Market Review: May 23, 2019

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Closing Recap

Thursday, May 23, 2019

Index

Up/Down

%

Last

DJ Industrials

-285.80

1.11%

25,490

S&P 500

-33.99

1.19%

2,822

Nasdaq

-122.56

1.58%

7,628

Russell 2000

-30.25

1.98%

1,501


 

Equity Market Recap

·     U.S. stock markets with a brutal day, led by steep declines in energy (top decliner on oil), financials (on plunging Treasury yields) and technology (trade war with China) pushing major averages below some key technical levels as the China trade rhetoric intensifies and slowing global growth fears reignite. Stocks dropped globally, leading to a flight of safety assets as gold jumped and the 10-year Treasury yield fell below 2.3% (new 2019 lows) on more trade uncertainty as well as weaker economic data. The Dow Industrials Average dropped below its 200-day MA support of 25,433 (falling as much as 400 points) and in jeopardy of posting its 5th straight week of losses. The S&P overall has held up well, but CNBC noted that more than half of the index is now in correction territory (more than 10% from highs). The Nasdaq 100 fell over 2%, led again by the semi index (SOX) plunging more than 3% to below its 200-DMA, though hardware, software and Internet plunged too given the apparent “tech-war” between the U.S. and China now following the Huawei ban by the U.S. Small caps underperform large caps for a 3rd straight day as the Russell 2000 drops below the 1,500 level (last time below that level was in March – briefly) – in correction territory, while the Dow Transports also fall into correction territory (more than 10% from highs of 11,623.58 last September) on slowing global growth fears and impact from trade tensions. Oil prices also plunging alongside stocks, with WTI crude falling to 2-month lows (below $58 per barrel).

·     More escalating tensions with China trade today included: 1) Bipartisan group of U.S. senators propose legislation that would ban 5G networks from using equipment or services from China-based Huawei and ZTE; 2) China’s Commerce Ministry said that the U.S. needs to "correct its wrong actions" if it wants to continue negotiations on trade; 3) U.S. Treasury Secretary Mnuchin said that proposed tariffs on a further $300B worth of Chinese imports could be a month away once the impact on U.S. consumers had been studied; 4) a top Chinese government researcher said that a trade war may last until 2035, predicting a cycle of "fighting and talking;" 5) Goldman Sachs Group Inc., Nomura Holdings Inc. and JPMorgan Chase and Co. are among those pricing-in a greater chance of a protracted trade war – and these don’t include the recent tariff increase on $200B of Chinese goods 2-weeks ago, China’s retaliatory moves and the recent tech supplier ban vs. Huawei by the U.S. (with several US tech companies stopping shipments this week).

·     In addition to the well-known trade dispute between the U.S. and Beijing, which at this time have no high level talks ongoing to resolve any issues (next big global meeting is G-20 at the end of June which President Trump said may meet China President then), the latest round of global economic data has not been impressive, showing dents in economies and raising fear that global slowing is taking place. Also add that the Fed, as per their FOMC minutes release yesterday, appear in no rush to lower interest rates again despite markets likely pricing in a cut this year. Earnings in the retail sector the last week also a cause for concern, with high level hits from LOW, KSS, JWN among others and lower outlooks. You can also add to the mix reduced hopes for any type of infrastructure deal in the U.S., with President Trump at odds with Democrats, walking out of a meeting yesterday.

Economic Data

·     Weekly Jobless Claims fell 1K to 211K, just below the 215K estimate while prior week claims were unrevised at 212K; the 4-week moving average stood at 220.25k in the week ending May 18; continuing claims rose 12k to 1.676m in the week ending May 11

·     U.S. flash Markit manufacturing index fell to 50.6 in May versus 52.6 in April (vs. 56.4 a year ago) and marked the worst since September 2009. New orders dropped into contraction at 49.7 versus 53.5 while services slid to 50.9 from 53.0, and was at 56.8 last May (weakest since February 2016)

·     New Home Sales for April fell (-6.9%) to 673K and just below the 675K annual rate est.; new home sales fell 50k in April from prior month; median new home price rose 8.8% y/y to $342,200 while the average selling price at $393,700; said 20% of new homes sold in April cost more than $500,000, up from 16% prior month; months’ supply at 5.9 in April compared to 5.6 prior month

·     The 30-year fixed mortgage rate for week ended today fell to 4.06% from 4.07%, while the 15-year rate avg 3.51%, down from 3.53% a week earlier

 

Commodities

·     Oil prices were crushed…as WTI crude dropped $3.51, or 5.7% to settle at $57.91 per barrel (two month lows), its steepest daily decline since December, while Brent dropped below $70 per barrel. A combination of trade concerns with China and expanding American petroleum stockpiles have stifled a rally that saw the U.S. benchmark jump 41% during the first four months of the year. Yesterday, 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 rise $11.20 or 0.9% to settle at $1,285.40 an ounce (off 2-week lows), supported by a slide in equity markets amid fresh trade tensions, but a strong dollar kept a lid on gains. Yesterday, the FOMC minutes showed officials at their last meeting agreed that their current patient approach to setting monetary policy could remain in place "for some time", reducing expectations of any futures rate hikes (or cuts).

 

Currencies

·     The U.S. dollar index (DXY) traded to a fresh 52-week high (best levels since May 2017) in early action, rising to 98.37 before making a quick about face and end lower on the day (down below 97.90 and off lows of 97.80). The US dollar fell to one-week lows of 109.50 against the safe-haven Japanese yen (off opening highs of 110.36) given increased risk-off conditions, along with growing sentiment the U.S./China trade war will get worse before it gets better. The Pound was little changed after plunging recently vs. the dollar on Brexit/political strife in the UK (British Pound has fallen 13-straight days vs. the euro/ down roughly 4% vs. the buck the last 3-weeks). The euro managed to rebound off early lows despite weak economic data overnight. The Canadian dollar slumps after oil prices plunge for a second day.

 

Bond Market

·     Treasury prices jumped, driving the yield on the benchmark 10-year note to its lowest level in over 17 months (below 2.30%), as nervous investors sought safety in the face of worsening trade problems between China and the U.S. The shorter-term 2-year yield sunk to 2.132%, its lowest since February of this year, while the long bond 30-year yield falls to its lowest since late December 2017 around 2.74%. Weaker economic data in the form of new home sales and flash manufacturing data also raises chances of FOMC to maybe cut rates before hiking as next move.

 

 

Macro

Up/Down

Last

WTI Crude

-3.51

57.91

Brent

-3.23

67.76

Gold

11.20

1,285.40

EUR/USD

0.0031

1.1181

JPY/USD

-0.80

109.54

10-Year Note

-0.089

2.297%

 

 

Sector News Breakdown

Consumer

·     Retailers; BBY reversed earlier gains despite better earnings and after issuing strong guidance that takes into account at least some impact from tariffs/Q1 comp sales slightly better and Q2 revs just above ests; LB boosted the low end of its guidance on Bath & Body Works strength (comps up 13%), which offset weakness at Victoria’s Secret (comps fell -5%), while overall Q1 EPS/sales beat; SCVL posted a 1Q EPS beat on tax while sales fell short of estimates and raised the FY19 EPS outlook and reiterated its +LSD annual comp expectation; BJ Q1 EPS beat by 2c and backed its year outlook; CTRN, CATO and SSI also movers on earnings

·     Consumer Staples; HRL Q2 mixed as EPS beat slightly on a revenue miss while lowers FY net sales to $9.50B-$10B from prior view $9.7B-$10.2B and lowers year EPS view to $1.71-$1.85, from prior $1.77-$1.91 (est. $1.80); Brazilian cosmetics maker Natura agreed to buy AVP in an all-stock deal that it valued at $3.7 billion https://on.mktw.net/2HyjSY3 ; ANFI announces new contracts worth about $9M earlier this morning; PM was upgraded to equal-weight at Barclays

·     Restaurants; BMO Capital downgraded CMG (tgt to $620 from $675) and BLMN (tgt to $18 from $23) to underperform as concerns surrounding African Swine Fever add another layer of downside risk to already cautious view on the casual dining sector/says BLMN and CMG, along with TXRH, are the most at risk with regards to margin pressures from ASF while estimates CMG and EAT have greatest exposure to pork prices

·     Autos; TSLA came into the day with a 6-day losing streak, trading below $185 in pre-market trading before bouncing as high as $199.45 before slipping again as analysts have gotten very cautious over the last few weeks; CPRT shares jumped after Q3 earnings results topped estimates; RACE was upgraded to outperform at Evercore/ISI saying in this turbulent period of declining sales/production, and with arguably the largest event risk the auto industry has faced this millennium sitting only months away – they say to turn to the stock;

·     Leisure movers; EVRI rises after Bloomberg reported the supplier of cash-withdrawal and machines to casinos, is exploring strategic alternatives including a potential sale; BXG shares dropped after BBX pulls out of its previously announced merger of the two companies (BBX Capital will continue to own ~90% interest in Bluegreen Vacations)

 

Energy

·     Energy stocks absolutely slammed in the early part of the day, dropping in reaction to the broader pullback in oil prices, as WTI crude fell more than 4% to lows below $59 per barrel following the unexpected jump in American inventories yesterday and concerns about demand outlook as U.S.-China trade. The sell-off was broad sector based with big declines in E&P, drillers and equipment names (RIG, DO, NE, HES, MRO, APA, FANG, HAL, DVN, PXD, etc. were all among the top S&P decliners) – back to inventory data, Mizuho noted the weekly report yesterday was a very bearish one, and crude justifiably tanked. Demand seems weak, refiners reduced runs but product stocks rose anyway. Notes this comes despite having Saudi at ~500Kbd below their OPEC+ cut allocation, Venezuela in tatters, and Iran sanctions

·     SDRL reported a wider-than-expected loss for Q1 of $295M, wider than the $199M estimate (and compares to a $362M loss in the three preceding months); HFC said it is shutting its Tulsa, Okla., refinery operations temporarily due to high water in the area; Oil drillers RIG, NE drop over 10% in broader energy stock rout; FANG’s Rattler unit IPO today (RTLR), pricing 38M shares at $17.50 per unit

·     Utilities rise; defensive utilities a pocket of strength – as the UTY traded to fresh 52-week highs – getting a boost amid the plunge in Treasury yields and flight to defensive sectors – 52-week highs for FE, AEP, AEE, ED, DTE, NEE, XEL, AWK, ETR, and PEG

 

Financials

·     Bank movers; large cap and regional banks absolutely slammed today given the gloomier look on interest rate hikes (FOMC noted in Fed minutes yesterday they seemed comfortable with their patient stance on interest rate, agreeing it could last for "some time.") With that said, Treasury prices jumped and yields fell, weighing on banks that look for higher yields to improve lending margins (JPM, BAC, WFC, C, PNC, USB, ZION, etc. fall)

·     Insurance; in research, UBS upgraded AXS to buy on view that consensus estimates for 2020 EPS and ROE are overly conservative given AXS’s substantial exposure to the improving U.S. excess and surplus lines (E&S), and Lloyd’s pricing environment while firm downgraded CB to neutral do not view CB as sufficiently leveraged to E&S/Lloyd’s to generate meaningful EPS revisions and/or warrant upward share re-rating; UNM announced a $750M share buyback plan; Citigroup said top picks remain AMP, LNC, VOYA and PRU in life sector as insurers are better positioned for low rates today

·     Exchanges and services; the New York Stock Exchange is lowering fees for companies with little to no revenue in a bid to lure biotech initial public offerings that typically go to rival Nasdaq Inc. The change, set for the beginning of next month, will lower fees for companies with annual revenue of less than $5 million and market values of at least $200 million, the exchange said in a regulatory filing last week. The NYSE will give such firms a 75% discount off its annual listing fees and cap such fees at $100,000 for three years, according to the filing

 

Healthcare

·     Biotech movers; in resumption of coverage, Citigroup upgraded shares of AMGN and GILD to buy as think investors should look at large caps again as some of them are returning back to stability/growth, favor early-stage bolt-on deals and see large biotech’s as good defensive plays (also buy rated on ALXN, BMRN and VRTX); IOVA gets breakthrough therapy designation for LN-145; GH 4.5M share Spot Secondary priced at $71.00

·     Medical equipment and devices; TMO three-year organic revenue growth outlook raised to 5-7% for the first time in TMO’s recent history, up from 4%-6% range; TTOO plunges after negative article saying “"Failed Product Launch And Covenant Violations Suggest 100% Downside" https://bit.ly/2HMXcCq (shares were defended by analysts); MDT posts Q4 profit beat on surgical instruments business strength as EPS tops views on in-line revs and slightly better guidance; BSX has initiated a 1,600-subject global clinical trial, OPTION, evaluating its next-generation WATCHMAN FLX left atrial appendage closure device

 

Industrials & Materials

·     Industrial & Machinery; agriculture has been a sector of concern (CAT, DE, AGCO) amid possible China retaliation for the U.S. added tariffs and bans on its tech companies in the trade care fight with the U.S.; USDA said midday that US farmers aid program to reach $16B, paid in three tranches, ending as late as 2020 to help the industry; in earnings, TTC shares fell after mixed Q2 results, though its outlook for the year was slightly above estimates

·     Aerospace & Defense; BA active on comments from the acting head of the Federal Aviation Administration that suggested there would be no near-term clearance for the grounded 737 MAX aircraft (aircraft part names active as well- SPR, ATI); HEI was upgraded at Baird reflecting an update to model reflecting slightly higher growth expectations for FY20 and including another solid performance in the upcoming 2Q19

·     Metals & Materials; Steel sector cautious at Credit Suisse as AKS downgraded to underperform from outperform and PT reduced to Street low of $1.00 from $3.50 as sees much greater balance sheet risk due to the outlook for negative free cash flow/STLD downgraded to neutral due to lower price deck and "sharply" lower FCF est (cut tgts on NUE, STLD, STLC CN, AKS and X); copper remains among underperformers within metals, as markets weigh the growing risks with the U.S.-China trade war.

 

Technology, Media & Telecom

·     Internet; in online travel Citigroup upgraded BKNG to Buy citing stabilizing room night growth trends, improving European/Latam travel data, EV/FCF valuation support and downgraded EXPE to Neutral citing slowing Vrbo growth trends, heightened competition, softening U.S. travel data; CTRP reported strong operating income margin at 17% vs consensus of 13% as domestic competition continues easing, while revenue guidance was modestly below consensus; WB shares fall after Q1 results beat on EPS but miss on revenue and the Q2 outlook has downside revenue of $427-437M versus the $483.93M estimate/MAUs were 465M at the quarter’s end, a net add of 54M users Y/Y. Mobile made up about 94% of the total; SINA shares fall as reported 1Q net revenue of $475.1M and non-GAAP revenue of $472.5M vs average estimate of $474.7M, as ad revenue growth was partially offset by a decrease of portal advertising revenue

·     Semiconductors & Optical; the Philly semi index (SOX) fell over 2.75% to lows of 1,302 before paring losses (below its 200-day MA of 1,322) as the tech war between the U.S. and China taking a toll on chip and optical stocks (SOX down from record highs of 1,604.56 about a month ago on 4/24); NPTN the 4th company to issue a lower outlook given its exposure to recently “blacklisted” Chinese company Huawei by the U.S., as NPTN (joins LITE, QRVO, IIVI) lowers Q2 EPS view (15c)-(5c) from (6c)-4c and Q2 revenue view $75M-$85M from $88M-$93M

·     Software movers; VRNT falls after being initiated strong sell by Spruce Point as sees 60%-70% downside saying he company has fallen far behind the evolving technological standards in the call center software industry; APPN both upgraded to equal-weight from underweight at Morgan Stanley as newer, more flexible approaches to development such as DevOps and Agile development are being adopted, fueling the rise of an emerging class of infrastructure software; PRO was upgraded to buy and tgt raised to $60 at Stifel as top line growth is accelerating, and free cash flows are finally poised to turn the corner into the black; CLDR downgraded at Wells Fargo as believe they have been too optimistic in terms of the timing of the potential inflection in customer adoption of CDP; ZEN positive mention by several analysts after investor day yesterday; MSFT has removed Huawei Technologies Co. from one of its websites offering cloud gear, a week after the U.S. government blacklisted the Chinese company

·     Media & Telecom movers; CNBC reported DOJ antitrust chief Makan Delrahim still hasn’t made up his mind and remains in conversations with Sprint (S) and TMUS and he may be trying to find a way to support the deal; CTL was upgraded to neutral from sell at Guggenheim noting the stock has declined -34% (vs. the S&P 500 up 14%) and despite the continued challenging fundamental backdrop, they see a more balanced risk/reward from current levels

·     Hardware & Component news; NTAP slides as posted weaker-than-expected revenues for 4Q ($1.59B vs. $1.64 est. which was down 3% y/y), with a slower global demand environment providing continued pressure to top line and forward sales guide was ~$100M below Street (note NTNX, PSTG and NTAP have all experienced execution issues the last two quarters; SNPS reported solid F2Q results, with revenue and EPS better than consensus; MAXR shares jumped late day after Bloomberg reported it was selected by NASA for first part of lunar gateway

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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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