Market Review: April 01, 2019

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Closing Recap

Monday, April 01, 2019

Index

Up/Down

%

Last

DJ Industrials

329.40

1.27%

26,258

S&P 500

32.71

1.15%

2,867

Nasdaq

99.59

1.29%

7,828

Russell 2000

16.30

1.06%

1,556


 

Equity Market Recap

·     U.S. stocks were in rally mode throughout the session, as gains in financials, technology, materials, industrials and energy outpaced the broader market following better-than-expected manufacturing monthly activity in China, sending defensive/safe haven assets tumbling. After sliding the last two weeks, Treasury yields posted big gains Monday as prices dropped, with the 10-year yield up as much as 9 bps to around 2.49%. Energy stocks benefitted from oil prices topping 5-month highs while the dollar was mixed on the day. Financials jumped, led by gains in BAC, JPM, C, MS, and COF amid the rebound in yields. The mood started off right for global stocks as China’s Shanghai index gained 2.5% overnight after the Caixin China manufacturing purchasing managers index rose to 50.8 in March from 49.9 in February, rebounding to expansionary territory for the first time in four months, while China’s manufacturing purchasing manager’s index for March rose to 50.5 from 49.2 last month, the biggest increase since 2012 and exceeding all estimates by economists. Both new orders and new export orders rose to the highest levels in six months. The positive data continued in the U.S. as Business Inventories, ISM Manufacturing and construction data all topped estimates (overshadowing weaker retail sales). Auto stocks/suppliers surged ahead of monthly auto sales data tomorrow and amid optimism for a breakthrough in China trade talks with the U.S. that will resume this week. Overall the S&P 500 moved back to its best levels since October while Europe and Asia markets also climbed.

Economic Data

·     Retail Sales for February unexpectedly fell (-0.2%) vs. an expected rise of 0.2%, while retail sales less autos fell (-0.4%) in February vs. an estimated gain of 0.3%; retail sales rose 0.7% in Jan., revised up from 0.2% gain; most other retail segments struggled as sales fell at home centers, electronic stores, home furnishers, groceries, apparel chains and department stores

·     IHS Markit final U.S. manufacturing PMI 52.4 in March vs 52.5 flash estimate; index falls to 52.4 from 53 in February (year ago 55.6) – lowest reading since June 2017; Output falls to 51.3 vs 52.7 in February (lowest reading since June 2016) and new orders fall vs prior month

·     ISM Manufacturing for March rises to 55.3, above the 54.5 estimate (and above 2-year lows); new orders rose to 57.4 vs 55.5 prior month, Employment rose to 57.5 vs 52.3 MoM and prices paid rose to 54.3 vs 49.4; backlog of orders fell to 50.4 vs 52.3 and new export orders fell to 51.7 vs 52.8

·     Business inventories for January jumped 0.8%, topping the 0.5% estimate while business sales rose 0.3% in January after falling (-0.9%) the prior month; December business inventories rose 0.8% m/m, revised up from 0.6% gain. Wholesalers inventories rose 1.2% m/m in January after rising 1.1% prior month (the 1.2% m/m increase largest since Sept. 2012)

·     Construction Spending for February rose 1.0%, topping the economist estimate for a decline of (-0.2%); January was revised to 2.5% gain from 1.3%; private construction rose 0.2% in Feb. after 1.5% gain and private residential construction rose 0.7% after rising 1.8%

 

Commodities

·     Oil prices jump to 5-month highs, as WTI crude rises $1.45, or a little less than 2.5% to settle at $61.59 per barrel, as risk appetite spanned across stocks and commodities after the better China manufacturing data overnight. In addition the China news, OPEC’s output slipped in March for the fourth straight month, led by deep production cuts in Saudi Arabia, according to a Bloomberg survey. The survey showed output from OPEC’s 14 members fell 295,000 barrels a day to 30.385 million last month. Overall, WTI crude rallied 30% in Q1 helped by OPEC+ output cuts along with sanctions on Iran and more recently, Venezuela.

·     Gold prices slipped by -$4.30 or 0.3% to settle at $1,294.20 an ounce as upbeat readings on economic activity in China soothed worries over global growth and provided a lift to equity markets, and creating selling pressure for defensive related assets. The dollar extended last week gains, sending gold back below the $1,300-an-ounce level (now well off February high near $1,348 an ounce). Gold had gained two-weeks ago after the dovish Fed interest rate guidance.

 

Currencies

·     The U.S. dollar rebounded off morning lows, only to finish the session mixed (dollar index was little changed around 97.25 (high 97.30 and low 97.03) as a rebound in Chinese economic data, along with signs progress toward a U.S.-China trade deal, boosted investor sentiment for risky assets. China’s Markit/Caixin manufacturing purchasing managers index rose to 50.8 in March, beating expectations of 49.8, and the prior month’s result of 49.9. The British Pound climbed (about 0.7% to 1.313) as MPs prepared to hold a second round of votes to test support for alternatives to Theresa May’s Brexit deal (highs were 1.315). The greenback gained vs. the Japanese yen to nearly two-week highs above of 111.40 on the better US data. The euro slipped late day, but overall little changed vs. the buck.

 

Bond Market

·     Treasury prices declined in a broad “risk-off” trading session, as defensive and safe haven related assets such as Treasuries, gold, and defensive sectors (utilities, Staples) all found themselves under sharp trading pressure after positive economic data (in China and the US) boosted risk sentiment. Late day, the 10-year yield rose over 8 bps to 2.49%, the 2-yr yield up over 5 bps to 2.33%, the 5-yr yield up 7 bps to 2.31% and the 30-yr up 7 bps to 2.89%. Also boosting stock sentiment, China’s Vice Premier Liu He visits Washington this week for trade negotiations, after China hosted a U.S. delegation led by U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin last week.

 

 

Macro

Up/Down

Last

WTI Crude

1.45

61.59

Brent

1.43

69.01

Gold

-4.30

1,294.20

EUR/USD

-0.001

1.1207

JPY/USD

0.54

111.40

10-Year Note

0.088

2.494%

 

 

Sector News Breakdown

Consumer

·     Auto’s; sector strong – China said it will continue with suspension of retaliatory tariffs on U.S. autos and auto parts from April 1, according to a statement on Ministry of Finance’s website -over the weekend, as per Bloomberg (BWA, AXL, LEA); KMX upgraded to overweight and tgt up to $93 from $83 at Stephens saying the tailwind from new omni-channel capabilities that enables customers to complete the entire car buying experience online, including financing, appraisal, and paperwork; SORL rises in reaction to mixed Q4 results as reported record 20% annual net sales increase for 2018; ADNT was upgraded to neutral at Baird saying risks from execution are likely better reflected following large YTD underperformance; LYFT shares dropped below its $72 per share IPO pricing last Friday (lows below $68) after touching highs of $88.60 last Friday.

·     Consumer Staples; Kellogg Co (K) said it would sell some assets including cookie brands Keebler and Famous Amos to Nutella maker Ferrero Group for $1.3 billion, to focus on its core cereal and snacks businesses https://yhoo.it/2YIHOPc ; CALM Q3 results topped the highest estimates for profit along with flat sales growth/points to favorable demand trends during the quarter and continued growth of its specialty egg business; HAIN was downgraded to neutral at JPMorgan citing valuation; COTY was added to JPMorgan’s analyst focus list as top short idea as we believe the technical dynamics following the completion of JAB’s partial tender offer will place downward pressure on the stock in the near term.

·     Housing & Building Products; the low rate environment has been a big boost to homebuilders and real estate related names over the last 2-weeks (LEN, KBH, PHM, MTH, TOL); ENR was upgraded to buy at Goldman Sachs and raised its target boosted to $60 from $48 after the recently-completed purchases from Spectrum Brands; home improvement retailer LOW shares slipped, as company announced a conference call tomorrow

·     Casino & Leisure movers; LVS, WYNN, MGM shares jumped higher after Macau March Casino Revenue falls 0.4% YoY, better than the Bloomberg est drop of (-3%) according to data published on the website of the city’s Gaming Inspection and Coordination Bureau.

 

Energy

·     Energy stocks rallied with higher oil prices, as upbeat manufacturing data out of China (large commodity consumer), helped improve sentiment in the commodity sector today (oil and metals names were mostly higher

·     Utilities; group pulled back from recent highs, as the UTY touched all-time best a week ago as lower Treasury yields prompted rotation into interest rate sensitive names. However today, as stocks rallied further and yields slipped, utility stocks pulled back

·     MLPs; OKE and KMI were both downgraded to hold at Jefferies on valuation noting shares have rallied 29% YTD, well ahead of the 15% rally in the MLP index (for OKE) and have outperformed the MLP index by about 15pp YTD (for KMI)

 

Financials

·     Bank movers; financials were among the top leaders in the S&P and Dow (JPM, AXP, GS), rebounding alongside the bounce in Treasury yields; Jefferies was out with a 1Q19 preview for bank coverage and make several ratings changes as forecast negative consensus EPS revisions on the flatter curve, offset somewhat by strong credit metrics/keep short rates steady through ’20E and use a 10Y of 2.4% (upgrade FITB and WTFC and downgrade FHN); in services, GDOT was upgraded at KBW Inc. on the premise that its recent pullback provides an attractive entry point/risk associated with the Walmart contract renewal is already factored in

·     Insurance; regarding life insurance, JPM said they maintain a bullish stance on life insurance stocks. In their view, business fundamentals will remain mixed, but improve versus 2018. This, coupled with downbeat investor sentiment and depressed valuation levels, creates attractive risk-reward. On a positive note, life insurers have ample capital flexibility

·     Real Estate/REITs; Evercore/ISI upgrades PGRE and UE, and downgraded EQR, ESS, KIM, EXR, WPC saying all changes are "valuation" based, rather than based on fundamentals or earnings growth in the near-term; said lower bond yields might seem to be a major tailwind for REIT stocks, especially compared with financials, but they also raise questions about the pace of economic growth; RDFN upgraded to overweight from neutral at Piper and raised tgt to $26 from $17 saying the company would benefit from an environment with lower interest rates

 

Healthcare

·     Pharma movers; MRK shares were active after China’s National Medical Products Administration approved its Keytruda (pembrolizumab) for the first-line treatment of patients with metastatic nonsquamous non-small cell lung cancer (NSCLC) with no EGFR or ALK mutations; PFE tgt raised to $48 from $45 at Bank America saying its orphan drug portfolio will serve as a “key inflection point” in the company’s strategy for more niche disease; AZN was upgraded to outperform at Cowen following the 5% pullback on Friday along with adding an attractive new breast cancer target provides a rare entry point; in the cannabis space, Creso Labs Inc. (CRLBF) agreed to buy Origin House, the registered business name for CannaRoyalty Corp. (ORHOF) in a deal valued at C$1.1 billion, or the equivalent of $823.5 million. https://on.mktw.net/2JV8Qzc

·     Biotech movers; ADXS rises following updated data from an open-label Phase 1/2 clinical trial, KEYNOTE-046, evaluating immunotherapy candidate ADXS-PSA, combined with Merck’s Keytruda; BLUE announced a positive opinion from CHMP recommending conditional marketing authorization for Zytenglo gene therapy for non-β0/β0 transfusion-dependent β-thalassemia (TDT) in the EU; PBYI signed an exclusive license agreement with Pierre Fabre under which they will develop and commercialize NERLYNX (neratinib) in Europe; TGTX rises after umbralisib for a deadly blood cancer saw an overall response rate of 52% in interim data from one arm of the “Unity-NHL” trial, meeting the main goal of trial

·     Medical equipment and devices as well as services and providers; managed care stocks underperformed (UNH) ahead of a final rule on 2020 Medicare Advantage (MA) rates from the Centers for Medicare and Medicaid, expected after the close on Monday. ZTS trades to all-time highs after Cantor boosted its price target to a Street-high $116 from $105, and raised 1Q EPS estimates to 77c from 49c ahead of results expected next month; ISRG tgt raised to $630 at Raymond James as expect robotically-assisted bariatric surgery to be a focal point at the upcoming Society of American Gastrointestinal and Endoscopic Surgeons (SAGES) meeting; in Med tech, fresh 52-week highs for TMO, MTD, WAT, SYK, DHR, BAX, HOLX, COO, VAR

 

Industrials & Materials

·     Transports; several airlines (LUV, UAL, AAL, DAL and ALK) all experienced system-wide outages leading to customers across cities in the U.S. complaining about flight disruptions (the problems were resolved); NSC lifted rails and transports in general, rising to record highs after Bank America upgraded to buy with a $205 tgt citing rapid improvement from its Precision Scheduled Rail overhaul

·     Metals & Materials; metals among the biggest winners early after the better PMI data out of China overnight – FCX, CLF, AKS, X, AA all among top gainers in the material sector; FOE shares fell after BMO Capital downgrade shares; RIO said iron ore operations in Western Australia’s Pilbara region are progressively resuming following last week’s tropical cyclone Veronica, but initial inspections uncovered some damage to the Cape Lambert A port facility.

 

Technology, Media & Telecom

·     Internet; AMZN tgt raised to $2,085 from $1,975 at Oppenheimer after revisiting AWS model to reflect our views on artificial intelligence and its impact on cloud adoption; over the weekend, FB CEO Mark Zuckerberg wrote an opinion piece for the Washington Post laying out how he believes his company should be treated saying regarding privacy and data protection issues “I believe it would be good for the internet if more countries adopted regulation such as G.D.P.R. as a common framework,” Mr. Zuckerberg wrote, referring to Europe’s data protection rule.

·     Media & Telecom movers; SCOR downgraded by three analysts following the unexpected departure of both CEO and President while company also guided 1Q revenues -4% y/y vs. prior mgmt guidance of flat or below 4Q’s +6%; ROKU tgt was raised to $76 from $63 at KeyBanc as they see positive momentum with the company’s platform business, a trend that could lead to estimates being revised higher; DISCA and BBC Studios have set a long-term content partnership (10-years) with includes a new video-on-demand service and an agreement on the future of UKTV’s channels business in the UK; ATVI rises after Wedbush added to best ideas list

·     Hardware & Component news; FFIV receives its second analyst upgrade in as many days (Piper on Friday) after Nomura upgraded it to buy from neutral with $180 tgt saying the company’s security division was finally a more meaningful driver for the stock; CNBC reported that AAPL slashes iPhone prices in China by as much as 6% https://cnb.cx/2HSWk1h ; JBL was upgraded to strong buy from market perform at Raymond James saying key metrics (operating margin and cash flow) should inflect over the next 12 months, which has correlated with alpha in the past

·     Semiconductors; Philly semi index at highs late afternoon around 2.5% at 1,430 – NXPI up over 6%, MCHP, ON, TER all up over 4% on the day; CRUS shares dropped as Craig Hallum said analysis by iFixit show CRUS’ adaptive noise cancellation (ANC) technology is not in the new AirPods 2

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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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