Mid-Morning Look: March 27, 2019

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Mid-Morning Look

Wednesday, March 27, 2019

Index

Up/Down

%

Last

 

DJ Industrials

-57.20

0.22%

25,600

S&P 500

-9.35

0.33%

2,809

Nasdaq

-33.74

0.44%

7,657

Russell 2000

-4.89

0.32%

1,523

 

 

U.S. equities erase early gains as markets continue to weigh the implications of falling bond yields, increasingly dovish central banks (commentary today from ECB President Draghi) and fresh evidence of slowing global growth (disappointing US, EuroZone and China data of late). Global bond yields fall again, in some cases to lowest levels in over 2-years, as markets remain concerned about the possibility of a global economic slowdown following recent weaker-than-expected data. ECB President Mario Draghi signaled at a conference in Frankfurt that ECB officials are starting to worry about the adverse side effects of negative interest rates (earlier this morning, German bunds were sold with a negative yield for the first time since 2016). Treasuries in the U.S. resume their recent rally, with the 10-year yield slipping to lows of 2.36% before paring losses. 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 basis points now and that December’s hike was “inexplicable.” 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, with China’s Vice Premier Liu. In corporate news, there was a $17B deal in the managed care space (CNC buys WCG), transports active after LUV cut its capacity forecast and homebuilders rise on low rates, mixed earnings (KBH, LEN). The tech heavy Nasdaq Comp slides to lows amid profit taking in the chip sector.

 

Treasuries, Currencies and Commodities

·     In currency markets, 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. Commodity prices lower as gold slips slightly as the dollar extends its bounce while oil prices were lower after mixed inventory data as oil 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)

·     Treasury market’s rally as yields fell firmly after 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. 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, while the shorter term 2-year dropped 10 bps to 2.158% and the 30-yr tumbled to 2.85%. 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.

 

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.

 

 

Macro

Up/Down

Last

 

WTI Crude

-0.12

59.82

Brent

0.24

68.21

Gold

-4.60

1,316.80

EUR/USD

-0.0015

1.1251

JPY/USD

-0.15

110.49

10-Year Note

-0.036

2.384%

 

 

Sector Movers Today

·     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

·     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

·     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

·     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)

 

Stock GAINERS

·     AXSM +9%; after the U.S. FDA granted breakthrough therapy designation for AXS-05 oral, a treatment for major depressive disorder

·     LEN +3%; 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

·     LUV +2%; cuts forecast for Q1 capacity to 1% from 3.5%-4% previously as a result of the cancellations 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%

·     SCVL +21%; shares rally after better-than-expected quarterly comparable sales and EPS and baked its annual EPS, sales outlooks

·     SKX +3%; upgraded to positive at Susquehanna saying proprietary checks and recent results from wholesale partners indicate Skechers’ business is gaining momentum

·     WCG +9%; as CNC said it would buy WCG for $305.39 per share, with the deal valued at $17.3B. Bloomberg News had reported late Tuesday that the health-care companies were in merger talks https://on.mktw.net/2TzVist

 

Stock LAGGARDS

·     BHF -2%; being replaced by DOW in the S&P 500 index

·     CVS -2%; declined after Wells Fargo said WCG could move $15B-$20B of spending away from the company for 2021 due to the $17B deal between CNC/WCG announced today

·     HOME -21%; 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

·     MGM -1%; 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

·     SCWX -7%; shares slumped after guiding Q1 and year earnings wider than analyst estimates

·     TITN -14% after Q4 EPS missed estimates by 5c while revs of $359.6M just topped views pf $354M

·     TKC -8%; falls in sympathy/reaction to weakness in Turkish stocks

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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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