Market Review: February 01, 2019

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Closing Recap

Friday, February 01, 2019

Index

Up/Down

%

Last

DJ Industrials

62.79

0.25%

25,062

S&P 500

2.27

0.08%

2,706

Nasdaq

-17.87

0.25%

7,263

Russell 2000

2.50

0.17%

1,501


 

Equity Market Recap

·     U.S. stocks failed to hold early gains, with major averages slipping to end the week, but still posted good gains the last 5-days amid a softer outlook from the Fed, positive trade negotiation headlines with China, strong economic data and better corporate earnings. Stocks were mixed to start February after having surged in January (S&P 500 climbed 7.9% for its best January since 1987, Dow rose 7.2%, and the Nasdaq Comp with a 9.7% monthly gain), getting a boost as U.S. job hiring in January topped all forecasts (jumped over 300K vs. est. 165K) while wage gains cooled (up 0.1% vs. est. 0.3%) and the government shutdown pushed up the unemployment rate. Improved trade rhetoric with China also boosted sentiment after China pledged to buy substantially more U.S. crops, services and energy and cooperate on IP rights and tech transfers. The rally started mid-week after the FOMC kept rates steady (as expected) but exercised caution going forward as it relates to the pace of interest rates direction. Stocks got a boost as well Dow component MRK rising on earnings as well as oil giants XOM and CVX on their results. Technology shares lagged behind a softer outlook from AMZN, though semi’s gained. Oil prices extended recent gains (up 18% in January), with WTI crude moving to the highest levels in more than two months as top exporter Saudi Arabia cut production deeper than had previously pledged. Fed members today dovish as well with Federal Reserve Bank of St. Louis President James Bullard applauded its decision this week to signal it had placed interest-rate increases on a prolonged pause and said “we’re willing to move in either direction.” “I thought this was a very good decision for the FOMC. I think it sets us up for a good couple of years here.” Fed’s Kaplan this morning also agreeing with the recent move.

Economic Data

·     Jobs data very strong: the Nonfarm Payrolls for January rose 304K, handily topping the 165K estimate while the unemployment rate inched higher to 4% (vs. prior and est. 3.9%) as the participation rate 63.2% vs prior 63.1%. Wages slowed as average hourly earnings rose 0.1% MoM, below the est. 0.3%, and prior month reading 0.4% (Y/y 3.2%, prior 3.3% est. 3.2%). Nonfarm private payrolls rose 296K topping the 175K est. (and prior 206) while manufacturing payrolls rose 13K after rising 20K in the prior month

·     ISM Manufacturing for January rises to 56.6 topping the 54.0 est. as new orders rose to 58.2 vs 51.3 prior month, employment fell to 55.5 vs 56.0, supplier deliveries fell to 56.2 vs 59.0 and inventories rose to 52.8 vs 51.2; prices paid fell to 49.6 vs 54.9

·     The U.S. Jan. Final Michigan Sentiment fell to 91.2 from 90.7 prelim and below the 90.7 est. (and down from 98.3 last month); the expectations index fell to 79.9 vs. 87.0 last month and the current economic conditions index fell to 108.8 vs. 116.1 last month. The end of government shutdown caused only modest boost in Sentiment Index

·     Markit Manufacturing PMI for Jan at 54.9 vs. Flash Reading 54.9 as index rises to 54.9 from 53.8 in December (year ago 55.5); output rises to 55.7 vs 54.3 in Dec. (highest reading since Sept. ’18)

 

Commodities

·     Crude oil prices finished higher, rising $1.47 or 2.47% to settle at $55.26 per barrel (high $55.66 and low $53.37) while Brent oil rises $1.91 or 3.14% to settle at $62.75 per barrel getting a boost again this week amid supply concerns (after US sanctions on Venezuela), a recent survey showed a considerable monthly decline in OPEC production (specifically Saudi Arabia) and a weekly fall in the U.S. oil-rig count also contributed to the price gains. For the week, WTI crude rose 2.9% after jumping 18% for the month of January. A survey out Friday showed production from the Organization of the Petroleum Exporting Countries had declined by 890,000 barrels a day in January, to 30.98 million barrels a day, in its largest monthly decline in two years.

·     Gold futures rose $3.10 or 0.2% to settle at $1,322.10 an ounce, getting a boost on the day and week following the softer tone out of the Fed regarding rate hikes. After rising 3% for the month of January (4th straight monthly gain), gold prices posted a weekly gain of roughly 1.9%. Gold managed a daily gain despite the bullish jobs report today that saw job gains top 300K, as investors feel it won’t likely sway the Federal Reserve from its newfound patient policy stance.

 

Currencies and Treasuries

·     The U.S. dollar eased off on the day and week, falling along with the more dovish outlook from the FOMC earlier this week noting “patience” regarding the future interest rate outlook. The dollar got a brief bounce after the impressive jobs report today, raising spectre of a “possible” rate hike in the future after saying moves will be data dependent. The Canadian dollar extended gains as the dollar slipped -0.4% vs. the CAD amid rising oil prices – trading to 1.3075, its best levels since early November (broke below the 200-day MA 1.3127). The dollar fell vs. the euro but gained against the Pound and Yen.

·     Treasuries tumbled after having gained the early part of the week, with the yield on the 10-year rising to 2.69% (up over 5 bps) but down from last Friday highs of 2.7585%. Meanwhile the short-end getting hit harder than the long-end, with the 2-year down at 2.50% today. Treasuries sold off during mid-morning trade as a strong reading on US manufacturing data added to the view that a run of solid economic data could complicate the Federal Reserve’s decision this week.

 

 

Macro

Up/Down

Last

WTI Crude

1.47

55.26

Brent

1.91

62.75

Gold

3.10

1,322.10

EUR/USD

0.0014

1.1462

JPY/USD

0.65

109.54

10-Year Note

0.053

2.69%

 

 

Sector News Breakdown

Consumer

·     Auto’s; monthly auto sales released today: 1) FCAU January US auto sales rose 2.5%, missing the 5% estimate/Jan. Jeep brand sales fell 2% y/y; 2) HMC January US auto sales rose 1.5% missing the 5% estimate/trucks sales rose 4.3% and U.S. cars sales fell 1.7%; 3) TM January US auto sales fell (-6.6%) vs. est. (-3.8%); 4) NSANY January US auto sales fell (-18.5%) vs. est. (-13.5%)/January U.S. car sales down 25.3% and January U.S. truck sales down 13.2%

·     Retailers; WMT extends recent declines after India Prime Minister Narendra Modi’s government tightened rules for the retail giants (AMZN as well) after complaints from small shops and domestic sellers. Amazon and Walmart’s Flipkart are now banned from cutting exclusive  arrangements with sellers, offering deep discounts; DECK reported F3Q19 EPS well ahead of forecasts on stronger revenue, gross margin & SG&A leverage as revenue benefitted from favorable weather/UGG growth driven by new styles and classic re-orders/Hoka momentum improved; LULU positive mention at Baird saying proprietary lululemon assortment tracker showed healthy growth in assortment size, strong growth in newness and continued declines in made-too-much mix; Needham lowers EPS ests. and PT (to $61 from $67) on CPRI to reflect Versace’s dilution but reiterate Buy rating as still see CPRI as a diversified story

·     Restaurants; CMG tgt raised to $600 at Baird and stay outperform as expect solid Q4 results, and remain confident the company is positioned to deliver robust operating performance in 2019; YUMC Q4 adjusted EPS 12c/$1.91B vs. est. 9c/$1.92B; total system sales grew 6% year over year, with 9% growth at KFC partially offset by a 2% decline at Pizza Hut, excluding F/X; PZZA shares fell after Reuters reported Papa John’s pursues stake sale after abandoning outright sale. While earlier Q1 same-restaurant sale projections cut to down 7% from down 5% at Stifel vs. forecast for a decline of 3.5%, given view that the company’s recent $6 promotion was likely not effective; MCD was named a new best short idea by Hedgeye, calling for 25% downside

·     Housing & Building Products; busy day of news/research: TPC downgraded at UBS as view TPC as a backlog burn story, with a lingering balance sheet overhang over the next 12-18 months; PEGI downgraded at BMO Capital as the stock has approached our US$21 target following strong relative performance; FND was downgraded to underperform at Bank America as comp sales slow; DOOR issued prelim Q4 results were below expectations, as volumes were weaker than expected (particularly December), which resulted in fixed-cost under absorption; FBHS reported below-consensus Q4 results and guided 2019 EPS 3% below the street (midpoint)

·     Staples; tobacco stocks were active (PM, MO) after two new studies showed children and teens who had used e-cigarettes were four times more likely to have taken up cigarette smoking than those who didn’t vape, according to a study published Friday in the Journal of the American Medical Association

 

Energy

·     Energy stocks were boosted early by better earnings results from Dow components and oil giants XOM and CVX, while oil prices add to January gains (of 18%) after output from OPEC fell by 930,000 barrels a day last month to 31.02 million, while Saudi Arabia cut production by 450,000 barrels a day from December to reach 10.2 million (more than expected). Top exporter Saudi Arabia cut deeper than pledged, while its close allies the United Arab Emirates and Kuwait also made sizable reductions. Those deliberate curbs were compounded by involuntary output drops in Iran, targeted by U.S. sanctions. Weekly Baker Hughes (BHGE) rig data showed the total rig count was down -14 to 1,045 with oil rigs down -15 to 862 and gas rigs up 1 to 198.

·     Big oil in focus on earnings as XOM shares rise after Q4 EPS beat highest estimates amid booming oil production in the Permian Basin while strong crude flows from North America’s most-prolific oil field softened the blow of declining output. Also, Reuters reported XOM and Qatar Petroleum are expected to announce plans next week to proceed with a $10B project to expand the Golden Pass liquefied natural gas export facility in Texas. CVX posted Q4 results that beat estimates while production rose to a record, climbing above 3 million barrels of oil equivalent a day for the first time, even as crude prices fell.

 

Financials

·     Bank movers; DB posted a larger-than-expected Q4 net loss but for the year, Deutsche recorded its first profit since 2014/now sees adjusted costs at EUR 21.8B vs. prior target of EUR 22B; reaffirms post-tax return on tangible equity target of above 4%; GS and MS were both downgraded to sell at SocGen saying as credit cycle deterioration has already been set in motion; ISBC shares rise after Piper upgraded following earnings (follows Wells upgrade yesterday); REITs making 52-week highs given slowing rate hike environment: AIV, O  

·     Insurance; AON Q4 EPS from continuing operations of $2.16 beats by 3c and Q4 revs rose 3% to $2.77B/Q4 adjusted operating margin, on pro forma basis, increases by 280 bps to 25.8%; AFL Q4 gains from tax reform, strong NII, benefit ratios while guidance in-line with estimates

·     Asset managers/brokers; WETF Q4 adjusted EPS missed by 2c and below Q3 levels as Q4 adjusted operating margin of 21.9% falls from 30.5% in Q3, up from 16.5% in the year-ago quarter; KKR EPS beat by 5c driven by monetization activity in private markets as assets under management of $195B as of Dec. 31, 2018 vs. $194.6B at Sept. 30, 2018 and $168.5B at Dec. 31, 2017

·     Republican Senator Mike Crapo on Friday released an outline for reforming Fannie Mae and Freddie Mac. Among other steps, it would privatize Fannie and Freddie. The plan from Crapo, chairman of the Senate Banking Committee, comes several weeks after the acting head of Fannie and Freddie’s regulator, the FHFA, announced plans to immediately start overhaul efforts without the participation of Congress.

 

Healthcare

·     Healthcare services and providers; sector under pressure today (CI, CVS, ABC, MCK, UNH, CAH) after the Department of Health and Human Services (HHS) announced a proposed regulation designed to create incentives to lower drug prices and reduce patient out-of-pocket spending on prescription drugs – specifically, eliminating the safe harbor for rebates paid by drug manufacturers to Part D plans and Medicaid MCOs, and instead creating new safe harbor protection for discounts offered to patients at the pharmacy counter; in other movers, BAX upgraded at Barclays as following disappointing 3Q results, expectations for the company have been reset/reduced

·     Pharma movers; MRK Q4 results beat as higher medicine sales and lower restructuring and other costs lifted drugmaker Merck to a $1.83 billion profit in Q4; CORT shares fell as guides 2019 revenue guidance between $285M-$315M, missing est. of $320.2M/preliminary 4Q revs of $66.8M below $70.4M est; SGMO rises following its announcement that it will host a conference call on Thursday, February 7, to discuss preliminary data from the Phase 1/2 CHAMPIONS and EMPOWERS studies

·     Medical equipment and devices; ZBH shares jump as Q4 EPS/sales top consensus on mostly in-line 2019 EPS guidance; ISRG raised its stock buyback to $2B; PKI 4Q18 core growth came in better and EPS beat the Street by 2c, but the print/guide was a bit messy; EW revs beat by $6M with EPS inline and reaffirmed 2019 guidance as TAVR was +11%, with positive commentary on US and Japan

 

Industrials & Materials

·     Industrial & Machinery; HON rises on Q4 beat, seeing strong 2019 with sales by segment: Aerospace +10%; Home and Building Technologies +1%; Performance Materials and Technologies flat; Safety and Productivity Solutions +15%; ITW shares fell after the company offered Q1 guidance that lagged consensus numbers

·     Chemical sector; FMC shares rose as preannounced Q4 earnings in a range of $1.62-$1.67 vs. the prior guidance of $1.33-$1.43 and consensus $1.39/the major driver of the higher EPS is a lower tax rate; DWDP was downgraded at JPM following its recent weaker earnings/guidance results; in earnings today, LYB missed lowest 4Q adj. Ebitda estimates mainly due to "extraordinary" fall in crude oil prices; while EMN Q4 adj. EPS missed the lowest estimates (RBC said it thinks that EMN’s comments on higher raw materials costs, customer destocking, and slowing demand in China could have negative read-through for LYB, WLK, HUN)

·     Forest, Paper & Packaging; WY share slipped after Q4 EPS, excluding special items, missed by a penny while Q4 net sales of $1.64B missed ests. by $90M and falls from $1.91B in Q3; WRK shares dropped after Q1 sales of $4.33B missed the $4.5B estimate though EPS beat

 

Technology, Media & Telecom

·     Internet; AMZN shares fell as beat on Q4 EPS and sales, while soft 1Q19 revenue/operating income guide, risk from India’s new E-com regulation, prospects for higher investments in 2019 weigh on shares – Q4 EPS $6.04/$$72.38B vs. est. $5.56/$71.92B; sees 1Q net sales $56B-$60B vs. est. $60.99B and sees 1Q operating income $2.3B-$3.3B vs. est. $2.99B; SOHU Q4 results that beat revenue estimates but missed on EPS

·     Semiconductors; CY rises as reported solid results with guidance below estimates as expected but the better-than-feared guidance was attributable to the well documented weakness in China, particularly in the consumer/industrial IoT markets- CY was the top gainer in the Philly semi index (SOX) which neared the 1,300 level (note the 1,296 level is the 200-day MA for the SOX – a level it hasn’t been above since early October)

·     Software movers; internet security names rally on SYMC, PFPT results; PFPT shares led internet security stocks higher after quarter with all metrics above its guide & consensus/billings of $269.9M grew 43% y/y; SYMC reported F3Q19/Dec ’18 results that exceeded almost every consensus metric (revenue, op margin, EPS, cash flow, billings) on better guidance; TWLO tgt raised to street high $134 at Baird, positive on the company’s multi-faceted growth opportunities over the long term; EPAY shares plunged as Q2 results beat on revenue with 10% Y/Y growth but met on EPS and included downside guidance ($103M-$105M vs. est. $107M)

·     Hardware & Component news; CLS shares drop as reports Q4 EPS miss and weaker guidance (follows stronger results from rivals SANM and FLEX in the EMS sector this week); SNE shares fell after FQ3 revenue trailed estimates slightly (¥2.4T vs. ¥2.6T) to take the shine off a guidance hike for FY19 profit of ¥835T from ¥705T/profit in Sony’s gaming business fell in FQ3 to ¥73.1B from ¥85.4B a year ago

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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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