Market Review: March 27, 2019

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Closing Recap

Wednesday, March 27, 2019

Index

Up/Down

%

Last

DJ Industrials

-32.08

0.13%

25,625

S&P 500

-13.11

0.47%

2,805

Nasdaq

-48.15

0.63%

7,643

Russell 2000

-5.90

0.39%

1,522


 

Equity Market Recap

·     U.S. stocks finished the day well off its session lows, as a rebound in discretionary and financials helped pull markets off sharp declines earlier while Treasury yields fell to the lowest level since December 2017 (10-year as low as 2.34%) and rates on benchmark German bunds sank further into negative territory. ECB President Draghi said the bank is ready to soften the impact of negative interest rates if they are found to harm the transmission of its monetary policy, as those comments pushed yields lower and lifted Euro banks. The U.S. dollar rose while precious metals fell (gold, palladium), along with oil, dragged down on bearish inventory data. Markets have been volatile the last few sessions amid mounting expectations that slowing global growth will dent economies and markets. Markets also keeping watchful eye on trade as President Donald Trump’s top trade negotiator, Robert Lighthizer, and Treasury Secretary Steven Mnuchin are due to resume trade talks in Beijing tomorrow.

·     In corporate news, there was a $17B deal in the managed care space (CNC buying WCG), transports were active after LUV cut its capacity forecast and homebuilders rise to 7-month highs amid low rates and mixed earnings (KBH, LEN). The tech heavy Nasdaq Comp slid over 100-points before paring losses amid profit taking in the chip sector after Infineon cuts its 2019 forecast for the second time in two months. The Dow Industrial Average rallied from being down more than 200-points with help from component Boeing, spiking over 1% after reports it hasn’t found additional issues in 737 MAX reviews. Turkish stocks fell after the Turkish government prevented foreign banks from accessing lira in so-called swaps transactions, trying to prevent bets against the lira ahead of a weekend election. That move sent the overnight cost of borrowing lira, to 1,200% from 23%, according to various reports. In the UK, Prime Minister Theresa May vowed to resign to get Brexit deal through Parliament.

Economic Data

·     The U.S. Trade Deficit narrowed by 14.6% in January to (-$51.1B) from (-$59.9B) last month and was better than the (-$57.0B) deficit estimate; imports fell 2.6% in Jan. to $258.49b from $265.29b in December and exports rose 0.9% in Jan. to $207.34b from $205.39b in December; U.S. goods exports to China in Jan. lowest since Sept. 2010

·     The U.S. current-account deficit rose 6.2% in Q4 owing to bigger gaps in trade and secondary income. The current-account deficit increased to $134.4B from a revised $126.6B in Q3. The current-account deficit was equal to 2.6% of GDP in Q4, the highest level since 2012

 

Commodities

·     Oil prices slipped following a weekly inventory report that came in bearish, sending WTI crude lower by 53c or 0.9% to settle at $59.41 per barrel while Brent dipped 14c to $67.83 per barrel. The EIA government report revealed a weekly increase in domestic crude supplies of about 2.8M barrels (following two weeks of declines prior), which compared to an expected weekly drawdown in inventories of roughly -2.5M barrels. The API on Tuesday had reported an increase of 1.9 million barrels. Prices have remained strong as OPEC has made efforts to curb production, in addition to the potential threat power outages in Venezuela pose the country’s output. Gold prices slipped again, as April gold dropped by $4.60, or 0.4%, to settle at $1,310.40 an ounce on Comex, marking the lowest finish since March 21, while June most-active contracts, lost $4.50, or 0.3%, to finish at $1,316.90. Palladium prices dropped as much as 6%. Precious metals pulling back as the dollar recovered from last week lows.

 

Currencies

·     The U.S. dollar was broadly higher vs. most rival currencies, posting big gains against emerging markets as the buck continues to rebound from last week’s post dovish FOMC stance on interest rates. The British Pound rose slightly (just off highs of the day) as UK PM May says she will step down once Brexit is delivered (Pound 1.324, up 0.2% vs. the buck). The New Zealand dollar dropped over 1.5% after a dovish policy update from the Reserve Bank of New Zealand. The euro slipped to its lowest levels in about two weeks vs. the dollar, down at 1.125.

 

Bond Market

·     Treasury market’s rallied across the board as yields fell sharply; ECB President Mario Draghi said the central bank could further postpone a plan to raise EuroZone borrowing costs if data continue to show contraction in the region, giving a boost to bunds. The yield on the 10-year Treasury note fell as low as 2.35%, down over 6 bps its lowest level since December of 2017 before moving up to 2.38% later, while the shorter term 2-year dropped 10 bps to 2.15% where it remained most of the day. Draghi said the ECB would continue monitoring how banks can maintain healthy earning conditions while net interest margins are compressed, and emphasized that the central bank remains ready to act. Global bond yields have sunk as markets remain concerned about the possibility of a global economic slowdown following recent weaker-than-expected data in the U.S, Eurozone (PMIs) and China. Also helping Treasuries, Stephen Moore, the person President Trump has nominated for the open seat on the FOMC told the NY Times that the Fed should cut rates by 50 bps now and that December’s hike was "inexplicable."

 

 

Macro

Up/Down

Last

WTI Crude

-0.53

59.41

Brent

-0.14

67.83

Gold

-4.60

1,310.40

EUR/USD

-0.0015

1.1251

JPY/USD

-0.15

110.49

10-Year Note

-0.036

2.384%

 

 

Sector News Breakdown

Consumer

·     Retailers; RL was upgraded to outperform at Wells Fargo and raised tgt to $150 from $130) saying the story seems to be shifting to RL "playing offense" given YTD top-line; SCVL shares rally after better-than-expected quarterly comparable sales and EPS and baked its annual EPS, sales outlooks; SKX was upgraded to positive at Susquehanna and raise tgt to $37 from $32 saying proprietary checks and recent results from wholesale partners indicate Skechers’ business is gaining momentum; GIL revealed that it will write off a debt from a distributor that is expected to be liquidated; said a trade receivable of $19M-$23M from Heritage Sportswear will become an impairment charge and it would cut 9c-11c off its forecast; LULU earnings tonight

·     Restaurants; PZZA was upgraded to hold from sell at Stifel as believe the turnaround has entered a phase where investors believe the worst is behind them and are willing to accord the company a hall pass to see whether the sales plan can work; CMG tgt raised to $760 at Baird saying although CMG may be due for a short-term breather following the robust year-to-date return (+60% vs. S&P 500 +12%), they continue to see a path for the shares to outperform over the next 12 months based on potential for the company to show strong operating momentum; SBUX store checks point to U.S. comparable sales growth of about 3.5%, below the 4% consensus according to Wedbush 9raised tgt to $70 from $66); WING initiated outperform at BMO ($85 tgt)

·     Housing & Building Products; in focus again getting a boost from the decline in Treasury yields (prompting a move lower in mortgage rates); also today earnings from two builders as LEN reported Q1 EPS just missing estimates due in part to weather related home delivery delays that negatively impacted revenue (revs missed as well) while new orders rose 24% to 10,463 (up from prior view 9,700-10,000; KBH Q4 EPS beat by 5c on a rev miss ($811M vs. $831M est.) as a lower tax rate and better GM drove the beat for earnings while orders declined -4% (better than some estimates) ; in home products, HOME shares dropped after mixed Q4 results, but lower Q1 view as sees Q1 adjusted EPS 3c-4c on revs $300M-$305M below est. 20c/$315.88M

·     Casino & Leisure movers; in casinos, MGM warns that it expects Q1 results to be hurt by likely lower hold rates and a "less profitable" Chinese New Year as a result of the government shutdown (shares of LVS, WYNN moved in reaction)

·     Consumer Staples; Food retailers were downgraded to underweight from market weight at Wolfe Research saying the “the industry landscape is even more trying than we could have imagined.” Food will be available whenever and however consumers desire, creating “a recipe for disaster, especially for traditional food retailers”

 

Energy

·     Inventory data: overnight, the API reported that U.S. crude supplies climbed by 1.9M barrels for the week; showed stockpile declines of -3.5M barrels for gasoline and 4.3M barrels for distillates; inventory data was bearish with the EIA reporting a weekly build of 2.8M barrels vs. est draw of -2.5M barrels (though gasoline and distillate inventories posted big drawdowns)

·     E&P sector; Seaport Global said it is more concerned about Colorado’s political landscape after State Senate Bill 181 as it currently stands, will "likely have a number of unintended negative consequences that we frankly didn’t fully appreciate" (APC, PDCE, HPR leveraged to bill); OIS was upgraded to strong buy at Raymond James citing valuation

·     Utilities & Solar; AWK and CWT both downgraded at Wells Fargo due to valuation concerns amid a backdrop of low interest rates, strong fundamentals, and elevated sector share prices; PCG won court approval on Wednesday for a $5.5 billion loan to help maintain electricity and natural gas delivery and for investments to reduce the risk of wildfires as it reorganizes.

 

Financials

·     Bank movers; European banks advanced after ECB President Draghi hinted at a conference today of adjusting the negative rate regime to boost bank profits…while a report in Reuters says that’s under consideration; Wedbush projects a solid Q1 for U.S. banks, but says growth could moderate q-o-q because of seasonal factors/expects NIM to rise 5 bps in 2019, and significantly driver earnings growth; however, sees margins contracting in 2020 because of Fed hold rate hikes/cuts 2020 EPS est due to increased margin pressure as a result of a drop in treasury yields, and slow growth; TCBI was downgraded to neutral and estimates lowered at Wedbush. In services, EFX and FICO started pitching each other’s services earlier this month, and the companies are expected to announce the partnership Wednesday, WSJ reported

 

Healthcare

·     Managed care and Health services; a big deal in the space as CNC said it would buy WCG for $305.39 per share, with the deal valued at $17.3 billion. Bloomberg News on Tuesday reported that the health-care companies were in merger talks. https://on.mktw.net/2TzVist ; shares of CVS declined after Wells Fargo said WCG could move $15B-$20B of spending away from the company for 2021 due to the deal; WBA pressured early after both Goldman Sachs and Cowen lowered their price targets on headwinds related to drug retailers. Managed care stocks have been falling (UNH, HUM, MOH, ANTM) amid plans expected in Washington – Democratic plans expected to be announced later this afternoon would follow last night’s filing by the Trump administration’s Justice Department, which is now arguing that the entire Affordable Care Act should be thrown out ahead of the 2020 election

·     Pharma movers; AXSM rises after the U.S. FDA granted breakthrough therapy designation for AXS-05 oral, a treatment for major depressive disorder; NVSMayzent (siponimod) was approved by the FDA as an oral, once daily tablet to treat adults with relapsing forms of MS; IRWD was upgraded to Equal Weight from Underweight at Morgan Stanley and raise tgt to $14 from $11, citing view that Linzess growth will stabilize after multiple quarters of deceleration; JAZZ announced positive data in the Phase III trial of JZP-258; Cannabis names lower across the board, down a second day after weaker earnings from CRON

·     Biotech movers; RARE was upgraded to overweight from equal weight at Morgan Stanley and its 12-month price target increased to $83 from $68 saying the market is undervaluing the drugmaker’s pipeline; GNFT 6.65M share Secondary priced at $20.32; MYOK 4.93M share secondary priced at $51.00

·     Medical equipment and devices; IRTC down sharply (falling as much as 16%) with Bloomberg reporting Washington Analysis health-care analyst John Leppard wrote in a March 26 report that Medicare reimbursement for the company’s Zio XT cardiac monitor will “eventually be reduced, potentially by 45%-65%.” (note it was named as recent short call from Kerrisdale on March 13th as well); ABMD shares were pressured early, falling for a 5th straight day on no apparent news – dropping to 3-month lows

 

Industrials & Materials

·     Industrial & Machinery; the Federal Aviation Administration said a Southwest Airlines Boeing (BA) 737 Max jet made a safe emergency landing Tuesday in Orlando, Florida, after experiencing an apparent engine problem; TITN shares fell after Q4 EPS missed estimates by 5c while revs of $359.6M just topped views pf $354M

·     Transports; airlines active as LUV cuts forecast for Q1 capacity to 1% from 3.5%-4% previously as a result of the cancellation as due to weather and unanticipated events; said it expects Q1 unit revenues to increase in the 2%-3% compared with its previous guidance of an increase in the 3%-4%/said the grounding of Boeing’s 737 Max jet and soft leisure travel demand will cut $150 million from its first-quarter revenue.

·     Metals & Materials; it was announced by S&P overnight that DOW will replace DWDP in the Dow Jones Industrial Average effective prior to the open of trading on Tuesday, April 2 following DowDuPont’s announcement that it is splitting into three companies, with Dow being spun-off effective April 2 (DOW to replace HAL in the S&P 100 prior and to replace BHF in the S&P 500)

 

Technology, Media & Telecom

·     Semiconductors; chip space among the top decliners in tech today, with the Philly semi index (SOX) falling over 2%; ON was upgraded to buy from neutral at Goldman Sachs and raised tgt to $26 from $22 saying the company had improved its position on a number of secular growth opportunities; German chipmaker Infineon (IFNNY) shares slipped after cutting its outlook for the year, citing global economic uncertainties and a slowdown in car sales in China

·     Media & Telecom movers; several analysts weigh in on recent weakness for CRTO (recent analyst downgrades) and TTD, as shares of both have slipped after an article by Adweek this weekend suggested GOOGL is contemplating drastic changes to the Chrome browser and advertiser tools within the Google Marketing Platform in response to rising concerns over data privacy. Stifel said the negative reaction in shares of The Trade Desk seems overdone while the stronger negative reaction in CRTO was unfortunately somewhat warranted in their view

·     Software, Hardware & Component news; SCWX shares slumped after guiding Q1 and year earnings wider than analyst estimates; ZUO down a 4th straight day after weaker guidance sunk shares last week/shares down over 24% during that stretch

·     Optical sector; LITE was upgraded to overweight from equal-weight at Morgan Stanley and tgt raised to $65 from $55 saying that the rest of 2019 presents more opportunity for upside, while downgraded ACIA to underweight from equal-weight saying even though they are early and think the company could post meaningful beats in the next 6-9 months

·     Internet; overall group down with the broader market, with large cap AMZN, NFLX, TWTR, FB all falling; CTRP was upgraded to outperform at Bernstein saying it is the dominant player in the growing Chinese online travel segment. With 52% market share in Chinese OTAs (online travel agencies), Ctrip has a unique advantage with its superior services, complete product portfolio

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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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