day gain in about three weeks, but energy still among the top laggards to start the year.
· Bank news quiet while insurers active amid deal news; French insurer Axa agreed to acquire property and casualty insurer XL for $15.3B; paying $57.60 a share https://goo.gl/aA2Fmx; shares of AHL, AXS, RE, RNR were active following the report; in lending, TREE will replace BIVV in the S&P MidCap 400; SQshares jumped to its best level since last year, potentially on report saying it is possibly testing an integration with Bitcoin https://goo.gl/1rVE5d ; in asset manager, IVZ shares mentioned positively in Barron’s saying the stock weakness a buying opportunity
· Pharma movers; VRX was upgraded to buy at Deutsche Bank with $20 tgt as the company reported solid Q4 results and a decent 2018 outlook, the price target suggests significant upside over the next year if Valeant continues to execute; GTXI presents additional results from a Phase 2 proof-of-concept study of enobosarm in female patients stress urinary incontinence; AIMT rises as its AR101 successful in late-stage peanut allergy study
· Biotech movers; DERM shares plunge more than 60% as its investigational treatment olumacostat glasaretil (formerly DRM01) did not meet the co-primary endpoints in its two Phase 3 pivotal trials; CLSD shares surged over 60% as one analyst (JPM) noted initial data from its pivotal Phase 3 trial of suprachoroidal CLS-TA in non-infectious uveitis (NIU) hit its target and support a “high likelihood of approval; AMAG was downgraded to hold at Jefferies citing valuation while raising tgt to $20 from $18 noting since FDA approval of line-extension Makena 3.0 in February, the stock has appreciated 50%; NITE announced the initiation of the company’s pivotal phase III STAR trial (2015-003958-41) of NSR-REP1, an AAV-based gene therapy (GT) for choroideremia
· Equipment, Healthcare facilities and services; LPNT downgraded at Leerink saying there’s little opportunity for topline growth in 2018-2019 due to challenging rural markets and issues with the 2016 acquisition class; VCEL shares outperform on earnings
Industrials & Materials
· Heavy duty truckers (CMI, ALSN, NAV, PCAR) – Preliminary Class 8 truck orders rose 75% YoY to 40,600 units in February, citing ACT Research data. JP Morgan said the orders are down 17% m/m from January’s 12-year-high reading, while Class 5-7 net orders in February were 27,000 units, up 19% y/y and down 15% m/m. Wells Fargo said Even though the orders were below their views, they believe investors likely anticipated a relaxation into the 30,000-40,000 range
· Transports; underperformed broader markets early, with the Dow Transport index falling as much as -1.5% and dropping under 10,200, with all 20-components trading in the “red” early; declines led by trucker JBHT and R, along with rails UNP and CSX (all four names were down over 2% early on). However the index rebounded with broader markets to pare losses/turn higher
· Metals & Mining; Steel names have edged lower in afternoon, with declines in X, AKS, STLD, CENX after House speaker Rep-Paul Ryan said he feared a trade war and NBC News reported a major Republican donor is asking President Trump to reconsider his decision to impose tariffs on steel and aluminum imports
· Multi-industry; if the proposed tariffs on steel and aluminum imports go through, the ripple effect will squeeze near-term margins among makers of auto, HVAC-systems, electrical equipment and construction equipment/building products, RBC said. Said HVAC players like JCI, IR, UTX and steel-exposed manufacturers like ATKR, ETN, PNR would be among most impacted
· Chemicals; Fertilizer stocks CF, MOS and UAN all upgraded to outperform at Cowen and IPI upgraded to market perform as meetings with South American agricultural players has yielded “game changing” agriculture data – says there seems to be a major crop shortfall in South America, which didn’t show up in major published sources yet, and will serve as a catalyst
Technology, Media & Telecom
· Internet; AMZN is in talks with big banks including JPM about building a checking-account-like product the e-commerce giant could offer its customers,https://goo.gl/FCKC4Q ; GRPN was upgraded to equal-weight at Morgan Stanley as sees the stock being fairly valued with limited downside following the 20% selloff; BKNG was added to the Best Idea’s list on the long side by Hedgeye; another record high for shares of NFLX
· Semiconductors; AVGO faces new hurdle as CFIUS probes QCOM takeover did; QCOM later said in a statement to Bloomberg, “In compliance with the CFIUS order, Qualcomm will delay its annual meeting of stockholders and election of directors for at least 30 days so that CFIUS can fully investigate Broadcom Limited’s proposal to acquire Qualcomm
· Tech movers; SPA shares dropped after confirming the termination of its merger pact with Ultra Electronics; ADSK to report earnings tomorrow night; FNSRwas downgraded to outperform at Raymond James and reduce estimates ahead of this week’s report as remain constructive on the long-term prospects for the optical sector but worry about price and margin compression in the Datacom segment. Separately, FNSR to replace TREE in the S&P SmallCap 600 index effective Thursday March 8th