Market Review: May 23, 2018

Terrie AmengualDaily Market Report

Closing Recap
Wednesday, May 23, 2018

Equity Market Recap
· U.S. stocks rallied late afternoon, as minutes from the May FOMC meeting revealed policy-makers support a June rate increase but had a calm attitude about the inflation outlook. Markets took the minutes as “dovish,” with the Dow Industrials turning positive after being down nearly -200 points earlier, while the tech heavy NASDAQ outperformed. Bonds gained, as the yield on the 10-year bond dropped below 3% briefly, though the dollar ended back around 2018 highs. Stocks were under pressure earlier as geopolitical and trade concerns continued to weigh on market sentiment. Oil prices slipped on bearish inventory data, while gold dipped as well. Retailers got a lift today, as stronger earnings results from luxury names RL and TIF boosted sentiment, though TGT shares fell on its earnings miss and home improvement retailer LOW’s rallied as much as 10% despite a miss across the board citing weather.
· Stocks have been on a roll lately, with the Dow and S&P coming off their best levels in over 2-months this week, while the Small Cap Russell 2000 remains around record all-time highs. But stocks were markedly lower to start after President Donald Trump said he wasn’t happy with the progress of U.S.-China trade talks, and is reportedly weighing trade measures to cut European Union steel and aluminum exports to the U.S. by about 10%. There also remains uncertainty on the planned summit with North Korea became more unlikely, political situations in Italy, weaker data Europe, Iran sanctions (and likely for Venezuela as well) and a plunge in the Turkish Lira to record lows all garnering attention as well (before they stepped in today).
· According to minutes from the May 1-2nd FOMC meeting, officials confirmed they planned to raise interest rates in June and were not concerned they were behind the curve on inflation. Federal Reserve officials said the economic outlook warranted another interest-rate hike “soon” and signaled they would welcome a modest overshoot of their 2% inflation target, indicating they’re in no rush to tighten more aggressively. “Most participants judged that if incoming information broadly confirmed their economic outlook, it would likely soon be appropriate for the FOMC to take another step in removing policy accommodation.

Economic Data
· New Home Sales for April fell (-1.5%) to 662K, below the 680K estimate; new home sales fell 10k in April from prior month, while the previous three months’ new home sales data revised down by 41K; median new home price rose 0.4% y/y to $312,400; average selling price at $407,300; 22% of new homes sold in April cost more than $500,000, up from 16% prior month
· IHS Markit flash services PMI climbs to 55.7 in May from 54.6 in April, while IHS Markit flash manufacturing PMI inches up to 56.6 in May from 56.5 in April

· Oil prices declined from its best levels in over 3 ½ years, slipping after bearish weekly inventory data as the EIA reported a weekly crude oil build of 5.78M barrels, which compared to a -2M barrel drawdown; gasoline inventories also a surprise build of 1.88M barrels vs. est. draw. WTI crude settled at $71.84 per barrel, down 36c or 0.5%, off earlier highs $72.26 per barrel.
· June gold slipped -$2.40 to settle at $1,289.60 an ounce ahead of the FOMC Minutes, but rallied slightly following the release of the commentary. Gold marked their lowest settlement of the year, with upbeat monthly U.S. manufacturing data helping to provide a lift to the dollar. Concerns over the fate of nuclear negotiations with North Korea, trade negotiations with Chin, Canada, and Mexico and political unrest in Europe failed to lift gold prices.

· The U.S. dollar index (DXY) resumed its upward momentum, pushing back above the 94 level (highs 94.18), gaining vs. various counterparts (euro, pound, peso), though fell against the yen. The euro fell over -0.5%, trading as low as 1.1685 earlier (lowest since mid-November), after weaker PMI data in the region, while the Pound dropped below the 1.34 level vs. the buck (lows 1.3306). The dollar pared losses vs. the Japanese yen, off earlier lows of 109.56, back above 110. Bitcoin prices tumbled early afternoon, falling more than 6% or about $500 to $7,600 level.
· After trading at record lows, the Turkish lira reversed higher after Turkey’s central bank raised interest rates to halt its slide. The central bank raised its late liquidity window rate by 300 basis points to 16.5%, after an extraordinary meeting of its monetary policy committee on Wednesday to “discuss recent developments” (the currency earlier fell as much as 5.5%)

Bond Market
· Treasury market’s gain as the 10-year Treasury yield touched a low of 3%, though finished 3.01% (more than 10-bps lower than last week’s 7-year highs). Treasury yields held declines after new home sales data came in softer, while failed to rally despite FOMC minutes from the May meeting gave all signs that a rate hike is coming in June. The U.S. Treasury sold $36B in 5-year notes at a yield of 2.684% vs. when/issued prior at 2.864%, with bid-to-cover (demand) at 2.52 vs. 2.49 prior auction and indirect bidders awarded 56.2% of notes with directs receiving 10.9%.

Sector News Breakdown

· Retailers; TGT shares slipped after posting weaker-than-expected Q1 earnings (missed by 7c) and slowing comparable store sales growth, but held to its full year outlook; URBN 1Q comp momentum accelerated, rising 10% while EPS of 38c topped views by 7c, while gross margin improved 130bp due to lower markdowns at all three brands and occupancy leverage/each division seeing acceleration; TIF trades to record all-time highs after posted strong quarterly sales growth, raised its profit forecast for the year and announced a share buyback plan of $1 billion; another luxury name rises on earnings as RL Q4 EPS and sales topped views while comp sales fell a smaller-than-expected comp decline of (-1%) vs. est. (-2.3%); in research: Deutsche Bank upgraded JWN to buy while Deutsche also downgraded DSW to hold
· Restaurants; RRGB shares plunge after disappointing Q1 results led to Stifel downgrading shares to hold saying it was unable to continue the strong traffic out-performance it experienced during 4Q due to aggressive competitive promotional activity (also downgraded at BTIG); SHAK was downgraded to neutral at Longbow based entirely on valuation; TAST init buy at SunTrust; Cleveland Research said MCD early 2Q U.S. comps look better vs trend and consensus
· Housing & Building Products; LOW Q1 results missed estimates on EPS, sales and comparable sales, as its greater exposure to outdoor and seasonal goods and weather-impacted locations, but analysts note results unsurprising as shares advanced; TCS shares fell after reporting 4Q and FY earnings while one analyst said while underlying sales trends are accelerating the company remains in the early stages for many initiatives; homebuilders attempted rebound after decline yesterday on TOL results

· Inventory data was mostly bearish: the EIA reported a weekly crude oil build of 5.78M barrels, which compared to a -2M barrel drawdown; gasoline inventories also a surprise build of 1.88M barrels vs. est. draw. The API reported U.S. crude supplies fell by -1.3M barrels for the week ended May 18, showed a rise of 980,000 barrels in gasoline stockpiles, while inventories of distillates declined by -1.3M barrels
· Energy stocks add to the late drop yesterday amid bearish inventory data; late yesterday, oily stocks underperformed with shares of CXO, RRC, PXD, EOG among decliners as crude turned negative amid reports that OPEC is said to be considering raising oil output. Follow through weakness continued today, with declines in CRK, SWN,
· E&P sector; Morgan Stanley upgraded WLL and OAS to overweight saying the outlook for oil fundamentals is the strongest since 2007 and oil demand is set to accelerate into 2020/thinks both names to play stronger oil prices and improving capital discipline, and diversify into the Bakken’s positive momentum given the Permian’s bottlenecks
· Solar stocks slumped, led by declines in SEDG after ENPH started shipping its IQ7 product in March, and it’s seen as lower cost versus SolarEdge’s product, with improved functionality according to one analyst (FSLR, JKS, CSIQ lower)
· Utilities and Power; sector will be in focus tonight (EXC, NRG, PEG) as the PJM Interconnection annual auction expected later this afternoon, and expectations will probably award bigger payments to generators supplying capacity to largest U.S. electricity grid for first time in three years (auction for parts of 2021-2022); WEC upgraded to buy at Bank America calling it too cheap to ignore saying seeing opportunities to not just delay its next WI rate case (potentially from ’20 to ’22), but yet further capex acceleration into the EEI conference this fall; in coal, ARLP upgraded to buy at MKM after strong 1Q result, and raised full year guidance recently; AEE was upgraded to neutral at Goldman Sachs

· Large Cap banks were among the largest decliners on the day, led by WFC, JPM, C, BAC, though partially pared losses late days after the FOMC minutes. Regional banks failed to rally (KRE) despite optimism about the biggest rollback of bank rules since Dodd-Frank. Congress approved a plan to ease rules for small and midsize banks. The House voted 258-159 to approve the most significant bipartisan revamp of financial rules since Republicans took control of government last year. In European banks, WSJ reported that DB is said to mull cutting 10,000 jobs; BCS active on reports they are not exploring a potential merger with other banks, Reuters reports
· Brokers & Asset managers; RJF raises its dividend to 30c from 25c and to buy back up to %250M in securities (shares came into the day with a 13-day win streak); LPLA said total net new assets for April were $2.1B, including $2.2B from the acquisition of the broker/dealer network of National Planning Holdings
· Deals/offerings; FBK 3.2M share Secondary priced at $41.25; CADE 18M share Secondary priced at $28.00; EVOP 14M share IPO priced at $16.00

· Large Cap Pharma; names such as PFE, JNJ, MRK outperform broader markets as investors rotated into defensive names; CARA shares jumped after enters licensing pact with Vifor Fresenius Medical Care Renal Pharma to commercialize its experimental Korsuva injection outside the U.S. for hemodialysis patients with pruritus (gets $50M in cash upfront as well as $20M investment); SHPG underperformed large cap Pharma stocks
· Biotech movers; ESPR third Phase 3 study of bempedoic acid met its primary endpoint of lowering LDL cholesterol (LDL-C) by 23% at week 12, compared to a 1% reduction for placebo, in an intent-to-treat analysis of statin-intolerant patients; CMTA falls as reports Statistically Significant Palovarotene data evaluating Palovarotene; CELG was upgraded to outperform at Bernstein with $102 tgt mainly on valuation, while CELG was downgraded to hold at Argus
· Movers on offerings/IPOs; ARDX 12.5M share Secondary priced at $4.00; CHRS 5.172M share Secondary priced at $14.50; MYOK 3.75M share Secondary priced at $49.00; PFNX 6.8M share Spot Secondary priced at $5.50

Industrials & Materials
· Industrial movers; Dow component GE shares slipped as CEO John Flannery says at EPG presentation that the company has “significant” unused credit lines/notes trying to “manage down” GE Capital insurance exposure; says planning on “soft” gas turbine market in 2019, 2020 and that gas turbine market continues to be “very challenging”
· Lumber futures fall a 4th straight day by CME limit amount – lumber futures had been surging to all-time record on tight supply and trade tariffs. Recall on weekend of May 12/13, Barron’s had said to “be leery for falling lumber prices, which have been on a tear since the U.S. Commerce Department announced new duties on Canadian timber imports (rising 32% this year) but says the market appears to resemble an “unsustainable bubble.”
· Metals & Mining; sector totally focused on trade and tariffs; late yesterday, the WSJ (citing EU officials) said President Trump considering trade measures to cut EU steel and aluminum exports to US by ~10%; shares of steel stocks (X, AKS, NUE), along with aluminum (AA, CENX) active

Technology, Media & Telecom
· Internet; AMZN tgt raised to $2,000 from $1,900 at Cowen saying results from 570+ respondents were positive for Amazon Web Service (AWS), with 41% of respondents expecting to accelerate AWS spend in 2018; CTRP rises following a 2Q guide for accelerating net revenue, and reiterating 2H18 top-line improvement
· Media movers; CMCSA said it’s considering, and in advanced stages of preparing, an offer for the businesses that FOXA has agreed to sell to DIS/the company says its offer would be all-cash, and at a premium to value of current all-share offer from Disney ; advertising stocks (OMC, WPP, IPG) slipped after Morgan Stanley said advertising company growth lagging GDP growth toward the end of the economic cycle is “concerning” and points to a downside risk in sector stocks
· Semiconductors; QRVO announced a $1B stock buyback plan; group higher yesterday after MU announced a $10B stock buyback; XLNX falls after analyst day as details and messaging around the opportunity set were roughly in line with expectations, but lack of GM upside and the need for opex limits EBIT growth; China trade dispute also a focus for semis (QCOM, NXPI) – yesterday, President Trump said looking into ZTE Corp.; unhappy with how China trade talks went, talks are a start, unsatisfied and fine to ZTE could be $1.3B
· Tech services, equipment; HPE Q2 results saw another solid beat on the quarter, as well as another conservative increase to annual EPS guidance/results driven by relatively broad-based product and geographic strength, although favorable FX and a favorable tax rate also contributed; CNBC reported that AAPL says it will offer a $50 credit to customers who paid for battery replacements on iPhone 6 or later devices between Jan. 1 and Dec. 28, 2017; Apple announced reduced battery prices on Dec. 29, 2017 amid controversy over slowing iPhones.
· Software movers; WAGE tgt cut to $62 from $88 at SunTrust as they lower their organic sales growth assumption to 4% in ’18 and ’19 vs. 9% and 7% previously; INTU reported better-than-expected F3Q results and raised FY18 guidance in excess of the F3Q beat; WDAY downgraded to mixed from positive at OTR Global; EA acquired the cloud gaming technology assets and personnel of a GameFly unit

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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