Market Review: July, 19, 2018

Terrie AmengualDaily Market Report

Closing Recap

Thursday, July 19, 2018

Equity Market Recap

· U.S. equities end the day lower, sliding after several quarterly earnings/guidance reports disappointed, sinking several sectors and snapping the 5-day win streak for the Dow Jones Industrial Average. The U.S. dollar reversed gains midday, Treasuries strengthened and stocks slipped mid-afternoon following President Trump’s comment that China’s currency is dropping and the dollar’s rising put U.S. at disadvantage…and also said he wasn’t “thrilled” the Fed is raising borrowing costs and potentially slowing the economy. Earlier, the dollar had reached 1-year highs vs. the Chinese yuan, while the British pound fell to its lowest levels since September, but the dollar index sunk off 2018 highs. Commodity prices benefitted from the late day pullback in the dollar, lifting oil prices and paring gold losses after touching fresh 1-year lows. European stock markets finish lower Thursday, pulling back from a one-month high as mining stocks led the selloff. While the Dow, S&P and Nasdaq Comp all posted declines, the small cap Russell 2000 put in an impressive performance, rising 0.5% trading back around the 1,700 level, while the S&P Small cap 600 touched an intraday record high. More key earnings tonight (MSFT, SWKS, and COF) and tomorrow morning (BHGE, SLB, HON, STI, STT, and GE) that will likely impact markets.

· Sector movers: Dow Transport index rises, reversing earlier losses and adding to yesterday’s 2.3% spike (after UAL, CSX earnings beats), topping its 50-day MA resistance of 10,707; financials were mostly lower on mixed earnings results from regional banks FITB, BK, BBT as well as insurance giant (and Dow component) TRV. Dow component IBM reported slightly better results, lifting shares ahead of MSFT numbers tonight in tech. Life science stocks rise after DHR results and spin-off of unit; consumer staples mixed with tobacco falling on PM guidance, while defensive utilities edge higher on lower bond yields. MLPs received good news, lifting shares of DM, EEP after FERC modifies gas pipeline tax law rule. Metals and mining falling sharply, led by a decline in aluminum names after AA cut its annual guidance, hurting several names. Forest and paper stocks fell as lumber futures drop a 4th straight day (down over 7% that period and 25% drop from peak) as the industry pressured from tariff and trade concerns.

Economic Data

· Weekly jobless claims fell 8K to 207K, below the 220K estimate and falling to its lowest levels since 1969; the 4-week moving average slipped by 2,750 to 220,500; prior week claims revised up to 215K from 214K; continuing claims rose 8K to 1.751M in the week ending July 7

· Philly Fed manufacturing index for July bounced 5.8 points to 25.7 in July, after tumbling 14.5 points to 19.9 in June, and topping the 21.5 estimate. Components were mixed as employment numbers fell to 16.8 from 30.4, with the workweek at 13.7 from 24.2. Meanwhile, new orders climbed to 31.4 from 17.9 and prices paid increased to 62.9 from 51.8


· Oil prices end higher, as WTI crude rises 70c, or 1% to settle at $69.46 per barrel, bouncing off earlier lows of $67.80 per barrel and shaking off the bearish inventory data from yesterday. However, Brent oil prices ended the day lower, after Saudi Arabia bolstered production by the most in three years last month, pumping almost 10.5 million barrels a day. Yet it signaled on Thursday that it won’t go any further for now, saying exports this month will be “roughly equal” to June, and will drop by 100,000 barrels a day in August. Oil futures on Wednesday shook off data that showed domestic crude supplies unexpectedly rose 5.8M barrels last week (vs. expected decline of over -4M barrels) to finish higher, buoyed by a larger-than-expected drop in gasoline inventories. OPCEC and non-OPEC producers cut oil output in June by 20% more than agreed levels, compared with 47% in May, Reuters reported Wednesday.

· Gold prices dropped by -$3.90, or 0.3% to settle at $1,224 an ounce, off earlier lows of $1,210.70, a fresh 52-week low and marked gold’s entry into correction territory—down more than 10% from its peak on Jan. 15 at $1,362.90. Gold prices pared their losses late day after President Donald Trump voiced his displeasure with Federal Reserve rate increases, prompting a decline in the benchmark dollar index and lifting precious metal prices. September silver dropped by 17.2c, or 1.1%, to $15.402 an ounce, marking its lowest close since late 2016. While copper prices closed near its lowest levels in over a year.


· The U.S. dollar reversed earlier gains, pressured in the afternoon after Trump comments about rates; the dollar index (DXY) set a new 2018 high of 95.65 on better jobs figures (reinforcing upward momentum of rate hikes) before paring gains and following Federal Reserve Chairman Jerome Powell’s upbeat assessment of the domestic economy during his testimony on monetary policy the last two days. The greenback rose broadly, as the Chinese yuan dropped to its lowest level since last July (President Trump noted the Chinese currency is “dropping like a rock”). The British pound fell below the $1.30 level for the first time Since September 2017 following weaker UK retail sales data; the dollar posted modest losses vs. the euro, but slid midday vs. the Japanese yen after comments from Trump saying he is not happy about seeing rates go up. The dollar gained vs. the Canadian loonie, touching highs of 1.3290 before paring gains.

Bond Market

· Bonds bounced as yields slipped, with the 10-year benchmark Treasury yield at 2.845%, down from earlier highs of around 2.89%, but above late last week’s 2.831% level, while the shorter-term 2-yr yields dropped 3 bps from yesterday highs around 2.89% as the yield curve steepened for a change. It appeared to be a rotation out of equities and back into bonds despite stronger jobless claims data and the bullish outlook on the economy from Fed Chairman Powell yesterday and the Fed Beige Book details.

Sector News Breakdown


· Consumer Staples; in tobacco, PM falls after strong 2Q earnings and sales beat, but FY EPS guidance $5.02-$5.12 missed the $5.14 estimates driven by currency and weaker 2Q iQos Heat Sticks sales; in household products, UBS downgraded PG to neutral saying the company has had significant missteps in Wet Shave and in China diapers, while upgraded CL to buy as stands out due to its high emerging market exposure, low private label penetration and online sales results (UBS initiated KMB and CLX with sell ratings)

· Restaurants; DPZ falls after sales growth trails estimates trades lower after Q2 sales fall short of expectations/Q2 comp sales growth at domestic company-owned stores of +5.1% vs +6.4% consensus; NDLShandily beat comp sales expectations (+5.4% vs. est. +1.9%), driven by the successful launch of Zoodles, though EPS missed; PZZA shares pulled back from yesterday’s spike after CNBC reported that talks between the company and WEN about a potential deal aren’t ongoing (reports yesterday were that the two started talks prior to the founder departing)

· Housing & Building Products; TTS helped lift flooring related stocks after Q2 revenue topped consensus views on better margins of 70.3%, while comp sales fell (-1.8%); homebuilders rebound after falling yesterday on rising rate yields and weaker housing data

· Autos; TSLA downgraded to underperform at Needham citing slower sales assumption of Model S/X due to increased competition, potential cannibalization from Model 3 and expiration of credits; in auto retail, GPC reported Q2 EPS/sales beat and raised its sales guidance for the year; Bank America preview of auto names as expects 2Q:18 to be a bumpy earnings season with particular focus on company outlooks/commentary on cycle/macro/trade risk

· Casino, Lodging & Leisure; in gaming, JPMorgan said continue to have a favorable view on regional gaming stocks (BYD, PENN) heading into the 2H18, reflecting (still) attractive free cash flow generation/yields

· Retailers; SKX to report earnings after the close; SCVL downgraded at Susquehanna citing valuation; SPWH2.82M share Block Trade priced at $4.93; POOL shares slumped early after Q2 EPS missed by 8c on in-line revs though boosted low end of year EPS view; group was broadly higher led by gains in apparel, department and specialty: CATO, KSS, M, BOOT, SIG, PLCE; 52-week highs for retailers ROST, TJX, COST, VFC, in the S&P 500


· MLP sector get a big boost (DM, EEP, SEP, BWP, TCP) after the Federal Energy Regulatory Commission announced last night that it took final action to facilitate the pass through of the tax reductions provided by the Tax Cuts and Jobs Act signed into law on December 22, 2017, and ensure natural gas pipeline rates remain just and reasonable; KMI moves after earnings

· Solar movers; Goldman Sachs reiterates its cautious view on the solar sector ahead of 2Q earnings, which mark the first set of results after China’s policy shift in late May; sees heightened risk of margin misses and weaker 3Q guidance, with 2H outlooks on demand appearing particularly challenged for China-levered stocks, including JKS, CSIQ; sees tougher 2H comps and slowing demand in select key markets for SEDG; RUN downgraded to neutral from buy (PT $15) on valuation; remains sell-rated on JKS, SEDG, FSLR

· Frac sand stocks declined (SLCA, EMES, HCLP) after UNP comments earlier that June was the first month this year the company saw its frac sand into the Permian Basin lower than a year ago


· Banks: BBT Q3 EPS and NIM in-line with ests, while sees loans in Q3 up 2%-4% QoQ; BK mostly in-line Q EPS and revs but said FX and real estate costs impacted expense growth by 2%; BXS Q2 EPS beat by 2c on better NIM 3.71%; BHLB 5c EPS beat with 3.5% NIM; EGBN reports in-line Q2 EPS of $1.08; FITB falls as much as 5% after lowering some aspects of its 2018 outlook; CATY 1c EPS beat with NIM of 3.83% topping views; UMPQ EPS missed by 4c, below lowest estimates; in research, FULT upgraded at Piper, MS upgraded at Bernstein, LTXBupgraded at Stephens and BHLB upgraded at Compass Point; TCBI missed

· Cards; AXP shares slumped after Q2 revenue trailed analyst expectations and spending rose, though AXP boosted its forecast for full-year revenue growth to at least 9%, up from prior view of at least 8% (EPS view unchanged); COF to report earnings tonight; ADS reported mixed Q2 results as EPS beat but revs slightly below views and cut its annual rev outlook ($8.2B vs. $8.35B est.)

· Insurance; ALL says 3 severe hail events, primarily impacting Texas and Colorado, accounted for about 75% of June catastrophe losses which totaled $329M after-tax; Dow component TRV slides early after misses profit estimates on storm losses

· Payments & Services; Morgan Stanley upgrades the payments and processing sector to an attractive view on likelihood of accelerating EPS growth, expansion to B2B payments and enhanced M&A potential, though downgrades ONDK to underweight and LC to equal-weight, while raising targets for several others in space (V, MA, PYPL, SQ, WEX, GPN, EVTC, FDC, GDOT, TNET, and PAY and cutting PTs on MGI and LC); SQ was upgraded to outperform at Credit Suisse with $81 tgt as believes its growing product eco-system is increasing its ability to penetrate larger merchants and growth investing should support strong revenue trends; GATX jumps on earnings


· Large Cap Pharma; ABBV shares fell as much as 10% after a negative mention by Citron Research saying Gottlieb’s comments for biosimilars and the removal of safe harbor is a DIRECT hit on Abbvie’s abuse of Humira; Canadian cannabis company TLRY surged over 20% in their trading debut, after the company priced its IPO at $17, above its $14 to $16 price range; CNST shares opened at $11.48, below the 4M share IPO pricing of $15

· Biotech movers; MRSN shares plunge after the FDA placed the Phase 1 study of XMT-1522, a Dolaflexin ADC targeting HER2-expressing tumors, after the company reported a Grade 5 Serious Adverse Event of patient death in dose level 7; ONCE downgraded at RBC Capital saying expectations for its upcoming Phase 1/2 data of SPK-8011 in patients with hemophilia A have become unrealistic; CARA 4.5M share Secondary priced at $19.00; ALLKopened at $27.20 after 7.2M share IPO priced at $18.00

· Healthcare services; TDOC tgt raised to Street high $80 at Citigroup as sees the deal for Advance Medical as accelerating Ebitda margins over the long term; LH is dealing with a broad cyberattack after ransomware hit one of its genetic-testing units over the weekend, and the impact spread in the ensuing days, according to the WSJ; drug supply chain active (MCK, ABC, CAH, ESRX) after a proposal to curb regulations allowing drug rebates was sent to the Office of Management and Budget late Wednesday; EOLS 4M share Secondary priced at $20.00

· Medical devices & Equipment; DHR shares rise as2Q results beat analyst expectations and the company announced plans to spin off its dental business in 2H19 with the transaction expected to be tax-free (dental peers PDCO, HSIC, XRAY active on spin-off news); ESTA shares opened at $26 after 3.715M share IPO priced at $18.00; ISRG to report earnings tonight

Industrials & Materials

· Metals & Mining; Metals: AA shares slumped, weighing on aluminum stocks (CENX, CSTM) after it cut its 2018 Ebitda view, citing current market prices, tariffs on imported aluminum, increased energy costs, and some operational impacts; in steel sector, NUE Q2 EPS beat by 4c on in-line sales and said performance of the steel mills segment is expected to remain strong in Q3; IIIN shares jumped after Q3 EPS beat by 18c on better revenue; FCX shares dropped after copper prices collapses 3% to one-year low, weighed by renewed trade jitters

· Industrial & Machinery; DOV rises after Q2 top and bottom line beat and raised low end of year guidance; URIbusiness momentum continued into 2Q18 with upside in the quarter and the full year outlook moving higher; BMI to best levels since Oct of last year after its earnings results

· Transports; sector was big winner yesterday, with Dow Transports rising 2.3% after CSX (rail) and UAL (airline) posted healthy quarterly beat and upward guidance; more rail earnings today with UNP Q2 results beating and raised its volume outlook to low-to-mid single digits, while CP top and bottom line beat with analyst positive post results

· Paper & Packaging; sector softer initially after CCK posts EPS at the low end of its 2Q18 guidance range, guided below the Street for 3Q, and reduced its full-year EPS guidance by ~4% on account of continued elevated N.A. freight costs and FX translation, but maintains FCF outlook for year (shares rebounded off lows lifting paper names)

· Chemicals; PPG said after slightly better Q2 results that it doesn’t expect any relief from inflationary cost pressures in 3Q and during 2Q, raw material and logistics costs continued to increase (SHW, AXTA other coating names)

Technology, Media & Telecom

· Internet; EBAY shares fell as much as 10% after the company reported an earnings beat but lower-than-expected guidance; MEET upgraded to buy at Canaccord and raise tgt to $6 given its more stable and larger video revenue opportunity

· Semiconductors; AMD and NVDA (which have crypto exposure) shares active after TSM trimmed its 2018 outlook for revenue and capital spending, reflecting lethargic mobile and digital currency mining demand; NXPI shares dipped after QCOM CEO told the NYT that the company was likely caught in the trade war with China ahead of a July 25 deal termination date for deal; SWKS to report earnings after the close (AAPL supplier)

· Software movers; SAP raised its guidance both for this year and for 2020, citing accelerating cloud sales. New cloud bookings, but shares slipped amid what some said was a “disconnect” between bookings and revs; DWCHreported a strong top & bottom line beat and the acquired Angoss business is tracking ahead of plan and now fully integrated as per one analyst; PTC posted lower-than-expected 3Q subscription sales growth after EPS/rev beat; markets prepare for MSFT earnings after the close

· Hardware and components; IBM slightly beat consensus revs/EPS, with surprise beat in systems revenue and management’s outlook for mainframe growth in Q3 despite a tougher comparison; FFIV downgraded to underweight at Morgan Stanley saying core market remains under pressure from public cloud migrations, and they see elevated risk to current FY19/20 estimates

· Opticals and 3D; JPMorgan raised estimates for both LITE and VIAV to reflect higher market share than previously modeled for both on the upcoming launches of the AAPL iPhone and accelerated adoption of 3D Sensing across Apple’s portfolio of devices

· Networking and switching stocks bounce (CSCO, ANET, JNPR) after AMZN’s top cloud-computing executive has officially denied that Amazon Web Services plans to start selling network switches to other businesses

· Telecom and Media; SWCH was upgraded to buy at Citigroup on optimism over the underlying value of the company’s Core Campus and additional growth opportunities within the Las Vegas market; CMCSA rallied after dropping pursuit of FOXA assets; LGF/A upgraded to buy at SunTrust as expanding distribution expected to drive Starz; DISCA added to Americas Conviction List at Goldman Sachs as believe the acquisition of Scripps creates meaningful cost and revenue synergy opportunities; DIS traded to 52-week highs


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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