Monday, April 2, 18
Equity Market Recap
· U.S. stocks fell on Monday, with major indexes closing at their lowest levels in more than four months and falling below key technical levels as technology stocks saw steep declines (though pared losses late in the session). Technology shares continue to weigh with AMZN and NFLX falling over 5% amid renewed presidential criticism and retaliatory tariffs from China. Stocks took a sharp downturn below key technical levels, with the S&P 500 index falling more than 3% to trade below its 200-day moving average (of 2,589). New afternoon lows for the Nasdaq, trading under 6,805 or down over 3.5% (260 points) surpassing last week’s lows, led by a sharp decline in Dow component INTC after reports that AAPL is said to plan move away from their chips to its own Mac chips (reported by Bloomberg). The Dow Industrial Average traded below its 200-day moving average support of 23,422, falling over -3% or over 725 points. Oil prices dropped roughly 3%, its sharpest one-day fall in about 7 weeks as stocks slumped and investors rotated out of riskier assets. The CBOE Volatility index (VIX) topped the 25 level for the first time since March 23rd. The selling was broad based, with defensive sectors falling the least. Economic data was mixed after two PMI readings as the IHS Markit manufacturing purchasing manager’s index hit a 3-year high of 55.6 in March, up from 55.3, while the ISM manufacturing report came in at 59.3, compared with a previous monthly reading of 60.8. Chinese manufacturing data over the weekend indicated a three-month high, but failed to rally markets. The dollar remained steady while European markets remain closed for holiday. Outside of the trade war rhetoric, this week’s focus will turn to U.S. labor market data Friday, which is expected to show unemployment fall to its lowest level since 2000, while traders will also have one eye on trade developments.
· March U.S. ISM Manufacturing falls to 59.3 from 60.8 last month and was slightly below the 59.7 estimate; new orders fell to 61.9 from 64.2 prior while employment fell to 57.3 vs 59.7 and inventories fell to 55.5 vs 56.7; prices paid rose to 78.1 vs 74.2
· Construction Spending for February rose 0.1%, below the 0.4% estimate; private construction rose 0.7% in Feb., private residential construction rose 0.1%
· March Manufacturing PMI 55.6 vs Flash Reading 55.7; the Index rises to 55.6 from 55.3 in February and compares to a year ago 53.3 (was highest reading since March 2015); output falls to 55.2 vs 55.5 in February
· WTI crude oil falls -$1.93, or around 3% to settle at $63.01 per barrel, near its worst levels of the day (low $62.95 per barrel – and off highs $65.42). Energy prices sunk with the broader stock market decline. Gold prices surged, with June gold up $18.50 or 1.4% to settle at $1,345.80 an ounce as investors rotated back into the safety of bonds and other defensive asset classes as stocks tumbled late afternoon to lowest levels since November. Markets also dealt with new developments on the trade-war front, as China announced tariffs on about 130 U.S. goods. Gold futures fell 2.1% last week and ended around 0.3% lower for the month of March. For the quarter and year to date, they were 0.7% higher.
· The U.S. dollar was mixed following a late day stock market selloff and on mixed economic data; the USD slipped vs. the yen as stocks retreated (fell to lows below 105.70, down over -0.5% after earlier highs of 106.45); the dollar index dips back under the 90 level; euro little changed on day, with Mexican peso active on NAFTA headlines. Trading action was thin as major markets were closed in Europe in observance of Easter Monday. In the first quarter of the year, the euro rallied 2.8% against the dollar and gained about 1.2% last month. The pound rose more than 2% against the dollar in March and booked a 4% rise during the quarter. The dollar held up relatively well despite the China tariff news vs. the U.S. on certain products.
· Treasury prices reverse earlier losses, as yields declined (10-year slipped to 2.72% after earlier highs above 2.77%) as a sharp stocks market decline sent investors fleeing for safe haven and defensive assets. The 10-year yield was down 8.6 bps last week and retreated 12.9 bps in March. The 30-yr remains under 3% after plunging in March (long bond lost 9.9 bps last week, contributing to a decline of 15.5 bps for the month – but up over 23 bps for the quarter). Bond investors shook off the retaliatory trade moves from China early on, which announced tariffs on about 130 U.S. goods and after mixed economic data.
Sector News Breakdown
· Retailers; DKS cautious mention at Morgan Stanley saying UA sales declines at Dick’s Sporting Goods could cause a 90-basis-point drag on the retailer’s 2018 sales (as firm estimates UAA sales fell 11%-15% at DKS in 2017); FIT was downgraded to underweight at Morgan Stanley and cuts tgt to a street-low $4 saying shares have more downside as revenues struggle to stabilize and cash burn resumes; Retailer Hudson’s Bay disclosed that it was the victim of a security breach that compromised data on payment cards used at Saks and Lord & Taylor stores in North America
· Auto movers; after a rough time last week, TSLA starts this week off in similar fashion; shares have slid following a recall of all Model S cars built before April 2016, a fatal accident last month involving the company’s driver-assistance system and a growing consensus that the carmaker’s Q1 deliveries may fall below expectations; TSLA pared losses but still dragging sentiment lower
· Consumer Staples; Protein sector under pressure (PPC, TSN, SAFM) after China announced Sunday night that it will enact retaliatory tariffs on a number of imported US goods, including an incremental 25% tariff on imported US pork, effective Monday; TSN was downgraded to sell and tgt cut to $55 at Pivotal on news as believe the impact will be broad based and will signal the top in Tyson margins; STZ was added to focus list at JP Morgan
· Casino, Lodging & Leisure; Casinos (WYNN, MLCO, LVS) active after Macau’s gaming bureau reported March gross revenue from games of fortune in the region rose 22.2% YoY to 25.95B patacas – ~520 bps above our Deutsche Bank pre-month forecast of 17.0% and nicely ahead of recent consultant checks (+17-20%) helped by VIP segment led the growth in the month of March, with 1Q18 VIP growth in excess of 20% YoY; WYNN separately upgraded to buy at Roth
· Not much in the energy space in general stock news, though oil prices dumped lower along with broader “risk” assets; in oil services & Equipment; BHGE was upgraded to buy at Bank America with a $33 price target, forecasting an upcoming turn in liquefied natural gas equipment orders
· Utilities; UBS upgraded shares of AEE to buy as expect EPS growth rate to increase due to a better environment for investment in Missouri which translates to a better valuation; also upgraded ES to buy as they see the current valuation as a reasonable entry point for investors seeking to own a high quality, pure play T&D utility; Guggenheim said the MPSC ordered an authorized ROE of 10% in CMS’ Electric rate case, which sends a strong signal to the market that MI remains a constructive regulatory environment. Overall, they view the order as supportive for CMS, a positive read-through for DTE
· Payment processors; not much helping market today, but there were a few positive analyst calls in the space as RBC Capital upgraded ADP to Outperform (and raised tgt to $130), as they see an improving growth story and more reasonable valuation after recent underperformance. The firm also upgraded PAYX to Sector Perform saying underperformance since last fall and higher estimates post US tax reform leave the stock more reasonably valued
· Large Cap Pharma; ALKS shares dropped after the company received a “refusal to file” letter from the FDA regarding its new drug application for ALKS 5461, a treatment for major depressive disorder (MDD) – ITCI shares fell in reaction; MNOV rises after saying it will terminate the Phase 2 clinical trial of MN-001 (tipelukast) in NASH and NAFLD with hypertriglyceridemia early based on the significant positive results from an interim analysis
· Biotech movers; SENS shares active after its pre-market approval application for Eversense gained unanimous support from an advisory panel on March 29;ALNA was initiated buy at Roth with $61 target (settle at $11.02 Thursday); ALNY shares fell on PFE competition fears after the drugmaker announced that the phase 3 ATTR-ACT trial assessing tafamidis in TTR-CM met its primary endpoint
Industrials & Materials
· Transports; initially moved higher after Deutsche Bank upgraded Rail Company UNP to buy and raised target to $158 from $137, while the firm upgraded truckers JBHT and WERN as remain positive on the backdrop for U.S. Transportation stocks; airlines dragged the index lower initially (DAL, UAL, AAL) along with low cost carriers – index fell sharply late day with a big “roll” in the major averages
Technology, Media & Telecom
· Internet; AMZN weak initially, extending last week losses after a fresh round of critical comments from President Donald Trump who weighs in again about post office, taxes, retail; GOOGL announced it is winding down its URL shortener named goo.gl starting April 13 and asked users to consider using app-centric Firebase Dynamic Links (FDL) or similar popular services like Bitly and Ow.ly as an alternative; GRUB has expanded its delivery capabilities to 34 more markets across 19 states and is part of Grubhub’s plan to grow its delivery network to reach more than 100 new markets this year; Internet sector was a drag on markets to start the week
· Software & Hardware/component movers; CRM raised its profit and sales guidance for Q1 and for FY19, as a result of the adoption of new accounting standards using the full retrospective method; CVLT shares active after Elliott Management discloses 10% stake; SNX shares slumped after Q1 EPS/revs topped consensus, but Q2 guidance fell short of expectations as issue in the quarter was that the company’s System Design & Integration biz, building servers for hyperscale vendors, was under margin pressure
· Media movers; DIS said its ESPN will offer a new $4.99 per month streaming service called ESPN+; LYV’s Ticketmaster denies report it stifles concert-access competition; DISCA was upgraded to outperform at Wells Fargo and raised its tgt to $27