Market Review: July 15, 2019

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Closing Recap

Monday, July 15, 2019

Index

Up/Down

%

Last

DJ Industrials

26.79

0.10%

27,358

S&P 500

0.51

0.02%

3,014

Nasdaq

14.04

0.17%

8,258

Russell 2000

-8.21

0.52%

1,561


 

Equity Market Recap

·     U.S. stocks remained in a narrow trading range most of the session as markets prepare for a busy week of earnings, with energy, financials and industrials the biggest market decliners, while tech and interest rate sensitive names edged higher. Energy stocks dropped as Tropical Storm Barry didn’t do as much damage to platforms in the Gulf of Mexico this weekend as feared, while financial stocks were shaken after Citigroup quarterly results (ahead of a busy week of bank results) as the bank earnings/revenue topped consensus, but red flags raised with declines (not a big surprise) in trading revenue (stocks/bonds) as well as weaker net interest margins (NIM). Asian markets managed overnight gains despite a soft 2Q China GDP report that was more in-line than headlines suggested rising 6.2%, down from 6.4% last quarter and at 27-year lows, but was still in-line with economist views. M&A activity kept some stocks active with one deal in the biotech sector (GLPG) and one in the energy E&P sector (CRZO), while one deal appears to have fallen apart on price (SYMC/AVGO). Overall stocks were little changed, holding on to the record gains for the S&P, Dow Industrials and Nasdaq Composite reached last week on Fed rate cut hopes. After U.S. stocks surged last week, attention now turns to quarterly earnings, with a heavy dose of results in the banking sector especially (Citigroup earnings today) and industrials along with some large cap tech names as well (MSFT, NFLX, IBM). The Dow Industrials erases early gains after new record highs, as Boeing falls on 737 MAX news.

·     Regarding interest rates, Fitch said it expects the Fed will only cut rates once this year saying a 25 bps cut appears probable at either July or Sept FOMC meeting. Treasury Secretary Steve Mnuchin said in a 2:00 PM EST press conference that he has had "very productive" discussions with Nancy Pelosi and other congressional leaders on the debt ceiling, which he said must be raised. The original conference was called to discuss concerns and regulation over crypto currencies saying the Treasury Dept has very serious concerns that Libra could be used by terrorist financiers.

Economic Data

·     July Empire Manufacturing showed its gauge of business growth in New York recorded its biggest increase in more than two years in July, returning to positive territory. The regional Fed’s "Empire State" index on current business conditions jumped to 4.3 points this month (above est. +2) from -8.6 in June, which had been the first negative reading since October 2016. New Orders pared losses to -1.5 vs. -12.0 prior, shipments +7.2 vs. +9.7 and employment index -9.6 vs. -3.5.

 

Commodities

·     Oil prices slid to end near session lows, as WTI crude settles at $59.58 per barrel down 63c, having fallen from earlier hi’s of $60.92 per barrel this morning. Prices reversed late last week gains as Tropical Storm Barry passed through the Gulf of Mexico without as much damage to platforms as markets feared. Natural gas prices slid 1.8% to $2.41 mln Btu’s. Gold prices were little changed on the day, edging up $1.50 to $1,413.50 an ounce for its best finish in nearly 2-weeks (down from earlier highs of $1,421.60 an ounce).

 

Bond Market & Currencies

·     Treasury prices advanced as yields pulled back from last week gains, as the 10-year yield dropped roughly 3 bps to under 2.10% (after having risen 8 bps last week). Treasury yields erased overnight gains, led higher initially as Chinese GDP growth fell to its slowest pace since 1992, even as other data pointed to signs of stabilization. The shorter term 2-year yield dipped modestly to 1.835% while the 30-year yield was at 2.60%. Also very quiet in currencies, with the dollar getting a small boost as monthly Empire Manufacturing data improves meaningfully from the prior month, posting modest gains vs. major rivals.

 

 

Macro

Up/Down

Last

WTI Crude

-0.63

59.58

Brent

-0.24

66.48

Gold

1.30

1,413.50

EUR/USD

-0.0013

1.1257

JPY/USD

-0.04

107.87

10-Year Note

-0.031

2.09%

 

 

Sector News Breakdown

Consumer

·     Retailers; AMZN’s 4th annual Prime Day kicks off today and runs over the next 48 hours, while TGT, WMT and EBAY are also having their own sales day over the same time to capitalize on the online traffics. Amazon, which sold over 100M products over Prime Day 2018; in research, Piper upgraded CROX to overweight from neutral and raise tgt to $27 from $22, while Citigroup downgraded three names: LB cut to neutral from buy and lowering our TP from $35 to $27 saying mgmt. slow to implement meaningful change, as may be too little too late for VS (to execute a turnaround the way we hoped), TIF downgraded to neutral and cut tgt to $100 as are less comfortable with the near-term dynamics and BOOT cut to neutral on valuation; BNED shares gained after Bay Capital discloses a series of failed attempts to talks to management about an offer https://bit.ly/2xNa1rJ

·     Consumer Staples; TAP was downgraded to underperform at Bank America and cuts tgt to $50 from $70 citing the heightened potential he sees that the company will need to increase spending to stabilize core brands’ market share; 52-week highs for PG, KMB, CL, DRI, SBUX, EL, YUM, CMG in restaurants, staples names; EAT was upgraded to overweight at JPMorgan saying it has become cheap enough to own even on conservative estimates following the announcement of the 116-franchise unit acquisition of ERJ Dining on July 10; CMG tgt raised to $824 at Piper as shares touch all-time highs with firm maintaining our +8% same-store sales estimate for 2Q19 following our June checks that suggest trends were steady sequentially in the +HSD% range

·     Casino & Leisure movers; in lodging, HLT and MAR both downgraded to neutral at Longbow based predominantly on valuation as shares of MAR recently surpassed our prior 12-month target price of $142 and HLT is trading very close to our previous 12-month target price of $103; in cruise lines, RCL, NCLH active after Nomura said pullbacks are buying oppty into Q2 earnings as expects both companies to have more constructive forward booking commentary than CCL did in its June outlook and beat more recent diminished yield expectations

 

Energy

·     Energy stocks busy given M&A in the E&P sector, but overall industry remained under pressure; in the E&P sector, CPE to acquire CRZO in an all-stock deal valued at $3.2B, with CRZO holders to get 2.05 CPE shares for each share held, or about $13.12 per Carrizo share (25% premium to Friday close) https://on.mktw.net/2xLqs7J ; prior to the M&A deal, Jefferies downgraded five E&P names (CDEV, CPE, CRZO, GPOR, RRC) in conjunction with their lower oil and gas price deck as they now 3% and 7% below Street estimates for big and SMID cap coverage, respectively.

·     Utilities, Alternative energy & Solar; PCG shares fell for the 8th time in the last nine trading days; ED shares may be active after New York city was hit Saturday night with a 5-hour evening blackout, extending from about Fifth Avenue to the Hudson River and from the 40s to 72nd Street, hitting most of midtown; FCEL warned about its liquidity position, saying it has "significant short-term debt and other obligations currently due or maturing in less than one year which are in excess of the company’s cash and current asset balance."

 

Financials

·     Bank movers; the first of the major banks report earnings with Citigroup (C) Q2 revenue rising 2% to $18.76 billion, while expenses fell 2% and estimates for quarterly profit beat/continued to add loans and deposits in Q2 as total loans by assets rose 3% to $689 billion, while deposits increased 5% to $1.05 trillion, excluding foreign exchange fluctuations. Stock weighed down by weak trading revenue as fixed-income trading fell 4%, while it declined 9% at its equities business; earnings this week from banks include: Tuesday morning: CBSH, FHN, JPM, SNV, WFC … Wednesday: BAC, BK, CMA, PNC, USB…Thursday: ALLY, BBT, BX, MS, MTB, PBCT, STI, COF … Friday: AXP, BLK, CFG, RF, STT, SYF

·     Consumer finance and lending; monthly charge off data: DFS credit card delinquency rate 1.53 % at June end vs 1.54% at May end and credit card charge-off rate 2.18% at June end vs 2.12% at May end; SYF reported net charge-offs (NCO’s) for June of 4.05% vs. 4.73% YoY while June delinquencies 2.33% vs. 2.72% YoY; ADS June net charge offs 5.8% vs. 6.3% last month and June delinquency rate 5.2% vs. 5.0% last month; AXP June NCOs 2.2% vs. 2% YoY (and 2.5% MoM) and delinquencies 1.4% vs. 1.3% YoY – from 8K

 

Healthcare

·     Pharma movers; GSK announced positive results from a Phase 3 clinical trial, PRIMA, evaluating PARP inhibitor Zejula (niraparib) as first-line maintenance treatment in women with Stage III or IV ovarian cancer who initially received platinum-based chemo; AZN announces that it received a CRL from the FDA in response to its supplemental marketing application seeking approval for Farxiga (dapagliflozin) as an adjunctive treatment to insulin to improve glycemic control in adults with type 1 diabetes; Pharma bounces after recent pull – ahead of JNJ earnings tomorrow

·     Specialty Pharma; TEVA were both downgraded to underweight at Morgan Stanley with TEVA tgt cut to $6 and ENDP tgt slashed to $3 from $8 saying while generic stocks are exposed to opioid litigation, Teva and Endo appear to face more significant risk given their historical branded opioid exposure; ZSAN said data from 294 participants in a trial testing its migraine drug Qtrypta showed they granted the treatment scores greater than three on average in the Migraine-ACT questionnaire when insulin alone fails to adequately control their blood sugar levels; ALKS was upgraded to neutral at Goldman Sachs after recent underperformance; EXEL announced two original cohorts are being expanded and four new cohorts are being added to the protocol for COSMIC-021, the phase 1b trial of cabozantinib (Cabometyx) in combination with atezolizumab

·     Biotech movers; GLPG shares jump after GILD agreed to pay $5.1 billion to raise its stake in the company to develop and commercialize its treatments for a ten-year period (GILD was upgraded to outperform at Wells Fargo on news) https://yhoo.it/2XLzTUb ; NTGN said its vaccine "NEO-PV-01" in combination with BMY’s Opdivo showed longer progression-free survival period in patients with certain types of melanoma, lung and bladder cancers; NBIX positive at Stifel as believe their survey of 30 physicians aligns with Buy rating as the TD market is still growing healthily with room to run, while Ingrezza is generally viewed as a best-in-class product; ETON shares fell as the FDA provided the company’s partner with a complete response letter related to the application for EM-100; CAPR surges after announced upbeat results from a trial for its treatment (CAP-1002) of Duchenne muscular dystrophy.

·     Medical equipment and devices; DGX was downgraded to sell at Goldman Sachs as remain below consensus estimates and seeing downside pressure to out-year numbers as the lab business struggles to grow organically while upgraded BRKR to neutral; in MedTech at Barclay’s, the firm downgraded MTD and A citing a preference for companies with exposure to healthy biopharma trends over those with exposure to industrial end markets where macro data are more moderate; Agilent cut to equal weight from overweight and tgt to $78 from $86 amid cautious expectations that weakening indicators for the sector could weigh on customer funding and investor sentiment in 2H

 

Industrials & Materials

·     Industrial & Machinery; Bank America upgraded DE to buy from neutral noting that its dealer retail sales for N.A. construction equipment were up double-digits in June on a trailing three-month basis, while the firm downgraded TKR to neutral from buy as expects the company to trim its outlook for 2019 on the basis of softer auto and short cycle data points; CIR shares dropped after CR said it won’t extend its tender offer of $48 a share beyond its July 19 expiration date, after CIR rejected its takeover offer a second time last week (to $48 from $45 prior); PH was downgraded at KeyBanc, incrementally cautious on the Company’s forward earnings prospects given potential for fundamentals to weaken and synergies to moderate in FY20; GE was downgraded to neutral at UBS as a notable decline in interest rates and ongoing power market weakness drive our more balanced valuation upside/downside

·     Transports; package delivery names UPS and FDX shares active given the 2-day online sales event from retailers AMZN, WMT and TGT; AAL said Sunday it is extending for a fourth time cancellations of about 115 daily flights into early November due to the ongoing grounding of the Boeing Co (BA) 737 MAX jets; in rails, CP was downgraded at Raymond James citing the stock’s recent outsized performance versus the market, and reduced upside

·     Aerospace & Defense; Dow component BA shares were weak after the WSJ reported that its 737 MAX planes are unlikely to be ready to carry passengers again until 2020 because of the time it will take to fix flight-control software and complete other steps, an increasing number of government and industry officials say, even as the company strives to get its jet back into service this year; aircraft parts maker SPR was downgraded at Credit Suisse to neutral and cut tgt to $83 saying given the extended grounding of the MAX, it has become increasingly difficult to favor OE names, though risk actually seems greater for certain suppliers than BA itself (shares of HXL, WWD, ATI also among names leveraged to BA)

·     Metals & Materials; steel stocks were active after White House trade representative Peter Navarro told Fox News that Trump will sign an executive order today boosting the use of domestic iron and steel in federal government contracts (shares of AKS, X, STLD, NUE were among those names moving); uranium miners (CCJ, UUUU, UEC, URG) shares active after President Donald Trump on Friday established new nuclear fuel working group, declined to issue quotas for domestic uranium production; in materials, CF shares spike after Cowen raised its tgt to $53 from $47 saying it should benefit from the significant near-term upside expected for nitrogen based on the developing situation in corn

·     Paper & Packaging stocks PKG, IP, WRK all downgraded to underweight from sector weight at KeyBanc saying it is likely to further cut its already lower-than-consensus 2020 EBITDA estimates for the companies due to worsening fundamentals in containerboard, pulp and uncoated freesheet. Notes U.S. benchmark containerboard prices have fallen in three of the past four months by a cumulative $30/ton after rising by a cumulative $225/ton from 2012 to early 2018. KeyBanc also downgraded SEE given concerns about the Company’s weak volume trends, levered balance sheet, the recent termination of fits CFO, its large restructuring program

 

Technology, Media & Telecom

·     Semis and trade; the semi sector active on several reports on Huawei as the U.S. may approve licenses for companies to re-start new sales to Huawei in as little as two weeks (QCOM, INTC, MU among movers), according to Commerce Secretary Wilbur Ross. Also, Huawei reportedly plans to lay off hundreds of employees in the U.S. as it struggles with a blacklist imposed by the Trump administration over national security concerns. Lastly, Reuters reported Huawei to Invest $3.1 Billion in Italy as it confirms U.S. job cuts

·     Internet; GOOGL a target of Peter Thiel saying Sunday night for the FBI and CIA to investigate Google’s “seemingly treasonous” ties with China. Speaking at the National Conservatism Conference in Washington, Thiel posed three unsubstantiated, provocative and leading questions that he said should be asked of Google

·     Software movers; SYMC shares plunged after CNBC’s David Faber reported SYMC and AVGO have ceased deal negotiations saying SYMC would not accept less than $28 per share https://cnb.cx/30xiuvn ; OMCL rebounds after saying accounting for sales commissions accords with GAAP in response to negative call from GlassHouse Research last week that crushed shares; FIVN shares fell after another sales departure, according to a Stephens note

·     Media & Telecom movers; SBAC was downgraded to neutral at Bank America solely a function of valuation as we expect fundamentals to develop positively along a steady path; in ad stocks, OMC was downgraded to market perform at BMO Capital; UNIT shares fell after Bloomberg reported Windstream, Uniti seek a mediator on lease/"far apart" on lease status

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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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