Market Review: August 05, 2019

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Closing Recap

Monday, August 05, 2019

Index

Up/Down

%

Last

DJ Industrials

-766.86

2.89%

25,718

S&P 500

-87.30

2.98%

2,844

Nasdaq

-278.03

3.47%

7,726

Russell 2000

-46.25

3.02%

1,487


 

Equity Market Recap

·     U.S. stocks were in freefall to start the week amid increased U.S/China trade tensions, as the Dow Industrial Average fell as much as 925 points (3.5% as the Dow fell roughly 1,600 points since President Trump’s tweet last Thursday), the Nasdaq Composite fell as much as 4.2% while the benchmark S&P 500 index fell more than 100-points or 3.4%, dropping below its 50-day (2,928) and 100-day (2,900) moving averages – before bouncing off the lows late. The CBOE Volatility Index (VIX) jumped as much as 39% to highs of 24.81 (off lows around 12.87 the day before the FOMC last week). Stock weakness carried into a second week after China devalued its currency to the lowest level in 11-years vs. the dollar in retaliation for President Trump saying he would levy a 10% tariff on $300 billion in Chinese goods starting Sept. 1st after talks between trade reps from the U.S. and Chinese counterparts failed last week. Meanwhile, CNBC reported Chinese firms have stopped buying agriculture products from the U.S., the country’s state-owned media claims. The S&P 500 and NASDAQ fell for a 6th day on the trade uncertainty, as the potential impact to global economies (and sectors tech, retailers, and agriculture) dragged sentiment lower. Treasury prices surged while yields tumbled to their lowest levels in more than 2-years given the flight to safe haven assets, with gold and certain currencies jumping.

·     Oil prices fell, extending last week’s drop on global growth concerns after the tariff threat, which could limit crude demand from the world’s two biggest buyers. With Treasury yields plunging – interest rate sensitive sectors utilities, REIT’s, housing, telcos which that tend to benefit from lower yields held steady. The strengthening of the U.S. dollar, the angst over slower global growth, and U.S. trade war drama pushes down U.S. Treasury yields, hurting financial stocks. Gold prices surge as gold prices jump to 6-year while China ADR’s pressured on trade concerns (BABA, BIDU, JD, CTRP). Semiconductors and key tech names (AAPL) dropped as investors weighed its exposure both to China’s manufacturing sector and its consumers. President Trump tweeted about China and the Fed on Monday morning, saying: “China dropped the price of their currency to an almost a historic low. It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”

Economic Data

·     ISM Non-Manufacturing Index for July falls to 53.7 (weakest since August 2016) vs. est. 55.5 (prior month 55.1), while business activity index 53.1 in July from 58.2 in June, prices paid index 56.5 in vs. 58.9 in last month; new orders index 54.1 from 55.8 in June and the employment index 56.2 in July up from 55.0 in June.

 

Commodities

·     Oil prices fell along with broader risk asset declines, as WTI crude dropped 97c (1.7%) to $54.69 per barrel, while Brent fell over $2.00 to $59.81 per barrel. Prices have tumbled over the last week due to broad-market selling and risk aversion as US-China trade tensions heat up following Trump’s threat or more tariffs and China retaliates as it devalued its currency. A lower yuan would raise the cost of dollar-denominated oil imports in China. Signs of rising oil exports from the United States add to pressure on prices.

·     Gold for December rose $19, or 1.3%, to $1,464.60 an ounce, moving to the best level for the most-active contract since May of 2013, this after prices jumped about 2.7% higher for last week and up about 15% from the 2019 lows. Prices have jumped over the last few weeks, first propelled by expectations of interest rate cuts by the Fed (they cut by 25 bps last week – first cut in over a decade), while the latest surge comes after President Donald Trump intensified a trade fight with China by announcing additional tariffs on Chinese goods and China pledged retaliation.

 

Currencies

·     The U.S. dollar fell for a 3rd straight session – pulling back from 2-year highs Thursday of last week for the dollar index (DXY) to 97.50, off highs of 98.93 on August 1st while safe haven currencies jumped. The China yuan the biggest story as China further devalued its currency over the weekend as the Chinese yuan moved beyond the 7.00 level for the 1st time in 11 years (last around 7.0476, up 1.57%). Carry trade active as investors buying safe-haven currencies such as the yen and franc given the market sell-off/uncertainty. The U.S. dollar fell below 106 overnight against the Japanese yen Low 105.79) to its lowest level since early January while the Swiss franc outperformed as the USD/CHF was down 0.9% at 0.9736 after falling to 0.9717. The euro rebounds to 1.12, bouncing from 2-week lows last week below 1.11. Bitcoin surges given currency mess with prices rising over 13% to $11,800.

 

Bond Market

·     Treasury yields absolutely crushed, with the 10-year yields falling to lowest levels since September 2016 (before the election), while 2-year yields fell to lowest levels since October 2017 and 5-year yields the lowest since November 2016. Given the increased trade tensions and uncertainty related to tariff impacts between the U.S. and China, fed fund futures have increased odds of additional Fed rate cuts this year to help stave off a broad economic slowdown. That has pushed Treasury prices higher and yields lower. Meanwhile global interest rates have continued to fall as central banks all over the world increase easing to help promote growth. The 10-year yield fell to lows below 1.73% (11 bps), the 2-year yield dropped 13 bps to 1.577% (was briefly at 1.96% last Wednesday after Fed Powell comments) and 5-year yield down 12 bps to 1.53%.

 

 

Macro

Up/Down

Last

WTI Crude

-0.97

54.69

Brent

-2.08

59.81

Gold

19.00

1,464.60

EUR/USD

0.0095

1.1204

JPY/USD

-0.48

106.12

10-Year Note

-0.112

1.732%

 

 

Sector News Breakdown

Consumer

·     Retailers; gun related stocks grabbed headlines today after President Trump hinted at gun control after two more mass shootings this weekend in El Paso Texas and Dayton Ohio (shares of RGR, AOBC, DKS, SPWH, VSTO shares among those moving); luxury retailers (CPRI, TPR) with presence in Hong Kong remain weak after Philip Chan, CFO of Hong Kong said that retail sales have dropped by nearly 7% in month of June (amid protests) and last nine-days dropped nearly 3% points (as per CNBC); TGT was upgraded to buy at Deutsche Bank while cut DLTR to hold; CPRI to 52-week lows ahead of earnings 8/7 with Needham saying read-thrus from US branded space have been broadly negative w/ weaker outlooks from RL , while LEVI cited difficulty at dept stores

·     Auto’s; another industry hurting due to continued trade tensions; RNLSY, DDAIF both downgraded to underperform at Jefferies as the firm assesses the risks from the 2H change in CO2 production/compliance and conducted a proprietary survey of 25 European fleet managers to understand their approach to buying EVs on behalf of customers or for their own purpose (fleet purchases are ~40% of Euro car demand); RACE was upgraded to buy at SocGen

·     Consumer Staples; TSN a bright spot as reported better-than-expected earnings helped by strong performances in its beef and prepared-food segments (Q3 EPS $1.47 beat by 3c) and maintained its 2019 guidance; Staples overall were mixed on broad market weakness; XXII named Clifford Fleet, former head of Philip Morris USA PM.N, as its Chief Executive Officer and President effective, Aug 3; SHAK announced an integrated partnership with GRUB for national delivery

·     Casino & Leisure movers; WYNN, MLCO shares weak as casino names feeling pain from China/US trade as well – the Chinese yuan slides past 7.0 against the U.S. dollar for the first time since 2008; Baird said recreational vehicle dealers reported a mid-single digit retail decline, citing its summer survey of 77 RV dealers, looking at May-July trends (THO, WGO, CWH)

 

Energy

·     Energy stocks bludgeoned again on falling oil prices, slowing economic growth concerns and trade impact uncertainty for demand; Natural gas leveraged names falling again (EQT, AR, RRC, SWN) as natural gas prices resume downward pressure; several names drop to 52-week lows this morning in S&P (COP, HAL, CXO, COG, XEC, HP). Equipment and Drillers; DO shares dropped to open at all-time low as the driller reported a bigger-than-expected Q2 loss on higher drilling expenses and posts revenue well below expectations

 

Financials

·     The U.S. Federal Reserve announced on Monday it planned to develop its own round-the-clock real-time payments and settlement service, with an expected launch in 2023 or 2024. In a statement, the U.S. central bank said it was seeking public comment on the project, saying near-instantaneous transfer of funds 24 hours a day could yield economic benefits for individuals and businesses. (possible target of banks)

·     Bank movers; banks plunged in tandem with the drop in Treasury yields as the probability of the federal funds target range being cut to 1.25%-1.50%, or 75 basis points below the current range of 2.00-2.25%, by Dec. 11, 2019, increased to 39.7% today vs. 22.5% on Friday, according to the CME Fed Watch Tool, after today’s trade news, China devaluing the yuan vs. the dollar. The probability of a 50-bp reduction to 1.50%-1.75% is 41.1% vs. 50.2% on Friday; CMA, TCBI downgraded at UBS while firm upgraded FHN

·     Insurance; PRU was downgraded to neutral from buy at Citigroup and trims price target to $94 from $112, citing the company’s weak Q2 earnings calling it now a show-me story; Loew’s (L) and CNA Q2 improves on strength of CNA, Boardwalk Pipelines as Loew’s Q2 EPS of 82c beat estimate of 75c; book value per share at June 30, 2019 of $64.49 increases from $59.34 at Dec. 31, 2018. Book value per share excluding AOCI rose to $64.48 from $62.16 during that same period.

 

Healthcare

·     Pharma movers; ITCI reached agreement with U.S. FDA to submit additional non-clinical data for the ongoing review of co’s schizophrenia therapy, lumateperone. FDA extends date by which it would announce its approval decision by 3 months to December 27; the European Commission has approved a label update for AZN’s type 2 diabetes med Forxiga (dapagliflozin) to include cardiovascular (CV) benefit data generated in the Phase 3 DECLARE-TIMI 58 study.

·     Biotech movers; ALLK surged over 130% after released positive data from a Phase II clinical trial, ENIGMA, evaluating lead candidate AK002 in patients with eosinophilic gastritis and/or eosinophilic gastroenteritis; GLYC shares plunge after partner PFE said a late-stage trial testing GLYC’s drug rivipansel failed the main goal of time to readiness-for-discharge from a hospital for patients with a complication of sickle cell disease

·     Medical equipment and devices; ABMD shares bounced early following continuation of current level of reimbursement for Impella heart pump as CMS said late Friday that the present level of Medicare reimbursement for certain procedures will be maintained for FY20 (reimbursement rates to increase 2.6%, rather than falling 28% like the CMS had proposed in April)

 

Industrials & Materials

·     Aerospace & Defense; Dow component BA shares dropped to its lowest opening level in seven months on trade impact concerns as well as reports that the plane maker is preparing a major fix to the flight software linked to its troubled 737 MAX aircraft; ATRO said it saw softer demand of its inflight entertainment and connectivity products due in part to the grounding of the Boeing 737 MAX as it posted a weaker profit and cut its year sales outlook to $740M-$775M from $760M-$805M prior (and below consensus $783.29M)

·     Machinery; heavy duty trucks active (PCAR, CMI, NAV) after ACT reported heavy duty truck orders of 10.2k units for the month of July, down 81% YoY and the lowest absolute level since February 2010. On a seasonally adjusted basis, orders declined 19% MoM to 144.9k, well below replacement demand (~250k) and broadly in line with trough levels experienced in prior down cycles (~150k SAAR) – Wells Fargo had estimate between 12K-15K

·     Industrials, E&C: JEC shares rise after Q3 EPS topped views as backlog +8% to $22.5B at end of FQ2 and boosted its 2019 EPS outlook to $4.75-$5.00 (excluding full year ECR); TXT announced that it is reviewing strategic alternatives for its Kautex business unit, which produces fuel systems and other functional components

·     Transports; Dow Transports fall with broader mkt weakness, down as much as -3.5% and falling to lowest levels since early June, trying to hold above 10,000 level (low just above) – all 20 names in Dow Transports were lower – led by 4% drop in airlines and FDX; DSKE shares dropped after cutting its full-year revenue outlook to $1.7B-$1.75B, from $1.8B-$1.9B, missing analysts’ estimates citing weaker market conditions in the flatbed market in its decision

 

Technology, Media & Telecom

·     Internet; high beta names under pressure with market sell-off, but Chinese Internet names among the hardest hit on trade tensions (BIDU 52-week lows, BABA, VIPS, CTRP, JD, SOHU weak); CARS shares plunged after cutting its revenue forecast for the full year to a decline of (-6% to -9%) form prior -5% to +2% and Ebitda margin 27% to 29%, saw 30% to 31%, while also saying it will remain an independent public company after its board concluded a strategic review resulting in no actionable bids

·     Semiconductors; a mass pullback in semi’s with the Philly semi index (SOX) down roughly 4.5% to 1,420 level – dropping below its 50-day MA 1,446 and 100-day 1,454 with today’s slide and now well off its all-time high of 1,625 on July 24th (less than 2-weeks ago) – all on trade uncertainty with China and its potential industry impact; ON shares fell after a mixed Q2 that beat on the bottom line but missed on the top and guides downside Q3 with revenue of $1.36-1.41B (vs. est. $1.46B) and adjusted gross margin of 36.7-37.7% (vs. consensus: 37.9%)

·     Media & Software movers; ATVI, EA, TTWO fall amid broad weakness in video game names after Trump said that the U.S. must stop or reduce violent culture, including video games that celebrate violence; broad selling pressure in software, hardware, tech in general; GCI to be bought by NEWM (both shares were halted pending news midday) as GCI holders to get $6.25 per share and 0.5427 of New Media shares (total valued at $12.06)

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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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