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 26, 18
Equity Market Recap
· U.S. stocks closed sharply higher, rebounding from last week’s market rout as trade issues continue to dominate market action. After a midday pullback that cut opening day highs in half, major averages settled in and rallied late morning (after European markets closed), pushing to fresh intraday highs late afternoon amid news of potential easing trade-tensions. Reports over the weekend indicated that U.S. and China officials are conducting behind-the-scenes talks to avert a global trade war, and comments from Treasury Secretary Mnuchin that America was holding productive talks with China, also boosted sentiment. The tech heavy NASDAQ traded in a 160-point range on the day, closing near its best levels, while the Dow Industrials advanced as much as 600 points, helped by shares of MSFT, rising as much as 7% today on positive analyst commentary and INTC up around 6% on an analyst upgrade. Chipmakers and financials helped pace today’s advance, though Facebook (FB) was under pressure again (fell as much as 6% before paring losses) as the FTC confirms a probe regarding its privacy practices.
· The other big story today was the broad weakness in the U.S. dollar, falling to 5-week lows vs. the euro, while the British Pound extended recent gains. There were no major economic data points today, with the focus squarely on trade issues with the U.S. and counterparts. Reports the U.S. and South Korea agreed to amend their free-trade deal to address American concerns about a growing deficit and resolve friction over tariffs on South Korean steel was another positive piece of trade news. Today’s rebound erased all of last Friday’s losses.
· Recall, the S&P 500 Index dropped over 2% Friday and was down 5.9% for the week, its biggest drop in more than 2-years, the Dow Industrials fell -1.7% Friday, falling over 425 points to the lowest since November 22nd. The Nasdaq Composite plunged -2.43% Friday, down over 6.5% for the week while the Nasdaq 100 Index dropped 7.2%, the most since August 2015, led by declines in FB following its data leak news. Coming into today, the Dow was 10% below its record close while the S&P is 8.5% below its all-time high and the NASDAQ 6.6% below its record
· European markets erased overnight gains, ending broadly lower as the Stoxx Europe 600 index fell 0.7% to end at 363.19, closing at its lowest level since February 2017 (after falling over 3% last week). The German DAX dropped 0.8% to close at 11,787.26, while the FTSE 100 index slid -0.5% to end at 6,888.69 in London.
· Oil prices quietly fell on Monday, pulling back from 8-week highs and ending the day lower by 33c or 0.5% at $65.55 per barrel. Brent crude also slipped, but held above the $70 per barrel level. Overall it was quiet for energy as markets focused on China and trade with the U.S. but there was a report that Iraq supports OPEC’s agreement to cut oil output, Iraqi President Fuad Masum said at a meeting on Monday with OPEC Secretary-General Mohammad Barkindo.
· Gold futures rise, ending the session at a more than 5-week high, rising $5.10 or 0.4% to settle at $1,355 an ounce, its 4th straight session climb, finding some support as the dollar declined. Last week, gold prices advanced 2.9%, with most of the gains coming late week on a soft dollar, stock market decline and fears of a global trade war after the U.S. announced tariffs on China.
· The U.S. dollar slumped, falling broadly vs. other currencies, including a 5-week low against the euro (traded up around 1.246 vs. the USD). The dollar index (DXY) traded down to lows around 89 (-0.5%), as the pound moved back above 1.42. The dollar however, rose against the safe haven Japanese yen, rebounding from a 16-month low against as trade-related fears appeared to have eased for the time being. The dollar was little changed vs. the Canadian dollar. Bitcoin prices dropped more than 8%, falling below the $8,000 level, off its overnight high of $8,674.
· Treasury markets pulled back only slightly after last week’s gains, as investors rotate back into riskier assets (such as stocks), with markets in full rebound mode early after last week’s decline; the yield on the 10-year traded around highs of 2.84% before slipping, while the 2-year was around 2.275%, both well off last week’s best levels. Treasuries have been active given the FOMC rate hike last week and fears of repercussions of a global trade war. In the afternoon, the U.S. gov’t auctioned $30B in 2-year notes at a yield of 2.31% vs. the 2.306% when issued, with the bid-to-cover at 2.91 vs. 2.72 prior auction and indirect bidders awarded 44.5%.
Sector News Breakdown
· Retailers; FINL rises as JD Sports Fashion to acquire the shoe retailer for $558M in cash, with holders getting $13.50 per share https://goo.gl/Wk15QX; DLTRupgraded to overweight at Piper and $112 tgt citing sensible investments with FDO to drive comp growth improvement and discounted valuation; broad gains in department stores, apparel retail and sporting goods (DKS)
· Restaurants; Restaurants Morgan Stanley upgraded QSR to overweight and downgraded JACK as they look toward the sustainable growth models of the underlying asset-light cash flows to determine which have the greatest potential to deliver peer-leading shareholder returns; DRI was upgraded to overweight at Stephens as believes the stock’s below-market valuation more than compensates for the slowdown in same-store sales growth; UBS said survey of CMG brand perceptions remain below pre-food safety incident levels and suggests continued weakness among light frequency and non-Chipotle customers
· Housing & Building Products; USG unanimously rejects unsolicited $5.9B buyout bid by Knauf (value at $42 per share) saying it substantially undervalues the company and isn’t in the best interest of shareholders https://goo.gl/cr1tSf; LOW announced Chairman, President and CEO Niblock to retire
· Top energy movers; Credit Suisse raised energy sector rating to market weight from underweight saying energy sector multiples have come back down to earth on strong earnings and lagging relative performance; MRO was upgraded to overweight at JP Morgan given the discounted relative valuation, robust FCF generation, and strong well productivity gains in the Williston Basin and Eagle Ford that are bolstering the company’s capital efficiency and inventory quality; DVN said it is looking to sell even more assets than previously announced in order to focus its portfolio on three shale regions/DVN is considering as much as $5B in asset sales; refiners (VLO, HFC, MPC, PBF) outperform in the energy complex
· Large Cap banks rebound; after leading markets lower last week as Treasury yields sank along with the dollar, banks partially rebounded to start the week; USB was upgraded at Baird saying selectively add bank exposure on this pullback, group’s risk/reward looks slightly better. Note the BKX dropped ~8% in the past two trading days and is now down ~3% YTD; CMA positive mention by Nomura says its status a plain vanilla regional bank with underappreciated leverage to higher rates, significant excess capital, and high credit quality position; online brokers strong with IBKR mentioned positively in Barron’s, while Bank America was positive on ETFCshares
· Large Cap Pharma; PTGX shares plunged after saying it was discontinuing its phase 2 trial of its ulcerative colitis treatment after an independent data monitoring committee (DMC) deemed the trial “futile.” ABBV shares fall a 4th day after a recent setback for an experimental lung-cancer drug known as Rova-T; Overall not much in way of news for large cap Pharma names (PFE, BMY, JNJ), though ARNA shares dipped after surging last week on positive data; in equipment, DRIO said it had received FDA clearance for its blood glucose monitoring system to be used on AAPL iPhone 7, 8, and X devices via the Lightning port on these phones
· Biotech movers; ALNY received EMA’s PRIME Designation for an accelerated review of Lumasiran and separately, JMP raised tgt to $207 from $165; IMGNpresented results from an early-stage study of mirvetuximab soravtansine in combination with MRK’s immunotherapy Keytruda that showed positive effect in Phase 1/2 ovarian cancer study; BHVN shares fall after positive late-stage results for its rimegepant fails to lift shares (one analyst noted despite beating endpoints, the drug’s effectiveness is disappointing especially with investors already concerned Allergan’s rival treatment works well) – LLY, AMGN, ALDR also developing anti-CGRP drugs
Industrials & Materials
· Metals & Mining; in steel, on Sunday, Bloomberg reported the U.S. and South Korea reached an agreement in principle to alter Korus, the bilateral trade deal between the allies. The U.S. signaled South Korea will reduce the volume of steel exported into the U.S. as part of its concessions, though no further details were provided (AKS, X, CMC, STLD, NUE)
· Chemicals; ASH upgraded to buy at Longbow with $85 tgt on stronger than expected sales of Industrial Specialties, which should drive higher asset utilization and margins in ASI; DWDP shares defended by several analysts saying the sell-off related to trade war risk is overblown
· Engineering & Construction; JEC upgraded to Outperform at Baird as recent share weakness significantly improving risk/reward and compensating for general caution around CH2M integration, expectations for a weak F2Q18
· Industrial & Machinery; DOV downgraded to neutral at JPMorgan as believe key catalysts that underpinned their prior thesis have played out and with Wellsite out of the way soon and a new CEO at the helm, the story now shifts to business fundamentals and forward strategic direction; ETN was upgraded to buy at Jefferies as they raise near-term estimates with potential further upside as the year progresses.
Technology, Media & Telecom
· Internet; FB extended last week losses of more than 10%, falling further after the FTC said it’s investigating the privacy practices of the company (follows news of the data leak last week to Cambridge Analytics); shares of other Internet companies declined in sympathy with FB after benefitting from earlier gains as investors scooped up beaten up stocks
· Semiconductors; INTC upgraded to market perform at Raymond James as does not see a negative catalyst that would cause Street estimates to come down this year; also says server demand appears to be improving, but guidance reflects a deceleration in Datacenter Group thereby suggesting an upward bias to estimates;ADI also upgraded at Raymond James to outperform to reflect favorable conditions, in addition to some ADI-specific benefits as their Apple headwind ends and as benefits from the Linear acquisition begin; AMD was downgraded to negative at Susquehanna citing crypto mining competition
· Software movers; Dow component MSFT rises with broader market and as Morgan Stanley raised tgt to Street high $130 saying company is poised to keep a dominant position in the public cloud market, which is expected to more than double in size to more than $250 billion; RHT to report earnings tonight after the close; ADBE was downgraded at JMP Securities
· Hardware and components; ZBRA upgraded to overweight a JPMorgan and raise our 2H18/FY19 top-line estimates to reflect solid momentum in enterprise mobile computing coupled with steady operating leverage