Market Review: June 21, 2019

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***The “Closing Recap” will resume next Wednesday June 26th

***No notes next Monday and Tuesday (6/24, 6/25)

 

 

 

 

 

 

Closing Recap

Friday, June 21, 2019

Index

Up/Down

%

Last

DJ Industrials

-34.18

0.13%

26,719

S&P 500

-3.65

0.12%

2,950

Nasdaq

-19.63

0.24%

8,031

Russell 2000

-13.85

0.89%

1,549


 

Equity Market Recap

·     U.S. stocks slipped into the bell, snapping its 4-day win streak though the S&P touched a new record intraday high (2,964.15) on follow through optimism from the lower interest rate outlook out of the Federal Reserve, a recovery in energy stocks and hopes ahead of President Trump/Chinese leader Xi meeting. Stocks got a bump after U.S. Vice President Mike Pence’s decision to defer a planned speech on China policy until after trade talks between the world’s two largest economies. Meanwhile, the Commerce Department is taking aim at China’s supercomputing push with new export restrictions that effectively cut five major Chinese developers of next-generation high-performance computing off from U.S. technology (this did not weigh on technology shares, but may get more attention next week). News that Trump aborted a military strike on Iran in response to Teheran’s downing of a U.S. drone kept oil prices and energy stocks higher. Stocks volume was greater than average late day due to options expiration today as well as a rebalance ahead of the Russell changes next Friday. Oil prices gained 0.6% to $57.43, up 8.8% this week, its biggest weekly percentage gain since early December amid fears of a military conflict between the US and Iran. The extended rally in gold and bonds this week came courtesy of the Fed outlook on the economy, trade and interest rates, while the dollar was the big loser. Couple of key earnings next week with transport giant FDX reporting as well as Dow components NKE and WBA, follows better results in software (ORCL, ADBE) on the week.

Fed Commentary

·     St. Louis Federal Reserve bank president James Bullard said he dissented at this week’s FOMC meeting because he felt weak inflation and uncertainties about the outlook for economic growth warranted an interest rate cut. "Inflation measures have declined substantially since the end of last year and are presently running some 40 to 50 basis points below the FOMC’s 2% inflation target," Bullard said in a statement.

·     Federal Reserve Vice Chairman Richard Clarida said this morning that “the case for providing accommodation has increased,” in an interview on Bloomberg Television. “Especially in the last six or eight weeks, there has been elevated uncertainty about the outlook.”

·     Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, said in an essay today that he advocated for a 50-basis-point rate cut to 1.75%-2% and a commitment not to raise rates again until core inflation reaches their 2% target on a sustained basis.

 

Commodities

·     Oil prices posted big gains on the week, rising 36c or 0.63% today to settle at $57.43 per barrel (best level in 3-weeks) up 8.8% on the week, while Brent prices rose 75c or 1.16% to settle at $65.20. Prices jumped on Thursday amid escalating military tensions in the Gulf region and the threat of potential U.S. airstrikes on Iran. Overnight President Donald Trump said he called off airstrikes on Iranian targets just minutes ahead of the strikes, saying the attack was not proportionate. Gasoline futures jumped following a fire at a key refinery in Philadelphia, with July gasoline up about 7c, or 3.9%, to $1.856 a gallon, adding 7.1% for the week. Natural gas prices were little changed at $2.19 mln Btu’s, near 3-year lows after bearish inventory data Thursday.

·     Gold prices end the day and week higher, rising $3.20 or 0.2% to settle at $1,400.10 an ounce, its first settlement above the psychological level since Sept 2013, ending the week higher 4.1% on dovish Fed commentary and increasing tensions with Iran. The dollar slumped this week, boosting the price of gold (inverse relationship) after several Fed speakers suggested they supported interest rate cuts in the future amid uncertainty for the global economy from the ongoing trade dispute between the U.S./China and weaker economic data. July corn futures fell 6.6 c to $4.43 a bushel late day on profit taking after hitting 5-year highs earlier this week (rain in the Midwest has disrupted crop planting).

 

Currencies

·     The U.S. dollar dropped this week, falling over 1.3% (dollar index down to 96.25 late week from high 97.76 mid-week) with the main catalyst Wednesday’s FOMC meeting where 8 of 17 Fed committee members anticipated interest rates cuts by year-end (note Fed Bullard was the only FOMC member who voted for a rate cut in June). The sudden reversal in sentiment by the Fed from “hawkish” to “dovish” has pressured the greenback (they raised rates last in December), much to the delight of President Trump who has been (to say the least) displeased with the Fed raising rates last year. The euro bounced back late week to highs around 1.137 today (up 0.6%), a sharp recovery from Tuesday’s low of 1.1181 after dovish Draghi comments on stimulus. The dollar bounced off January lows vs. the Japanese yen, while the Pound ended up 1% on the week. Bitcoin prices quietly to their best levels since May 2018, off earlier highs of $9,962 (note Bitcoin has not been above the $10,000 level since March 2018 – and all-time highs $19,511 in Dec ’17).

 

Treasuries

·     Treasury yields recover off multi-year lows yesterday for the 10-year and 2-year. It has been a good few weeks for Treasuries (not so much for yields), but prices slipped late afternoon heading into the weekend. The yield on the benchmark 10-year rose to 2.065%, above yesterday’s lows of 1.97%, while the 2-year yield climbed to 1.778% from lows of 1.693% yesterday. The dovish Fed outlook and geopolitical tensions with Iran boosted interest in safe-haven assets this week.

 

Economic Data

·     Weak manufacturing data: the June U.S. PMI Composite Flash: 50.6 (lowest reading since Sept 2009) vs. 50.9 consensus 50.9 prior; Manufacturing PMI 50.1 vs. 50.4 consensus, 50.6 prior and services PMI 50.7 (lowest since February 2016) vs. 50.9 consensus, 50.9 prior.

·     Existing home sales rise 2.5% to 5.34M vs. est. 5.3M (prior month revised to 5.21M from 5.19M); there was 4.3 months’ supply in May vs. 4.2 in April; median home price rose 4.8% from last year to $277,700 (biggest gain since August of last year); Inventory rose 4.9% to 1.92M homes

 

 

Macro

Up/Down

Last

WTI Crude

0.36

57.43

Brent

1.15

65.20

Gold

3.20

1,400.10

EUR/USD

0.0068

1.1361

JPY/USD

0.11

107.40

10-Year Note

0.037

2.066%

 

 

Sector News Breakdown

Consumer

·     Retailers; auto retailer KMX touched record high after Q1 earnings and revenue topped consensus ($1.59/$5.37B vs. $1.49/$5.18B) while its Q1 total used vehicle unit sales up 13.0%, including a 9.5% increase in comparable store used unit sales (above est. 5.1%) due to strong conversion, web traffic growth; CROX was upgraded to outperform at Baird with $29 tgt saying the stock looked compelling following a share pullback

·     Consumer Staples; TSN tgt was raised to $100 at Barclays while they upgraded JBS to OW with a higher price target of R$26 saying diversified animal based protein companies seem set to benefit most from the worsening African Swine Fever (ASF) situation in China and other countries in Southeast Asia; SFM named former Walmart executive Jack Sinclair as their new CEO and announced the resignation of interim co-CEO and CFO Brad Lukow

·     Restaurants; PZZA shares weak after Stifel lowered 2019 and 2020 EBITDA estimates to ~$80M (from $95M) and ~$88M (from $108M), respectively, to reflect higher than expected investments associated with royalty relief and national marketing fund contributions, partially offset by slightly higher SRS projections

·     Housing & Building Products; homebuilders fell after recent outperformance on lower interest rate expectations; Existing home sales data today came in slightly better, but appears a little caution ahead of earnings from two names next week (LEN, KBH) and a bounce in Treasury yields; INVH shares slipped as BX shaves its holdings for second time in less than a month as the PE firm sold 37.5 mln shares for gross proceeds of ~$1B

·     Casino & Leisure movers; SEAS was upgraded to buy from neutral and raise tgt to $39 from $31 at Goldman Sachs; CCL adds to yesterday’s 7.6% decline after analysts weigh in on yesterday co lowers year EPS outlook to $4.25-$4.35 from prior view $4.35-$4.55 as sees lower ticket prices in 2H of the year

·     Services; shares of GEO and CXW active after Elizabeth Warren said that private prison companies have spent millions to turn our criminal and immigration policies into ones that prioritize making them rich instead of keeping us safe—with terrible consequences. Today I’m announcing my plan to end this private profiteering off of cruelty; KFY shares fell after guides Q1 EPS 73c-81c on revs $466M-$486M below est. 82c/$488.5M

 

Energy

·     Energy stocks finished the week on a strong note, getting a late week boost from oil prices, helping ease pressure on the sector that has underperformed the last few months on rising supply concerns. Utility stocks touched all-time highs yesterday as Treasury yields sank to nearly 2-year lows, making higher dividend paying sectors more appealing. Baker Hughes (BHGE) total U.S. rig count fell -2 to 967, with oil rigs rose 1 to 789 and gas rigs were down -4 to 177. PCG shares jumped midday after a Bloomberg report that the utility has been shopping a new plan that would have it emerging from bankruptcy in March with a $14B fund established to address past wildfire claims and another $20B statewide fund for future fires

·     Refiners PBF, VLO, HFC, DK, MPC, PSX) active as the refinery fire the top story in the energy complex today (taking some attention away from Iran tensions with US), as gasoline prices jumped following an explosion and massive fire at the Philadelphia Energy Solutions refinery, the largest gas refinery on the east coast. The crude section at the Girard Point portion of the 335K bbl/day refinery reportedly was shut down due to the fire. A fire broke out on June 10 at the same refinery, which is believed to have affected a 50K bbl/day catalytic cracking unit

 

Financials

·     Bank movers; banks were mixed with weakness in European banks early (DB, CS, BCS), while U.S. banks enjoyed a little bounce after recent weakness as Treasury yields inch higher; KEY outperformed in regionals after Baird upgraded shares to outperform

·     Consumer finance and lending; PYPL said that current Chief Operating Officer and EVP, Bill Ready, will step down from his current role in order to pursue other entrepreneurial interests; QD shares rise after raising its adjusted net income forecast for FY 2019 to be greater than 4.5 bln yuan ($654.72M) from prior expectations of greater than 3.5 bln yuan; Susquehanna said Visa’s (V) stock is poised to outperform MA as it now trades at a 4X premium to Visa in terms of P/E, an all-time high. Visa used to trade at a significant premium to MA, but that has reversed

 

Healthcare

·     Pharma movers; EXEL said a late-stage trial of a combination of Cotellic and Tecentriq with partner Roche AG did not meet the main goal of preventing cancer from progressing in melanoma patients; AGN said the FDA approved its supplemental biologics application (sBLA) for BOTOX® for the treatment of pediatric patients (2 to 17 years of age) with upper limb spasticity; OCUL said the FDA approves a supplemental new drug application for Dextenza to treat swelling after ophthalmic surgery/Dextenza is now approved for treatment of both ocular inflammation and pain following ophthalmic surgery; AXGT rising for the 7th time in 8 days – initiated as a new outperform and $18 tgt at Leerink today follows recent earnings and strategic gene therapy development partnership

·     Cannabis sector active. Led by weakness in CGC as reported Q4 revenue C$94.1M vs. C$22.8M a year ago and were up sequentially from C$83M in Q3 (but below est. C$95.2M); Canopy said it took in C$68.9M in Q3 from sales of recreational pot, down from C$71.6M the quarter before, when legal sales began two weeks into the quarter. Piper said they continue to estimate a $250-500B potential long-term global cannabis market, with a $15-50B near-term opportunity, and believe Canopy is well positioned in the sector (TLRY, ACB, CRON, GWPH active)

·     Biotech movers; ANAB shares plunged after Credit Suisse slashed its tgt to $79 from $137 and downgraded to neutral as lowers assumed probability of success for the company’s experimental drug etokimab to 35% from 55% as a treatment for atopic dermatitis and to 40% from 45% as a treatment for asthma. Separately, Stifel downgrade ANAB saying they are less confident etokimab will be meaningfully differentiated from SNY/REGN’s Dupixent, which we think is required for the stock to work; REGN and SNY said a Phase 2 trial evaluating the investigational IL-33 antibody REGN3500 met the primary endpoint of improvement in loss of asthma control; ARWR rises after saying the FDA granted ‘orphan drug’ status to its drug ARO-APOC3 to treat familial chylomicronemia syndrome

·     Medical equipment and devices; BRKR tgt raised by several analysts (to $55 at Deutsche Bank, $57 at BTIG and $49 at Cowen) after analyst day as mgmt provided a three-year financial model for the first time, including: 1) organic revenue CAGR of 5-7; 2) OM expansion of 75-100 bps annually to achieve >20% OM by 2022; and 3) Non-GAAP EPS CAGR of 11-15%

·     Managed Care; UNH has agreed to buy health-care payments firm Equian LLC from its private-equity owner for about $3.2B according to reports https://on.mktw.net/2FomrdJ ; Leerink said that if UNH does buy Equian, it is less likely to buy MGLN in the near-term, assuming an all-cash deal, and taking into account UNH’s recent $4.3B deal for DaVita Medical Group, the Equian buy would fully allocate the $6.5B-$8B of operating cash flow UNH earmarked for growth capital in 2019. In February, Reuters reported that Magellan was exploring selling itself after coming under pressure from Starboard Value LP; Bernstein said CVS could become the #2 to UNH in integrated MCO and care delivery, with a potential doubling of stock price in 3 years if the medium-term objective should be to shift the company from 25% to over 50% MCO and care delivery earnings

·     Healthcare Services; IQV was upgraded to buy at Mizuho and upped target to $175 from $150 saying after the investor day it became clear that IQV is not just differentiated from its peers, the company is actually light years ahead of its competitors; CTLT upgraded to buy at Jefferies saying its profile has been shifting to high-value, higher growth biologics, with the Paragon deal adding an exclamation point; LH upgraded to buy at Deutsche Bank which reflects an increasingly constructive view on the Covance contract research business

 

Industrials & Materials

·     Industrial & Machinery; CAT shares slipped after rising for the last 6-trading sessions, downgraded to underweight at Atlantic Equities; in transports, FWRD said it sees Q2 EPS to be approximately 15% below the low end of its previous EPS guidance range as a result of a $5.0M reserve recorded in June 2019 for pending vehicular claims; in materials, SEE shares tumbled after the company said it terminated Chief Financial Officer for cause after an internal review, promoting a downgrade to underperform at Bank America. The industry will be watching the G20 meeting late next week for any signs of easing trade concerns.

 

Technology, Media & Telecom

·     Semiconductors; MU tgt lowered by two analysts today as JPM reduced tgt by $14 to $50 citing U.S. curb on Huawei and tougher memory pricing environment, while Baird cut tgt o $28 from $32 saying that the downturn in NAND memory chips could extend well into 2020; European wafer maker IQE warned its 2019 revenue would miss forecasts, blaming a bigger than expected hit on the industry’s supply chain from U.S. restrictions on China’s Huawei. Quietly late day, the U.S. added China names to the entity list may not be as well-known as Huawei but they are important players in china and could potentially disrupt the PCs/server in china.

·     Services & Software movers; CLDR announced a strategic partnership with IBM to develop joint go-to-market programs designed to bring advanced data and AI solutions to more organizations across the expansive Apache Hadoop ecosystem; LKSD shares fell over 20% after the U.S. Department of Justice filed a lawsuit in the United States District Court for the Northern District of Illinois to enjoin Quad’s proposed acquisition of LSC Communications

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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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