Market Review: July 01, 2019

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Closing Recap

Monday, July 01, 2019

Index

Up/Down

%

Last

DJ Industrials

117.40

0.44%

26,717

S&P 500

22.59

0.77%

2,964

Nasdaq

84.92

1.06%

8,091

Russell 2000

3.18

0.20%

1,569


 

Equity Market Recap

·     U.S. stocks rise to all-time highs after the U.S. and China agreed to restart trade talks this weekend at the G20 meeting, while President Donald Trump also offered concessions including no new tariffs and an easing of restrictions on Huawei Technologies Co Ltd, and China agreed to make unspecified new purchases of U.S. farm products. The news helped boost shares of technology and industrial stocks, though major averages finished off their earlier best levels (the S&P and Dow Industrials both traded above prior record highs on a closing basis) in a bout of profit taking. The Nasdaq Composite fell as much as 90-points from its intraday high of 8,150 (all-time highs 8,176.08 on April of this year), but still posted gains of nearly 1%. Volumes were lighter than normal given the holiday week (US stock markets close early on Wednesday and are closed Thursday for the 4th of July), as macro stories once again dominated market action. Semiconductors led the gains in tech, along with strength in casinos, while defensive utilities declined and energy stocks were mixed in a volatile day for oil prices.

·     Iran exceeded a key limit on enriched uranium agreed in its 2015 nuclear deal, the country’s foreign minister said on Monday, raising new fears of an escalation of tensions. Oil prices rise after reports OPEC members agree to a 9-month extension of oil production cuts, as per several OPEC delegates during their meeting in Vienna (ahead of meeting with non-OPEC members tomorrow). In Hong Kong, police fired tear gas to try to disperse hundreds of protesters, some of whom stormed the legislature, on the anniversary of the city’s 1997 return to Chinese rule.

·     Economic data was mixed as global PMI manufacturing data in Europe and Asia fell short of estimates: 1) China June Caixin Manufacturing PMI reported at 49.4 vs. est. 50.1 (back into contraction territory); 2) Taiwan’s PMI fell to 45.5, its lowest levels since 2011; 3) Japanese manufacturing activity contracted in June to hit a three-month low, as the Japan Manufacturing Purchasing Managers’ Index (PMI) dropped to a seasonally adjusted 49.3 from 49.8 in May, and also down from a preliminary reading of 49.5; 4) IHS Markit said its UK Purchasing Managers Index for the manufacturing sector fell to 48.0 in June from 49.4 in May, hitting its lowest level since February 2013

Economic Data

·     ISM Manufacturing for June slipped to 51.7 from 52.1 last month, but was above the 51.0 estimate, helping ease fears of slowing (still, the data point at its lowest level since Oct. 2016 as new orders fell to 50 vs 52.7 prior an prices paid fell to 47.9 vs 53.2)

·     Construction Spending for May fell (-0.8%), worse than the estimate for an unchanged reading, while April was revised to 0.4% gain from unchanged; private construction fell (-0.7%) in May while public construction fell (-0.9%) in May

·     Manufacturing PMI for June was 50.6 vs. Flash Reading 50.1 and up from 50.5 in May (but down from year ago level of 55.4); employment falls to 50.8, its lowest level since August 2016 and vs. 51.9 in May while new orders rise vs prior month

 

Commodities

·     Oil prices were all over the place on Monday, settling at $59.09 up 62c or 1.06% (off lows of $58.34 and down from earlier highs of $60.28) in what was a volatile session for prices that jumped into settlement. Prices rose early as OPEC members reached a consensus to extend its current production cuts for 9-months. OPEC members began its first meeting Monday, and will meet with Russia and other oil producers on Tuesday. The current deal called for production cuts of 1.2 million barrels a day which expired on June 30th.

·     Gold prices fell sharply, with August futures dropping -$24.40 or 1.7% to settle at $1,389.30 an ounce, its biggest one-day percentage decline since June of last year, as the dollar spiked and investors fled more defensive/safe haven investments after the agreement to resume of trade talks between the United States and China. Spot gold fell to lows around $1,381.51, its lowest since June 20 and is now down from 6-year highs last week of $1,438.63 an ounce, driven by a dovish outlook from major central banks and an escalation of tensions between the U.S. and Iran.

 

Currencies

·     The U.S. dollar outperformed, as the dollar index (DXY) rose as much as 0.7% to 96.80, two-week highs following news the U.S. and China agreed to restart their troubled trade talks, with investors selling safe-haven currencies as the yen and Swiss franc fell. But the dollar was broadly higher, rising vs. majors such as the euro and Pound following weaker PMI manufacturing data overseas, overshadowing expectations the Fed will lower rates at their July meeting. Bitcoin prices slid to lows of down roughly 18% as it briefly breaks the $10,000 level (low $9,986) – this after hitting last week hi’s of $13,851 on 6/26. The Turkish Lira rises to its strongest level since April after President Tayyip Erdogan said he heard from U.S. President Donald Trump there would be no sanctions over Turkey’s purchase of Russian S-400 Defense systems.

 

Bond Market

·     Treasury prices slipped with yields recovering off lows earlier in the session, as investors rotated into riskier assets amid improving trade between China and the U.S. The benchmark 10-year yield fell to lows (but held) the 2% level before bouncing to highs around 2.05%. The 2-year yield recovered off 1.75% lows to above 1.8% midday. Treasury prices remain well bid given the expectations the FOMC will cut interest rates when they convene in July for their next meeting (despite stocks trading around all-time highs). Treasury yields got a small bounce late morning after the U.S. ISM manufacturing data was slightly better than expected.

 

 

Macro

Up/Down

Last

WTI Crude

0.62

59.09

Brent

0.32

65.06

Gold

-24.40

1,389.30

EUR/USD

-0.0086

1.1287

JPY/USD

0.60

108.45

10-Year Note

-0.023

2.029%

 

 

Sector News Breakdown

Consumer

·     Retailers; WMT said it plans to invest 8 billion yuan ($1.2 billion) in China over the next 10 years to upgrade logistics/also said it will set up or renovate more than 10 logistics centres in the country; ETSY initiated with a buy and $75 tgt and Wayfair (W) a buy and $175 tgt at Needham; FIVE resumed overweight and $135 tgt at Morgan Stanley calling it a high quality discount retailer with differentiated value proposition, best-in-class store returns, and long unit runway

·     Consumer Staples; MNST shares dipped initially after KO said an arbitration panel informed them they could sell its energy drink under the terms of contract with MNST; COTY shares dropped after saying new turnaround plan, and expects to record an impairment for its intangible assets of about $3 billion; PFGC agreed to acquire privately held rival Reinhart Foodservice for $2 billion

·     Restaurants; YUM was downgraded at Longbow to underperform noting shares trading at nearly a 25% premium to its closest quick-service peers despite carrying similar balance sheet leverage as well as comp and unit growth profiles; weakness in casual dining sector today broadly, with SHAK leading declines after hitting record highs, though weakness in DPZ, WING as well

·     Casino & Leisure movers; in leisure, BC was downgraded to sector perform at RBC and cuts price target to $47 from $55 as likes BC’s positioning mid-to-long term, but near-term weather headwinds force company to destock; SIX was upgraded to overweight at KeyBanc predicated on an improving near-term setup, led by data supporting above-consensus attendance trends for 2Q19; casino stocks rise (WYNN, MGM, LVS, MLCO) as June gambling revenue in Macau rises 5.9% y-o-y, as sentiment to gamble sees an uptick – June’s figure of 23.8 billion patacas ($2.95 bln) is ahead of analyst expectations of a gain of 1-3%

 

Energy

·     Energy stocks were active amid rising oil prices given commentary out of the OPEC meeting in Vienna, where delegates point to a 9-month extension of oil production cuts. Iraq’s oil minister said on Monday that his government and the rest of OPEC seek to control global oil inventories and restore balance to the oil market. OPEC met today followed by talks on Tuesday with Russia and other allies (non-OPEC members).

·     In stock news; XOM said that in Q2 it expects higher oil prices and refining margins compared to the prior quarter, but the gains will be offset by lower natural gas and weaker margins in its chemicals business; BE rises after a subsidiary of DUK announced it will acquire a portfolio of distributed fuel cell technology projects from Bloom Energy; Barclays upgraded CPE to overweight saying it offers a better risk-adjusted high-leverage oil beta play, while the firm downgraded SM to underweight in part due to concern that small- to midcap E&P’s continue to underperform large caps

 

Financials

·     Bank movers; banks were generally strong, adding to last week gains following the positive annual Fed stress tests last Thursday which allowed many top banks to announce stock buybacks and boost dividends; in research, Morgan Stanley upgraded shares of SBNY, EWBC (both to overweight) and WBS (to equal-weight). In insurance; GNW received the go-ahead from China Oceanwide Holdings’s consent to shop around Genworth MI Canada in hopes that Canadian regulators will then clear the proposed purchase of Genworth Financial by Oceanwide. In consumer finance and lending; EVOP was downgraded at BTIG and removing their price target of $31 after its stock price exceeded that level saying valuation looks full; GSKY was downgraded to hold at SunTrust sending shares lower as believe beyond C19, we have less conviction that GreenSky can maintain 20%+ rev growth.

 

Healthcare

·     Pharma & Biotech movers; RARX shares rise for a 7th straight day, and up 13 of the last 14 sessions – follows the recent addition of the IMNM indication for zilucoplan (on June 4th); ZTS was downgraded to neutral at Bank America citing YTD outperformance as they raised their price tgt to $120 from $111; BIIB said results from an open-label Phase 2 clinical trial, NURTURE, evaluating its Spinraza (nusinersen) in 25 pre-symptomatic patients with spinal muscular atrophy (SMA) showed a long-term treatment benefit; BCYC said partner Oxurion’s early-stage study in patients with an eye condition brought on by diabetes recorded no drug-related side effects or dose-limiting toxicities; UTHR upgraded to outperform at Credit Suisse as sees downside limited

 

Industrials & Materials

·     Transports; Freight railroad operator GWR to be acquired in an $8.4B buyout deal including debt by Brookfield Asset Management Inc. and Singaporean sovereign wealth fund GIC, with holders to receive $112 per GWR share, a 12% premium https://on.mktw.net/2Jfdd4Q ; ECHO was downgraded at Stephens saying the stock could be range-bound until investors get more confidence that freight trends are improving.

·     Metals; FCX shares fell as cut its gold sales volume forecast for Q2 saying it sees market-to-market impact of lower copper prices in the quarter associated with March 31, 2019, provisionally priced sales will reduce Q2 revenue by ~$85M./sees 2Q gold sales volume 190,000 oz, saw 265,000; gold miners slumped (GOLD, AUY, NEM) as gold prices declined following relatively positive results from the G20 summit in Japan triggering a retreat from defensive assets

·     Materials and Chemicals; WLK shares fall initially after forecasts Q2 EPS of 73c-87c on sales of $2.1B-$2.2B (below estimates of $1.34/$2.19B) saying its average margin did not rise as much as industry pricing forecast at the start of Q2 2019/also forecasts FY EPS below estimates; BG, MOS, ADM rise after China agrees to make unspecified new purchases of U.S. farm products

 

Technology, Media & Telecom

·     Large cap names & Internet; AAPL shares got a bounce on the China/US trade truce headlines, as Wedbush said they believe a resolution to the China tariff situation could add between $20-$25 per share to Apple’s stock over the coming months in our opinion, as this would take away the dark cloud currently shadowing the stock; China based ADR’s such as BIDU, BABA, JD, VIPS were among gainers in technology amid renewed trade talk news between the U.S. and China

·     Semiconductors; big rally in chip stocks after Presidents Trump and Xi agreed to a US-China trade truce, while Trump also said he would allow US companies to sell equipment to Huawei Technologies (shares of SWKS, MU, AVGO, QRVO, and optical names NPTN, ACIA which rely on trade and Chinese demand to boost revenue jumped); WDC was upgraded to buy at Mizuho; AMAT said it is acquiring Kokusai Electric Corp. for $2.2B from the global investment firm KKR

·     Software movers; PLAN upgraded at Goldman Sachs to buy and tgt raised to street hi matching $62 citing the high likelihood of PLAN achieving its "Blue Sky scenario" in 2020; SWI was downgraded to sell at Goldman Sachs as see limited possibility for multiple expansion given its end market exposure and already best in class operating margins; ZM downgraded to sell form neutral citing valuation at Goldman Sachs

·     Media & Telecom movers; FOXA was downgraded to neutral at Guggenheim and cut tgt to $38 to reflect incremental investment costs in fiscal 2020 and to refine our outlook of the timing of carriage renewals

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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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