Market Review: April 17, 2019

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Closing Recap

Wednesday, April 17, 2019

Index

Up/Down

%

Last

DJ Industrials

-2.99

0.01%

26,449

S&P 500

-6.57

0.23%

2,900

Nasdaq

-4.14

0.05%

7,996

Russell 2000

-15.14

0.91%

1,568


 

Equity Market Recap

·     U.S. stocks were steady to little changed most of the afternoon as markets appear to be in “wait and see” mode ahead of heavy earnings results the next few weeks. Stocks sputtered midday, paring back earlier gains in the tech heavy Nasdaq Composite (Nasdaq 100 hit all-time highs), while the S&P 500 index tried to hold the 2,900 level. A combination of better China economic data overnight (China’s economy grew 6.4% YoY in Q1, the same as last quarter and slightly above expectations for an expansion of 6.3%) and trade hopes helped keep markets near their elevated levels. The most recent batch of corporate earnings did little to boost confidence in the economy though transports rallied behind CSX, KSU and UAL results, while tech was mixed on IBM (weak) and NFLX (mixed) results, and semiconductors continue their record climb behind QCOM strength (the SOX index all-time highs). Financials reversed higher late day, led by large caps helping offset in the healthcare sector a second day as policy concerns appear to be the major driver of sector downturn. Recall yesterday, the UNH CEO said that the "Medicare for All" legislation proposed by House Democrats threatened to "destabilize the nation’s health system." With that, managed care, biotech, large cap pharma, suppliers, MedTech all plunged with no sub-sector immune to the sell-off fears. The yield on 10-year Treasuries turned lower after climbing to a four-week high and the dollar was mixed, while gold slipped to 2019 lows and oil remains not far off 5-month highs. Late day, the WSJ reported midday that the U.S. and China aim to sign a trade deal as soon as late May, with China envoy Liu He coming to Washington the week of May 6th after US trade rep Lighthizer tentatively set to travel to Beijing the week of April 29.

Economic Data

·     U.S. trade deficit shrinks again in February to lowest level in eight months, sliding 3.4% in February to (-$49.4 billion) from a revised (-$51.1 billion) in January, due to higher exports of autos and airplanes (ests were for deficit of -$53.4B). The trade deficit was 7.6% smaller in the first two months of the year, compared with the same period in 2018

·     Wholesale Inventories for February rose 0.2%, slightly below the 0.3% estimate to $668.9B from $667.5B in the prior month; Wholesale inventories rose an unrevised 1.2% in January; wholesales sales rose 0.3% m/m in Feb, following 0.5% the prior month

·     The Fed Beige Book showed: while most districts reported that growth continued at a similar pace as the previous report, a few districts reported some strengthening. Reports on consumer spending were mixed but suggested sluggish sales for both general retailers and auto dealers. Employment continued to increase nationwide, with nine districts reporting modest or moderate growth and the other three reporting slight growth. A majority of districts cited shortages of skilled laborers, most commonly in manufacturing and construction. Wages for both skilled and unskilled positions generally grew at about the same pace as earlier this year.

 

Commodities

·     Oil prices end lower with WTI crude down 29c to $63.76 per barrel, pulling back from earlier highs after weekly mixed inventory data. WTI crude initially rose after an industry report signaled an unexpected drop in U.S. crude inventories last week, while data showed China’s economy rebounded in Q1. U.S. stockpiles declined by -3.1M barrels last week, the API said while the EIA posted a larger decline as well. Late day, the WSJ reported that after almost two weeks of fighting "in and around Tripoli," Libya’s capital, the country’s oil output is at risk because of a decline of fuel the state-run National Oil Corp. uses to maintain production. Oil prices remain elevated, with major benchmarks up over 30% YTD given turmoil in Venezuela and Libya, sanctions on Iran making supplies tighter and now improving data in China. Gold prices were little changed on the session, slipping 40c to $1,276.80 an ounce, holding near the lowest levels of 2019 as investors have abandoned defensive assets as major US averages remain near records.

 

Currencies & Treasuries

·     The U.S. dollar was mixed on the day, as the dollar index for a third straight day remained around the 97 level after data showed the pace of Chinese economic growth steadied in the first quarter, helping to soothe fears of a global economic slowdown. The safe-haven yen pulled back mid-afternoon after the WSJ reported about a possible US/China deal being done by the end of May. All quiet in the UK for now related to Brexit after failing to leave the EU at its deadline cut off, as the British Pound remained soft.

·     Treasury prices were very quiet along with stocks, as the 10-year yield, after briefly trading above 2.6%, slipped back to yesterday’s closing levels around 2.585%, with the 2-year yield under 2.40% and the 30-year staying under 3% as investors await the next catalyst for Treasuries (questions is…what will it be with the Fed already very dovish and a trade deal in still far off).

 

 

Macro

Up/Down

Last

WTI Crude

-0.29

63.76

Brent

-0.10

71.62

Gold

-0.40

1,276.80

EUR/USD

0.0013

1.1295

JPY/USD

0.07

112.08

10-Year Note

0.000

2.585%

 

 

Sector News Breakdown

Consumer

·     Consumer Staples; beverage giant PEP rises as Q1 EPS of 97c beat by 6c on better revs of $12.88B while also reaffirmed its financial targets for 2019 saying it continues to see full-year organic revenue growth of 4%/1Q Frito-Lay N.A. organic revenue up 6%; in grocers, SFS agreed to be acquired by private-equity firm Apollo Global Management LLC for $6.50 a share in cash; at $6.50, has market cap of about $500 million https://on.mktw.net/2v8Ei31

·     Restaurants; lots of analyst calls as CMG was downgraded at Morgan Stanley as shares approach their bull case valuation (and reaped 54% gains YTD) – now raises bull case view to $785 from $727 and overall tgt raised to $658 (from $617); Morgan upgraded DPZ to overweight and raised tgt to $283, taking advantage of what they believe is a price dislocation based on concerns over near term trends; SHAK was downgraded to neutral at Longbow citing valuation as shares have risen 25% since November off modest Q4 comp sales beat

·      Housing & Building Products; Homebuilders DHI, TPH, LEN were all downgraded to neutral from positive at Susquehanna saying they are "taking money off the table" after a period of solid performance from the group and not making a call into the quarter; overall quiet moves in the housing space with rates steadily higher the last few days

 

Energy

·     Inventory data mixed: The API reported that U.S. crude supplies fell by -3.1M barrels for the week ended April 12, showed a stockpile decline of -3.6M barrels for gasoline, but distillate stockpiles climbed by 1.3M barrels. This morning, the EIA said weekly crude stockpiles unexpectedly fell -1.4M barrels vs. est. build of 2.5M barrels, though gasoline and distillates posted smaller than expected weekly drawdowns

 

Financials

·     Bank movers; MS the last of the big six to report earnings, topping analysts’ estimates while FICC sales and trading revenue beat too, while equities trailed (similar to GS, BAC, C results); 1Q FICC sales & trading revenue $1.71B vs. est. $1.59B; in other bank earnings, SBNY Q1 EPS missed by 11c reflected by a weak core NIM down -7bps vs. Stephens -2bps estimate (guidance was -2-4bps) and higher expense growth; WSBC falls early amid post soft Q1 on lower balance sheet growth, NIM & given YTD performance; trust banks lower (STT, NTRS) after BK earnings drop on weaker revenue from interest income and investment management-related activities; in research, CMA was downgraded to hold at Jefferies given negative EPS revisions and not enough upside to warrant a Buy rating (says NII at 70% of revs, outlook is proving even more challenging)

·     Insurance; CB downgraded to Equal-weight from Overweight at Morgan Stanley as see a thinner reserve cushion following their YE18 actuarial study, with the bulk of the change emanating from long-tailed liability lines; in consumer finance and lending; several analyst previews for upcoming earnings in the sector (PYPL ); PYPL was downgraded to Neutral at UBS citing EPS sensitivity analysis on PayPal’s core operations indicates limited beat-and-raise potential over a two-year horizon, and our bull scenario for Venmo monetization would only add 2% to current 2020E EPS

 

Healthcare

·     Managed care and hospitals down again after being absolutely crushed yesterday, led lower after UNH raised its profit guidance for the year on revenue growth across all its businesses but CEO David Wichmann warned the "Medicare for All" legislation proposed by House Democrats threatened to "destabilize the nation’s health system." Also hurting the group, comments by JNJ on its c/c saying that preliminary estimates indicate a slight declining trend in both hospital admissions and lab procedures, with growth of 0.5% and flat respectively – early declines yet again for managed care and the like (ANTM, CI, HUM, CNC, WCG)

·     Pharma movers; large cap Pharma falling with broader healthcare (MRK, LLY, JNJ, BMY); Roche raises FY19 revenue guidance to mid-single digit growth as sales are now expected to grow in the mid-single digit range, at constant exchange rates

·     Biotech movers; Biotech plunging as the IBB falls over 3% to the 106 level (down below its 100-day MA 107.85 earlier) and to its lowest levels since early January; TPTX 9.25M share IPO priced at $18.00; BWAY 2.5M share IPO priced at $11.00; IONS slumped most since August 2018 after partner Roche said on its conference call that their Huntington-disease (HD) drug may need further testing to assess its efficacy,

·     Medical equipment and devices; BSX said it sees a negative impact of about $25 million to global full year revenue as a result of the FDA’s April 16 order for all manufacturers of surgical mesh products indicated for transvaginal repair of pelvic organ prolapse to stop selling and distributing the products in the U.S.; Med Tech not immune to the overall healthcare industry sell-off, with big declines in names like ABMD, DXCM, TNDM, MASI, etc.

·     Healthcare services and providers; TDOC was initiated overweight and $75 tgt at Stephens saying there is considerable growth in front of the telehealth industry as it is in its early innings and as the industry leader, see TDOC as a winner and expect TDOC revenues to outpace industry growth; service and supplier names also pressured with broad sector weakness (EHTH, STAA)

 

Industrials & Materials

·     Transports; CSX leads rails higher after posting a quarterly record operating ratio of 59.5%, a mark that smashed the 63.7% recorded a year ago while EPS beat by 11c on in-line revs of $3.01B as merchandise volume growth and broad-based pricing gains helped rev growth; airlines active as UAL Q1 EPS beat by 20c while backing its year outlook and for Q2 expects capacity to grow 4% and unit revenue to expand 1.5% at the midpoint; KSU in rails backs FY19 revenue growth guidance to 5%-7% and lowers FY19 volume growth guidance to 2%-3% YoY after earnings

·     Metals & Materials; Miners outperform as metals rose on Chinese GDP, which exceeded estimates; also, aluminum and steel output reached records as the Chinese economy holds up; iron ore names (CLF, BHP) fell Tuesday as VALE sees restart of major mine; BHP cuts its annual iron ore production forecast by ~3.5% to 265M-270M mt from 273M-283M mt previously, and faces higher costs following disruptions caused by Cyclone Veronica, a day after RIO dialed down its full-year outlook for the same reason; gold miners fell (NEM, AEM)

·     Industrials; ARNC 8.7M share Block Trade priced at $20.25; HOLI rises as announced that it has decided to withdraw its previously announced public offering of 7.8M of its ordinary shares due to market conditions; TXT rises as earnings handily beat as strength in core aviation segment boosts Q1 bottom line; said Aviation Q1 jet deliveries jump 18%; PNR slips as reported Q1 revenue decrease of 6% Y/Y to $688.9M, impacted by cold and wet weather

 

Technology, Media & Telecom

·     Internet; NFLX shares were volatile overnight and today, rising after Q1 EPS/revs topped consensus on better subs, but shares slipped after Q2 guidance disappointed as sees Q2 EPS 55c on revs $4.93B below est. 99c/$4.95B; sees 2Q streaming paid net change +5.00M (est. +6.09M) and saw 2Q U.S. streaming paid net change +300,000 vs. est. +617,000; BABA, JD shares popped late day after Reuters reported AMZN plans to close its domestic marketplace business in China by mid-July

·     5G semi chip news; QCOM advanced further after yesterday’s 23% gain, as analysts very “bulled up” on its news with AAPL, agreeing to settle all outstanding royalty, licensing and patent disputes between the companies – QCOM guided to an incremental EPS of ~$2.00 from both the patent agreement as well as the chipset supply agreement (several analysts upgraded and upped tgts for QCOM). In reaction, INTC said it will get out of the business for 5G modem chips, in which it was trying to compete with QQCOM – Intel has had trouble getting up to speed in making the chips, and had said that they would not be available until 2020.

·     Semiconductors; SWKS downgraded to neutral at Macquarie citing yesterday’s Apple-Qualcomm settlement that could put pricing pressure on RF vendors SWKS, AVGO, and QRVO; Citigroup raised MRVL tgt to $28 to reflect improving storage fundamentals, increasing confidence in 5G momentum, and growing M&A appeal; XLNX positive mention at Citigroup as well as expect Xilinx to post upside to Consensus estimates and opened up a positive catalyst watch on Xilinx; ASML sees 2Q net sales EU2.5 billion to EU2.6 billion vs. estimate EU2.55B and sees 2Q gross margin 41% to 42%; Q1 net sales EU2.23 billion, vs. estimate EU2.11 billion; Longbow downgraded DIOD, ON, LFUS and TXN to Neutral from Buy to reflect a more conservative view of Q2 and second half sales growth relative to consensus expectations

·     Media & Telecom movers; in telecom, S and TMUS shares slipped after the WSJ reported that Justice Department staffers have told the companies their planned merger is unlikely to be approved as currently structured https://on.mktw.net/2V09ccn ; Intelsat (I) shares active as analysts said the satellite company would be a beneficiary if Sprint’s merger with T-Mobile falls apart – Goldman Sachs sees positives for $I and DISH, which also owns excess spectrum, as none of the current national carriers probably has enough spectrum on a standalone basis for 5G

·     Hardware & Component news; IBM reported a decline in revenue, including in such widely followed businesses as cloud computing and artificial intelligence/also guided below consensus revenues and EPS for Q2, pointing to a back-ended loaded year; in the tech supply chain, CDW and TECD were both downgraded at Stifel as expect IT spending growth to slow next year, particularly in hardware, we believe most stocks in the group appear fairly valued; CAJ said it expected to lower 2019 earnings guidance

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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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