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 19, 18
Equity Market Recap
· U.S. stocks were under significant selling pressure today, with technology leading the declines following reports about Facebook’s data leak and that Europe is considering a 3% tax on revenue for large digital companies such as GOOGL. Facebook shares fell over 7% concerns over how it manages third-party access to its users’ information, after saying a firm with ties to the 2016 Trump campaign improperly kept member data for years despite saying it had destroyed those records. Separately, Apple suppliers in Asia came under pressure after reports that the company is developing its own device displays for the first time. Political concerns and trade war fears following President Trump’s tariffs also remain a concern, as well as expected commentary at this week’s FOMC meeting, but today was about the “tech-wreck” with heavy selling in Internet and semiconductor stocks. Overall, the S&P 500 declined for the 5th decline in 6 days on broad sector weakness, while the Nasdaq Comp fell as much as 2.5% and the Dow tumbles nearly -500 points (down -488 at lows).
· Stocks extended last week’s losses ahead of the FOMC policy meeting results Wednesday (2-day meeting starts tomorrow with results the following day – widely expected for a 25-bps hike). The Cboe Volatility index (VIX) spiked as much as 40% amid a broad selloff in the U.S. equity market that was largely attributable to a sharp drop in shares of Facebook. The VIX touched highs of 21.87 off lows 16.56). Geopolitical tensions remain a concern in relation to Trump administration changes, issues with Russia, as well as trade war fear concerns with China after Trump’s tariff proposal. Reuters reported that 45-U.S. trade associations representing several of the largest companies in the country are calling on President Donald Trump to not implement tariffs on China arguing it would be “particularly harmful” to the U.S. economy.
· After touching all-time highs of 7,637 last Tuesday, the NASDAQ dropped to its 50-day moving average support of 7,283 (before paring losses), with the Nasdaq-100 index falling over 3% on the Internet concerns out of Facebook and the EU news. It was also another big day of levels, with the S&P 500 fighting at the 2,700 level, the Dow breaching the 25,500 level and the NASDAQ dropping below the 7,300 mark. The dollar fell, Pound rallied as the U.K. and EU reached a deal on the transition agreement for the period immediately after Brexit.
· There are a few potential market moving catalysts this week including: the G20 meeting, the FOMC policy update due Wednesday afternoon and the Bank of England policy decision Thursday morning. Back to the Fed, this will be the first meeting chaired by Jerome Powell since he succeeded Janet Yellen at the helm of the central bank in early February and he will also hold his first news conference as chairman.
· Commodity prices: Oil prices slip, with WTI crude falling -28c, or 0.5% to settle at $62.06 per barrel (high $62.35 and low $61.36), on a fairly quiet day of news in the energy complex. Recall last Friday, data showed American producers added oil rigs for the seventh time in eight weeks. Gold prices reversed earlier losses, closing higher by $5.50 or 0.4% to settle at $1,317.80 an ounce, bouncing off lowest levels of the year. The rebound in safe-haven assets came as stocks plunged on tech and trade war fears. Gold prices had closed Friday at $1,312.30, its lowest finish since March 1 and enough to nudge the weekly loss to 0.9%. Gold also in focus ahead of this week’s FOMC meeting which is expected to see a 25 bps hike from the Fed, though less certain are any signals from the central bank panel regarding the pace of future hikes.
· The U.S. dollar declined, with the dollar index (DXY) falling over -0.3% back under the 90-level, falling against the British pound (which jumped to its highest level of 1.4088 in more than a month) after the EU’s and the U.K.’s Brexit negotiators, Michel Barnier and David Davis, confirmed they’ve reached a transition deal. Barnier said the two sides had agreed to a transition period from March 2019 until the end of 2020. The euro moved to session highs midday, topping 1.2359 (up 0.45%) against the greenback, while the buck steady vs. the Japanese yen. Bitcoin trades into positive territory above $8,700 (overnight lows $7,386), before reversing gains.
· Treasury markets were little changed despite the general stock market weakness, with the yield on the 10-year note holding steady around the 2.84% (traded as high as 2.875% and lows under 2.83%), while the 2-year yield climbed above 2.305% before paring gains. The 2-yr yield rises ahead of Wednesday’s FOMC rate decision on fears of hawkish rate guidance from the Fed (along with a widely anticipated rate hike of 25 bps). A lack of economic data ahead of Wednesday’s policy meeting will keep investors focused on the Federal Reserve.
Sector News Breakdown
· Auto sector; auto supplier active after DAN raised its 2018 adjusted EPS and Ebitda view, citing strengthening end-market demand, most notably in off-highway and commercial vehicles, (BWA, LEA, DLPH, AXL, TRW, ALV, TEN, LEA among those active); TSLA shares active after Goldman Sachs said Q1 2018 Model S/X deliveries are tracking below guidance and believes Model 3 deliveries will fall “well short” of consensus expectations
· Consumer Staples; NWL announced that it entered into a cooperation agreement with Carl Icahn, Chairman of IEP who beneficially owns approximately 6.9% of the company’s outstanding shares; DPS was upgraded to outperform at RBC Capital; USFD upgraded to outperform at BMO Capital as see no reason to stay on the sidelines following the company’s bullish analyst day; EL traded to 52-week highs, while KHCtraded to 52-week lows
· Retailers; VFC said it sold the Nautica brand business to Authentic Brands Group.; WMT announced it is bringing Handy’s installation and assembly services to more than 2,000 of its 5,000 U.S. stores; CRI was downgraded at Evercore/ISI
· Energy stocks dropped along with a quick move lower late morning in crude oil prices, in what was a broad pullback with natural gas related stocks underperforming (NFX, RRC); MLPs remain weak (Alerian MLP Index fell as much as 3%); still active as Wall Street recaps recent FERC decision: On Thursday March 15th FERC surprised the market by ruling that pipelines owned by MLPs will no longer be able to recover tax allowance in pipeline rates. The market was expecting an impact from the 2017 Tax Cuts and Jobs Act that reduces corporate rates from 35% to 21%, but was taken off guard by the decision to eliminate them altogether
· MLP analyst commentary: JP Morgan said challenging industry and greater total return elsewhere in MLP land, downgrade APU/SPH to underweight and reduce estimates for the group; DM reaffirms its 1Q operating earnings forecast of 95C-$1.15 per share and $3.80-$4.25 per share for 2018 saying sees FERC immaterial; Mizuho said they recommend taking advantage of market weakness to buy ETP, EPD, PAA andVLP while cutting target on EEP to $13 from $15 to reflect the negative impact of the FERC tax change
· Oil service sector; Citigroup updated models for FTSI and LBRT following earnings, lowering 1q estimates given guidance for a slow start and also update for FET, WHD, NCSM, and FMSA/also downgrade ESV to Neutral as rail data suggests logistics issues leak into Q2
· Solar stocks a small bright spot in a relatively weak day for stocks; CSIQ shares outperform after the company’s Q1 revenue forecast exceeded analysts’ estimates, helping boost prices in other solar companies such as JKS, FSLR and SPWR
· Large Cap and Regional banks suffer along with a decline in Treasury yields as markets fell broadly on Monday; not much specific news in a sector that is focused on the Fed and rising rates; credit card companies fell as well after mixed monthly NCO/delinquency metrics last week; KBW said loan growth trends through the end of February at regional banks have been weaker than normal, due largely to declines in wholesale commercial and industrial and commercial real estate balances (HBAN, KEY, ZION, MTB shares were active)
· Mortgage finance and lending; FNF agreed to acquire STC for $50.00 per share of common stock, subject to potential adjustment in deal valued at about $1.2B (will be paid 50% in cash and 50% in FNF common stock) https://goo.gl/NS2NWq
· REITs; last week the RMZ increased 1.1%, outperforming the S&P 500 and the Russell 2000; GGP shares outperform after Reuters reportedBPY has submitted a new bid to acquire GGP, as the new offer comes over three months after a special board committee of GGP spurned a $14.8B takeover bid https://goo.gl/5KuT4G (Mizuho upgraded GGP on the news); BTIG lowered targets on strip center REITs (KMI, KRG, REGand ROIC); UBS with a few REIT rating changes, upgrading CPT to neutral and EQR to buy, while downgraded UDR to neutral
· Large Cap Pharma; HRTX shares rise after the company announced positive results in a late-stage trial of an anesthetic used for patients undergoing bunionectomy and hernia repair (rival drug maker PCRX falls in sympathy); JAZZ was upgraded to overweight and tgt to $183 at Morgan Stanley as expect strong growth in 2018 along with P/E expansion on rising pipeline expectations; AGN positive mention in Barron’s saying shares could rise 20% or more by the end of 2019; AZN was upgraded to buy at Jefferies saying the company is at a “turning point”;ZTS was downgraded at Morgan Stanley as now sees more balanced risk/reward
· Biotech moves; GERN shares rise after saying JNJ had completed a third review of on ongoing study of imetelstat in relapsed myelofibrosis patients; REGN said there were no new safety signals in the 24-week EYLEA trial; JP Morgan with several rating changes in the sector, downgrading NVAX, OPHT and OTIC to underweight and MRSN to neutral saying mid-term elections and concerns around pricing headlines reinforce the need for selectivity; CDTX shares slipped amid anti-fungal data financing concerns according to one analyst
· Medical Equipment and Services; CVS trades to 52-week lows; FMI advances patient access to precision medicine; pursues regulatory approval for FoundationOne; AMED was upgraded to outperform at RBC Capital saying that Amedisys is fine-tuning its operations to maximize its sales growth and improving visibility by providing annual guidance
Industrials & Materials
· Heavy duty machinery; Deutsche bank reevaluated ratings in the Machinery space following the recent pullback in the shares as upgradedOSK to buy and CMI to hold, while downgraded PCAR to sell noting over the past month, the group has fallen 3%, worse than the 2% gain for the S&P 500, which makes sense given substantial steel content in heavy machinery; CAT was among the top Dow component decliners on a rough day for Materials and Industrials
· Aerospace & Defense; CACI made a roughly $7.2B bid to buy CSRA in an attempt to break up the information-technology provider’s sale toGD/CACI has offered $44 per share in cash and stock, above the $40.75 all-cash deal CSRA agreed to last month with GDhttps://goo.gl/Bu569o ; after falling over 6% last week and was top decliner in the Dow Industrials, BA small recovery; the WSJ reported late day that BA dropped its opposition to the UTX/COL merger
Technology, Media & Telecom
· Internet; FB shares slide after concerns arise how the company manages third-party access to its users’ information, after the social network said a firm with ties to the 2016 Trump campaign (Cambridge Analytica) improperly kept data for years despite saying it had destroyed them; broad weakness across Internet sector as well on reports that Europe is considering a 3% tax on revenue for large digital companies such asGOOGL; WSJ reported GRUB has expanded its partnership with YELP to double the number of U.S. restaurants on the review site that offer GrubHub delivery to over 80,000 https://goo.gl/keWVrk ; GRUB cut to hold at Stifel on valuation
· Hardware and components; AAPL is designing and producing its own device displays for the first time, using a secret manufacturing facility near its California headquarters to make small numbers of the screens for testing purposes, Bloomberg https://goo.gl/HFQnJc; shares ofOLED and SYNA came under pressure on the AAPL story; ANET was downgraded to sell from hold at Deutsche Bank and slash tgt to $195 from $245 as lowers top line growth and earnings estimates; ORCL expected to report earnings after the close tonight
· Semiconductors; ORBK to be acquired by KLAC in deal with equity value of about $3.4B; KLAC will pay $38.86 a share in cash, plus 0.25 of a share in stock https://goo.gl/S2mqPR; Philly semi index (SOX) plummets as much as 3% before paring losses, falling to lows around 1,375, well off its recent all-time high of 1,464 last Tuesday; NVDA shares slipped after reports that Uber was pausing autonomous vehicle tests after a fatal crash in Tempe, Arizona
· Telecom and Media movers; media names (DIS) broadly lower with market; CMCM rises after quarterly earnings results; DOX was upgraded to buy at Jefferies saying past mergers suggest that the AT&T spend slowdown related to its acquisition of TWX is only temporary
· Software movers; KeyBanc on security sector, positive bias toward potential platform plays, names showing demand inflection and improved profitability timelines/metrics, as up tgts on APTI, NEWR, OKTA, SAIL, and NOW, but downgrade FTNT to sector weight; ZS shares declined early after surging last Friday following IPO release; BL was downgraded to hold at SunTrust as recent gains in the stock price have made the risk-reward less compelling