Market Review: May 13, 2019

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Closing Recap

Monday, May 13, 2019

Index

Up/Down

%

Last

DJ Industrials

-616.84

2.38%

25,323

S&P 500

-69.52

2.41%

2,811

Nasdaq

-269.92

3.41%

7,647

Russell 2000

-49.99

3.18%

1,523


 

Equity Market Recap

·     U.S. stocks post their worst day of 2019 as the trade war between the United States and China escalated after China announced plans to raise duties on some American imports starting June 1, defying a call from President Donald Trump to resist increasing a trade war. It was less than two hours after Trump tweeted a warning that “China should not retaliate…will only get worse!” that China’s Ministry of Finance boosted tariffs on part of $60B of U.S. goods starting on some 2,493 goods that will see tariffs raised to 25% (and smaller tariffs on other goods). Investors fled names leveraged to China/trade tariff such as industrials, agriculture, metals, retailers and technology. Financials were clobbered on plunging Treasury yields, while transports fell to key technical levels as the Dow Transport Index is now down over 10% (correction territory) from all-time highs last year. Dow components AAPL, BA, CAT, MMM and INTC are all down over 20% from 52-week highs. The move by China came in response to the U.S.’s decision last week to increase levies on $200 billion in Chinese imports to 25% from 10%. Trump on Monday accused China of backing out of a deal that was taking shape with U.S. officials. Trump also said today that he has not made the decision to go ahead with tariffs on another $325B in Chinese goods yet. Stocks got a small reprieve, bouncing off afternoon lows following a headline from Treasury Secretary Mnuchin telling CNBC that China talks are ongoing. Defensive sectors such as gold prices, Treasuries, utilities, and REITs outperformed in a flight to safety.

·     Before paring losses late afternoon as headlines from Trump and Mnuchin tried to ease the market concerns, the Dow Industrial Average had fallen more than -700 points (lows 25,222) to move below its 200-day moving average of 25,425 earlier (first time below level since February), while the S&P 500 index traded as low as 2,800 (off over 2.7%). Today’s move followed the worst weekly losses for U.S. stocks since March for the Dow which fell -2.1% while the S&P saw a -2.2% weekly fall and the Nasdaq Composite shed -3% for their the biggest losses since December.

 

Commodities

·     Oil prices reverse to end lower; oil prices gained overnight after Saudi Arabia said two tankers came under attack near the United Arab Emirates on Sunday, shortly after the UAE said four of its vessels had been sabotaged, boosting supply concerns. However, oil prices turned mid-morning, falling in conjunction with a broader pullback in riskier assets as WTI crude ended lower by about 62c to settle at $61.04 per barrel (well off intraday highs of $63.33). Oil prices have been volatile of late, pulling back despite big hits to the global supply of petroleum from Russia, OPEC+, Iran, Venezuela, and Nigeria.

·     Gold prices jumped on Monday, with June gold rising $14.40, or 1.1% to settle at $1,301.80 an ounce, its first close above $1,300 since April 10th as investors looked for safe-haven assets. With today’s gain, gold has now risen five of the last six sessions. Lumber futures fell by $15 exchange limit. Copper prices tumbled further following the weakening yuan on trade tariffs.

 

Currencies & Treasuries

·     The U.S. dollar ended mixed, with the dollar index (DXY) recovering of earlier lows of around the 97 level (one-month lows) before moving back near the 97.30 level (little changed on the day), rising against the Canadian dollar and British pound while falling vs. the Japanese yen. The buck rose vs. the Canadian Loonie (highs 1.3482) on rising risk-off conditions after China announced new tariffs on U.S. goods. China’s yuan slumps to 4 1/2-month low as trade war escalates.

·     While stocks made new lows throughout the day, Bitcoin saw a resurgence of interest today, rising as much as 25%, topping the $7,900 level and gaining for the 11th consecutive session, its longest winning streak since 2013 on no specific news. Today’s advance comes only a few days after the crypto-currency broke through $6,000, with some wires noting two U.S. exchanges carrying futures closed, making it potentially difficult for short sellers to cover.

·     Treasury market’s rallied as yields stayed weak all day (10-year fell 6 bps last week to 2.47%); today the 10-year yield fell to lows below 2.40% before paring losses while the 2-year yield dropped below 2.20% as investors continue to rotate out of riskier stocks and into safety assets amid uncertainty regarding the global trade issues. Longer dated maturities fall to 6-week lows.

 

 

Macro

Up/Down

Last

WTI Crude

-0.62

61.04

Brent

-0.39

70.23

Gold

14.40

1,301.80

EUR/USD

0.0001

1.1234

JPY/USD

-0.65

109.30

10-Year Note

-0.068

2.402%

 

 

Sector News Breakdown

Consumer

·     Retailers; sector crushed today; BBBY said board member Mary Winston has been appointed Interim CEO after Steven Temares stepped down from the CEO position and resigned as a board member; the NY Post reported top executives at major chains such as WMT, TGT, KR and Safeway have been quietly meeting with makers of drinks, gummy bears, topical creams and oils that are infused with CBD; BOOT was downgraded to hold at Pivotal Research as believe that risk/reward is less favorable at these levels; JWN estimates cut at Piper ahead of the company’s FQ1 earnings report, as channel checks throughout the quarter across multiple markets show elevated inventory levels; TIF and TPR lower as retailers that generate a large portion of sales in Asia have come under pressure on escalating trade tensions with the U.S.

·     Autos; industry pressured early after China threatens to raise tariffs on $60B worth of U.S. goods starting on June 1. Even if auto tariffs aren’t part of the picture, an extension of the trade disagreement impacts production and manufacturing decisions within the automobile industry (shares of Ford, GM, DDAIF, FCAU, TM among those names active as well as suppliers)

·     Restaurants; TXRH upgraded to outperform at Baird following the sharp recent pullback in the stock, citing inflationary worries and some concerns about softer early-Q2 comps; QSR downgraded to Underperform at Longbow saying latest talks with domestic Burger King franchisees points to a significant level of discord between corporate and franchisees related to the company’s recently more aggressive discounting strategy and comparable sales growth at the brand has decelerated from nearly 4% average growth in 2H’17; WING and WEN were both initiated as new overweight ratings at Piper

·     Housing & Building Products; homebuilders benefit slightly from the plunging Treasury yields, falling to lowest levels in about 6-weeks (brining mortgage rates lower as well); two analysts positive on sector today as Barclay’s upgraded KBH as gradual market improvement links with a ’19 community ramp allowing for accelerating growth, which coupled with improving margins manifests in more resilient returns, supporting a higher multiple. Firm also upgraded TMHC saying current valuation accurately balances improved market conditions with areas of risk (note TMHC was also upgraded at Wedbush today)

·     Services & Leisure movers; ADT was downgraded at Morgan Stanley with $7 tgt saying it has less confidence in the company’s growth outlook following a recent AlphaWise survey conducted by the firm; ALRM was downgraded to hold at Jefferies as believe the stock is appropriately valued given likely organic growth moderation even if current guidance is exceeded by levels similar to 2018 outperformance

 

Energy

·     Energy stocks dropped along with broader markets despite oil prices holding up well early (though later succumbed to selling pressure) most of the session on reports Saudi Arabia said two tankers came under attack near the United Arab Emirates on Sunday, shortly after the UAE said four of its vessels had been sabotaged. Individual stock news was relatively quiet for energy stocks outside of LONE falling on weaker earnings. Utilities gained early amid plunging Treasury yields (making dividend paying stocks more attractive) and as investors rotated into defensive less risky stock sectors.

 

Financials

·     Bank movers; bank stocks decline as the KBW Bank Index dropped as much as -2.6% to the lowest since April 10, after China announced plans to raise duties on some American imports starting June 1, and as U.S. Treasury yields fell as investors sought shelter. Large cap banks such as BAC, C, JPM, WFC and interest-rate-sensitive regional banks such as SIVB, RF, CMA, ZION fell

·     Asset managers; IVZ shares drop after UBS downgraded to sell saying that current P/E multiple should contract, pressured by the upcoming additional leverage from the Oppenheimer deal and views the 27% YTD rally having been driven by the 2020 multiple rising even as estimates have declined; LM reports preliminary AUM approximately $767.5B as of April 30

 

Healthcare

·     Pharma movers; generic drugmakers under pressure big time (TEVA, MYL, MNK, ENDP), led by reports of a new price-fixing civil suit by 44 states alleging the nation’s largest generic drugmakers conspired to artificially inflate and manipulate prices for more than 100 different generic drugs; INSY shares plunge following a warning that it may seek bankruptcy protection after bleeding tens of millions of dollars on legal settlements and defending former executives convicted of bribing doctors to prescribe the company’s powerful opioid

·     Biotech movers; sector was under pressure all day as the IBB fell over 3.3% to 101.50, lowest levels since early January; PTCT was upgraded to buy at Bank America citing its data update at the American Academy of Neurology (AAN) conference for risdiplam (partnered with Roche) for treatment of spinal muscular atrophy (SMA),

·     Healthcare devices, services and providers; BDX was upgraded to Overweight from Equal Weight at Barclay’s with an unchanged price target of $266 saying the pullback in the shares since the FDA update on drug-coated balloons on March 15, coupled with the resetting of expectations following the company’s Q2 results, provides an opportunity; BSX was upgraded at Evercore/ISI

 

Industrials & Materials

·     Industrial & Machinery; DE and TITN downgraded to neutral at Baird saying demand for agriculture equipment is stalling as fundamentals have weakened as 2019 progressed and the recent trade flare-up is likely to further weigh on farmer sentiment/says dealer inventories have risen, posing an additional risk; construction equipment growth is moderating (ag industry also under pressure as China retaliates against U.S. tariffs on certain good – ADM, BG); CAT said April North American 3-month machine sales +13%; DE reports earnings this week

·     Transports decline; the Dow Transport index fell as much as 3.5% below 10,300, holds the 100-day MA support of 10,213 (lows 10,229) and down roughly 6.5% from April highs around 11,100 and down over 10% from all-time highs last September (correction territory)

·     Metals & Materials; gold miners (NEM, GOLD, AEM) got a boost early as the precious metal proved to be one of the beneficiaries to the U.S.-China trade war, with gold posting near its biggest gain in two months after China said it would raise tariffs on some U.S. goods. Meanwhile industrial metals such as copper fell in reaction to the increased trade tensions. China said it will raise the tariffs on rare earths imports from the U.S. to 25% from 10% as of June 1

 

Technology, Media & Telecom

·     Hardware; AAPL turned lower on the China trade concerns; also on AAPL, the US Supreme Court ruled against Apple on Monday and paved the way for an antitrust lawsuit filed by iPhone owners who argued the company’s ‘walled garden’ for apps is anticompetitive; it was just a brutal day for tech, as software, hardware and service names were down across the board

·     Internet; big sell-offs in high-beta names (BABA, AMZN, NFLX, GRUB); JMIA was on track for an 8th straight down day, falling sharply the last few sessions after negative call by Citron Research (Andrew Left) on the company – got a boost midday after Stifel upgraded to buy; JOBS downgraded at Citigroup following a mixed 1Q19 result with top line coming in 5% below their estimate and non-GAAP profit beating by 19%, JOBS guided 2Q19 revs of +4-9% yoy growth, 8%/9% below consensus estimates going into the print

·     Semiconductors; STX among top decliners in the S&P along with weakness in WDC, AMD, QRVO as chip names fall on tariff fears with China slowing demand; overall group getting slammed today amid those chip makers that are China exposed; INTC shares drop again, falling to lowest levels since January falling below $45 per share (52-week highs $59.59 on 4/17)

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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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