Market Review: May 18, 2018

Terrie AmengualDaily Market Report

Closing Recap
Friday, May 18, 2018

Equity Market Recap
· U.S. stock markets end mixed as Treasuries rallied with markets eyeing trade talks. The 10-year yield hit an afternoon low of 3.06% (still up around 10 bps this week) after White House Economic advisor Larry Kudlow said he expects China to offer to cut the trade gap by $200B. The comment comes after mixed reports last night that China had offered to reduce its trade surplus with the U.S. by up to $200B, but the government had since denied the reports. Technology stocks dropped on softer guidance from semi-equipment maker AMAT (dragging index lower), while the retail space was hit by lower comp sales from JWN and food space lower on CPB lower outlook after surprise CEO retirement. European stocks retreated from an almost-four month high as the Stoxx Europe 600 index closed 0.3% lower at 394.67, breaking a three-day winning streak while Italy’s FTSE MIB Index dropped -1.5% to 23,449.65 on political developments. The three major U.S. indexes posted weekly losses while the small-cap Russell 2000 posts its 3rd straight record close as Small caps continue to outperform large caps as the rising dollar less impactful. This week was highlighted by trade, a surging dollar (2018 highs), rising yields (10-yr 7-yr high 3.11% yesterday), declining gold (lowest levels since December) and 4-year highs for energy prices. Retailers started the week strong on Macy’s results but slumped after WMT and JWN disappoint. Tech was lower on the week led by CSCO and AMAT reports.

· Oil prices settle lower on Friday, but up for the week; WTI crude falls 21c to settle at $71.28 per barrel, but gained roughly 0.8% for the week. Prices pulled back from more than 4-year highs reached yesterday (above $72 for WTI and above $80 for Brent), little movement today after the weekly Baker Hughes rig count was little changed. Oil prices have found momentum over the last few weeks on Iran sanctions, Venezuela production issues and bullish inventory data.
· Gold futures edged higher $1.90 to settle at $1,291.30 an ounce, but finish the week lower by 2.2% (end straight weekly decline after a month of gains prior) as the dollar index and Treasury yields continued their march higher. Gold bounced off its lowest settlement of the year yesterday on rising rate hike expectations as well. The strength of the dollar index and the subdued reaction to the geopolitical tensions by investors are the latest reasons behind the move.

· The U.S. dollar posted its 5th straight weekly advance as the euro declined amid political developments in Italy, falling as low as 1.175 (lowest since December) before paring losses. The British Pound falls back below the 1.35 level vs. the greenback (lows of 1.3455 also before paring losses), though the dollar slipped late day to end lower vs. the yen. Bitcoin prices lower by 1% at $8,100, off overnight lows of $7,928, on track for a weekly decline of roughly 4%. The dollar posted gains vs. emerging markets, rising vs. the Canadian dollar and Mexican Peso as markets await a hopeful resolution of trade and NAFTA with the U.S.

· Bonds gain on the day as yields slip 4-bps off 7-year highs; the 10-year Treasury yield climbed above 3.11% yesterday, and remains near its highest level since 2011, rising nearly 13 bps since the end of last week. The recent surge in rates has been supported by strong economic data, fueling the view that the Federal Reserve will adopt an aggressive pace of rate increases, perhaps three further rate increases (4 in total for 2018) rather than two in 2018. Geopolitical concerns, including those centered on global trade and Italian politics, raised appetite for defensive assets. Chinese officials disputed reports that they had offered the U.S. a $200 billion cut to its trade deficit. This comes as China and the U.S. hold weeklong trade talks to avert a trade conflict.

Sector News Breakdown

· Retailers; JWN shares fell more than 10% as 1Q comp result of +0.6% came in below the +1.0% estimate, with softness in the off-price segment/company did post better EPS and raised guidance, but didn’t match the strength in Macy’s results earlier in the week; BOOT top holder divests its remaining 26% stake in company as sells 7.21M shares in secondary priced at $23.50; GME shares fell after NPD announced yesterday April video game data, including software sales that fell 1% vs Stifel estimate of up 5%
· Consumer Staples; CPB falls as CEO Denise Morrison will retire, effective immediately, without providing a reason for her departure and reported Q3 adjusted gross margin fell 3.9% to 32% hurt by higher supply chain costs/company also cuts its yearly forecast (CPB a drag on other food related stocks today PF, THS, FDP, KHC, GIS, CAG, K)
· Lodging sector; LHO was upgraded to buy at BTIG after reported a better than forecast 1Q18 result as the rebound in demand from business and international demand segments more than offset operating weakness; HLT active after largest shareholder BX agreed to sell its 15.8M shares to exit stake; lodging rating changes at Evercore/ISI as they upgraded MAR and HST to outperform, HLT and SHO to in-line and downgraded DRH to in-line
· Casual dining; JACK extends losses after falling 8% yesterday after Q2 EPS and system-wide comp. sales missed estimates and failed to provide long-term forecasts…JACK was the last of major casual dining names to report for qtr and disappointed …that coupled with rising fuel (gas) costs and rising rates, expect to dent optimism in sector (SONC, YUM, WEN, CMG, PZZA, SHAK); Canaccord also noted for the first week of May, our casual dining restaurant checks suggest that comps returned to negative territory. This marks the first negative week since February during the Winter Olympics

· Energy stocks among the biggest sector gainers on the week on surging oil prices as WTI crude topped $$72 per barrel yesterday and Brent topping $80 before paring gains, as bullish sentiment continues in the sector. Today, the Baker Hughes (BHGE) weekly rig count data showed the total U.S. rig count rose 1 to 1,046, with oil rigs steady at 844, gas rigs up 1 to 200, and miscellaneous rigs unchanged at 2 – follows several weeks of rigs being added; According to Bespoke, 22 out of 88 stocks in the S&P 1500 Energy sector are up over 40% since the sector’s 3/28 closing low
· Refiner sector; another positive analyst call, this time at Tudor Pickering (follows recent VLO upgrade at Morgan Stanley) as the firm upgraded CVRR, HFC, VLO to buy as looks for pure-play names with Midland crude exposure and refiners that are prepared for IMO 2020 regulations; said transportation issues mean Midland crude may fall to a price that compels E&Ps to stop completions and drilling until new pipes come online in late 2019 or early 2020 (firm also downgraded ANDV and MPC to hold)

· Large Cap banks led market declines, with broad pullback on profit taking as bond yields slip from the highs; in insurance; AFSI shares active after Carl Icahn disclosed a stake in the company after the close yesterday and said he planned to oppose its plans to go private; in payments; PYPL buying Swedish small-business platform iZettle for $2.2B to expand in Europe and Latin America (shares of SQ dropped early in reaction); SYF announces $2.2B stock repurchase program

· Biotech movers; AMGN said the FDA approves Aimovig, first preventative treatment for migraine (NVS marketing it), which encompasses both chronic and episodic migraine. The US list price is a fixed $575 for one monthly 70 or 140mg single-use auto injector, or $6,900 annually (TEVA also has an anti-CGRP monoclonal antibody awaiting FDA approval with PDUFA date 6/16/18)
· Pharma and equipment movers; INSY declines on the heels of the release of briefing documents for next Tuesday’s Ad Com review for Buvaya; OPK shares declined after draft policy by Medicare administrative services provider Novitas Solutions denying coverage for its 4Kscore test; QTNT shares rise as it completed the MosaiQ verification and validation (V&V) phase for its initial blood grouping MosaiQ microarray and started its European field trials; AZN shares slipped on quarterly results, hurt by rising sales and administration costs to support product launches
· Healthcare services; CERN shares rose after Veterans Affairs Dept says it awarded 10-year IT contract valued at up to $10B; VA will adopt Cerner’s electronic health record platform, enabling patient data to be shared between VA, Defense Dept and community providers; IQV shares rebound after company and selling stockholders terminate the previously announced secondary public offering and repurchase due to the recent market conditions

Industrials & Materials
· AG & Machinery; farm machinery giant DE posted Q2 EPS and sales below consensus ($3.14/$10.72B vs. est. $3.30/$9.83B), but raises FY adjusted net to about $3.1B, up from prior $2.85B (est. $3.09B) and sees FY net income $2.3B (had seen $2.1B) – peers AGCO, CNHI, LNN, TWI, and TTC among those active on DE earnings; ETN was upgraded to buy at Bank America
· Transports; Bernstein updates estimates on FDX, raising EPS by 2% over the next several years on higher confidence in Ground earnings growth; Transports lower but off worst levels with CAR top decliner with modest gains led by MATX, CHRW, UNP, JBHT

Technology, Media & Telecom
· Internet; BIDU falls as former MSFT executive Qi Lu, who was hired to oversee virtually every aspect of its business, has stepped down from all active management roles just 14 months in the job (downgraded at CSFRB on news); SPOT initiating with a Strong Buy at Raymond James and $190 tgt as feel is well positioned to double its subscriber base, expand gross margin, and generate material free cash flow; BABA tgt raised to $280 at MKM and raising estimates following another strong quarter and encouraging outlook; YELP upgraded to buy at B Riley as believe YELP has a significant opportunity to consolidate its engagement in the restaurant vertical and benefit from accelerating growth in the home services vertical
· Semiconductors; in the semi-equipment space, AMAT reported Q2 revs/EPS above the Street, but guided Q3 revs below consensus ($4.33B-$4.53B vs. est. $4.53B) as miss was driven by weaker SSG due to pushouts in NAND/guided 2019 display revenues to decline, and pushed out their 2020 targets for Display revenues; several analysts positive on MU ahead of its analyst day on Monday with RBC saying the company may pre-announce positive FY3Q results, providing a catalyst for the stock; SWKS was downgraded to market perform at Raymond James as they don’t see enough potential upside to estimates to justify our former price target; MLNX upgraded to overweight at Piper and raise tgt to $100
· Software & Hardware movers; COUP downgraded to equal-weight from overweight at Barclays as sees limited upside potential from current valuation levels, though firm raises tgts on SPLK to $125 from $110; ZEN tgt raised to $60 at JMP Securities after the company hosted its investor day in NY yesterday and made two key product announcements as released: 1) The Zendesk Suite, and 2) Connect; DVMT shares rallied midday after CNBC reported Dell is talking with the holders of its DVMT tracking stock to gauge their opinion on if they want a full merger between VMW and Dell.
· Media & Telco movers; VIVHY downgraded at Raymond James after the recent rally in share prices, even if they remain positive on the outlook for the music industry; AABA tgt raised to $124 at MKM on their upward revision to Alibaba from to $280 from $260 previously; Shari Redstone (VIAB) won a round in her fight with Les Moonves and CBS

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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