Market Review: November 19, 2018

Terrie AmengualDaily Market Report

Closing Recap

Monday, November 19, 2018

Equity Market Recap

· A rough start to the week for U.S. equities, as major averages snapped their brief two-day winning streak, falling throughout the day, barely closing off their worst levels. The S&P 500 cash index (SPX) dropped below 2,700 with the market pullback, hitting tech, energy and industrials, while defensive sectors outperformed (Staples, Telecom, Utilities). The Dow Industrials Average fell to a session low of 24,900, down as much as 500 points at its worst level, led by declines in Boeing and Apple. The NASDAQ retreated to afternoon lows around 7,015, falling over 3% (more than 225 points), with tech the biggest drag on the day hands down (software sector crushed today). The SmallCap Russell 2000 dropped below the 1,500 level, falling as much as 2%. In addition to the continued revaluation of tech stocks, trade tensions continued to be a key driver of risk after Vice President Mike Pence sharpened U.S. attacks on China this past Sunday adding, among other comments. Reports that Apple cut production orders in recent weeks for all three iPhone models that it unveiled in September (as per the WSJ) weighed on shares, while Internet and software names rolled. The U.S. dollar fell and Treasuries gained (sending yields lower) after housing sector data disappointed as NAHB posted the biggest drop in homebuilder sentiment in more than four years. Oil prices a nice rebound in the afternoon, closing higher after early weakness. Concerns about trade, as well as the path of the Fed rate hikes (many outlets including President Trump have voiced criticism over the aggressive rate hike cycle, with more joining in over the last few weeks as well) raising market concerns about slowing growth.

Commodities

· Oil prices with a late session push higher as expiring December futures rising 30c to settle at $56.76 per barrel, while the January contract settled at $57.20, up 52c or nearly 1%, now up a 4th straight session (albeit modest gains after falling a record 12-straight days prior). Earlier, Russian Energy Minister Novak said oil producers need to monitor supply and demand in the coming weeks before making a decision on possible production cuts. The comments pushed prices earlier, but prices rebounded as the dollar ended lower helping lifting commodity prices. Gold prices climb for a 4th straight session, gaining $2.30, or 0.2% to settle at $1,225.30 an ounce to its highest settlement in nearly 2-weeks, getting a lift on the weaker dollar

Currencies

· The U.S. dollar remained lower, no lift late day with the broader stock market off lows, holding lower vs. most rival currencies throughout the day following weaker housing data and market hopes that the Fed may ease on their aggressive rate hike cycle in 2019 amid signs of slowing economic growth. Bitcoin prices added to recent losses, plunging below $5,000 to the lowest since Oct 2017 and down 75% from its record highs in Dec 2017. The latest leg lower seems driven, among other things, by anxiety over the split in Bitcoin Cash according to reports. The recent selloff began last Wednesday when it broke crucial support at $6,000, and has fallen five of the past six sessions.

Bond Market

· Treasury prices move higher adding to last week’s steep yield decline, as traders watch how U.S.-China trade tensions will shake out ahead of a meeting between President Donald Trump and China’s leader Xi Jinping next week. The 10-year Treasury note yield fell around 2 bps to under 3.06%, while the 2-yr yield dropped again after last week’s 12 bps drop, finishing around 2.78%. Amid the holiday-shortened week, investors will mostly focus on geopolitical tensions, with renewed attention on U.S.-China trade tensions, while a softer housing data point also helped send Treasury prices higher.

Sector News Breakdown

Consumer

· Retailers; According to new survey from Deloitte Survey, 71% of holiday shoppers plan to shop in stores and online over the holiday weekend from Thanksgiving Thursday to Cyber Monday and shoppers say they’ll spend average of $420, and 88% expect to spend more or the same on the holiday season than originally intended; BIG upgraded to an Overweight at Piper as expects Big Lots to sees a big boost from tax refund benefits, including the Child Tax Credit, in the early part of 2019 for lower and moderate income families; earnings results tonight from LB, URBN as well as BBY, BKS, KSS, LOW, ROST, TGT, TJX tomorrow morning

· Auto movers; big story of the day, NSANY will remove Carlos Ghosn as chairman after he was arrested in Tokyo for violations of financial law. Ghosn is best known for bringing Nissan together with Renault SA and Mitsubishi Motors Corp.

· Consumer Staples; SPB falls after Q4 EPS missed by more than 20c on weaker than expected sales ($787M vs. est. $804M) and gross margins (56.8% vs. 38.6% est.); THS positive mention in Barron’s this weekend saying could hit $60 a share if it achieves earnings per share of $3; CLX traded fresh 52-week highs; DAR was upgraded to overweight at JPMorgan; Dow components KO, MCD actually traded at 52-week highs today despite market weakness

· Housing & Building Products; housing (TOL, LEN, KBH) and building product related stocks fall initially after confidence among U.S. homebuilders plummeted by the most since 2014 as the highest borrowing costs in eight years restrain demand. The NAHB index dropped eight points in November to 60, the lowest level since August 2016. Stocks later rebounded off lows

· Business services; Barclay’s said they are more cautious about the outlook further out in 2019 as we enter into the late stage of the business cycle/firm downgraded RHI to underweight alongside other staffer MAN and downgraded EEX for its ‘events’ exposure while initiating coverage of modular office provider WSC at Equal-weight/says tough spots for RHI & MAN

· Casino & Leisure movers; in casinos sector (WYNN, LVS) Bernstein said channel checks point to month-to-date Macau gross gaming revenue (GGR) of 14.6b patacas for an average daily rate (ADR) of approximately 813m patacas, up 6% vs last year/visitation slowed during the last week compared to the first 11 days of the month

Energy

· Energy stocks rallied off lows as oil rebounded to close higher for a 4th straight session after ending last Friday lower for a 6th straight week in E&P sector; few deals as XEC acquired REN in cash and stock deal valued at $35.00 per share, or a total purchase price of approximately $1.6 billion, including Resolute’s long term debt of $710M. https://yhoo.it/2KfOSvJ; QEP agreed to sell Northwest Louisiana natural gas assets for $735M to Aethon III, an affiliate of Aethon Energy

· Service and equipment stocks; shares of HP were upgraded by three analysts today (CSFB, Citi, SunTrust) following last week’s earnings and update saying continued strengthening of the U.S. land rig market, particularly at the high end, as well as the recent pull-back in HP’s stock creates an attractive entry point in our view; Citigroup initiate coverage on NINE with a Buy rating, upgrade PDS and WTTR to Buy and stay Neutral on FET and QES

· Utilities & Solar; PCG top story again as shares fell once after the California utility disclosed a second outage that occurred the same day a deadly wildfire broke out; outside of PCG weakness, utility stocks overall were higher amid lower Treasury yields and rotation into defensive sector

Financials

· Bank movers; Overall, news was sparse in the financial sector, which held up well despite broader market weakness and a pullback in Treasury yields (which could weigh on lending margins for banks). PNC was downgraded to Market Perform at BMO Capital on valuation as the shares are approaching their target price of $139 and believe it may be more challenging for PNC to continue to gain market share through expansion; UBS downgraded SCHW to neutral because a less attractive earnings mix means its premium to peers may fade, and it faces tougher regulation; AMTD was upgraded to buy at UBS saying its capital return is underappreciated; UBS also removing potential ETFC take-out means AMTD may build substantial capital.

Healthcare

· Pharma movers; Merck KGaA/PFE phase III JAVELIN Ovarian 200 trial evaluating avelumab alone or in combination with PLD did not meet the primary endpoints of overall survival (OS) or progression-free survival (PFS) in patients with platinum-resistant or -refractory ovarian cancer; in specialty pharma, MNK upgraded to buy at Canaccord as came away from recent mgmt meetings positive on the company’s NT prospects; NVS was upgraded to buy at Goldman Sachs as see Novartis entering a period of sustained top-line growth

· Biotech movers; lot of movers on research as ICPT was upgraded to outperform at Oppenheimer saying the company is “increasingly likely to have a first-in-class and potentially best-in-class” Farnesoid X receptor (FXR) agonist for liver disease NASH; AMGN positive mention in Barron’s saying shares could rise to $220 on new products, including Aimovig, for migraines, and Repatha; VKTX upgraded to strong buy and $43 tgt at Raymond James based on data for VK2809 and MGL-3196 presented at AASLD and conversations with investors and physicians; AKER rises amid update to strategic alternatives, including potential foray into cannabis space

· Medical equipment and devices; CFX agrees to acquire orthopedic solutions provider DJO Global from Blackstone (BX) for $3.15B in cash https://reut.rs/2TrPi6y ; BSX said it was recalling SQ-RX Pulse Generators according to the GDA, a component of Subcutaneous Implantable Cardioverter Defibrillator (S-ICD)

Industrials & Materials

· Industrial & Machinery; in defense, BA was among the biggest drags on the Dow Industrials following a weekend WSJ report that investigators are examining how the company heeded earlier warnings about flight control sensor failures similar to the one implicated in last month’s Lion Air jet crash; industrials and materials were overall pressured given the tough talk again from Vice President Pence over the weekend at the APEC summit, reducing hopes for a positive trade outcome with China in upcoming days/weeks.

· Transports; Dow Transports moved to new lows early afternoon in tandem with market pullback, as index drops below 10,500; airlines initiated at Credit Suisse, with outperform ratings on ALK (top pick), DAL and UAL, while underperform rated on JBLU and neutral on AAL;

Technology, Media & Telecom

· Internet; FB falls to 19-month lows (trades under $132) as recent scrutiny continues to weigh on shares, several recent high executive departures comes; BKNG was upgraded to outperform at Wells Fargo while raising our price target to $2,150 from $2,000 previously as continue to view BKNG’s 3Q performance and 4Q guide constructively, along with mgmt’s articulation of 2019/LT strategy; JD shares active after posted lower than expected revenue in the third quarter and recorded its first sequential fall in annual active customers since listing

· Semiconductors; AAPL suppliers weak again on this morning’s report of further iPhone production cuts from the WSJ, stating that Apple has slashed supplier orders and lowered production further for the iPhone XR (QRVO which cut guidance last week, LITE which warned of cuts last week, among others CRUS, SWKS all pressured); MU shares weak on reports NAND Flash bit output increased steadily in Q3, but demand has yet to catch up despite the busy season, according to Trendforce’s DRAMeXchange/flash revenue was up 4.4% Q/Q; NVDA adds to last week losses following its sharply lower guidance that sunk shares; shares now down roughly 20% since earnings results to lowest levels since early 2017

· Software sector was among the hardest hit in tech, led by early declines in shares of CRM, ADBE, ADSK, AYX, SAIL, SEND, SPLK, TTWO, TWLO, ZEN, ZS, ZUO, ADSK; there was no one specific headline that crushed software, as most of tech as lower, but group really underperformed (note Internet, optical and semis have been pressured recently, software playing catch-up perhaps)

· Telecom, Hardware & Component news; Chinese smartphone maker Xiaomi Inc. said it swung to a net profit in Q3, beating analyst estimates, driven by robust sales in India and Europe; BB was upgraded to buy at CIBC; ZAYO has attracted takeover interest from a group of investors including funds managed by Blackstone Group LP and Stonepeak Partners LP, according to Bloomberg https://bloom.bg/2DLijoR

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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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