Market Review: July 31, 2019

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Closing Recap

Wednesday, July 31, 2019

Index

Up/Down

%

Last

DJ Industrials

-333.75

1.23%

26,864

S&P 500

-32.82

1.10%

2,980

Nasdaq

-98.19

1.19%

8,175

Russell 2000

-11.02

0.70%

1,574


 

Equity Market Recap

·     Stocks slide after the Fed cut! After days of waiting for today’s FOMC meeting, markets got the volatility it had been waiting for. As expected, the Federal Research cut interest rates for the first time since 2008, trimming by 25 bps to 2%-2.25% range citing global developments, downside trade tension uncertainties and muted inflation pressures, while left the door open for future cuts (but didn’t do what markets hoped – cut by a more aggressive 50 bps). What was notable that the vote was 8-2 as both the Fed’s George and Rosengren dissented on the cut with both favoring maintaining rates as is, while the FOMC also ended its plan to reduce its balance sheet through the sale of government bonds two months earlier than expected.

·     As Fed Chairman Powell held his press conference, stocks took a turn for the worse, with the Dow Industrial Average falling as much as 400 points and the Nasdaq Composite more than 190 points off its intraday highs around 8,300 (low 8,110) before recovering. Powell said "the committee called the current state of growth “moderate” and the labor market “strong,” but decided to loosen policy anyway." Fed Chairman Powell also called today a "mid-cycle adjustment" which markets took as a one-off cut (vs. the stock market want of additional easing). Powell did try to clarify his comments saying “this isn’t the start of a long series of rate cuts – but also said not saying the Fed will only cut once.”

·     Fed Chairman Powell noted that the U.S. economy has shown resilience in recent weeks, that confidence has moved back up recently and economy as close to goals as it’s been in long time – saying the FOMC is thinking of it as mid-cycle adjustment to policy and insurance against trade uncertainties. The commentary was not well received by stock markets which had been hoping for more dovish comments and additional easing measures. Treasury yields spiked along with the dollar as markets took from commentary that the rate cut may be a one-off for now. The headlines from Powell overshadowed a busy day of earnings led by gains in AAPL on results, weakness in semi’s on lower guides (AMD, MXIM, MKSI), among others. Details of earnings related movers, economic data, commodity and currency moves all below. It will be interesting to see President Trump reaction to Fed today (after wanting 50 bps cut).

Economic Data

·     Chicago PMI in contraction mode for a second straight month, falling to 44.4 from 49.7 last month and below the 51.0 estimates (marks lowest reading since Dec 2015);

·     Hiring by US private sector employers rebounded in July to the highest in three months, as ADP said it added 156K jobs in the month, slightly above the 150K estimate while the prior month was upwardly revised to 112K from 102K

·     Employment Cost Index for Q2 reported at 0.6% vs. est. 0.7%

 

Commodities

·     Oil prices climbed for a fifth straight session, with WTI crude up 0.9% to $58.58 per barrel, two-week high, on the back of further declines in US crude-oil inventories. The EIA reported a seventh-straight weekly decline in US crude stockpiles (to 8-month lows), which now sit at just 436.5M bbls. The Fed’s 25bp rate cut also has given oil a boost, as has continued tensions between the US and Iran. The EIA weekly energy inventory data showed bigger draws (bullish) as crude stockpiles fell -8.5M barrels vs. est. for draw of -2.75M barrels, while last night the API said U.S. oil inventories fell by -6.024M barrels last week. December gold futures fell $4.00 to $1,437.80 an ounce, snapping its 3-day win streak ahead of the FOMC rate decision (futures closed prior the FOMC rate cut), while gold futures prices tumbled further after the FOMC cut.

 

Currencies & Treasuries

·     The U.S. dollar managed to rally despite the Fed cutting with rates coming down globally, or in process of (ECB kept rates unchanged last week but commentary pointed to future easing). Fed Chairman Powell noted the global economic slowing, pointing to manufacturing weakness in Europe and China, and noted many central banks have been easing or are considering it, giving the dollar another boost late day with the dollar index (DXY) trading to a new 2019 high above 98.50). Sterling bounced back off near multi-decade lows on, recording its first gain in five days. Euro dropped to the lowest levels since May 2017, falling to 1.1085.

·     Treasury markets were volatile, selling off as Fed Chairman Powell held his press conference, as the 2-year yield was a straight shot up to highs of 1.96% (most leveraged to near term rate moves), up 15 bps off its lows (1.806%) as markets taking Powell comments as a one-time cut (despite the Fed saying will act accordingly if needed) – but fell back to around 1.87% after the dust settled. Powell did signal that the rate cut isn’t necessarily the start of an easing cycle. The 10-year yield rose above 2.06% before ending back around 2.01%.

 

 

Macro

Up/Down

Last

WTI Crude

0.53

58.58

Brent

0.34

64.97

Gold

-4.00

1,437.80

EUR/USD

-0.068

1.1087

JPY/USD

0.12

108.73

10-Year Note

-0.047

2.01%

 

 

Sector News Breakdown

Consumer

·     Auto sector; APTV a bright spot in weak auto earnings season, rising after strong Q2 EPS beat on in-line revs while raised its year view to $5.05-$5.15 from $4.90-$5.10 (above est. $4.98) and narrows FY19 revenue view to $14.53B-$14.73B; DAN Q2 EPS/sales both fell short of consensus and backed year profit view $2.95-$3.45 (mid-point shy of est. $3.31); in autos, FCAU Q2 adjusted Ebit met estimates and confirmed its guidance for the year; MTOR said sales rose 3% in Q2 to $1.17B after higher truck production, primarily in North America, partially offset the negative effect of a stronger U.S. dollar against most currencies.

·     Consumer Staples; MDLZ topped sales estimates and raised its FY sales forecast, boosted by higher demand in emerging markets as five analysts raise tgt, but shares fail to rally; TAP shares slide after Q2 revenue and profit miss consensus estimates with EBITDA down -12.8% in constant currency/said worldwide brand volume was down -5.6% during the quarter and financial volume was off 07.0% due in part to unfavorable weather patterns; Tobacco names fall again after MO yesterday lowered their outlook for cigarette industry volumes for the second time this year, now looking for a 5.0%-6.0% decline; SMG trades to record highs after boosting its full-year sales and profit forecast following better-than-expected Q3 sales of $1.17B amid growth in U.S. consumer and Hawthorne segments (raises year sales view to 16-17% sales growth from 13%-14% prior); MGPI plunges over 20% after Q2 EPS and sales miss and revised guidance

·     Restaurants; BLMN posts Q2 EPS 36c on sales $1.02B vs. est. 35c/$1.04B while company owned comp sales up 0.6% was below est. 2.1% and reaffirms year guidance; DIN Q2 EPS of $1.71 missed the $1.84 estimate while comps for the Applebee’s chain fell -0.5% during the quarter, while IHOP saw a 2.0% increase. And guided year below views ($6.80-$7.05 vs. $7.16 est); YUMC Q2 mixed as EPS beat but sales missed consensus (2.12B vs. $2.16B) as comp sales for KFC better 15% and Pizza Hut 1%; DENN rises on earnings beat and raised guidance with comp sales +3.8%

·     Casino & Leisure movers; GOLF was downgraded to hold from buy at SunTrust on its view that near-term upside earnings drivers are missing; in gaming, BYD was upgraded to outperform at Telsey following its Q2 Ebitda beat largely driven by outperformance in the Downtown LV segment, while reiterating full-year EBITDAR guidance

·     Retailers; GRMN Q2 revenue and profit estimates citing strong demand for its wearable and fitness devices while also boosting its 2019 revenue forecast, driven by higher expectations for aviation, marine and auto segments; BGFV posted a Q2 profit vs. year ago loss citing lower selling and administrative expenses and favorable settlement of a software contract termination; JWN shares jumped on reports Nordstrom family prepares new proposal to increase stake

·     Services; TWOU shares plunged after being downgraded by at least five analysts after noting the company has revised its outlook lower for the 3rd time in last year citing additional pressures to both Graduate Programs and Short Courses/sees FY19 adjusted EPS ($1.25)-($1.16) vs. est. (32c); HURN shares rose after strong Q2 EPS and revenue beat (76c/$220.8M vs. 61c/$205.8M); LOPE shares fell as Baird said the U.S. Department of Education’s recent guidance that makes CA-based students ineligible for Title IV funds at out-of-state public and not-for-profit private universities could materially negatively impact LOPE’s revenue guidance

 

Energy

·     Energy stocks outperform for a second day, led by a bounce in oil prices, bullish inventory data, and a second day of better than expected earnings in the sector.

·     Inventory data very bullish for oil prices as the EIA weekly energy inventory data showed bigger draws (bullish). The EIA said crude stockpiles fell -8.5M barrels vs. est. for draw of -2.75M barrels, while gasoline inventories fell -1.8M barrels vs. est. for draw of -1.5M barrel. Overnight the API said U.S. oil inventories fell by -6.024M barrels last week, and saw gasoline stocks fall -3.135M barrels, while inventories of distillates were down 890,000 barrels

·     E&P sector; HES adds to energy related gains after earnings beat on higher Bakken output and posted smaller quarterly loss/lowers capital spending view to about $2.8B from prior view $2.9B and boosts production view to 275K-280K boe/d from prior 270K-280K view; LPI was upgraded to neutral at JPMorgan driven by valuation and rate of change; ECA posted better than expected Q2 earnings, helped by record high quarterly production from its core Anadarko and Permian holdings as Q2 total production rose 11% YoY

·     Integrated and services; BP was upgraded to buy at Jefferies saying the company has delivered solid operational performance and has made strong progress in reaching the targets established in its 2017 5-year plan; BHGE shares jump on EPS beat and better revs of $5.99B; Dow components XOM and CVX to report earnings on Friday; MLP WES drops after cutting its earnings guidance amid low natural gas prices – now sees growth 5%-6% down from 6%-8%

·     In equipment, FTSI posted modestly weaker-than-expected 2Q19 results with adjusted EBITDA of $41.9 million, missing Stifel’s estimate by about 4%; PES said it expects the second half of 2019 to be cash flow positive after reports a 4% rise in Q2 revenue; NOV was upgraded to buy at Citigroup and neutral at Seaport Global following earnings

·     Utilities & Solar; ENPH shares jumped after Q2 EPS beat by a nickel on sales of $134.1M vs. est. $120.4M citing demand for its microinverter; EIX 28M share secondary priced at $68.50; in earnings, ETR Q2 operating EPS missed by 4c while narrowed year view to $5.15-$5.45 from $5.10-$5.50; MDU Q2 EPS beat by 4c and raised its year outlook by a nickel on top and bottom line after beat; NI also a mover on earnings.

 

Financials

·     Bank movers; banks benefitted from Powell comments as markets took them as a “one and done” on rate cuts before he clarified; USB was upgraded to neutral at JPM to reflect expected improvement in trends for credit/debit card fees and merchant processing fees in 2H19, which should help offset some of the pressure on net interest income from Fed rate cuts

·     Insurance; ALL Q2 EPS of $2.18 handily exceeded consensus of $1.52 with Deutsche Bank saying beat almost entirely related to better-than-expected results in the company’s auto business, both in terms of current period underwriting results and net favorable reserve development

·     Consumer finance and lending; FMCC shares drop after posting a 40% decline in Q2 earnings driven by $2.09B loss on derivatives – said net interest income dropped to $2.93B from $3B YoY (FNMA shares also weak); CACC Q2 EPS beat driven by a $13M increase in the forecasted collections of past loans according to BTIG as firm reiterates sell;

·     Services; ADP Q4 adjusted profit beats estimates, helped by strong employer services and new business bookings, which increased 11% in the quarter

·     REITs; FSP rises after boosted its full-year FFO guidance for 2019 to 84c-88c from its previously estimated range of 81c-87c; other REITs reporting earnings included UDR, EXR, PSA, EQR (all little changed most of the day post results

 

Healthcare

·     Pharma movers; drug costs remain a hot topic as the Health and Human Services Dept and FDA are proposing plan to allow importation of certain drugs intended for foreign markets into the U.S. with a goal of lower drug prices, according to a statement from HHS.

·     Biotech movers; AMGN Q2 sales and profit beat and raises the lower end of 2019 profit guidance to $13.75-$14.30 from prior guidance of $13.25-$14.30; GILD beat expectations in its most recent quarter and raised guidance, as sales of its HIV drugs rose

·     Medical equipment and devices; NUVA delivered another strong 2Q, with revenue of $292.1MM (+4.7% organic), beating by $1.5MM while GM (73.4%) and OM (16.3%) were higher than expected, driving an EPS beat of $0.07; TTOO shares plunged over 30% after quarterly revs of $1.8M (-54%), matching the low end of its guidance range on bigger loss and lowered 2019 revenue guidance to $8.7-9.6MM from ~$21MM; PEN was named a new short call from SprucePoint saying they see 40%-55% downside; VCYT better than expected with rev growth seen in biopharmaceutical revs as well as genetic testing biz

·     Healthcare services and providers; MOH posted Q2 profit ahead of estimates, said its medical loss ratio of 85.6% was better than the estimate of 86.2% and also guided year total revenue of $16.7B above the $16.42B estimate and EPS $11.2–$11.50 vs. est. $11.08; HUM Q2 results easily topped consensus and raises FY19 adjusted EPS view to about $17.60 from $17.25-$17.50; ACHC downgraded at Raymond James after quarterly results (reported a slight EBITDA beat of $158.9m vs consensus of $158.5m, but a slight revenue miss)

 

Industrials & Materials

·     Industrial & Machinery; GE shares were volatile after earnings beat and raised profit guidance (to 55c-65c from 50c-60c) as adjusted industrial free cash flow was negative $1B during the quarter, coming in at the strong end of company guidance, while guided expenses in its industrial restructuring lower to $1.7B-$2B (vs. $2.4B-$2.7B); MLM adds to yesterday gains after a 10% jump yesterday on results while comp EXP falls today after an earnings miss

·     Transports; another weak report in trucking as CHRW warned of a soft freight environment through the rest of the year and missed Q2 revenue and operating income estimates/truckload volumes declined 2.5% in the quarter, driven lower by a 31% drop in intermodal volume

·     Metals & Materials; GLNCY reported a 2.4% fall in Q2 copper production to 342,300 metric tons and cut its full-year production guidance for the metal by 1%, citing problems at its copper business in Africa

 

Technology, Media & Telecom

·     Hardware & Component news; AAPL helps lead tech higher (and giving a boost to some semi-supplier names) after Q3 profit and revenue estimates topped consensus citing improvement in greater China, though it wasn’t all great as IPhone sales fell 12% to $25.99B, which was slightly below views on a small miss in service revs as well (though Q4 rev view topped estimates); UIS rises as Q2 adjusted EPS 87c on revs $753.8M – topping views as revenue growth grows at best rate in over 20-years; BDC mixed Q2 lowered guidance and gross margin declined by 72 bps to 37.8%; and operating margin declined by 114 bps to 9.6%.

·     Internet; AKAM Q2 EPS/revs beat amid strong demand for its cloud security services and growth in its traditional business of speeding up media content delivery through the web while raised its year outlook; SPOT shares slide after a bigger-than-expected quarterly losses and said it now has 108 million premium subscribers, up 30% YoY but slightly below the 108.5M est./; MEET guided Q3 revs $50.5M-$51M below the $53.5M estimate and said it expects video revenue to face pressure in the short-run due to updates to its apps; GRPN said sees gross profit, adjusted EBITDA to be lower in Q3 vs. Q2 – follows a miss on EPS/revs for Q2

·     Semiconductors; weak guidance from AMD, MXIM, MKSI offset any strength from AAPL earnings on semi supply chain; AMD Q2 results were better but shares slumped after guiding Q3 revs of about $1.8B below the $1.95B estimate and said it expects full-year revenue to grow in mid-single digits vs earlier forecast of high single-digits; MXIM shares dropped on lower revenue guidance (Q1 adjusted EPS 46c-52c on revs $510M-$550M well below consensus of 62c/$576.82M); semi-equipment maker MKSI guided Q3 EPS 69c-$1.02 on revs $415M-$465M well below the consensus est. $1.25/$501.4M; Samsung Electronics warned of growing uncertainties in its business environment amid fears that an escalating trade row between South Korea and Japan could disrupt production of chips and display; LSCC a bright spot after Q2 beat and upbeat rev guidance for $3 at $101M-$105M vs. est. $101.1M; laser based photonic names lower after COHR Q3 EPS miss on weaker revs with below Q4 rev guidance ($320M-$340M vs. est. $375.1M) – followed weak guidance from IPGP the day prior

·     Software movers; FEYE shares tumble in the Internet security space after posting an unexpected Q2 loss and forecasts Q3 revenue and profit below estimates as it continues to transition to a subscription-based model; video game maker EA posted better-than-expected Q1 revs ($743M vs. est. $719M) on the success of its battle royale game "Apex Legends" prompting an upgrade at Cowen; PAYC posted strong F2Q19 earnings, with results above expectations and management raising guidance by more than the beat; TENB delivered beat across revenue and EPS while widened its billings guidance for the year to $10 million instead of previously being a $4 million range, resulting in a midpoint that is less than 1% below its prior guidance; ZEN shares volatile after quarterly results and guidance; CSLT shares plunged after posted 2Q miss, lowered 2019 guidance, and CEO change; CDAY 52-week highs after Q2 EPS beat by 4c on better revs above $196M and backed its year Ebitda and rev outlook

·     Media & Telecom movers; in telecom, EGHT results that were above expectations for revenue and bookings on the heels of significant go-to-market investments, especially around channel enablement/but sub rev growth of 16% disappoints; in media, NLSN Q2 beat EPS estimates and met on revenue while raised FY EPS view from $1.63-1.77 to $1.70-1.80 and said its strategic review is ongoing and the board hopes to complete the process before the Q3 earnings; CHTR 3M share Block Trade priced at $389.00; AMT the second tower stock to post good earnings; Dow component VZ set to report tomorrow morning.

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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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