Market Review: May 31, 2019

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Closing Recap

Friday, May 31, 2019

Index

Up/Down

%

Last

DJ Industrials

-355.25

1.41%

24,815

S&P 500

-36.84

1.32%

2,752

Nasdaq

-114.57

1.51%

7,453

Russell 2000

-20.01

1.35%

1,465


 

Equity Market Recap

·     U.S. stocks were punished on the day as the latest tariff news out of Washington shook global markets further, this time being with Mexico. The White House released a statement last night announcing 5% tariffs on all Mexican imports starting June 10, in order to address the illegal migration crisis at the border. Tariffs would then rise to 10% on July 1, 15% on August 1, 20% on September 1 and 25% on October 1 if Mexico does not take sufficient actions. The move is just the latest by President Trump against large trading partners as the recently increased tariffs against China has sunk shares of industrials and technology stocks. With today’s losses the S&P 500 index posted its first monthly loss of 2019 while Treasury prices rallied, sending yields lower across the curve, with the 10-year dropping to 20 month lows and the 2-year slipping below 2%. Wall Street’s main indexes are down more than 6% in May, as investors have become increasingly worried about deteriorating trade talks between the U.S. and China trade war. Oil prices were obliterated in May, falling over 16% for the month after a 5% drop today. Outside of strength in defensive Utilities and REITs, broader markets were lower led by big declines in autos, beverages, transports among others leveraged to Mexican trade. The Dow Industrial Average fell for its 6th straight weekly decline, the longest since 2011.

·     Regarding future rate changes: Reuters reported that JPMorgan now sees the Fed cutting rates in both September and December after market pullback and potential impact of tariffs where they previously said it saw risks of Fed’s next move "as about evenly distributed"/said if U.S. tariffs on Mexican goods are raised to 25%, the Fed may well need to cut by much more than’ 50 bps. Regarding the Fed and rate cuts, futures traders are now pricing in a 92% chance of a rate cut by December, with the probability going markedly higher in the past few days. Back in March, Fed funds futures were pricing in a nearly 0% chance of a rate cut.

Economic Data

·     Personal Income for April rose 0.5% MoM, topping the 0.3% estimate while Personal consumption rose 0.3%, beating the 0.2% estimate; real personal spending was unchanged (in-line with estimates). Inflation readings showed: PCE prices rose 0.3% MoM (in-line with estimates) and were up 1.5% YoY (vs. est. 1.6%). Core inflation rose 0.2% Mom (in-line) and rose 1.6% YoY (in-line). The savings rate at 6.2% in April vs 6.1% MoM

·     Chicago PMI rebounded in May to 54.2 from 52.6 in April, as was mostly in-line with the 54.0 estimate by economists after falling to a more than two-year low in the prior month. The index still sits near the lowest level since President Trump took office in January 2017 and down from highs of 64.7 just three months ago

·     Final May Michigan Sentiment rose to 100.0 from 97.2 last month, but was slightly below the 101.5 estimate; the expectations index rose to 93.5 vs. 87.4 last month while the current economic conditions index fell to 110.0 vs. 112.3 last month

 

Commodities

·     Oil prices closed sharply lower, capping an awful week and month; WTI crude settles near the lows of the day, down over $3 or 5.4% to settle at $53.50 (lowest since early February), down around 8.7% for the week and over 16% for the month. Prices have plunged for the same reasons day-after-day, amid slowing global growth fears (weaker economies), the potential impact of tariffs/trade tensions with China, as well as oversupply concerns on bearish weekly inventory data again yesterday. WTI crude fell for the sixth time in eight days.

·     Gold prices surged on Friday, with August gold rising $18.70 or 1.5% to settle at $1,311.10 an ounce, its best settlement since April 10th, ending the month with a 2% gain. Gold was buoyed by a further rotation into defensive assets and fears of a global slowdown.

 

Currencies

·     The U.S. dollar was down vs. most currencies, but advanced against the Mexican peso, which fell as much as 3.3% before paring losses to -2.6% late day. The peso fell following the expected tariffs against the country by the U.S. The U.S. dollar fell to 4-month lows of 108.41 vs. yen, down more than 1% on the day (off overnight highs 109.62) as investors flocked to safe-haven assets. Meanwhile the Pound and euro each posted modest gains as the dollar index (DXY) slid -0.35%.

 

Bond Market

·     Treasury prices surge/yields plunge; the yield on the 2-year dropped more than 11 bps to below 1.95% (first move below 2% since February 2018 – note 52-week highs 2.973% on 11/8/18); the benchmark 10-year Treasury note yield fell over 6 bps to 2.151% (lows 2.14%), the lowest since Sept 2017 (52-week highs 3.2594% on 10/9/18). Yields overall falling globally as the 10-year German government bond fell to a negative -0.21% as the new tariff threat raised concern about economic growth. On shorter end of the curve, the 5-year yield fell over 8 bps to lows under 1.93% (52-week highs 3.0967% on 11/8/18). The fact fed fund futures are now pricing in rate cuts later this year also pushing yields lower. The 3-month and 10-yr yield curve remains inverted – widened today to 19 bps (3-mo 2.342% vs. 10-yr yield 2.152%) – raising recessionary fears.

 

 

Macro

Up/Down

Last

WTI Crude

-3.09

53.50

Brent

-2.38

64.49

Gold

18.70

1,311.10

EUR/USD

0.0039

1.1168

JPY/USD

-1.21

108.41

10-Year Note

-0.068

2.144%

 

 

Sector News Breakdown

Consumer

·     Auto sector; was one of the hardest hit sectors today following news of President Trump’s threat to apply a 5% tariff on imports from Mexico (and rise up to 25% on Mexican goods), which threatens the supply chain and is seen cutting into sales volume due to higher consumer prices. Shares of GM, Ford (F), and FCAU drop as well as Japanese automakers as a number of parts that bounce between the U.S and Mexico before final car assembly (HMC, NSANYand TM). RBC noted that 28% of GM’s 2019 North American production is being done in Mexico, compared to about 10% of Ford’s – auto parts makers ADNT, DLPH, AXL, LEA, MGA, VC also exposure

·     Regarding tariffs: Deutsche Bank noted in 2018, US nominal imports from Mexico were roughly $350B, of which $93B were auto imports. Hence, a 25% tariff would be worth $86.6B annually, with $23B of that falling on US autos, which could cripple the industry

·     Retailers; GPS the latest retailer to miss on earnings/lower guidance as EPS (24c vs. 32c est.) and comps (-4%) below estimates as weather and other macro factors impacted the business/cut year EPS view to $2.05-$2.15 from $2.40-$2.55; GCO shares jumped after Q1 EPS and revenue topped consensus with comp sales rising 5% vs. expected drop of (1%) and sees FY20 comp sales growth of 1% to 2% and EPS of $3.35-$3.75 (est. $3.57); COST delivered another good quarter beating many aspects of consensus expectations with comp sales up over 5%; after strength in dollar stores DG yesterday on earnings, discount retailer BIG follows up with a beat and raise quarter as comp sales rose 1.5% (raises FY19 EPS view to $3.70-$3.85 from $3.55-$3.75); retailers KSS, M, JWN, TPR, KSS at 52-week lows today; CONN shares dropped on earnings

·     Consumer Staples; beverages hit on Mexican tariff fear impact as BUD falls with Bernstein estimating that the brewing giant generates 10% of its EBIT from the sale of beer in Mexico while STZ falls with the company importing nearly all of its beer into the U.S. from Mexico; CVGW another casualty of the tariffs imposed on Mexico goods (avocados) ; KHC was upgraded at Piper to neutral after shares made new all-time lows which has fallen amid a weak outlook and accounting mishaps; cosmetics retailer ULTA solid results as comps increased 7% but quarterly revs just missed views while raised its year profit forecast to $12.83-$13.03 from $12.65-$12.85

·     Restaurants; RRGB shares fall after Q1 EPS of 19c fell well short of the 49c consensus driven by lower restaurant margin with adjusted EBITDA of $34.2M below views/Q1 comp sales fell (3.3%), as well as a (-5.5%) decline in traffic; shares of restaurants with exposure to avocados (guacamole) such as CMG under pressure on fears of rising prices

·     Housing & Building Products; in home products, WSM shares rose after Q1 EPS topped even the highest estimates while also raised the lower end of its full-year profit outlook for FY20 EPS to $4.55-$4.75 from $4.50-$4.75 prior and $4.60 consensus; CSS shares dropped more than 20% after suspending its quarterly dividend amid a focus on “near-term priorities of liquidity and debt management.”

·     Leisure and Services; in education, SCHL shares fell after cutting its 2019 views for adj. EPS, revenue and adj. EBITDA primarily as a result of certain factors affecting its Children’s Book Publishing and Distribution (lowers FY19 EPS view to 83c-$1.03 from $1.60-$1.70); in toys, MAT shares weak after having recently reduced production in China, but is actively increasing its capacity in Mexico

 

Energy

·     Energy stocks absolutely pummeled on the week as oil prices slide to the lowest levels in several months following a smaller than expected decline in U.S. crude inventories and fears of a global economic slowdown from the U.S.-China trade war. WTI crude posts its sixth loss in eight days, posting losses of around 14% for May which pressured energy related stocks (more than 7% declines this week for MPC, HAL, XEC, MRO, BHGE, SLB, VLO). Utilities bounce off lows, trades back to break even around 739, but index down about -3.4% on the week in broad mkt pullback (and off recent all-time highs 769.63 on 5/24). Baker Hughes (BHGE) weekly rig count shows total rigs rose 1 to 984, oil rigs up 3 to 800 and gas rigs down -2 to 184.

 

Financials

·     Banks move to the downside again; as Treasury market’s rally, pushing yields to the lowest levels in nearly 2-years, large cap and regional bank stocks have faltered because margins have come under pressure now that the Federal Reserve has moved away from raising interest rates further. With Fed fund futures (and JPM comments as well) suggesting the Fed may actually lower rates the tail end of 2019 due to market weakness and potential impact of tariffs, banks may see additional pressure; REITs moved higher amid lower yields (PSA, EQR, UDR, MAA, AVB, FRT)

 

Healthcare

·     Pharma movers; JNJ was ordered by a jury to pay $300M in punitive damages to a woman who blamed her rare asbestos-related cancer on decades of daily use of the company’s talc-based products; MRK said Keytruda in combination with chemotherapy for the first-line treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma reduced the risk of death by 40% in patients whose tumors expressed PD-L1 with CPS≥20; MYOV 15.15M share Secondary priced at $8.25; FOLD 16.28M share Secondary priced at $10.75

·     Biotech movers; all eyes on ASCO conference this weekend – American Society of Clinical Oncology (ASCO) 5/31-6/4, in Chicago, with several companies expected to reveal abstracts including: AMGN, BPMC, IOVA, REGN, AZN, BMY, EPZM, NVS, among others; MACK board has decided not to sell the company outright or any of its assets as it could not reach acceptable terms with potential buyers; IOVA announced updated data from studies of TIL therapy LN-145 in patients with advanced cervical cancer and TIL therapy lifileucel in advanced melanoma

·     Healthcare services and providers; MOH was upgraded to outperform at Wells Fargo and raise tgt to $177 from $139 after investor day (5/30) highlighted the LT sustainability of margins and growth which should be attainable if MOH can avoid losing ground in upcoming contract rebids

 

Industrials & Materials

·     Industrial & Machinery; Evercore ISI downgraded machinery stocks PCAR, CMI, OSK and TEX to In Line from Outperform as sees risk building up for vehicle makers in the back half of the year

·     Transports; KSU falls sharply, seen among the hardest hit names in transports given its exposure to Mexico (operates a commercial corridor of the Mexican railroad system and owns a track between Mexico City and Laredo, Texas/gets almost half its revenue from Mexico each year, AP noted); ride hailing companies active after UBER adjusted revs topped estimates in its first report as a public company while posted an Ebitda loss of $869M; transport index falls below the 9,800 level to its worst levels since January amid weakness in rails, truckers, and airlines

·     Metals & Materials; steel stocks have been pummeled of late on lower pricing fears and impact on demand due to strained trade policy between the U.S./China; NUE was downgraded to underperform from buy at Bank America and cut tgt to $50 from $68 to incorporate a lower near-term forecast for prices, especially for sheet and rebar, and a lower 2021-2022 forecast given expectations for a looming glut in steel

 

Technology, Media & Telecom

·     Semiconductors; group remains down roughly 17% from its all-time highs above 1,600 for the Philly semi index (SOX) on lower outlooks from chip makers amid the China trade war; MU tgt and estimates lowered at Stifel citing US-China trade tensions since shipments into China accounted for about 32% of MU’s FY18 revenue and Huawei accounts for 13% of sales

·     Software movers; ZUO shares plunge over 30% after disappointing guidance overshadowed a smaller Q1 EPS loss as guided Q2 and year lower/for year sees revs $66-68M (vs. est. $71.24M) and EPS loss (15c-13c) vs. est. (11c); VMW shares slipped after Q1 results topped views but Q2 and year EPS guide disappointed ($1.55 for Q2 and $6.49 for year vs. $1.57/$6.53); TWLO 7.01M share Secondary priced at $124.00; UPLD initiated buy and $61 tgt at Jefferies following its recent acquisition of content operations platform Kapost for $45M

·     Internet security; OKTA rises as reported strong Q1 results that handily topped the highest Street estimates for revenue, EPS, billings, FCF, while guidance for FY20 was revised higher/said had 52% year-over-year growth in subscription revenue; ZS mentioned positively by several analysts after earnings, posting revenue of $79.1M vs. est. $74.9M and billings of $84.7M (above est. $72.4M) also raised the FY19E revenue and billings guide, but the increase in billings guide was close to the beat in the quarter, and, given the run in the stock – the results followed weak guidance from PANW this week

·     Media & Telecom movers; Telecom names moved lower (VZ, T) lower following a Reuters report that Amazon is interested in acquiring prepaid wireless phone service Boost Mobile from TMUS that is likely to be viewed as a negative for all national carriers given Amazon’s history of entering adjacent markets “aggressively” and gaining scale and share, according to Citi

·     Hardware & Component news; NTNX Q3 revs of $288M missed to $297M estimate while billings of $346M (-1%) missed the $370M guidance and the 4QF19/July quarter revs, billings and margin guidance was well below Street estimates ($280M-$310M vs. $334M); TIVO bounces off 52-week lows yesterday after raising its full-year rev outlook overnight (low yesterday $6.63 vs. 52-week highs of $15.00 last June); DELL shares dropped after earnings

·     Internet; FB shares slipped after Ireland’s Supreme Court blocks Facebook’s bid to keep its privacy case out of the European Court of Justice/case relates to the transfer of EU citizen data to the U.S. and will go before the EU court in July; Reuters reported a U.S. judge ordered Facebook to give shareholders emails and other records concerning how the social media company handles data privacy, after data for an estimated 87 million users was accessed by the British political consulting firm Cambridge Analytica.

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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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