Market Review: May 22, 2019

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Closing Recap

Wednesday, May 22, 2019

Index

Up/Down

%

Last

DJ Industrials

-100.72

0.39%

25,775

S&P 500

-8.08

0.28%

2,856

Nasdaq

-34.88

0.45%

7,750

Russell 2000

-13.66

0.88%

1,531


 

Equity Market Recap

·     U.S. stocks were lower on the day, but it felt much worse than the actual numbers with SmallCaps underperforming for a second straight day (Russell 2000), but the S&P and Nasdaq Comp finished well off session lows despite more market/trade uncertainty. Stocks slumped early amid new developments in the ongoing trade war between the U.S. and China, UK politics (more Brexit headlines as Pound falls to 4-month lows), and more negative commentary from retailer earnings/forecasts. Energy stocks dropped as WTI crude fell nearly 3% after bearish weekly inventory data, while U.S. crude production rose by 100K bbl/day to 12.2M bbl/day, just short of an all-time record. Minutes from the latest FOMC meeting showed Fed officials appear to be in no rush to hike or cut rates, taking a more “wait-and-see” approach.

·     Trade tensions with China continued overnight amid new reports the U.S. is weighing whether to blacklist more Chinese companies. The White House is considering adding five Chinese companies involved in the manufacture of surveillance equipment to the blacklist that bars them from using U.S. components or software. Shares of Hangzhou Hikvision Digital Technology Co. and Zhejiang Dahua Technology Co.

·     In news out of Washington, President Trump said yesterday he will likely see China President Xi at the end of June (G-20 meeting June 28th), while Mnuchin echoed that comment this morning, helping markets bounce briefly. U.S. President Donald Trump also abruptly left a meeting with House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer at the White House, telling reporters just after that he would not discuss any legislation, including infrastructure, with Democrats as long as he was under investigation by several committees.

·     In sector news, there was no lift at all for transports as all 20-components end in negative territory, with the index down over 1.7% to 10,330 (AAL, FDX among top decliners). Defensive sectors such as utilities, telecom and healthcare held up the best in todays down market. Technology has led the latest market pullback, specifically semis which have been hit hard in May, with the SOX down ~12% thus far and around 10-15% from their April-end high (down about 2% today), falling additionally post the stop ship to Huawei including Tuesday’s rebound. Markets have seen several US companies this week stop selling to Huawei, while three firms have cut guidance regarding the ban (LITE, QRVO, IIVI).

FOMC Minutes

·     According to the release of the Fed minutes from their prior meeting, voting members of the FOMC seemed comfortable with their patient stance on interest rate, agreeing it could last for "some time." This echoed recent comments from Bostic, Rosengren and Clarida the last few days). Fed members said even if global economic and financial conditions improve, a wait-and-see approach was warranted, as officials were split on the outlook for interest rates. A few officials said there might be a need for higher rates if the economy evolves as they thought. But others thought higher productivity might mean there was more economic slack than the low unemployment rate might suggest. Several others expressed worry about the risk of low inflation readings leading to lower expectations of future inflation, but did not call for a rate cut. Many said that the recent low inflation readings were transitory.

 

Commodities

·     Crude oil prices plunged, with WTI crude falling -$1.71 or 2.7% (the biggest one-day percentage loss in about 3-weeks) to settle at $61.42 per barrel after U.S. crude inventories surged last week to their highest level since July 2017 and domestic oil production increased toward another record high. The EIA reported that U.S. stockpiles added 4.7M barrels to 477M barrels in the latest week (vs. estimates for a draw in stockpiles) while U.S. crude production rose by 100K bbl/day to 12.2M bbl/day, just short of an all-time record. Gold prices were little changed most of the session, rising $1 to settle at $1,274.20 an ounce.

 

Currencies & Treasuries

·     Very quiet moves in the bond and currency markets, even after the FOMC minutes release, as the dollar was little changed vs. most rivals and Treasury yields dipped slightly below yesterday’s closing levels. The British Pound fell to fresh 4-month lows of 1.2624 vs. the greenback before paring losses (and down a 13th straight day vs. the euro) after many of UK PM May’s lawmakers and the opposition Labour Party vowed to vote against her proposals in Parliament next month. The dollar gained against the Canadian dollar, rising above 1.3425 (erasing earlier declines) as oil prices tumbled with broader riskier assets. Busy day of economic data tomorrow in the U.S. but quiet today with the 10-year yield at 2.39%, the 2-year 2.23% and 30-year 2.82%.

 

 

Macro

Up/Down

Last

WTI Crude

-1.71

61.42

Brent

-1.22

70.99

Gold

1.00

1,274.20

EUR/USD

0.0002

1.1163

JPY/USD

-0.23

110.27

10-Year Note

-0.035

2.387%

 

 

Sector News Breakdown

Consumer

·     Retailers; broadly lower following disappointing earnings and or guidance today; TGT one of the few bright spots as reported Q1 comp growth of 4.8% well ahead of the 4.3% estimate, on an EPS and revenuer beat, driven largely by traffic, up 4.3% while EBIT was ~4%-5% ahead of consensus and also reiterated full-year comp and EPS guidance; department stores weak again as JWN Q1 top/bottom line big miss saying top-line results were impacted by three areas – loyalty, digital marketing and merchandise – which contributed to declines across its Full-Price and Off-Price businesses (also cut year outlook which follows weak KSS guidance yesterday); URBN mixed as Q1 EPS topped consensus with upside to comps/revenue and lower SG&A more than offsetting a gross margin shortfall, but issued weaker FQ2 guidance; VFC shares fell on earnings as well; earnings tonight from LB, SCVL and tomorrow morning from BBY, BJ, CATO, SSI

·     Consumer Staples; AVP confirmed it is in advanced discussions with Brazil’s Natura on a potential all-stock transaction https://on.mktw.net/2Qhv0uY ; BUD was named sector Best Idea at Guggenheim, replacing KO citing increased conviction in its U.S. growth following an investor seminar hosted by the company; in protein sector, SAFM and PPC were both upgraded at Cleveland Research as they believe US and any non-Chinese meat/protein manufacturers have the potential to deliver record earnings over multiple years as a vaccine for African Swine Fever appears years away

·     Autos; Citi the latest to provide fresh “bear-case” on TSLA, maintains sell as sees an increasing chance that Tesla shares will drop more than 80% due to "lingering demand/FCF concerns" despite the recent capital raise and stock pullback (would be $36 level), while overall cut tgt to $191 from $238; CRMT same-store sales growth of 2.9% in Q1 and average retail sales price increased 3.5%; auto retailer AAP Q1 EPS beat by 10 on in-line revs around $3B while backed its year revenue and comp sales view; CVNA 4.2M share Secondary priced at $65.00

·     Housing & Building Products; LOW falls after mixed Q1 report with better than expected U.S. comps (3.5% vs. est. 3.2%) helping offset weaker margins, resulting in a ~9% EBIT shortfall/cuts FY19 EPS view to $5.45-$5.65 from $6.00-$6.10 (below consensus $6.05) while backs FY19 revenue growth; homebuilder TOL reported an EPS/revenue beat for the quarter, but shares slipped after posting a bigger-then-expected decline in new orders of (-9%) vs. a Bloomberg est (-7%); note the average 30-year mortgage rates now at 4.33%, lowest since Jan 2018 but no help to weekly mortgage applications, as the MBA posted a (-2%) WoW and down 4 of the past 5 weeks to the lowest level since mid-March; infrastructure stocks fell further (MLM, EXP, VMC) after President Donald Trump told Democratic leaders that passing his replacement for the North American Free Trade Agreement should come before talks on infrastructure

·     Casino & Leisure movers; ISCA to be acquired by NASCAR for $45 per share in cash in deal valued at about $2B in cash https://on.mktw.net/2VJBCn4 ; MGM has ended talks to buy WYNN’s nearly-completed casino near Boston, saying it plans to focus on its existing Springfield, Massachusetts property – Bloomberg

 

Energy

·     Energy stocks down with the broader market and a decline in oil prices after bearish inventory data. Oil also remains pressured on signs the worsening U.S.-China trade war will take a toll on global economic growth, overshadowing the prospect of OPEC and its allies extending production curbs. Federal Reserve Bank of Boston President Eric Rosengren said the trade standoff is adding a downside risk to his economic forecasts.

·     Inventory data showed: the API reported that U.S. crude supplies rose by 2.4 million barrels for the week ended May 17, showed a stockpile increase of 350,000 barrels in gasoline, but distillate supplies fell by 237,000 million barrels. Meanwhile the EIA reported an unexpected build of 4.7M barrels of crude vs. est. draw -1.7M barrels – inventories hit highest since 2017

·     Utilities & Solar; CLNE shares jumped after signing renewable gas deal with UPS which will buy the equivalent of 170 million gallons of renewable natural gas over the next seven years in a deal worth about $95M; Saudi ARAMCO‘s US subsidiary Aramco Services Company announced a deal with SRE for a 25% stake in the first phase of its Port Arthur liquefied natural gas export project in Texas; AES was upgraded to buy at Argus saying the company is now poised to deliver more consistent EPS and dividend growth

 

Financials

·     Bank movers; banks under pressure again, though European banks down worse than US counterparts; Reuters reported Commerzbank may refine its strategy and is still open to mergers following the collapse of talks with its larger rival Deutsche Bank, its CEO said today. In consumer finance and lending; GDOT said it will buy a total of $100M of its class A common stock under an accelerated stock repurchase transaction.

 

Healthcare

·     Sector movers; AFMD shares fell after terminating its Phase 1 AFM11 program and said plans to focus its R&D investments on advancing clinical trials for innate cell engager candidates, AFM13 and AFM24 and also provides corporate updates; TOCA shares fall after saying its Phase III study of Toca 511 & Toca FC in patients with recurrent high-grade glioma will continue without any modification after a planned interim analysis of data conducted by an Independent Data Monitoring Committee; INSM 9.62M share Secondary priced at $26.00; EKSO 6.667M share Spot Secondary priced at $1.50; NEO 7M share Secondary priced at $21.25

 

Industrials & Materials

·     Transports; overall weak start for the Dow Transports, falling over 1% as breaches 10,400 (fell below 200-day MA of around 10,500) with all 20-components starting in negative territory, led by airlines (ALK, AAL); in trucking, Cowen upgraded ARCB, CVTI, and HUBG to Outperform as calls for a freight recession are misguided and largely due to tough 1H18 comps which are masking decent freight trends which should improve with weather and easier comps in 2h

·     Metals & Materials; no specific new news in the metals space today, but the sector was slammed again with sharp declines for steels, aluminum and copper names again as trade uncertainty with China remains an overhang (CENX, CLF, CMC, AKS, AA, FCX); gold prices remains near a two-week low as the safe haven metal fails to attract support as China concerns overshadow a flight to safe-haven assets with stocks dropping

 

Technology, Media & Telecom

·     Semiconductors; QCOM shares dropped more than 10% after U.S. District Judge Koh sided with the FTC case accusing the company of anti-competitive practices also finding Qualcomm charged high royalties for its patents; IPHI the latest to cut its 2Q outlook due to the U.S. action on Huawei, joining the list of companies (QRVO, LITE) that anticipate negative impact from the ban/Q2 revenue outlook drops to $82.3M-$86.3M from $86.8M-$90.8M and lowered EPS view as well; AMBA shares fell sharply as Morgan Stanley outlined risks from the U.S. blacklist actions against Huawei noting the company has "similar high teens exposure" to Chinese customers Dahua and Hikvision (which were both mentioned in news reports that the U.S. is also considering adding to the blacklist); ADI and PLAB shares also active after earnings

·     Software movers; VEEV tgt raised to $150 at Stifel as believe the emerging Clinical Data Management and Clinical Operations suites hold the highest potential for long-term growth; CDAY 8M share Spot Secondary priced at $50.50; ATVI was downgraded at Stephens as trouble in “Call of Duty” pipeline calls into question 2020 Bull case, as do not anticipate having any additional visibility into Blizzard’s pipeline until BlizzCon in November; SE shares surged after earnings and higher revs as Stifel raises tgt to $44

·     Media & Telecom movers; Sprint (S) shares fell early following a report that the U.S. Justice Department’s staff recommends suing to block the telecommunications companies’ planned merger with TMUS ERIC was upgraded to buy at Bank America; EXPE downgraded to hold at Argus as they expect bookings and earnings growth to decelerate (notes bookings at the company’s Vrbo unit (previously HomeAway) grew just 5%, down from 46% a year earlier)

·     Hardware & Component news; PSTG shares plunge as Q1 revenue missed by $6M and guided FY20 revenue lower by ~$30M as the Company deals with longer sales cycles for enterprise transactions and new sales capacity ramp; NTAP was weak after Loop Capital said the company could guide its July quarter revenue below consensus when the data storage company reports 4Q earnings later today

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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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