Market Review: March 29, 2019

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Closing Recap

Friday, March 29, 2019

Index

Up/Down

%

Last

DJ Industrials

211.29

0.82%

25,928

S&P 500

18.97

0.67%

2,834

Nasdaq

60.15

0.78%

7,729

Russell 2000

4.68

0.30%

1,539


 

Equity Market Recap

·     U.S. stocks end the day strong, with the S&P 500 posting its best quarterly return in a decade, the Russell 2000 index its best quarter since 2011 and oil prices jumping over 30% the first three months of the year (best return in a decade) amid hopes of a trade deal between the U.S. and China, an overly dovish Fed which has changed its outlook to no more rate hikes this year (from prior view of two), strong quarterly earnings results and buying momentum after the December stock swoon. Helping stocks move to intraday highs late in the session was White House economic advisor Larry Kudlow pressuring the Federal Reserve, saying he wanted the U.S. central bank to “immediately” cut its benchmark interest rate by 50 basis points. Kudlow said he was echoing President Donald Trump’s viewpoint about monetary policy. Treasury yields end the quarter at their lowest levels in over 15-months with the 10-year down around 2.40%. However, after the strong returns in Q1, can markets supplicate its performance with a stronger dollar and a more sanguine growth outlook with GDP numbers coming down?

·     Outside of hopes for the trade deal to emerge between the U.S. and China (paring back tariffs), there are very few catalysts on the horizon for stocks, especially with the Fed tipping its hand of no more hikes in 2019 (and said only sees one in 2020). Earnings season gets underway in about three weeks, but until then, markets will like only have data to move markets (which hasn’t been positive). Car hailing company LYFT raised $2.3B by selling 32.5M shares at $72 per share (with Uber, Pinterest, AirBnB among others expected this year). Transports register a weekly rise of roughly 3.5% (after recently posting an 11-day losing streak). Wells Fargo shares active after CEO Sloan steps down. CLEG shares surged after BMY’s planned takeover of the company was recommended by proxy advisory firm Institutional Shareholder Services.

Economic Data

·     Personal Income for February rose 0.2%, just below the 0.3% estimate while personal spending for Jan rose 0.1%, also missing the mark of 0.3%; January real personal spending rose 0.1% (est. 0.3%); Jan. PCE prices fell (-0.1%) vs. est. unchanged (up 1.4% YoY) while January core PCE prices rose 0.1% below the 0.2% (rose 1.8% YoY); savings rate at 7.5% in January vs 7.7% prior month

·     The January PCE inflation index slipped 0.1% in January to knock the yearly rate down to 1.4% from 1.8%. That’s the lowest level since the fall of 2016, putting it well below the Federal Reserve’s 2% target.

·     Chicago PMI in March slowed to a reading of 58.7 from 64.7, and was below the 58.7 economist estimate; order backlogs fell into contraction territory, while production and new orders fell but were still above their January levels; inventories fell at the fastest pace since July 2018.

·     The U.S. March Final Michigan Sentiment rose to 98.4, topping the 97.8 estimate and was above the 97.8 in the preliminary reading (last month index was 93.8); the expectations index rose to 88.8 vs. 84.4 last month and the economic conditions index rose to 113.3 vs. 108.5 last month

·     New home sales for February rose 4.9% to 667,000 annual rate, above the 620K estimate, while new home sales rose 31k in Feb. from prior month (previous three months’ new home sales data revised down by 51K); the median new home price fell 3.6% y/y to $315,300 while the average selling price at $379,600; months’ supply at 6.1 in Feb. compared to 6.5 prior month

 

Commodities

·     Oil prices ended higher by 84c to $60.14 per barrel, while Brent rose 57c to settle at $68.39 per barrel getting a boost to end the month and quarter. Prices had dropped on Thursday after a tweet for lower prices by President Donald Trump, but managed to fight back above the $60 per barrel level today. Prices have gained somewhere around 30% for the quarter as OPEC has said they remain committed to a pledge to curb production by around 1.2M barrels a day from October levels for the first half of this year.

·     Gold prices ended the day higher, rising $3.20, to settle at $1,298.50, paring earlier gains as books daily, quarterly gain but ends lower for week and month. Today’s move came after yesterday’s decline, the biggest single day drop since August as the dollar surged. For the quarter, gold prices rose by about 1.2%, but dropped more than 1% for the week and slipped by about 1.4% month to date. Precious metals had spiked last week after the FOMC dovish statement, but has since pulled back amid the dollar rally. Corn prices fell more than 3% after US farmers indicated they would plant more of the crop in 2019 than expected.

 

Currencies

·     The U.S. dollar lifted off morning lows, rising against the British Pound which dropped below the 1.30 level vs. the greenback (lows 1.2978) after MPs rejected UK Prime Minister May’s Brexit plan yet again, registering a weekly decline of about -1.6%. The Canadian dollar gained vs. the buck boosted by economic data and crude oil prices ending around 1.3360, as the loonie recovered sharply, making a reversal from 3-week lows. The dollar was little changed vs. the euro and yen in what has been a volatile ride the last week after the Federal Reserve is seen leaving interest rates lower for longer as the economic backdrop shows signs of weakness.

 

Bond Market

·     What a ride it’s been for Treasury markets, with yields plunging sharply over the last 10 days, with the benchmark 10-year yield down around 2.40% (touching lows of around 2.32% this week), more than 20 bps below the levels of 2.60% last Tuesday, the night before the Fed changed the landscape on rate hikes by saying they see no additional hikes this year (though Fed Kaplan said today he didn’t rule out a 2019 hike – though seems to be alone on that). Falling Treasury yields, and an inversion of the yield curve (3 month-10-yr until today), have reflected growth fears on Wall Street, sending the 10-year yield to 15-month lows this week.

 

 

Macro

Up/Down

Last

WTI Crude

0.84

60.14

Brent

0.57

68.39

Gold

3.20

1,298.50

EUR/USD

0.0001

1.1222

JPY/USD

0.15

110.79

10-Year Note

0.017

2.405%

 

 

Sector News Breakdown

Consumer

·     Auto related sector; car-hailing company LYFT opened at $87.24 after priced its 32.5M share IPO at $72 a share, the top of the recently increased price range, valuing the company at about $24 billion; auto dealer stocks active after KMX reported 4Q earnings above market estimates, but comparable store sales for the period lagged expectations saying used unit sales growth was hurt by delays in February tax refunds vs last year; TSLA tgt cut to $215 at JPM and lowers estimate for 1Q Model 3 deliveries to 50K from 55K and total deliveries of 70,500 from 75,500 prior

·     Retailers; H&M’s Q1 net profit was lower than last year but beat forecasts as the company has struggled with its shift to online as it loses foot traffic to stores/says its overstocking issue is under control and it has decreased markdowns; OXM Q4 results mixed as adjusted EPS just beat on slightly weaker sales (and weaker margins at 55.1%) while guides Q1 and year sales below views; YETI downgraded at Morgan Stanley as likes l-t outlook, but sees balanced risk/reward; Barclays said came away from the FL investor day event with incremental confidence in our bullish call on the stock, as believe management is making prudent investments

·     Consumer Staples & Restaurants; WTW shares rise after the company launched a new "It Works" marketing campaign. The campaign features Oprah Winfrey, a board member and the company’s 2nd-largest shareholder, who surprises WW members with a video call to celebrate weight loss; 52-week highs today for consumer names: SBUX, CMG, EL ; REV shares fell said after saying that it identified a material weakness in its internal control over financial reporting primarily related to the implementation of the company’s new ERP system

·     Housing & Building Products; RH shares declines as Q4 results faced pressure from slowing sales trends/reported its second negative earnings surprise in the past three quarters driven by significant top-line slowdown in the final two months of the fiscal year; EXP shares extended late day gains on Thursday after Activist investor Sachem Head Cap requested a break-up of the company/want to sell the wallboard, cement and especially the frac sand businesses; MHK downgraded to neutral at Longbow saying their flooring survey checks suggest sales are flattish for the U.S. flooring industry and tracking below expectations due to slowing trends

 

Energy

·     Energy stocks ended modestly lower on the final day of the quarter, in what was generally a strong return for energy names as oil prices surged; Baker Hughes (BHGE) weekly rig count fell -10 rigs to 1,006, with oil rigs down -8 to 816 and gas rigs down -2 to 192 (now back to back weeks that the total rig count fell 10)

·     Oil Services & Equipment; Wells Fargo downgraded FTSI as the stock is up 47% YTD vs SPX +13% and is discounting active fleet growth and pricing that we believe is aggressive; upgraded OIS based on reasonable LT valuation, more resilient NT L48 completion activity, potential upside from Downhole Technologies margins and in 2020-2021 from offshore equipment orders and upgraded RNGR on attractive valuation and potential FCF generation on a more disciplined business approach. Largest cuts to ests are primarily for select SMid cap/pressure pumpers (CJ, LBRT, SPN, RES)/register slight increases for select companies (HAL, FRAC, OIS, APY)

 

Financials

·     Bank movers; big story of the day was WFC as CEO Tim Sloan announced his retirement which drew mixed reviews on Wall Street (upgraded at Raymond James saying removes a “headwind” while Deutsche downgraded to hold citing mgmt uncertainty and Opco calling the change a start of a process, not a resolution); regional banks KEY were upgraded to Neutral at Nomura saying bank estimates are too high but valuations discount downside

·     Brokerage/advisors; JEF shares rose after calling its 1% jump in trading revs “excellent” given the tough December market conditions; CG was downgraded at Bank America citing a lack of fundraising catalysts and growth potentials; BGCP updated 1Q19 forecast, which calls for revenue and pre-tax adjusted earnings to be roughly in-line w/midpoint of previous guidance

 

Healthcare

·     Pharma movers; AZN agreed to pay up to $6.9B to Daiichi-Sankyo Co. for the shared rights to a new cancer drug, as the drugmaker further expands in oncology https://on.wsj.com/2uEetqZ ; TLRY announces that wholly owned subsidiary Natura Naturals and High Park Holdings have received a standard processing license under Canada’s Cannabis Act; BMY’s planned takeover of CELG was recommended by proxy advisory firm Institutional Shareholder Services, saying the deal’s strategic rationale is sound; AMRS successfully delivered on its first milestone for its cannabinoid partner, LAVVAN, earning its first payment of $10M

·     Biotech movers; GILD and GLPG announced results for the experimental arthritis treatment filgotinib “matches best in class efficacy” from competitors like ABBV while putting forward a thus far superior safety profile, according to one analyst (Leerink said Filgotinib could add 10%, or $5 to $6 a share to GILD’s value); BPMC 4.05M share Secondary priced at $74.00; SGMO presented new preclinical data showing significant (>80%) reduction of tau expression in the nonhuman primate brain following administration of zinc finger protein transcription factors; 52-week highs for TMO, WAT, BAX, VAR in medical equipment

 

Industrials & Materials

·     Aerospace & Defense; SAIC rises as Q4 results came in above expectations, and the company says that 2018 results reflects strongest financial performance in five years/Q4 revenues increases 6% Y/Y to $1.2B (shares of LDOS, CACI, BAH, MANT active on results)

·     Transports; Dow Transports gained on the day, rising roughly 3.5% on the week (despite recent lower forecasts from LUV capacity in airlines, FDX lower guidance last week after earnings and disappointing trucker guidance of late – the index up for a 4th straight day – recall the index had fallen 11-straight days from 2/22-3/8 recently

·     Metals & Materials; a strong finish to the month and quarter for China stock markets helped boost optimism in commodities along with the renewed optimism of trade talks w the U.S.; CRS announced it will increase base prices between 5% and 10% on new non-contract orders across all premium products/increases will be effective with new orders placed after March 29, 2019

·     Chemicals; Dow component DWDP lowers Q1 revenue view to down high-single digits from previous view of down mid-single digits citing near-term trends and discrete headwinds in some of its key value chains; analyst weigh in on MOS after investor day as Credit Suisse upgraded to neutral citing modest downside to Chinese cash operating costs, while BMO lowered estimates and Citigroup downgraded to neutral as feels phosphate fundamentals have weakened in the near term and are unlikely to pick-up significantly; VSM rejected Merck KGaA’s unsolicited tender offer to acquire for $48 per share in cash and continues to recommend the previously announced proposed merger-of-equals between Versum and Entegris (ENTG)

 

Technology, Media & Telecom

·     Internet; broad gains for the sector on the final day of the quarter; BABA positive analyst mentions as Baird raised its tgt to $195 from $178 as estimates Lazada can generate $13B in gross merchandise volume this year, adding 5% to 10% to BABA’s enterprise value.

·     Semiconductors; XLNX tgt was raised to $140 at Mizuho citing the potential from 5G technology, with orders potentially up ~50%+ YoY in 2019; MU shares jumped after a note from CLSA notes that some Korean media outlets are reporting that Amazon’s DRAM chips from Samsung might have quality issues/says AMZN is reportedly in talks with competitors including MU and SK Hynix about potential replacements if a Samsung settlement isn’t reached

·     Software movers; ADSK at its annual investor day reaffirmed 1Q20 and FY20 guidance and maintained targets for FY23, including $5.6B; PRGS shares jumped after its fiscal 2019 forecast to reflect Ipswitch acquisition as now sees FY adjusted EPS $2.46-$2.52 (est. $2.37) on higher revs; ZEN tgt was raised to $94 from $88 at Deutsche saying with the launch of Sunshine and Sell, is becoming more open in describing themselves as a customer relationship management provider

·     Media & Telecom movers; in cable, CMCSA, CHTR both downgraded to Sector Perform at RBC, while remain Sector Perform on WOW and ATUS is their only Outperform-rated cable stock saying they see downside risk to broadband/video subscriber estimates and expect increasing pressures to sentiment through 2019 as limiting further Cable stock outperformance; FOXA traded to fresh 52-week lows today

·     Hardware & Component news; SGH share dropped as reported EPS slightly ahead but guided revenue/profitability well below as Brazil customers are opting to wait until the 2H to meet local content rules given the weakening pricing environment; FFIV was upgraded to neutral at Piper and raised tgt to $163 from $157 saying that some of the main downside catalysts have played out and priced into shares; BB Q4 beats with a net profit of 8c vs. an expected loss of (6c) while software and services revenue totaled $248M (+14% Y/Y)

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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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