Mid-Morning Look: May 31, 2019

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Mid-Morning Look

Friday, May 31, 2019

Index

Up/Down

%

Last

 

DJ Industrials

-278.47

1.11%

24,891

S&P 500

-31.68

1.14%

2,757

Nasdaq

-97.28

1.29%

7,470

Russell 2000

-21.27

1.43%

1,464

 

 

U.S. equities pummeled on this final day of trading in May (a month to forget), with new trade and tariff fears pressuring stocks globally…but this time, the trade headlines targeted 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. Today’s announcement on Mexico takes a toll on other sectors such as autos (GM, F), transports (KSU), beverages (STZ, BUD), and food (CVGW, CMG) to names a few names punished this morning. Oil headed for its biggest monthly slump this year as fears that the U.S.-China trade war will hurt demand. Economic data today in-line to slightly better for confidence, manufacturing, income and spending. Given the market rout this month, 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.

 

Treasuries, Currencies and Commodities

·     In currency markets, the weakness in the Mexican peso standouts out today following the expected tariffs against the country by the U.S., falling over 3% vs. the dollar which is up at 19.75 on the day (highest levels since late December). The dollar was little changed following the higher than expected income and consumption data. The dollar fell below the 109 level against the safe-haven yen, but up from earlier four-month lows of 108.71. The dollar little changed vs. the euro.

·     Commodity prices mixed as oil prices on track for further declines, down roughly 13% for the Month on slowing global growth fears and impact due to trade tensions, as well as oversupply concerns on bearish weekly inventory data again yesterday. Gold prices rise back near the $1,300 an ounce level as investors rotate back into defensive assets.

·     Treasury market’s rally as the benchmark 10-year Treasury note yield fell over 7 bps to 2.151%, the lowest since September 2017. Yields overall falling globally as the 10-year German government bond fell more than 4 bps to at negative -0.21% as the new tariff threat raised concern about economic growth. The yield on the 2-year dropped more than 7 bps to 1.992%, dropping below the 2% threshold for the first time since February 2018

 

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

·     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.

 

 

Macro

Up/Down

Last

 

WTI Crude

-1.54

55.05

Brent

-2.17

64.70

Gold

9.85

1,298.50

EUR/USD

0.004

1.1170

JPY/USD

-0.88

108.75

10-Year Note

-0.06

2.166%

 

 

Sector Movers Today

·     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

·     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)

·     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

·     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

·     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

 

Stock GAINERS

·     BIG +10%; 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)

·     CCI +1%; towers outperform, led by CCI, AMT, SBAC

·     GCO +10%; 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)

·     NEM +1%; as defensive gold miners bounce early given the broader market sell-off

·     OKTA +9%; reported strong Q1 results that handily topped the highest Street estimates for revenue, EPS, billings, FCF, while guidance for FY20 was revised higher

·     UBER +1%; adjusted revs topped estimates in its first report as a public company while posted an Ebitda loss of $869M

·     WSM +10%; 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

 

Stock LAGGARDS

·     GM -4%; 5% tariff on imports from Mexico (and rise up to 25% on Mexican goods), threatens the supply chain and is seen cutting into sales volume due to higher consumer prices

·     GPS -14%; broad miss on 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

·     KSU -6%; 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)

·     NTNX -13%; 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 below

·     RRGB -15%; 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%)

·     SCHL -11%; 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)

·     STZ -6%; falls with the company importing nearly all of its beer into the U.S. from Mexico

·     ZUO -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)

 

Syndicate

·     Amicus (FOLD) 16.28M share Secondary priced at $10.75

·     Eversource (ES) 15.6M share Spot Secondary priced at $72.50

·     Myovant Sciences (MYOV) 15.15M share Secondary priced at $8.25

·     Twilio (TWLO) 7.01M share Secondary priced at $124.00

·     XBiotech (XBIT) 4.85M share Secondary priced at $8.25

_________________________________________________________________

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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