Market Review: August 30, 2019

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Closing Recap

Friday, August 30, 2019

Index

Up/Down

%

Last

DJ Industrials

37.00

0.14%

26,399

S&P 500

1.34

0.03%

2,925

Nasdaq

-10.51

0.13%

7,962

Russell 2000

-1.98

0.13%

1,494


 

Equity Market Recap

·     U.S. stocks were mixed, getting a late day bounce in quiet trade ahead of the upcoming three-day holiday weekend, ending the week higher but down on a month that was filled with headlines and tweets back and forth between the U.S. and China on trade and increased tariffs. Despite today’s losses, major averages tallied their biggest weekly gains since June on easing China/U.S. trade tensions after China indicated yesterday it wouldn’t immediately retaliate against the latest American tariff increase (which are expected to take effect on some goods this weekend). Stocks turned lower late day amid a pullback in financials and energy, as oil prices dropped nearly 3% on the day after 6% for the month ahead of this weekend’s tariff implementation. Trump also took another jab at the Fed this morning, pointing to the stronger dollar saying in a tweet “the Euro is dropping against the Dollar "like crazy," giving them a big export and manufacturing advantage and the Fed does NOTHING! Our Dollar is now the strongest in history. Sounds good, doesn’t it? Except to those (manufacturers) that make product for sale outside the U.S.” Treasuries prices remained lower after a key measure of inflation came in as expected (PCE core prices), while the euro fell to a two-year low against the dollar. Confidence plunged to multi-year lows while manufacturing data improved slightly, spending rose and income missed estimates.

·     In stock news, reinsurance names (RNR, RE, AXS) along with property & casualty names (ALL, CB, PGR) were volatile, pulling back ahead of expected landfall by Hurricane Dorian this weekend and damage related fears. Dorian expected to make U.S. landfall this weekend as a powerful Category 4 hurricane late Sunday or early Monday. Tech took a break after strong gains recently, while in retail, ULTA shares lose a quarter of its value on a miss and weak guidance. Cruise lines, hotels, transportation and restaurants are among some names that could be affected by Dorian.

Economic Data

·     Personal Income for July rises a smaller than expected 0.1%, below the est. 0.3% while Personal Spending for July rises 0.6% vs. est. 0.5%. Regarding inflation data: PCE Deflator MoM for July in-line at 0.2% and PCE Deflator YoY for July also in-line at 1.4%. The PCE Core Deflator MoM for July in-line at 0.2% and PCE Core Deflator YoY for July in-line at 1.6%

·     Chicago PMI better, reported at 50.4, topping the 47.5 est. (and coming off recent 3 ½ year low of 44.4 in prior month) as priced paid rise faster, new orders also rose back to expansion while production and inventories declined (now contraction territory)

·     University of Michigan sentiment for August fell to 89.8 (lowest since October 2016), missing the 92.4 estimate as the expectations index fell to 79.9 vs. 90.5 last month while the current economic conditions index fell to 105.3 vs. 110.7 last month

 

Commodities

·     WTI crude oil prices fell -$1.61 or 2.8% to settle at $55.10 per barrel (down roughly 6% for the month of August), while Brent dropped 65c to $60.43 per barrel and natural gas slid to $2.29 mln btu after rising yesterday. Prices rolled mid-morning on reports Russia’s output cuts agreed to as part of a deal with OPEC may be smaller-than-expected this month, coupled with a spike in the U.S. dollar weighing on commodity prices and fears ahead of the start of China tariffs on oil this weekend. Note several analysts have slashed oil price forecasts further this week due to fears over economy, trade.

·     Gold prices lost steam late day, sliding -$7.50 or 0.5% to settle at $1,529.40 an ounce (off intraday highs $1,541.90 an ounce), ending the week lower by the same amount (-0.5%) but managed a 6% rise for August, buoyed by a rotation into defensive assets on trade tensions and slowing growth concerns after having touched fresh 6-year highs in August.

 

Currencies

·     The U.S. dollar surged while the euro moved to fresh 2-year lows, falling below the 1.10 level (lowest levels since May 2017), amid concerns over global trade and Brexit (which remains on track for October). The euro dropped to as low as 1.0965, down -0.8% in mass late day selling. The overall Dollar Index (DXY) was up 0.4% to 98.90, back near 2019 highs approaching the 99 level (up about 0.4%) and at its best levels since May 2017. Note President Trump bashed the Fed yet again today in another tweet, noting that the weaker European currency is putting US manufacturers at a disadvantage as the Fed does nothing. The dollar also gained vs. the British Pound while slipped against the Japanese yen (but up roughly 1% on the week).

 

Bond Market

·     Treasury market’s slipped on Friday, down slightly as the yield on the 10-year up slightly at 1.52% (but off weekly 3-year lows of 1.44%) but little changed on the week. The long maturity 30-year yield was back under 2% after touching a life-time low this week of 1.90%. Mixed economic data, rising stocks, slowing global growth fears and central bank easing globally has created mass buying in bonds over the last month. The big story remains the recessionary indicator in yield inversion, as the 3-month Treasury yield stands at 1.97%, more than 45 bps above the 10-yr yield at 1.51%, while the 10-2yr yield inversion narrowed to nearly flat late Friday after widening as much as 4,5 bps this week.

 

 

Macro

Up/Down

Last

WTI Crude

-1.61

55.10

Brent

-0.65

60.43

Gold

-7.50

1,529.40

EUR/USD

-0.0084

1.0972

JPY/USD

-0.14

106.38

10-Year Note

0.021

1.518%

 

 

Sector News Breakdown

Consumer

·     Retailers; ULTA shares plunged over 20%, downgraded by several analysts with accompanying lower tgts after the company missed EPS expectations largely due to a lower comp vs. expected ( 6.2% vs. 6.7%) & EPS guidance was revised -7.5% lower for FY19 – co said trends in July have been more volatile, particularly in the cosmetics category (>50% of sales), and also indicated QTD trends were softer; AOBC shares dropped sharply after reporting s miss for Q1 (first in 2-years according to Wedbush) with an accompanying guide-down for the year as lowers year profit outlook to 70c-78c from 76c-84c (est. 83c); BIG the latest of the dollar/discount related stores to post strong results/guidance (DG, DLTR, FIVE rose yesterday on results), as Q2 EPS beat on smaller forecast loss for Q3, though Q2 comps of 1.2% missed the 1.8% est.

·     Consumer Staples; in food, CPB reported Q4 adjusted EPS 50c on sales $2.02B, both est. 42c/$1.98B/Q4 organic rev rom cont ops up 2%/gross margin improved 260 bps to 34.0% of sales driven primarily by supply chain productivity improvements and cost savings; in tobacco (MO, PM), the FDA and CDC say 215 potential cases of respiratory illnesses have been reported after use of e-cigarette products, as of August 27; BGS shares dropped after Credit Suisse cut its tgt to $17 to reflect concern regarding weaker retail sales trends in the B&G frozen business

·     Autos, Casino & Leisure movers; TSLA receives positive news on reports all of its auto models will be exempted from China’s auto tax on purchases, according to a statement posted on the industry minister’s website. Separately, TSLA has increased prices for some cars in China as the yuan trades at its weakest level in over decade, according to Reuters (Model X SUV was hiked to Y809,900 from Y790,900 and some Model 3 vehicles are currently Y439,900, up from Y429,900)

 

Energy

·     Energy stocks couldn’t hold on to their recent two-day gains, falling alongside oil prices again ahead of the expected implementation of tariffs on China this weekend. Prices had risen yesterday following a sizable drop in American crude inventories and an apparent pause in U.S.-China trade hostilities easing demand fears. Baker Hughes (BHGE) weekly rig count showed the total rig count fell -12 to 904; oil drillers cut rigs for an 8th time in last 9 weeks, falling -12 to 742 and gas rigs unchanged at 165. Nat gas prices extend yesterday gains (had risen 3.2% to $2.30 mln btus on Hurricane Dorian impact fears), though names lever to nat gas (SWN, RRC, GPOR) declined early. In solar, JKS handily tops Q2 earnings expectations as revenues topped $1B, as solar module shipments exceeded company guidance/gross margin was 16.5% vs. 12% QoQ

 

Financials

·     Bank movers; industry just can’t get a pop given the global slowing growth fears, and low interest rate environment. Adding to worries into Q3 earnings starting in October, weaker trading and investment banking revenues following low volume activity. Reinsurance names (RNR, RE, AXS) along with property & casualty names (ALL, CB, PGR) were volatile, pulling back ahead of expected landfall by Hurricane Dorian this weekend and damage related fears

 

Healthcare

·     Pharma movers; in specialty pharma, MNK shares dropped as much as 20%, and down over 60% for the month follows recent appeals court ruling that Linde’s Praxair did not infringe INOmax patents, as well as ongoing opioid –related litigation for the sector (follows JNJ lost ruling this month in Oklahoma on opioid’s and reports Purdue Pharma and the Sackler family, are offering to settle more than 2,000 opioid-related lawsuits for $10B-$12B); NVO was downgraded to hold at Jefferies US oral sema approval is imminent but we envisage pricing nearer oral SGLT-2s, a significant discount to injectable GLP-1s, compounding pressure on the class.

·     Biotech movers; ALXN shares pressured after AMGN challenged three patents covering top seller Soliris (eculizumab)/claiming the three patents shouldn’t have been issued/the USPTO should announce its decision in about a year; NKTR slipped as the FDA (as expected) notified them about its decision with its marketing application for opioid NKTR-181 for low back pain

·     Healthcare services and providers; COO shares fell after results as reported results that beat earnings but missed top-line expectations as miss was largely driven by tough comps in CVI (and some competition in their small multifocal segment as well as destocking around Brexit, too) and self-inflicted wounds in CSI where the company halted Paragard TV ad spend (as per Piper); TRHC was upgraded to buy at Stifel saying the prior neutral rating reflected valuation concerns and the need to ramp investment spending in 2019, but believe the opportunities in Medicare, Medicaid and PACE can sustain 20%+ organic revenue growth, plus annual margin expansion; EHTH shares fell as much as 10% on the day to its 100-day MA $80.30, and lowest levels since early July – some concerns ahead of the Centers for Medicare & Medicaid Services (CMS) preparing to relaunch the Plan Finder website this weekend in order to address some of the problem about site navigation for open enrollment

 

Industrials & Materials

·     Metals & Materials; the Financial Times reported Nickel prices surged by 8% on Friday to their highest levels in four years as Indonesia, the world’s largest producer, said it would ban exports of raw ore in December (nickel names NILSY, ERMAF); overall, metals and miners extended gains for a 3rd day as trade talks optimism grows; precious metal stocks fall as gold pulls back from 6-year highs and after a good run in several names (KGC, AUY, AEM, GOLD); iron ore prices plunged this month, following 5-months of gains helped by supply disruptions in Brazil and Australia that lifted futures to the highest since 2014 – contract in Singapore sinks into $80s from July high of $120 (CLF, BHP, VALE, RIO)

 

Technology, Media & Telecom

·     Semiconductors; AMBA shares jumped after beat/raise results boosted by order pull-ins from China but also market share gains and strong CV trends in Security and broadening design win traction in Automotive (sees Q3 revenue $63M-$67M above est. $55.38M); MRVL Q2 results slightly better, but 3Q guide missed due to Chinese Networking customers digesting inventories after slight over-shipments in F2Q, lower 4G demand ahead of 5G production ramps

·     Software movers; WDAY was upgraded to neutral at Citigroup, while many other analysts raise their tgt price after the company raised its FY subscription revenue outlook, guided Professional Services revenue of $135M in Q3 and $520M for FY20; SEAC shares jump after Q2 EPS and rev beat (3c/$18.8M vs. loss 7c/$14.7M); YEXT falls as negatives (F2Q billings grew +19% y/y to $69.7M, missing est. by ~$5M, and growth decelerated from +29% in F1Q), outweigh positives for quarterly results (beat F2Q Street estimates and the high end of the guidance for revs/EPS)

·     Hardware & Component news; DELL shares strong after raising its full-year profit outlook to $6.95-$7.40 from $6.05-$6.70 (est. $6.42) while mid-point of year rev guidance also tops consensus after better Q2 results as well as strong cash flow and core debt reduction

·     Media & Telecom; MSGN shares jumped after authorizes $300M boost to stock buyback; to begin up to $250M modified Dutch auction; AT said it’s reached tentative agreements with a union representing about 20,000 workers in nine states in the Southeast; DIS sold its interest in the YES Network to an investor group including Yankee Global Enterprises, SBGI and AMZN, as the group acquired the 80% the Yankees already didn’t own, for an enterprise value of $3.47B; LGF shares dropped as much as 9% after a report in The Information said CMCSA plans to drop Starz and Encore at end of year from its bundle

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Content is provided by Hammerstone Inc., which has no affiliation with Regal Securities, Inc. (“Regal”) This commentary is provided for information purposes only, and is not a recommendation, offer or solicitation by Regal to buy or sell securities or to adopt any investment strategy. Regal has not participated in the creation of the Hammerstone content and does not directly or indirectly endorse the content. Any reliance on this material is at the sole discretion of the reader.

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