Market Review: May 29, 2019

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Closing Recap

Wednesday, May 29, 2019

Index

Up/Down

%

Last

DJ Industrials

-221.98

0.88%

25,125

S&P 500

-19.57

0.70%

2,782

Nasdaq

-60.04

0.79%

7,547

Russell 2000

-14.16

0.94%

1,489


 

Equity Market Recap

·     Stocks end lower but bounce meaningfully late afternoon (saw a pop in stocks late day following a weak bond auction that lifted yields), ending well off the worst levels. Major U.S. averages fell to their lowest levels in about 3-months amid several factors including ongoing trade issues with China, political turmoil in Europe (UK/Italy), plunging oil prices and slowing global concerns…but it appears the recent surge in Treasury markets has raised a red flag for stock markets. Since the Fed has gotten more dovish from their rate hike last December (as fed fund futures now see the next move as a rate cut), Treasury yields have pulled back in recent months, but has really picked up steam over the last week, with the 10-year yield falling as low as 2.21% today (lowest in 20-months), the 2-year sliding to 2.06% and the 3-month/10-yr yield inverted by 12 bps as of today…raising recession fears – but stocks rallied late as yields jumped to afternoon highs back above 2.25%. The rising recession fears and slowing growth concerns have really hampered sentiment as stocks have pulled back from recent record highs just a month ago. In Europe, the Stoxx 600 ended the day below its 100-DMA (373.49), with the 200-DMA the next support level to test (368.71) – as ended down at 370.51 with all sectors lower with 2% drop for IT and 1.7% for Industrials, Healthcare, Discretionary and Materials.

·     The Dow Jones Industrial Average slipped as much as 400 points, breaking below the 25K level for the first time since early February (lows 24,938), amid weakness in JNJ over 5% as a trial implicating the drugmaker in the opioid crisis grinds on, while financials were weak (JPM, GS) amid the plunge in Treasury yields and energy stocks (XOM, CVX) on lower oil. Today also marked the first day since early March that the S&P 500 and Nasdaq Comp fell below their 200-day moving averages before recovering. In other sector action, consumer discretionary stocks were pressured amid another round of weak earnings and guidance for the group (ANF, GOOS, CPRI) and ahead of more results tonight/tomorrow (DLTR, DG, PVH, BURL) as trade impact/tariffs hurt sentiment. Transports drop again as the Dow Transports fell below the 10K level.

·     Special Counsel Robert Mueller said in an unexpected press conference that he was closing his office and stepping down as the Russian collusion investigation came to an end. Mueller did say he couldn’t reach a conclusion on whether Donald Trump obstructed justice, stopping short of delivering a full exoneration of the president. “If we had had confidence the president clearly did not commit a crime we would have said so,” Mueller said in his first public remarks in the two years since he was named special counsel.

 

Commodities

·     Oil prices fall, but close well off the worst levels; July WTI oil dropped 33c or 0.6% to settle at $58.81 per barrel, though was well off the $56.88 low ahead of weekly inventory data tonight (API) and tomorrow morning (EIA), each delayed a day due to the Memorial Day holiday. Commodity prices dipped after reports out of Asia (Chinese newspapers) indicated China would use the rare earths card in its trade war with the United States, stoking concerns that an ongoing stand-off could hurt crude demand. Note WTI crude and Brent are set for their first monthly decline in five. Meanwhile corn prices popped to a 3-year high after a severe delay in plantings in the US Midwest due to extreme wet weather. Gold prices edged higher, with June gold up $3.90 or 0.3% to settle at $1,281 an ounce, as the need for defensive assets overshadowed another bounce in the U.S. dollar.

 

Currencies

·     The US dollar was broadly higher vs. rival currencies as the dollar index (DXY) added to yesterday gains, with the DXY trading back above the 98 level, led by gains against the euro which fell to lows around 1.135 today (political issues in the UK and Italy weighs on sentiment); the Canadian dollar pared losses after the Bank of Canada keeps key interest rate target on hold at 1.75% (initially fell to 5-month lows vs. the US dollar at 1.3547); the Yen rises on safe-haven demand.

 

Bond Market

·     Treasury market’s rallied as Treasury yields dropped sharply with the 10-year falling as low as 2.21% (20-month lows), the 2-yr 2.06% and 30-yr 2.66% before paring losses on a weak bond auction, while the 3-month and 10-yr yield inverted by about 12 bps now (2.346% vs. 2.226%). Amid the turmoil in Europe, slowing global growth fears and of course the potential impact on global economies given the trade dispute with the U.S. and Beijing, investors have once again rotated into the safety of Treasuries. Treasury prices pared earlier gains following a week government auction after the U.S. Treasury sold $32B in 7-year notes at a yield of 2.144% well above the 2.125% when issued prior, but with a bid-to-cover (demand) at 2.30, below the 2.49 prior auction and indirect bidders awarded 58.3% of the auction and 11.3% to direct bidders.

 

 

Macro

Up/Down

Last

WTI Crude

-0.33

58.81

Brent

-0.66

69.45

Gold

3.90

1,281.00

EUR/USD

-0.0024

1.1136

JPY/USD

0.09

109.46

10-Year Note

-0.00

2.255%

 

 

Sector News Breakdown

Consumer

·     Retailers; CPRI shares slipped after mixed quarterly results as operating margin and Kors unit comparable store sales missed estimates/gross profit fell 80 bps to 59.4% of sales during the quarter/guides Q1 revs to $1.36B vs. est. $1.45B; watch names weak early (FOSL, MOV) after CPRI said Kors watch/jewelry category hurt Q4 comps by 170bps; ANF shares dropped as much as -20% after mixed results as posted smaller EPS loss (29c) on in-line revenue ($734M), but overall Q1 comp sales rose 1% missing the 1.4% est. as Hollister comps misses (rose 2%); GOOS 52-week lows after Q4 revenue of C$156.2M just missed ests. raising growth concerns

·     Non-apparel retailer; DKS raised its full-year EPS of $3.20-$3.40 from prior $3.15-$3.35 (est. $3.27), while Q4 EPS and revenue topped views while comp sales were flat (vs. est. -1.5%) – but shares fell amid high inventory levels and EPS guidance suggesting a decline ex. buybacks; Wedbush said mattress retailer TPX product sales were strong over Memorial Day weekend citing checks with brick and mortar mattress retailers and industry contacts; dollar stores DG and DLTR to report earnings tomorrow morning

·     Consumer Staples; in food, GIS was downgraded to sell from neutral at Goldman Sach’s citing the mounting deceleration concerns it sees (recall weakness in food space yesterday as well – MDLZand KHC which traded record lows; food stocks may be feeling pain from surging corn prices as meat producers will face higher costs for livestock feed (TSN)

·     Restaurants; BLMN will replace TVPT in the S&P SmallCap 600 effective June 3rd; CMG shares were pressured (possibly on impact from rising grain prices from flooding/increased costs; Cowen the latest to note potential impact in the dining sector citing the African Swine Fever posing possible risk to protein inflation through at least 2020, with 10-15% of the global hog population affected, or roughly 5% of the global protein population when including chicken and beef, as of August 2018 said WING most insulated, followed by DNKN and QSR and remains reluctant to get more negative on the more susceptible stocks at this point

·     Housing & Building Products; BBBY to add four new directors in settlement with activist trio, pursue permanent CEO; lumber futures 3-year lows to $286, down over 7%; housing stock seen as one of the beneficiaries of lower mortgage rates

 

Energy

·     Energy stocks were a victim of lower crude oil prices, with E&P, drillers, integrated and equipment names falling broadly despite analysts defending some names after the recent sell-off; Seaport Global noted post a 20% pullback for the average E&P through earnings, they’re bullish on the risk/reward for the space. With oil down almost $10/bbl since the start of earnings and the industry not exactly putting its best foot forward in Q1 thanks to a barrage of capex misses, they are not shocked to see the average E&P stock under Seaport coverage down 20% over the last month. With that said, we see a number of positives coming to fruition across the industry; stocks movers; DVN entered into a definitive agreement to sell its Canadian business to CNQ for $2.8B; XOM said at its annual shareholder meeting it expects to increase annual earnings potential by more than 140% and double potential annual cash flow from operations by 2025 from 2017 adjusted earnings; much like yesterday, defensive utilities not rallying in risk-off market sell-off, as the group drops from recent record highs for a third day.

 

Financials

·     Bank movers; there wasn’t much news in the banking/financial sector today, as the sector continues to be pressured by plunging Treasury yields which tends to put pressure on lending margins; PJC announced the sale of Advisory Research, Inc. through two separate transactions which will result in the firm exiting its traditional asset management business; insurance companies ALL were upgraded at Goldman Sachs to buy; FinTech sector quiet a day after the GPN and TSS $21.5B merger day (the third deal in the financial technology sector so far this year (WP as well as FDC deals this year).

 

Healthcare

·     Pharma movers; AMRN rises after its supplemental new drug application for Vascepa capsules seeking cardiovascular risk reduction indication has been accepted for filing and granted Priority Review designation by the FDA; FCSC receives FDA regenerative medicine advanced therapy designation for FCX-007 gene therapy for the treatment of skin disease RDEB; MNK said its Acthar Gel shows treatment benefit in rheumatoid arthritis (RA) study; large cap Pharma names were under pressure early, led by declines in JNJ as a trial implicating the drugmaker in the opioid crisis grinds on for a second day in Oklahoma; AGN traded to six-year lows on opioid fears

·     Biotech movers; INO slides after saying AZN intends to discontinue activities with respect to the research collaboration programs, other than MEDI0457, that are the subject of the parties’ license and collaboration agreement dated August 7, 2015; CARA announced topline data from the KALM-1 pivotal Phase 3 trial of Korsuva Injection in hemodialysis patients with moderate-to-severe chronic kidney disease-associated pruritus; in research, shares of ESPR, CLVS declined after Goldman Sachs downgraded to sell, while upgraded RDUS to buy; FOLD announced a major expansion of its collaboration with the Perelman School of Medicine at the University of Pennsylvania aimed at the research and development of gene therapies

·     Healthcare services and providers; EVH shares sharply lower down over 25% (note filing for shareholder stock sale (Momentum Health) yesterday) – also to buy 70% stake in Passport Health Plan for $70M; NXGN reported Q4 revenue and adjusted EPS ahead of estimates while bookings declined slightly y/y due to several one-off contracts that did not sign

 

Industrials & Materials

·     Aerospace & Defense; BA remains a focus of the trade war between the U.S. and China, while at the same time, the company said it has begun carefully mapping out the steps to ease its 737 Max back into commercial service once regulators lift a global grounding for its best-selling jetliner; HEI 52-week highs posted a better than expected Q2 with higher op margins (23.1%) and organic sales growth was ~17%, with total sales growth of ~20%/also raised its full year FY19 sales guidance to up 12-13% (from 10%), net income to 17-18% (vs. prior 12% and upped op margin guidance

·     Transports; the Dow Transports extend recent decline, falling and holding below the 10,000 level for the first time yesterday since January, as all sub-sectors were under pressure on slowing global growth fears (airlines (AAL, UAL), parcel (FDX, UPS), rails (NSC), truckers (JBHT, LSTR)

·     Metals & Materials; steel producers pressured early as MT said it would cut European production for the second time in a month as weak demand and high quantities of imports continue to take their toll (industry already under pressure from trade tensions with US/China; Australia’s Lynas (LYSCF) rose after Chinese media warned of a potential freeze on the supply of rare earth materials; CENX agrees to sell stake in JV to Guangxi Qiangqiang Carbon for 144.9M yuan

·     Chemicals; DWDP said it expects to record aggregate pre-tax, non-cash impairment charges estimated to be in the range of $800M-$1.3B primarily related to goodwill ahead of the completion of the realignment into agriculture, materials science and specialty products groups

 

Technology, Media & Telecom

·     Semiconductors; CY shares jumped mid-morning after Bloomberg reported that the company is weighing a sale after receiving takeover interest https://bit.ly/2HIte3o ; NXPI agrees to acquire MRVL’s Wi-Fi Connectivity business in an all-cash, asset transaction valued at $1.76 billion/acquisition encompasses Marvell’s Wi-Fi and Bluetooth technology portfolios and related assets https://on.mktw.net/2EHaX4D ; IDCC announced a $100M stock buyback; overall, the semiconductor sector (SOX) has tanked over the last three-weeks, with the latest piece of trade news being China may be ready to use rare earths to retaliate (citing a Chinese newspaper) as rare earths are a group of chemical elements used in high-tech consumer electronics, smartphones, rechargeable batteries. The Philly semi index (SOX) is down more than 300-points from its all-time high on 4/24 of 1,604.56, but up 12.5% YTD

·     Software movers; WDAY pulls back from 52-week highs yesterday after earnings results as posted better Q1 as EPS beat by 2c on revs of $825.1M, up 33% YoY (est. $814.1M), and YoY billings growth of 42%, above the consensus at 31%; UPLD acquired Kapost for $45M which is expected to contribute $15M in revenue and $7M in EBITDA; tonight earnings from PANW in the software security sector and VEEV in application software

·     Media & Telecom movers; Reuters reported overnight that TMUS and Sprint (S) may sell Boost Mobile for up to $3B, https://reut.rs/2HHU0sE ; FTR to sell operations and associated assets in Washington, Oregon, Idaho, and Montana to WaveDivision Capital, in partnership with Searchlight Capital Partners for $1.352B in cash

·     Hardware & Component news; FLEX was upgraded to overweight at JPMorgan saying the stock looks attractively valued relative to its peer group and relative to its own historical trading range; CAMP was downgraded to sell at Goldman Sachs and cut its tgt to $11

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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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