Mid-Morning Look: May 25, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Friday, May 25, 18

U.S. equities mixed in early trading, with volume light across the board ahead of the Memorial Day holiday weekend. Energy stocks pacing the early losses, following oil prices lower, after Saudi Energy Minister Khalid Al-Falih said OPEC and its allies are likely to gradually revive oil output. Once again, defensive assets leading early gains with utilities, REITs and Staples outperforming along with strength in technology, while bonds rally. Gold is little changed as the dollar surges to fresh 2018 highs. Markets with plenty to digest ahead of the weekend as President Trump, a day after he canceled a planned meeting with North Korea citing North Korea’s “tremendous anger and open hostility,” said this morning the June 12 summit with North Korea “could” still happen. But troubles in the EU have yields falling in Western Europe and the U.S. Economic data was mixed as Durable goods orders sank 1.7%, but the internals were better after a 0.9% rise ex-autos, while UoM confidence data was in-line with estimates.

Political unrest in Europe having an affect overseas on Spanish and Italian markets: Spain’s main opposition party (center-left Socialist Party supported by the far-left Podemos) called a parliamentary vote in an effort to oust Prime Minister Mariano Rajoy from office, after a court ruled that the premier’s party benefited financially from an illegal kickback scheme during the country’s property boom. Italian markets decline amid the prospect of an impending anti-establishment government that threatens to balloon borrowing and resist further European integration. Bond yields surging overseas as Bloomberg noted the Spain-German 10-year spread has jumped to over 110 basis points, while the measure for Italy has hit the widest since 2014.

Treasuries, Currencies and Commodities

· In currency markets, dollar index rises (DXY) back above the 94 level, fresh 2018 highs; the euro falls to morning lows, down roughly -0.6% at 1.1653 vs. the dollar – lowest since early November while Pound also new lows vs. dollar down -0.5% just above the 1.33 level (lowest since November). The safe-haven Japanese yen little changed around 109.15.

· Precious metals little changed, still holding above the $1,300 an ounce level, but down slightly on the day – gold buoyed as safe haven asset buying kicks in given the global fears (EU political questions, trade spat with China and North Korea news) – but weak as dollar hits new 2018 high.

· Energy futures dropped sharply after reports that OPEC and Russia are considering lifting oil production in order to hold down recent gains linked to supply shortfalls from Venezuela. The report suggested that OPEC and Russia could lift production by as much as 1 million barrels a day.

· Treasury markets extend its weekly rally, with the 10-year yield falling below 2.93% (down about 18 bps from last week highs) and the 2-yr down under 2.48% (down over 10 bps from last week); weakness overseas in European markets, fears of uncertainty with North Korea, and trade dispute concerns with China and countries related to NAFTA all weighing on market sentiment this week.

Economic Data

· Durable Goods Orders for April fell (-1.7%) vs. est. down (-1.3%) – dragged down by civilian aircrafts; Durable goods new orders revised up to 2.7% for March from 2.6%; new orders ex-transportation rose 0.9% in April after 0.4% rise and new orders ex-defense fell 1.9% in April after 4.3% rise; non-defense capital goods orders ex-aircraft rose 1% in April after falling 0.9% in March

· May final University of Michigan Confidence fell to 98.0 – compared to preliminary reading, last month figure and estimate all standing at 98.8; the expectations index rose to 89.1 vs. 88.4 last month and the current economic conditions index fell to 111.8 vs. 114.9 last month.

Sector Movers Today

· Retailers; in apparel, GPS shares decline as Q1 EPS missed with comp sales mixed as Old Navy comp result was the weakest since 3Q16 (+3%) and significantly decelerated from 4Q17 (+9%), with under-performance in the company’s second largest brand, Gap (-4% comp); BKE shares slip after profit beat expectations, but revenue missed/Q1 comps fell (-3.1%) vs. est. (-3.3%); ROST Q1 EPS and sales top consensus, though Q2 outlook disappointed; in sporting goods, HIBB reported an unexpected Q1 comp sales decline of (-0.3%) vs. est of up over 1%/reaffirms year

· Energy sector the top decliner in the S&P 500 as OPEC and Russia are considering lifting oil production in order to hold down recent gains linked to supply shortfalls from Venezuela, which has sent oil prices tumbling and stocks following; APA, NBL, MRO, NFX, HES, HAL, BHGE all down 4% or more while Dow components XOM and CVX top decliners in the index a second day

· Athletic and footwear-related stocks active after FL Q1 results topped consensus estimates across the board, citing improvement in the flow of premium goods from top vendors (comp sales fell a smaller -2.8% vs. est. -3.6%); shares of NKE, UAA, DKS got a lift; also in footwear, DECK shares jumped as Q4 EPS and revenue topped consensus estimates, including better-than-expected sales growth (+8.4%), while gross margin was in-line as UGG sales increased for the second straight quarter; SCVL trades higher after issuing profit guidance ahead of expectations (expects full-year EPS of $1.90-$2.05 vs. $1.94 est.) and said sales growth and a “favorable” inventory position led to the 31% Y/Y increase in operating income during Q1

Stock GAINERS

· AAL +4%: amid strength in Transports and airlines in general for a second session

· DECK +4%; Q4 EPS and revenue topped consensus estimates, including better-than-expected sales growth (+8.4%)

· DGX +6%; and comp LH shares also higher after the lab companies established a long-term strategic partnership with UNH

· FL +14%; Q1 results topped consensus estimates across the board, citing improvement in the flow of premium goods from top vendors

· QSII +13%; reported higher profits and higher sales than estimated while continues to expect FY20 rev growth in the high single-digits

Stock LAGGARDS

· ADSK -5%; as 1Q earnings/revs beat estimates on strong ARR (annual recurring revenues) but new subscription adds of 101k were below consensus estimates of 123k/606 write-downs negatively impacted billings

· APA -4%; among top decliners in the S&P along with other energy related stocks on oil drop

· FCAU -2%; recalling 4.8M vehicles to address a defect that could prevent the cruise control system from disengaging

· GPS -12%; Q1 EPS missed with comp sales mixed as Old Navy comp result was the weakest since 3Q16 (+3%) and significantly decelerated from 4Q17 (+9%)

· HIBB -11%; reported an unexpected Q1 comp sales decline of (-0.3%) vs. est of up over 1%

· HLF -8%; Carl Icahn said at most only 11.4M shares could possibly be purchased in the Herbalife tender, which would still leave the investor the largest shareholder with at least 34.3M shares

· SPLK ; reported results that came in above guidance and consensus, though, the billings metric came in somewhat light/also raised its full-year outlook/negative was the implied 606-adjusted billings growth of just 18%

· ZOES -32%; on wider Q1 EPS loss on lower than expected revs of $102.1M and a unexpected decline in Q1 comps (-2.3%)/also cut full year outlook

Syndicate

· BG Staffing (BGSF) 1.125M share Spot Secondary priced at $18.00

· Callon Petroleum (CPE) 22M share Spot Secondary priced at $11.80

· Iterum Therapeutics (ITRM) 6.15M share IPO priced at $13.00

· Universal Stainless & Alloy (USAP) 1.224M share Spot Secondary priced at $24.50

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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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