Market Review: March 23, 2018

Scott GreenDaily Market Report

Closing Recap
Friday, March 23, 18
Equity Market Recap
·      U.S. stocks posted fresh lows in the final hour, with the S&P 500 index dragged lower by financials and technology (down more than 2% and trading near its 200-day moving average of 2,585), and as the Dow Industrials moved back into correction territory, falling 10% from record highs late January of 26,616 (down over -400 points late). Global trade war fears between China and the U.S. ramped up late week, leading to weakness in shares of metals, autos, and industrials, but there were a few pockets of strength, as gold miners (NEM, ABX) surged on gold strength (5-week highs) and defense stocks (GD, LMT) and infrastructure stocks (EXP, VMC) both benefitted from the late day passage of the spending bill that included $21B in infrastructure. Energy stocks also stayed strong for the most part as oil prices closed at 8-week highs. Overall it was a very busy week of news, with several market moving catalysts, which included:
·      1) The FOMC as expected, raised its benchmark interest rate target by 25 bps to 1.5%-1.75% Wednesday saying they see the economy now rising at a “moderate rate.” The Fed estimates show steeper path for rate increases in 2019-20 as median estimate shows three 2019 hikes vs. two in the December outlook (13 of 15 fed dots at 3 or more 2018 hikes vs 10 of 16 in December
·      2) Trade-war fears ramp up on tariffs: Trump administration on Thursday unveiled $50B in tariffs against China over IP theft and said they may seek to further limit Chinese acquisitions in the U.S. This morning, in retaliation, China is said to slap $3 billion in reciprocal tariffs on U.S. products, including plans 15% tariffs on U.S. steel, fruit, wine and other products, and 25% tariffs on pork and aluminum
·      3) Tech wreck started early in the week as: 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 on 50M users for years despite saying it had destroyed them. Also weighing on Internet, reports that Europe is considering a 3% tax on revenue for large digital companies such as GOOGL hurt the group. Lastly, software sector weighed by slower cloud growth forecasts from ORCL
·      4) Other central banks in action: Russia cuts interest rates by 25 bps today, Bank of England signaled that it remains on course to lift interest rates in Britain this year and next but held benchmark interest rate steady this month at 0.5%; China raised the interest rates it charges on 7-day reverse-repurchase agreements by five basis points yesterday
·      5) Spending Bill: US government shutdown averted after President Trump signs $1.3 trillion spending bill today (was ahead of potential gov’t shutdown tomorrow), though noted he was unhappy with things including the limited duration of time the bill was public. Trump said he signed the bill as a matter of national security, to provide an increase in military funding.
·      6) More changes in Washington as President Donald Trump said he named former Ambassador John Bolton as his new national security adviser, succeeding Lt. Gen. H.R. McMaster

Economic Data
·      Durable-goods orders jumped 3.1% in February, easily topping the 1.6% estimate, rebounding from last quarter decline reading. The prior reading was slightly revised to -3.5% from -3.6%. Orders for passenger planes and autos both rose, but even after stripping out planes and cars, orders minus transportation climbed a solid 1.2% (vs. est. 0.5%). Non-defense capital goods orders ex-aircraft rose 1.8% in February after falling 0.4% in January
·      New Home Sales for February fell (-0.6%) to 618K, slightly below the 620K estimate, while the prior month was upwardly revised to 622K from 593K; the median new home price rose 9.7% y/y to $326,800; average selling price at $376,700; months’ supply at 5.9 in Feb vs. 5.8 MoM
·      Oil futures advanced $1.58 or 2.5% to settle at $65.88 per barrel, its highest settlement in eight weeks, and posting a gain of roughly 5.6% for the week. Oil prices also got a boost from hints that the OPEC may extend its production cut agreement to 2019. Oil had suffered its worst hit in two weeks on Thursday, pressured by gains in U.S. production, as the risk of a global trade war weighed on financial markets the world over.
·      Gold prices rallied on Friday, surging $22.50, or 1.7% to settle at a 5-week high of $1,349.90 an ounce, as investors sought safe-haven assets amid global trade tensions. For the week, gold prices advanced 2.9%, with most of the gains coming the last two-days on a dollar and stock market decline and fears of a global trade war after the U.S. announced tariffs on China.
·      The U.S. dollar ends lower, posting its first losing week since the middle of February, as the dollar index (DXY) declined roughly (-0.8%) on the week as fears over a potential trade war, particularly with China, took hold once again. The Canadian dollar spiked following higher consumer inflation data in Canada today (USD falls -0.7% vs. CAD), as core prices, which exclude energy, rose the fastest in six years, up for a 5th (raising rate hike expectations). The dollar fell to its lowest level against the yen since the U.S. election in 2016 (104.64 low) in a flight to haven assets as the trade rhetoric between the U.S. and China got tougher. Both the euro and British Pound both advanced firmly vs. the greenback today.
Bond Market
·      After an extremely volatile week for U.S. Treasuries, yields inch only slightly higher on Friday, with the 10-year yield holding around 2.83% most of the session. Treasury markets were fairly with the benchmark 10-year yield rising to highs above 2.93% late Wednesday after the Federal Reserve released its policy statement and its interest rate projections (and raised rates by 25 bps), or the dot plot while the 2-yr jumped above 2.35%. However, following the broad stock sell-off yesterday and subsequent rotation into safe-haven assets, Treasury prices gained and yields plunged, with the 10-yr briefly dropping below the 2.80% level. This morning, the 10-yr yield up slightly at 2.835% and the 2-year dropped to 2.27%. Thirty-year Treasury yields holding above 3% for now as the latest flight-to-quality subsides.
Sector News Breakdown
·      Retailers; Dow component NKE delivered a Q3 EPS beat driven by International revenue upside and better GPM, partly offset by continued North America softness, and was helped by better tax rate; PLCE was double downgraded to underperform from buy at Bank America; DXLG shares dropped early as FY2019 guidance was below estimates; NWY rises after reported 4Q results that met or topped forecasts
·      Consumer Staples; KR shares initially rise on a report they are discussing possible merger with TGT as grocery wars rage CNBC later rebuffed the M&A report saying there is “no truth” to the Kroger merger report ; in tobacco (PM, MO, BTI) defended at Piper saying they believe recent selloff in tobacco is unjustified and view current valuations as attractive, particularly for likely long-term winners like PM and Altria; UN was upgraded to buy at Argus noting shares have underperformed their benchmark, the EFA Index, over the past quarter, declining 7% while EFA has risen less than 1%; STZ upgraded at OTR Global
·      Housing & Building Products; homebuilder KBH upgraded to outperform at Wells Fargo after earnings as orders and EBIT coming in +2% and +17% versus consensus, respectively, while margins benefitted from strength in the West; EXP was upgraded to buy with $133 tgt at Longbow citing stronger wallboard pricing checks and lower near term costs as well as improving cement supply and demand over the next 1-2 years; MTZ named top mid-cap idea at Canaccord with buy and $65 tgt amid conviction in MTZ’s ability to deliver upside to estimates, noting management’s strong track record with respect to guiding the Street; HOME Q4 EPS beat by 15c on better comps of 5.7% vs. est. 4.3% and guided year above views
·      Casino, Lodging & Leisure; WYNN relief rally as Steve Wynn sold the remainder of his stake in WYNN that will “effectively eliminate his ownership” in the company. The total value of Thursday’s sale of 8M shares, at $175 a share, is $1.4B, which comes after Wednesday’s sale of about 4.1M shares for a combined $738.9M; in cruise sector, CCL was upgraded to overweight at Barclay’s with $77 tgt calling cruise fundamentals strong, noting Carnival’s bullish commentary for 2018 as sees 16% upside
·      Energy stocks among the day’s top performers amid an ongoing rally in oil prices, as investors rotated out of industrial, materials, financials and technology. The weekly Baker Hughes rig report showed the total rig count rose 5 to 995, with oil rigs up 4 to 804, gas rigs up 1 to 190, and miscellaneous rigs unchanged at 1; APA announced a significant oil discovery on Block 9/18a Area-W in the United Kingdom sector of the North Sea
·      Oil and E&P sector; SLCA announced a definitive agreement to acquire EP Minerals for $750 million in cash; JAG provided FY’18 production guidance of 28-31 Mboe/d (65%-82% YoY increase), below consensus estimates for 33.8 Mboe/d; OXY was upgraded to buy at Deutsche Bank citing improved outlook at a better price
·      Large Cap and regional banks again turn lower, falling broadly as aggressive rate hike expectations lessen, sending Treasury yields lower, which could potentially weigh on lending margins; group fell sharply yesterday, with more weakness today across the financial complex (banks, brokers, insurers); shares of large cap banks, BAC, MS, GS fell below key technical levels today of 100 day and 200 day moving averages
·      Consumer finance and Payments; SQ is testing a $1 coffee reward program. Square Cash users will receive a $1 off each purchase conducted at eligible merchants that “mostly sell coffee and coffee drinks”. The purchase must be at least $1.50, and users are limited to 10 rewards per day; separately, SQ was downgraded at Craig Hallum based on his belief that increasing competition will decelerate revenue growth and compress the ~15x EV/Sales valuation
·      Large Cap Pharma; PFE announced disappointing results from a smoking cessation study of CHANTIX/CHAMPIX (verenicline) in nicotine-dependent adolescents aged 12-19 as it failed to achieve the primary endpoint; PGNX shares slid as the FDA extended its PDUFA date for Azedra (radiotherapeutic for treating malignant pheochromocytoma and paraganglioma tumors) by 3 months, to July 30; AKBA 8.5M share Spot Secondary priced at $10.50; GSKconfirmed it withdrew from the bidding process for PFE’s Consumer Healthcare business, the second suitor to exit this week
·      Biotech movers; PTLA said the Committee for Medicinal Products for Human Use of the European Medicines Agency issued a negative opinion for betrixaban; CLVS initiates an early access program in Europe aimed at providing Rubraca (rucaparib) for certain ovarian cancer patients.
·      Medical devices and Equipment; Baird upped shares of TNDM and DXCM to outperform saying DexCom investor focus can increasingly shift to its 2H opportunities after a volatility over the last few years, while Tandem can rebound to more normalized MedTech level; in ortho space, ZBH was downgraded to neutral at Baird citing low visibility and Street estimates looking to high; CDNA rises after better earnings results
·      Healthcare services and facilities; Mizuho initiated coverage on the hospital sector, with Buy ratings on HCA and THC (remain buy UHS) and Neutral ratings on LPNT and CYH as think underlying industry demand supports mid-single digit EBITDA and cash flow growth for companies that operate hospital networks in urban areas with good population growth dynamics and leverage to the steady; CVS rises, snapping its 9-day losing streak
Industrials & Materials
·      Metals & Mining; GSM shares dropped after the ITC said it has “made negative determinations in its final phase antidumping and countervailing duty investigations concerning Silicon Metal from Australia, Brazil, Kazakhstan, and Norway; metals remains weak, falling the tail end of the week on tariff concerns between US and China and impact to steel and aluminum stocks; gold miners advanced after a 1.7% gain in gold prices today, closing near the $1,350 an ounce level (shares of NEM, ABX, AEM, GG among those outperforming today)
·      Aerospace & Defense; Bernstein said says while BA’s stock has risen 331% since early 2013, outperforming the S&P 500 by nearly 250%, and Airbus has already captured substantial upside, appreciating almost an identical amount relative to European indices since January 2013, both stocks still have substantial upside from here; Defense stocks traded higher following signing of spending bill late afternoon, with big gains in GD, NOC, LMT, RTN, LLL
·      Shipping & Maritime; JPMorgan downgraded shares of GLOG, NM and NAP to Underweight from neutral as they have the lowest return expectations for these names relative to risk; and are also upgrading DHT from Neutral to Overweight citing good combination of strong balance sheet/liquidity and very attractive valuation; firm said sees dry bulk, LNG shipping furthest along in recovery, followed by product tankers and containers
Technology, Media & Telecom
·      Internet; Dropbox (DBX) 36M share IPO priced at $21.00, above the recently raised $18.00-$20.00 price range (shares of BOX dipped as rival IPO launches today); Sunlands Online (STG) 13M share IPO priced at $11.50; end of a tumultuous week for Internet sector with FB falling over 10% on data leak concerns and the EU considering a 3% tax on revenue for large digital companies also pulled shares of the group lower
·      Semiconductors; sector underperforms; MU delivered a beat and raise above its positive pre-announcement, driven by further strength in server DRAM, graphics, and Enterprise SSDs, while guidance implies DRAM pricing only declines slightly after a double-digit step up last quarter with just moderate declines in NAND; SGH shares jumped as turned in its fourth consecutive beat and raise report since their IPO last year, reflecting continued content growth in the Brail smartphone and PC market along with a favorable memory demand/pricing environment
·      Towers; (AMT, CCI, SBAC); KeyBanc said they continue to be positive on the three tower operators and favor global pure play tower exposure (AMT and SBAC) over fiber/small cell exposure (CCI). While our outlook is positive, timing of FirstNet and Sprint deployments, which we see as a $450M+ medium-term to long-term opportunity, temper our very near-term view on the stocks. We would be adding to positions of AMT and SBAC on pullbacks

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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