Market Review: August 23, 2019

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Closing Recap

Friday, August 23, 2019

Index

Up/Down

%

Last

DJ Industrials

-623.34

2.37%

25,628

S&P 500

-75.72

2.59%

2,847

Nasdaq

-239.62

3.00%

7,751

Russell 2000

-46.47

3.08%

1,459


 

Equity Market Recap

·     U.S. stocks tumbled in what was a very volatile and action packed summer Friday, with President Trump stepping up actions against China after Beijing earlier announced retaliatory tariffs vs. the U.S., imposing tariffs of 5% and 10% (in two batches on Sept 1 and Sept 15) on $75 billion worth of U.S. products. President Trump, in a 4-part tweet storm, said he would be responding to China’s Tariffs this afternoon – calling for US companies to immediately start looking for an alternative to China (full-tweet below). The Dow Jones Industrial Average fell more than 700 points at its worst (in the final minutes of trading), while the tech heavy NASDAQ underperformed, falling more than 3% midday led by weakness in semiconductor companies which are more leveraged to the trade/tariff dispute. Interest rate sensitive sectors such as Utilities, Telecom and REITs were among the best gainers, but there were few places to hide outside of Treasuries (yield drop) and gold (6-year highs).

·     More on the China trade threat – China announced retaliatory tariffs vs. the U.S., imposing tariffs on $75 billion worth of U.S. products saying it will impose tariffs of 5% and 10% (in two batches on Sept 1 and Sept 15) on what amounts to roughly the remaining U.S. imports it has yet to impose punitive taxes on. It said it will also impose tariffs on U.S. vehicles and car parts, instead of holding off on such a plan (but will allow certain car/parts to apply for exclusions). China also said it will impose added tariffs on soybeans, wheat, corn, beef and pork.

·     What was supposed to be the main market driver today, but took a back seat to trade, several Fed members and central bankers spoke (including Fed Chairman Powell) at the Jackson Hole central bank symposium: Fed Chairman Powell in his highly anticipated speech said the U.S. economy is in a "favorable place" and the Federal Reserve will "act as appropriate" to keep the current economic expansion on track. Between that, the possibility of a hard "Brexit," tension in Hong Kong, an economic slowdown in places like Germany and other overseas troubles, Powell said the Fed needed to "look through" short-term turbulence and focus on how the U.S. is performing. Cleveland President Loretta Mester said earlier if the economy stays like this, Fed should keep rates where they are. St. Louis Fed head James Bullard said he expects a robust debate on a half-point rate cut even with the markets’ base case is for a 25-bps reduction. He said “I think we can afford to be kind of dovish here” because inflation expectations are too low and need to be pushed to the Fed’s 2% target (Bullard a voting FOMC member).

·     Trump’s full tweet late morning that sparked the market sell-off: “Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA. I will be responding to China’s Tariffs this afternoon. This is a GREAT opportunity for the United States. Also, I am ordering all carriers, including Fed Ex, Amazon, UPS and the Post Office, to SEARCH FOR & REFUSE all deliveries of Fentanyl from China (or anywhere else!). Fentanyl kills 100,000 Americans a year. President Xi said this would stop – it didn’t. Our Economy, because of our gains in the last 2 1/2 years, is MUCH larger than that of China. We will keep it that way!”

·     The White House is growing increasingly worried about a slowdown over the next 12 months and are brainstorming ideas to juice the economy. Ideas currently include a rotation of Federal Reserve governors to check the power of Fed chief Jerome Powell, according to one report. Other ideas range from a currency transaction tax that could devalue the dollar and make U.S. exports less expense and reducing the corporate tax rate to 15%. The Washington Post report said that White House aides do not have a firm idea of which of these policies the president would seriously consider adopting – CNBC

 

Commodities

·     Benchmark oil prices ended off their worst levels of the day, falling -$1.18 or 2.13% to settle at $54.17 per barrel after dropping more than 3% earlier (lows $53.24) after China said it will slap a tariff on crude oil as of Sept. 1 as the US/China trade spat intensifies. Oil prices pared losses after the weekly Baker Hughes rig count dell for the 7th time in the last 8-weeks, with oil rigs at their lowest levels since January 2018.

·     Gold prices spiked on Friday, rising $29.10 or 1.9% to settle at $1,537.60 an ounce, ending the week high by 0.9%, fueled by a further escalation in US-China trade tensions. China retaliated with additional tariffs expected in September to counter the recent tariff move by the U.S. two weeks ago, only to be followed up with sharp comments and promised additional action by the President. Also a positive for gold was the decline in the dollar after Federal Reserve Chairman Jerome Powell’s commitment to stimulate the economy if it’s hurt by the global slowdown, according to comments at the Central bank symposium in Jackson Hole today.

 

Currencies

·     It was a rough day for the U.S. dollar, falling against most rival currencies, with the biggest declines coming against the safe haven Japanese yen, falling over 1% to near 2-week lows vs. Japanese yen, hitting 105.27 at its worst level (last week lows 105.05). The euro hit a three-week high against the buck as selling pressure accelerated following Trump’s tweets against China. President Trump ordered U.S. companies to start looking for an alternative to China after Beijing imposed more tariffs on American goods. The headline triggered mass selling in the dollar, though strengthened against the Chinese yuan in the offshore market, hitting a two-week high. The comments by Trump overshadowed a speech from Federal Reserve Chair Jerome Powell, who did not announce a major stimulus measure to ease a worsening global economic outlook, but set the stage for further interest rate cuts saying the U.S. economy was in a "favorable place" and the Fed would "act as appropriate" to keep the current economic expansion on track. Bank of England Governor Mark Carney took aim at the U.S. dollar’s "destabilizing" role in the world economy late day at the Jackson Hole meeting and said central banks might need to join together to create their own replacement reserve currency.

 

Bond Market

·     Treasury market’s rallied across the board, as yield curves further invert; yields slipped again erasing overnight declines after China announced retaliatory tariffs and the US vowed to respond again; the 10-year yield fell to lows of 1.51%, down about 10 bps with the shorter-term 2-year also around 1.51%; the yield curve inverted by over 40 bps between the 10-yr yield (1.518%) vs. the 3-month (1.953%), its widest margin in over a decade. The Powell comments, coupled with the market angst and uncertainty into the weekend between China and the U.S. on tariffs and trade was enough to push investors into the safety of bonds.

 

 

Macro

Up/Down

Last

WTI Crude

-1.18

54.17

Brent

-0.58

59.34

Gold

29.10

1,537.60

EUR/USD

0.0065

1.1143

JPY/USD

-1.10

105.34

10-Year Note

-0.105

1.508%

 

 

Sector News Breakdown

Consumer

·     Retailers; Footwear stocks pressured after FL Q2 profit, revenue missed consensus estimates, while its same-store sales growth of 0.8% falls short of expectations (3.3% est.)/said Q2 profit drops ~32% as invests heavily in online business, infrastructure; SG&A expenses up 3.4% in Q2; in sporting goods, HIBB posted a smaller-than-expected loss and raises FY profit, sales forecast, helped driven by last year’s acquisition of City Gear and strong back-to-school expectations; BKE Q2 net sales rose 1.4%, lifted by 9.2% rise in online sales and comparable store sales up 1.8%; ROST delivered a strong 2Q, with the top-line upside impressive and comps up 3% vs. est. 2%/rev growth and SSS slightly surpassed consensus expectations as gross margin came in shy by 10 bps; GPS 2Q EPS beat consensus by 10c, driven by gross margin 50 bps above street and SG&A 80 bps below street, while comps disappointed with Old Navy SSS decelerating (5%), Banana and Gap posted SSS of (3%) and (7%); Macy’s (M) downgraded at Guggenheim; overall it has been a good week of earnings from retail between TGT, LOW, BJ, JWN, but couldn’t escape the sell-off today

·     Consumer Staples; BUD hasn’t made a qualifying offer for the remaining shares of BREW and will instead make an incentive payment of $20 million/the action comes as the deadline for a qualifying offer, as indicated by the 2016 International Distribution Agreement, expires; MO upgraded to Equal Weight at Morgan Stanley noting that shares have underperformed the S&P 500 by 22% YTD and are trading at a 48% discount to the consumer staples sector

·     Autos & Leisure; U.S. automotive stocks sank in pre-market trade on news China will resume auto tariffs with shares of GM, TSLA, F, sliding along with auto suppliers DLPH, APTV, ALV, BWA, TEN; casino stocks couldn’t shake the trade impact woes between US and China, with WYNN, MLCO and others all under pressure; HOG traded to 52-week lows

·     Housing & Building Products; LZB was upgraded to outperform at Raymond James saying in a vacuum where investors did not have to worry about a potential recession and/or China tariffs, LZB would be a compelling buy; monthly new home sales data for July plunged over 12% after a downward revision as it missed consensus estimates (TOL, LEN, KBH, PHM)

 

Energy

·     Energy stocks sink again after China unveils new tariffs on $75B worth of U.S. goods, including a 5% tariff on U.S. crude imports beginning Sept. 1; the pain reverberated amid all sub sectors including equipment, E&P, refiners and services; Baker Hughes (BHGE) said the weekly total rig count fell -19 to 916; oil drillers cut rigs for a 7th time in last 8 weeks, falling -16 to 754 and gas rigs down -3 to 165 – recap. Utilities outperformed other sectors given the pullback in Treasury yields making dividend paying stocks more attractive

 

Financials

·     Banks move lower in broad based market pullback, driven down on plunging Treasury yields as the Fed remains divided on the future of interest rates (Powell said Fed will do what is necessary, Bullard also dovish, while Harker, Mester, George less accommodative; in services, TurboTax parent INTU posted a smaller-than-expected Q4 loss, revenue above estimates, boosted by growth across its business segments/raised the out year driven by strength in the QuickBooks franchise (mid-30s online ecosystem growth); in insurance, KMPR slides after William Blair downgraded earlier citing expectations of slowing earnings momentum

 

Healthcare

·     Pharma & Biotech movers; new flow relatively quiet for healthcare sector, with a few pockets of strength as industry not as directly affected to trade tensions with China as industrials, tech, retail are; CERN was downgraded to hold from buy at Jefferies as think the margin targets for 20% in 4Q19 and 22.5% in 4Q20 require some heavy lifting and with the stock up 37% YTD, partly on the activist involvement, think the much good news is now behind;

 

Industrials & Materials

·     Industrial & Machinery; BA shares rose, late Thursday the FAA said it would invite Boeing (BA) 737 MAX pilots from across the world to participate in simulator tests as part of the process to recertify the aircraft for flight following two fatal crashes; farm equipment stocks (DE, AGCO, CNHI) hurt again after China’s commerce ministry says it would impose additional tariffs of 5% or 10% on a total of 5,078 products originating from the United States including agricultural products such as soybeans, crude oil; MMM trades to new 52-week lows

·     Transports; pressure for the sector, specifically UPS, FDX after President Donald Trump asks the companies to refuse deliveries of synthetic opioid fentanyl from China; overall though, no escaping selling pressure for airlines, truckers or rails

·     Metals & Materials; chemical stocks among sectors hit along with metals, as DOW and EMN trade to 52-week lows; given the ramped up verbal attacks from both China and the U.S. on trade, metals stocks came under pressure as well (steel, aluminum, copper names); gold and gold miners strong given the market uncertainty with AEM, NEM, GOLD, AUY and KGC all higher; copper prices fell to 2-year lows

 

Technology, Media & Telecom

·     Internet; AMZN active after a WSJ investigation said it found 4,152 items for sale on Amazon.com Inc.’s site that have been declared unsafe by federal agencies, are deceptively labeled or are banned by federal regulators — items that big-box retailers’ policies would bar from their shelves.

·     Software movers; VMW was active overnight, reporting roughly in-line F2Q and F20 guidance while F3Q guide was light, implying a slightly steeper F4Q ramp, and both F3Q and license forecast were light – but the big stories were two acquisitions as they officially announced its acquisition of the 85% of PVTL it does not already own for $2B net in cash and stock, and the acquisition of long-time partner CBLK for $2.1B in cash ($26 per share); CRM shares rally as delivered another solid quarter of revenue upside, with strength across all areas (also (20-21% organic growth and 150bps+ organic operating leverage for FY20) and raises outlook

·     Media & Telecom movers; HAS shares fell after they announced last night it will acquire eOne in an all-cash transaction valued at approximately £3.3 billion or US$4.0B; eOne shareholders will receive £5.60 in cash for each common share of eOne

·     Hardware & Component news; HPQ shares fall after Q3 results were in-line on revenues and beat on EPS, and the company delivered very strong FCF…but again disappointed on printing, lowered its forecast for supplies growth this year to -4% to -5%, down from -3%, and stated supplies would not grow in 2020/also announced CEO to step down due to a family health matter

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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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