Market Review: March 22, 2019

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Closing Recap

Friday, March 22, 2019

Index

Up/Down

%

Last

DJ Industrials

-459.48

1.77%

25,503

S&P 500

-54.14

1.90%

2,800

Nasdaq

-196.29

2.50%

7,642

Russell 2000

-56.53

3.62%

1,505


 

Equity Market Recap

·     U.S. stocks posted a day of sharp losses, with only defensive utilities trading higher after significantly weaker manufacturing sector data out of the EuroZone, coupled with the Fed’s lowered assessment of the US economy this week renewed worries about global growth and recession fears. The dollar advanced against most major currencies, while the 3-month/10-year yield curve inverted for the first time since 2007. Treasury yields dropped across the board, with the 10-year falling as low as 2.42% and the 2-year just above 2.3%. It was the biggest daily decline for major averages in about two months, as financials and materials sunk just a day after indices closed near their best levels in about 4-months. The tech heavy NASDAQ, which until today had enjoyed a week of strong gains in Dow component AAPL, the Internet sector and semiconductors, dropped over 2% in a bout of profit taking. Growth fears also took a toll on crude oil and metals while energy shares also tumbled. Financials declined for a third session, with the biggest losses in large cap banks (BAC, JPM, C) and regionals (STI, KEY, ZION) as the recent change in tone from the FOMC Wednesday, (now sees no additional rate hikes in 2019 vs. two seen prior) has pummeled sentiment in banks that benefit from rising rates/lending margins. On the flip side, sectors such as homebuilders, REITs, utilities and other dividend paying names have seen massive buying thus far. Gold prices also rising on the weaker dollar/softer economic outlook from the Fed. Back to the weak Euro data, IHS Markit said EuroZone PMI fell to 51.3 in March from 51.9 in February versus economists’ expectations for a dip to 51.8, while the region’s manufacturing PMI reading falling to 47.7, a 71-month low, from 49.4 in February.

Economic Data

·     Existing-Home Sales for February rise 11.8% to 5.51M rate after falling 1.4% prior month and was above estimates for a 3.2% rise to 5.10M; there was 3.5 months’ supply in Feb. vs. 3.9 in January while inventory rose 2.5% to 1.63M homes; median home price rose 3.6% YoY to $249,500

·     Wholesale Inventories rose 1.2% in January to $669.9B from $662B in prior month (matches the biggest gain since Sept. 2012); wholesale inventories excluding oil rose 0.9% in January and wholesale sales rose 0.5% in Jan. after falling 0.9% the prior month; Petroleum inventories rose 10.7% from last month, the biggest gain since June 2008

·     U.S. March Markit manufacturing PMI fell to 52.5 after dropping 1.9 points to 53.0 in February (lowest level since June 2017 and down from 55.6 a year ago); the March flash services index fell 1.2 points to 54.8 after rising 1.8 points to 56.0 in February

·     The federal government ran a budget deficit of $234 billion in February, the Treasury Department reported on Friday, wider than the $215 billion recorded in February 2018, as spending rose 8% while receipts climbed 7%. Total spending was $401 billion in February while the government took in $167 billion.

 

Commodities

·     Commodity prices were crushed early, led by declines in oil prices (pulling back from $60 per barrel for WTI crude) as well as industrial metals given the weaker manufacturing data in Europe, while precious metals jump as investors rotate into safe-haven assets. WTI crude fell 94c or 1.6% to settle at $59.04 per barrel, but still managed to close out the week with a modest 0.5% gain, helped by bullish inventory data mid-week.

·     Gold for April delivery advanced $5.00 or 0.4% to settle at $1,312.30 an ounce, ending the week with a 0.7% advance (its 3rd straight weekly gain), managing to rise despite a solid bounce in the U.S. dollar the last 2-sessions as investors looked to safe-haven assets amid fresh global growth fears. Silver prices slipped 3 to $15.407 an ounce, but settled up 0.5% for the week. Gold jumped late week as stock indexes headed lower and European equities also fell after a round of downbeat economic data.

 

Currencies

·     The U.S. dollar climbed vs. most currencies, rising for a second straight session after falling earlier in the week to six week lows on the dovish Fed move, as the euro declined (lowest levels in a week) following a round of disappointing economic data overseas. The EuroZone manufacturing PMI index fell to 51.3 in March, from 51.9 in February, a worse drop than expected while manufacturing PMI slipped to 47.6, compared with 49.5 expected. The perceived safe-haven Japanese yen advance vs. most other currencies while emerging markets fell vs. the dollar, led by the Turkish lira dropping as much as 5%, one of the worst performers in emerging market currencies as the US interest rate outlook has changed this week.

·     In the U.K., the British pound was stronger above $1.32, compared with $1.3107 late Thursday. The European Union Thursday agreed a conditional extension of the March 29 Brexit deadline. If the U.K. Parliament passes a version of Prime Minister Theresa May’s deal next week, the exit point will be delayed until May 22. If the vote fail, as it has three times before already — the U.K. has to clarify its next steps or leave without a deal by April 12.

 

Bond Market

·     Treasury markets were even a bigger story than the sell-off in US stocks, with yields falling across the board in the U.S. (and in Europe) following a round of weaker-than-expected EuroZone manufacturing data that sent investors scrambling into the safety of government paper on fears of rising recession expectations. The 10-year yield fell over 10 bps to lows around 2.42% before slightly paring losses to around 2.44% (lowest back since January of last year), while the 2-year yield drops to 2.32% (down over 8 bps) while the 30-year falls under 2.89% (over 6 bps). The yield for the 10-year German government bond fell to zero, its lowest in nearly 2 1/2 years. Interesting headlines were: 2-year yield falls to lowest since May 2018 and the 3-month Treasury and 10-year inverted for the first time since 2007.

 

 

Macro

Up/Down

Last

WTI Crude

-0.94

59.04

Brent

-0.83

67.03

Gold

5.00

1,312.30

EUR/USD

-0.0076

1.1298

JPY/USD

-0.74

110.07

10-Year Note

-0.089

2.45%

 

 

Sector News Breakdown

Consumer

·     Footwear; Dow component NKE posted weaker-than-expected Q3 sales in its key North American market and noted that a stronger dollar would hit profits over the near term/Q3 gross margin beat expectations with revenue fairly in line with consensus; CAL share fall after Q4 EPS of 38c missed by 7c on weaker Famous Footwear comps (1.1% vs. 1.3% est.)/in-line EPS guidance

·     Retailer research, BBY was upgraded to outperform from market perform at Oppenheimer with $86 tgt saying despite an impressive turnaround, investors are still not fully embracing the company’s improved sales and earnings power; LULU was downgraded to neutral at Wedbush citing less near-term upside ahead

·     Retail earnings; Sporting goods retailer HIBB shares rise as Q4 results blew past estimates and offered upbeat guidance for FY20; Q4 comp -store sales rose 3.8% vs. est. of flat; announced the planned retirement of CEO Jeff Rosenthal; sees FY20 EPS of $1.80-$2.00, above estimates of $1.74; in jewelry, TIF reports comparable-store sales flat on constant currency basis vs. est. up 0.1% during its key holiday period/gross margin rate -10 bps to 63.8%; DXLG Q4 sales of $131.2M and EPS topped views and guides for continued low-single digit same-store sales for FY2019, but no other guidance was provided

·     Consumer Staples; AVP shares active after the WSJ reported directors of the company have discussed selling to Natura & Co./negotiations include situation where Natura would buy Avon’s North American operations https://on.wsj.com/2UQMG2i (Natura later confirmed the WSJ report saying it has engaged in talks); TSN announces recall of more than 69,000 pounds of frozen chicken strips that may have been contaminated with pieces of meta

·     Restaurants; CMG was upgraded to neutral from underperform at Wedbush and raise tgt to $640 from $500 saying checks suggest Q1 SSS growth in-line with current expectations; PZZA announced that it has added NBA Hall of Famer Shaquille O’Neal to its board and is investing in nine restaurants in the Atlanta area, and has agreed to pitch the brand.

·     Housing & Building Products; SWK was upgraded to buy at Longbow in conjunction with analysis of its opportunity with Craftsman through 2022 and current valuation discount to the SP500; homebuilders in focus next week with earnings from LEN and KBH; housing stocks strong ahead of the earnings next week as well, a boost on housing data today and the low rates env’t

 

Energy

·     E&P sector; absolute lambasting of the sector today, with energy stocks falling cross the board with E&P (CXO, MUR, APA, APC), drillers (RIG, NE, ESV), majors (CVX, XOM, SU), services (HAL, SLB), refiners (VLO, PBF, HFC, DK) – as investors fear grows of slowing global growth after a very weak round of economic data in Europe overnight; KMI downgraded at JPMorgan in MLPs

·     Baker Hughes (BHGE) weekly rig data showed total rigs fell -10 to 1,016, with oil rigs down -9 to 824 and gas rigs down -1 to 192 – drillers cut rig for a 5th week in a row

·     Utilities & Solar; rough week for solar stocks, as the group fell yesterday on lower results from CSIQ, while today, JKS Q4 revenue fell short of analysts’ expectations amid lower selling prices of solar modules, coming in at $1.12B, below the $1.22B estimate; utilities trade to all-time highs, with the UTY up over 1% topping the 750 level on low rates (lifting sentiment for higher dividend paying names) as well as rotating into defensive names

 

Financials

·     Bank movers; financials sliding for a 3rd day, with Dow components JPM, GS a drag on the index and regionals down again (STI, ZION, RF, SIVB, SNV) as Treasury yields tumble to 14-month lows after the Fed dovish statement this week on rates – lower interest rates/borrowing costs seen as negative for lending margins for banks; DB said in its annual report that it expects group revenue to be slightly higher this year than in 2018 as revenue at its key corporate and investment-bank division should grow slightly. Revenue at the corporate and investment-bank division are seen improving, with FI and equities sales and trading revenue expected to increase. The KBW Bank Index shed over 3% to fall to the lowest intraday since Jan. 15 (and down over 8% last 4-days).

 

Healthcare

·     Pharma & Biotech movers; CNAT shares plunge after it disclosed yesterday that its emricasan failed to demonstrate the desired effect in the Phase 2B NASH fibrosis study; BIIB shares remained weak after plunging about 30% yesterday after it and partner Eisai Co’s decision to stop late-stage phase III studies of their Alzheimer’s disease drug aducanumab based on results of a futility analysis conducted by an independent data monitoring committee (several analysts have issued downgrades of the stock the last 2-days on news); LXRX shares fell late day in response the licensor Sanofi (SNY -2.6%) receiving a Complete Response Letter (CRL) from the FDA regarding its marketing application seeking approval for Zynquista

·     Medical equipment and devices; EW tgt raised to $204 from $190 at BMO Capital saying there are several near-and medium-term catalysts that we expect will drive EW higher; MDT shares volatile after the U.S. Department of Homeland Security issues an advisory to citizens with its implantable defibrillators to keep their monitors and programmers updated and in sight due to the risk of cyber-attack by hackers; VAR was upgraded to outperform at Baird saying multiple paths are emerging for Varian to sustain upper-single digit plus oncology order growth,

·     Healthcare services and providers; BIOS shares fell over 10% as continues to selloff from last week after investors digested the terms of the company’s merger deal with Option Care Enterprises Inc. late last week – (note Lakestreet defended shares earlier today); sector down with broader market on the day – managed care, services, etc.

 

Industrials & Materials

·     Transports; TRN downgraded at Buckingham citing weaker demand/lease rates – also hurting rail cars lower guidance from GBX earlier (shares of WAB, RAIL down in sympathy); YRCW reached a tentative agreement with the Teamsters union on a new contract covering thousands of workers/current labor deal was set to expire March 31; in rail cars, GBX guides Q2 EPS 7c-9c, well below the 42c estimate (though sees higher revs) blaming the weak EPS view on poor manufacturing execution in Romania, compounded by supplier delivery failures and railcar loss contingencies/increased labor costs; pilots from AAL are scheduled to test Boeing’s (BA) 737 MAX software fix on simulators this weekend, says Reuters

·     Metals & Materials; Broad based selling in commodity space as metals crushed (AKS, FCX, X, STLD, AA) and oil names also pounded with E&P getting hit hard (CXO, EOG, APA, MUR, FANG) on slowing global growth concerns; CMC positive mention by several analysts today, upgraded to outperform at Macquarie while JPMorgan said results were solid and we expect earnings to continue to improve throughout the balance of the year/raise tgt to $23 and remain OW; in chemicals; PPG and SHW were both downgraded at JPM, with SHW cut to neutral and PPG to underweight citing valuation among other items for their reasoning

 

Technology, Media & Telecom

·     Internet; BKNG was downgraded to neutral at Wedbush saying prior view centered on the company’s dominant position in Europe, and the superior profits that go hand in hand with such a position/but says this exposure is likely to represent a liability during 2019; Cleveland Research raised TWTR 2019 ad revenues on positive feedback regarding video ad spend, stronger execution, and partner investments, while for FB, the firm said near-term trends suggest in-line revenue growth in 1Q, improved ROI and future optimism on Stories monetization leave us feeling less concerned on the outlook vs. our prior research

·     Semiconductors; after posting one of its best daily returns in a year as the Philly semi index (SOX) jumped 3.5% yesterday led by gains in MU on mixed results/guidance, which carried over into strength in equipment and memory names (WDC, STX, LRCX, AMAT) – the group suffered heavy selling pressure today in a mass day of profit taking (SOX index traded to 52-week highs Thurs)

·     Hardware & Software movers; ZUO shares dropped after guidance for the following quarter came in short of consensus views after Q4 results were in-line to a slight beat; in the optical sector, LITE was upgraded to overweight at JPM citing the solid outlook for the telecom business on the back of strong growth led by 5G investments, upside to synergy targets relative to recent acquisition of Oclaro and limited downside risk relative to iPhone volume expectations

·     Media & Telecom movers; JPMorgan notes AAPL’s upcoming video product to include original content and premium channels while NFLX’s shift to original programming is driven by partners pulling back their content; PSO was upgraded to overweight at JPMorgan

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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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