Market Review: May 15, 2018

Terrie AmengualDaily Market Report

Closing Recap
Tuesday, May 15, 2018

Equity Market Recap
· U.S. stocks end the day lower, as the Dow Industrial Average snapped its 8-day winning streak, and the S&P 500 index its 4-day streak, pulling back near the lows of the session in the final hour. Rising rates and borrowing costs, as well as a strengthening dollar sapped investor optimism, with all eleven-major industries declining, led by technology and high dividend paying sectors. With rates surging, interest rate sensitive groups such as homebuilders (DHI, LEN), utilities (ED, CNP), and REIT underperformed. The 10-year Treasury yield hit a seven-year high above 3.08% while the dollar rose to its highest levels for the year. Oil prices rebounded ahead of inventory data to close the day higher while gold prices sunk over 2% to its lowest levels in 5-months. U.S. markets were attempting to rebound in the afternoon until headlines that North Korea cancels Wednesday talks with South Korea and threatened to cancel the U.S. summit over drills weighed slightly. Today was all about the massive surge in rates, with yields breaking above levels it hasn’t seen in years, potentially changing the near-term landscape? Economic data came in better with a rise in NY manufacturing data and strong retail sales, which also boosts Fed rate hike chances.

Economic Data
· Empire manufacturing index for May rises to 20.1 from 15.8 last month and was above the 15.0 estimate by economists; prices paid rose to 54 from 47.4 prior (highest since June 2011), while new orders rose to 16 vs 9.0 prior; number of employees rose to 8.7 vs 6.0; the six-month general business conditions rose to 31.1 vs 18.3
· Retail Sales for April reported at 0.3%, in-line with economists’ estimates while retail sales less autos rose 0.3% in April, slightly below the 0.5% estimate; retail sales rose 0.8% in March; retail sales ex-auto dealers, building materials and gasoline stations rose 0.3% in April
· U.S. Home Builders’ Confidence index in May rises to 70 vs. 68 last month and above the 69 estimate; the present single family sales rise to 76 vs 74 last month, future single family sales unchanged at 77 vs 77 last month and prospective buyers traffic unchanged at 51
· Business Inventories for March unchanged MoM vs. est. 0.1%; Business sales rose 0.5% in March after rising 0.5% the prior month; Feb. business inventories rose 0.6% MoM

· Gold prices posted a sharp decline on the day as the dollar and Treasury yields jump; gold futures fell -$27.90 or 2.1% to settle at $1,290.30 an ounce, its lowest levels since the end of 2017. Gold prices ended lower for a sixth loss in seven sessions and have tumbled more than 6% since its recent peak of $1,322.30 last week, a roughly two-week high.
· Oil prices reversed earlier losses, with WTI crude up 35c, or 0.49% to settle at $71.31 per barrel, bouncing off earlier lows of $70.42 per barrel as tensions in the Middle East helped to extend gains in crude futures. Brent prices also rebounded to close higher at $78.43 per barrel. Oil prices remained elevated late day ahead of tonight’s API and tomorrow EIA inventory reports. Note the price spread between U.S. benchmark WTI and Brent has widened to more than $7 a barrel.

· The U.S. dollar gained for a 2nd day (after snapping its 3-day losing streak yesterday), getting a lift from surging Treasury yields and putting the dollar index (DXY) on track for its best day in two weeks. The ICE U.S. Dollar Index pulled back from earlier highs (of 93.45), but still posted a one-week high. The euro slipped below $1.19 and traded at $1.1872, down versus $1.1929 late yesterday, while the British pound fell to lows of 1.3451 before paring losses around 1.35. The dollar moved to a fresh 3-month high against the yen, topping 110.30; the dollar back to 1.29 vs. the Canadian dollar; the Turkish Lira fell to a record lows vs. the dollar.

Bond Market
· Treasury bonds fell as yields on the 10-year moved to their best levels since 2011 after a strong retail sales number and empire manufacturing added to recent data points indicating the strengthening economy. The yield on the 10-year yield jumped over 8 bps to highs above 3.08% while the shorter-term 2-yr yield topped 2.58%, highest in a decade. The yield advance comes amid resurgent worries that negotiations between the U.S. and China remain challenged, stoking fears that a potential trade clash could push prices and inflation higher. The yield spread between the 2-year and the 10-year rate stood at 47.1 basis points, holding near its narrowest levels in about a decade.

Sector News Breakdown
· Housing & Building Products; in home improvement retail, Dow component HD reported earnings and revenue beat, but Q1 comp sales of 4.2% was below the 5.6% estimate, as the company cited poor weather for the lower comps (note LOW reports next week) – shares pared losses after saying May comp sales are up double-digits so far; SMG was upgraded to buy at SunTrust and upped tgt to $100 saying the stock has bottomed out and is poised to follow its counter seasonal trend of outperformance; housing stocks (LEN, DHI) fall on rising rates; in building products, EXP responded well to its quarterly results
· Retailers; ULTA was upgraded to outperform at Oppenheimer and raise tgt to $280 as still sees the potential for more gains and outperformance from current levels; GPS was upgraded to outperform at Telsey Advisory; TGT said to cut next-day delivery for household staples; Macy’s (M) reports earnings tomorrow morning
· Auto’s; Ford (F) was downgraded to neutral at Piper and cut tgt to $12 saying despite low valuation, is less convinced that Ford can find compelling revenue drivers to offset secular threats; TSLA weak as tgt cut to $291 at Morgan Stanley and lower ests on downgrades to auto margin forecasts and likely greater equity dilution
· Consumer Staples; TSN said its units have agreed to buy some poultry rendering and blending assets of American Proteins and AMPRO Products for about $850M; MDLZ was added to US 1 list at Bank America; SunTrust initiated WTW with buy and $90 tgt; USFD was upgraded to overweight at Morgan Stanley; 52-week lows for CL, COTY, KO, IFF, PM, MO and CPB in Staples
· Casino, Lodging & Leisure; gaming sector in focus for a second day, as several analyst weigh in on the U.S. Supreme Court ruling yesterday in favor of the state of New Jersey in a case that could open sports betting around the nation. In a 6-to-3 vote, the Supreme Court in Murphy vs. National Collegiate Athletic Association ruled the Professional and Amateur Sports Protection Act doesn’t make sports gambling a federal crime. Analysts positive on shares of PENN, BYD, IGT, SGMS on the decision, while casinos MGM, LVS, WYNN with mixed results

· News in energy space mostly macro driven/oil price movement with earnings now behind the sector; oil prices pull back from best levels since late 2014 as markets take profits following recent rally (jump in the dollar also weighing on commodity prices); in news, MTDR 7M share Spot Secondary priced at $32.75; sand frac stocks were active after SNIC said at Bank America conference that they are bullish about frac sand (SND, EMES, SLCA, HCLP, FMSA)
· Utilities pressured; rate sensitive utilities falling over 1% as Treasury yields to new highs; all 20-components of UTY are lower, led by ED, CNP, ETR and NEE

· Large Cap banks among the day performers today, along with brokers, insurance and other related sector amid surging treasury yields (helping margins); CFR rises after pair trade idea from Bank America as downgraded CBSH to Underperform: recommend pair trade vs. Buy-rated CFR saying it offers a stronger EPS growth outlook on the back of a booming Texas economy
· Monthly credit card data; COF April net charge-offs 5.04% vs. 5.29% MoM, while April 30-plus day performing delinquencies 3.33% vs. 3.57% in March; SYF April Credit Card Charge-Offs 5.64% vs. 4.81%; reports April delinquencies 2.84% vs. 3.03% in March; DFS April net-charge offs 3.2% vs. 3.3% in March; 30-day delinquency rate 2.3%, the same as in March; JPM April net charge-offs 2.63% vs. 2.65% MoM, while delinquencies 1.17% vs. 1.22% MoM; BAC April default rate 2.96% vs. 2.81% last month and 30-plus day delinquency rate 1.63% vs. 1.69% last month; ADS April NCO’s unchanged at 6.3% while delinquencies of 5.3% also unchanged; AXP April NCO’s 2.3% vs. 2.2% MoM while delinquencies slip to 1.3% vs. 1.4% prior

· Large Cap Pharma; VRX was upgraded to buy and tgt raised to $27 from $15 at Mizuho saying after a drug-by-drug review they conclude that Valeant is growing its key brands and has stabilized losses from older products
· Biotech movers; Leerink raised its tgt on SRPT to street high $121 tgt saying the company is one of three companies developing microdystrophin gene therapy for Duchenne muscular dystrophy (DMD), in competition with PFE and SLDB; INO said its HIV vaccine, PENNVAX-GP, showed generated nearly 100% immune responses, sustained durable memory responses 12 months after the start of the clinical study; PFNX said PF708 study shows comparable profiles with Forteo/on track to submit a New Drug Application in 3Q
· Gene editing; Chardan overweight the gene editing space on “scarcity value”. We believe there are far fewer credible companies in gene editing than there are maturing opportunities to meet profound societal needs, and see the likelihood big biopharma recognizes this scarcity value and continues to increase exposures; firm upgrade NLTA to buy and raise tgt to $57.50, CRSP tgt raised to $72.50, but EDIT tgt cut to $55
· Medical equipment and devices; Agilent (A) shares fell as Q2 core growth hit the guidance midpoint, but fell short of expectations due to unforeseen headwinds in China and ICP/MS shipment timing (TMO, PKI, DHR also lower on guidance); HAIR reported results that were below consensus as management changes, a lack of tenured reps, lighter than expected EMEA sales, and customers holding out weighed one analyst noted

Industrials & Materials
· Industrial & Machinery; AZZ falls as Q1 EPS well below consensus on lower revenue and guidance also disappoints; FLR added to BofA Merrill Lynch US 1 List, as think the stock presents an attractive risk-reward to the improving energy and mining capex cycle; in aerospace, BA cut its intraday losses in half, after the aerospace giant called the World Trade Organization’s finding that the European Union had failed to honor previous rulings about illegal subsidies to rival European aircraft maker Airbus a landmark ruling
· Transports; in rails, CNI said volume is up 14% this month on a revenue-ton-mile basis, buoyed by strong demand for fracking sand/said railroad “hit a bump” in 2017 and “we are getting out of that situation probably quicker than we believed – comments at BoFa conference; CSX at conference said sees setting operating record at end of Q2 and into Q3 though notes domestic coal continuing long-term structural decline
· Metals & Mining; STLD announced the acquisition of CSN’s Heartland Sheet Operations for $400M (including $60M of net working capital) in Terre Haute, IN, in an all-cash purchase; RIO CEO warned the mining industry will need to work hard to protect margins and generate cash against a backdrop of rising costs and increased political risk
· Chemicals; Fertilizer producers’ estimates and price targets raised at Stifel on “de-risked” price forecast for all three major nutrients; continues to recommend NTR among major North American fertilizer producers while raises CF tgt to $43 and MOS to $32

Technology, Media & Telecom
· Internet; VIPS reported mixed 1Q results and missed on 2Q guidance as 1Q revenue beat by ¥400M, mainly driven by higher ARPU, which was up 25% y/y, with little growth in the number of active customers (Mizuho notes 2Q revenue guidance of 17%-22% growth suggests benefits from Tencent-JD deal won’t come until 3Q); in online travel TVPT downgraded at Bank America in relative call, as the firm upgraded SABR to buy
· Semiconductors; sector lower as the Philly semi index (SOX) fell as much as -1.3% at 1,350, led by weakness in NVDA down along with AMAT and TER down over 2% in equipment space; MU shares active after Stifel raises tgt to $101 saying that the negativity in NAND Flash is overdone and has created buying opportunities in buy-rated MU, WDC and SGH; WDC announced a stock buyback plan of up to $1B in shares
· Software movers; MIME revenue growth decelerated from previous quarter; SITO slides after Q1 results with much higher expenses offsetting better revs; SYMC provided more details about an internal probe that sent shares down 33% in a single day/said it doesn’t anticipate a material adverse impact on past results
· Hardware & Telecom; SWCH shares decline after reported disappointing March quarter results as sales and EBITDA came up short, primarily related to customer contract delays; VOD shares fell after results; telecom and tower stocks dropped amid the rise in treasury yields
· Media movers; CBS was upgraded to outperform at Bernstein as it views the probability of a CBS-VIAB re-merger as close to zero, for many years to come

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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