Closing Recap

Monday, June 03, 2019

Equity Market Recap

·     U.S. stocks in another sharp downturn, led today by declines in technology and discretionary, as Treasuries extend recent gains (sending yields lower) amid dovish commentary from the Fed’s Bullard adding fuel to the rate cut hopes, along with weaker economic data. Tech was the big laggard, led by steep declines in AAPL, FB and GOOGL on negative headlines. At the Worldwide Developers forum, AAPL updated its WatchOS operating system with new features, including the ability to download apps directly onto an Apple Watch without requiring a companion iPhone version of the app, while also announced new tools and updated operating systems. However, the announcements were overshadowed by a Reuters report that the Justice Dept. has been given jurisdiction over it for a potential probe as part of broad tech company review. The headlines turned shares lower by more than 2%, joining weakness in other large-cap names earlier, led by the FAANG stocks. GOOGL fell on a DOJ investigation report, while FB dropped below key technical levels to their lowest levels in months on reports the FTC is said to open competition probe of Facebook practices. With today’s tech drop, the Nasdaq Comp fell into correction territory, a 10% drop from high’s, which occurred on May 3rd. Stocks got a brief bounce off lows after the Fed’s Bullard said rate cut may be warranted to boost inflation, but the bounce was short lived. Between the latest concerns in tech, coupled with the escalating trade tensions with China and latest tariff impact concerns with Mexico, stocks started June how they finished May, under pressure and with momentum clearly to the downside. Note for the month of May, the Dow Industrial Average fell -6.69%, the S&P 500 dropped -6.58%, and the Nasdaq Composite declined -7.93% as the three major averages posted their first monthly losses of 2019. The Dow also comes in with a 6-week losing streak (longest streak since 2011) and both the S&P and Nasdaq Comp riding 4-week losing streaks. This weekend, China said that Washington’s trade moves have done serious harm to the U.S. economy by increasing production costs, causing price hikes, damaging growth and people’s livelihoods and creating barriers to U.S. exports to China. Markets are also looking to pick up the pieces from last Friday when President Trump announced 5% tariffs on all Mexican imports starting June 10, in order to address the illegal migration crisis at the border. Tariffs would then rise to 10% on July 1, 15% on August 1, 20% on September 1 and 25% on October 1 if Mexico does not take sufficient actions.

Economic Data

·     Markit US Manufacturing PMI, May-F reported at 50.5 vs. est. 50.6, while the new orders index for May stood at 49.6 vs flash reading 49.7 and final April 53.5 (lowest since September 2009)

·     ISM Manufacturing for May fell to 52.1 (lowest since Oct ’16) from 53.0 last month, which was also the estimate while new orders rose to 52.7 from 51.7 prior, employment rose to 53.7 vs 52.4, inventories fell to 50.9 vs 52.9 and prices paid rose to 53.2 vs 50.0

·     Construction Spending for April was unchanged, slightly below the estimate for a +0.4% increase, while the prior month was revised to +0.1% from -0.9%

Commodities

·     WTI crude erases earlier gains (but also closes well off the lows), sliding 25c to settle at $53.25 per barrel (highs $54.63 and lows $52.11) despite a drop in the dollar and reports Russia average daily oil output in May fell below its OPEC+ target for the first time this year failed to boost prices. Oil remains pressured by trade tensions (weighing on demand) and oversupply. Gold prices jumped $16.80 or 1.3% to settle at $1,327.90 an ounce, its 4^th straight daily advance and moved to its best levels since February, supported by a drop in the dollar as well a further decline in U.S. stocks, sending investor scurrying for safe-haven assets.

Currencies & Treasuries

·     The U.S. dollar slides to fresh lows mid-afternoon (had already been weak) as the dollar index (DXY) touched lows of 97.19 (-0.45%) – off recent 2019 highs of 98.37 on 5/23 – helped after the Fed’s Bullard said a rate cut may be warranted to boost inflation and counter downside economic risks from an escalating trade war. The dollar had already exhibited weakness early on weaker US data, as well as general market fears. The Canadian dollar rebounded to a 1-week high.

·     Treasury market’s remain strong, adding to last week gains as Treasury yields move to new low levels from 2017; the 10-year yield fell to 2.10% after dropping as low as 2.069%, while the 3-month and 1-year yield invert further to over 25 bps, boosting recession fears; the 2-yr yield falls under 1.87% and the 30-yr drops to 2.55%. Dovish comments from the Fed’s Bullard on rate cuts helped buoy Treasuries late day as well.

Sector News Breakdown

Consumer

·     Auto movers; monthly auto sales data for May released today: 1) TM said May total U.S. auto sales rose 3.2% vs. est. (-0.5%); 2) FCAU May U.S. auto sales rose 2% vs. est. (-5.9%) as Ram brand sales rose 29% YoY while May Jeep brand sales fell (-7%) YoY; 3) HMC May US auto sales fell (-4.9%) vs. est. (-1.3%); 4) NSANY May auto sales rose 0.1% vs. est. (-6.2%); overall rebound from Friday’s Mexico tariff related sell-off with suppliers higher (AXL, BWA, VC, LEA); TSLA shares fell below the $180 level, down to its lowest levels since late 2016 on continued lower momentum

·     Consumer Staples; MO said it took an 80% stake in the global business of Burger Sohne for $372M; CHWY is offering 5.6M shares of its Class A common stock at an IPO price expected to be between $17-$19 per share (the subsidiary of PetSmart, Inc., is offering 36M shares of stock); FIZZ was upgraded to hold from sell at Maxim after shares have significantly declined from its 52-week and all-time high of $127.32 and $129.82, respectively; KHC mentioned in Barron’s saying shares could be near a bottom after the latest downdraft; consumer staples mostly higher, led by gains in food space (TSN, SJM, CPB)

·     Restaurants; CMG said it could face about $15M in costs this year if the U.S. carries out proposed tariffs on goods from Mexico (notes gets avocados from Mexico) with its CFO saying “if the tariffs become permanent, we would look to offset these costs through other margin improvement efforts already underway,”…and “could also consider passing on these costs through a modest price increase”; EAT was upgraded to neutral from sell at UBS saying that with the stock falling below that level, valuation now appears to reflect the challenges of April initiation

·     Casino & Leisure movers; casinos and gaming names active after gross gaming revenue (GGR) for Macau casino operators was 26 billion patacas ($3.2 billion) in May, up 1.8% YoY but was slightly worse than the median analyst estimates of a 3% increase, and follows declines in March and April. (watch shares of WYNN, MLCO, LVS, MGM)

·     Retailers; BIG was downgraded two notches to underperform from buy at Bank America saying they believe that the company’s outlook for the rest of the year may be too optimistic and could be due for additional cuts (cuts tgt to $23 from $45)

Energy

·     Energy stocks rebound along with a bounce in oil prices (highs $54.63 and lows $52.11), after the sector dropped sharply the last 2-weeks on slowing demand fears given the ongoing trade dispute with China and the U.S. as well as rising oversupply fears. Headlines that Russia’s average daily oil output in May fell below its OPEC+ target for the first time this year failed to meaningfully help oil prices. The trade war still looms over markets as China blamed the U.S. for the collapse in trade talks and said it won’t be pressured into concessions. No real other specific headlines pertaining to energy stocks today.

·     Utilities & Solar; EE after agreeing to be acquired by the Infrastructure Investments Fund, an investment vehicle advised by JPMorgan Investment Management, for $68.25 per share in cash in total deal valued at $4.3B including debt https://on.mktw.net/2WywR4v in solar, Credit Suisse said ENPH and SPWR are most impacted from tariff uncertainties as they source majority of U.S. shipments from Mexico

Financials

·     Financials; after the sector was absolutely pummeled the last few weeks on plunging interest rates, large cap and regional banks caught a bounce today on likely oversold conditions, and as Treasury yields bounced off more than 2-year lows (10-year yield hit 2.067% before moving back above Friday’s closing levels of roughly 2.12%) giving a boost to banks. In consumer finance and lending; CNBC reported PYPL is rolling out e-commerce platform to help start-ups compete with Instagram and Facebook; IBKR said for May, 894 thousand Daily Average Revenue Trades (DARTs), 15% higher than prior year and 15% higher than prior month.

·     In other news BX is buying a network of U.S. industrial warehouses from Singapore-based GLP for $18.7B, including debt, in the largest private real-estate transaction ever. The deal, culminating an auction, could be announced as soon as Sunday as they outbid real-estate company PLD for the roughly 180-million-square-foot portfolio https://on.mktw.net/2ERMwBQ

Healthcare

·     Highlights/movers from this weekend ASCO conference in Chicago:

·     ADRO falls downgraded at Oppenheimer as Aduro’s partner NVS presented initial clinical results from an ongoing Phase 1b trial of ADU-S100 in combination with spartalizumab in advanced tumors/said of 83 patients dosed as of an April 5 cutoff, five objective responses were observed

·     AMGN said AMG 510 response rate improved to 50% from 30% in lung cancer patients/saw early signs of activity in a study of 35 patients for an experimental drug targeting one of the most commonly mutated genes in cancer (MRTX shares surged, which is developing its own medicine with GSK for KRAS mutation data, boosted by AMGN data at ASCO)

·     FPRX shares fell after being downgraded at Wells Fargo following review of data at ASCO for B7:H4 antibody FPA-150 in B7:H4+ patients w/ solid tumors including ovarian cancer saying response rate of 1/18 in B7:H4+ tumors is underwhelming, w/lack of clarity on dose response

·     GNCA surges as announces promising data from its ongoing trial of GEN-009, its lead cancer treatment vaccine, at ASCO saying in five patients, GEN-009 monotherapy elicited T cell responses to 91%; the treatment has been well tolerated to date, with no dose-limiting toxicities

·     NKTR after its bempegaldesleukin combined with BMY’s Opdivo spurred more remissions of skin cancer, as updated results from an early-stage study showed four additional patients out of 38 were cleared of their cancer, for a total of 13

·     MRK presented data on its blockbuster cancer drug Keytruda at ASCA as data showed that five year overall survival rate was 23.2% in new patients and 15.5% in previously treated patients, as compared to a historical survival rate of around 5%

·     Pharma movers; ATXI rises after saying a second late-stage trial of its intravenous (IV) drug tramadol achieved the main goal of improving pain over 24 hours versus a placebo in patients with postoperative pain following abdominoplasty surgery; after hitting 19-year lows, Oppenheimer upgraded shares of TEVA as believe business fundamentals continue to improve and management’s execution on the operational front is generally in line with expectations; Cannabis stocks extend recent slide as TRLY (down a 7th straight day), CRON (down a 4th day), CGC (also down a 4th straight day) all lower after the FDA conducted its first-ever hearing on cannabis and its non-intoxicating ingredient CBD all day Friday with more than 100 speakers

·     Medical equipment and devices; TMO’s Oncomine Dx Target Test CDx System received reimbursement coverage from Japan’s Ministry of Health, Labour and Welfare and is now commercially available in that country; DGX shares active after the WSJ reported a data breach may have involved the collection of 11.9 million patients’ financial information, such as credit-card numbers and bank-account information

·     Healthcare services and providers; HUM shares rallied after confirming this morning that it would not bid for CNC; MOH was upgraded at BMO Capital while the firm downgraded WCG

Industrials & Materials

·     Industrial & Machinery; in waste, KeyBanc downgraded WCN to sector weight saying that a more limited upside potential for 2019 may put pressure on consensus Ebitda estimates for the company; CTVA shares fell on its first day of trading after the agriculture co’s separation from DowDuPont; FTV shares were downgraded at Cowen they see risk to 2H19 and 2020 estimates as it appears M&A contribution is coming in light in the company’s main segment – compounding the impact of cyclical deceleration in legacy businesses; Dow component shares BA were active after U.S. regulators say some Boeing 737 max planes may have faulty parts

·     Transports; FDX slipped on reports China will investigate into the U.S. package delivery co, Xinhua news agency said on Saturday, after Chinese telecoms giant Huawei Technologies Co Ltd said parcels intended for it were diverted – UBS cut estimates and tgt citing the investigation

·     Metals & Materials; regarding AA the United Steelworkers (USW) said members of local unions have granted negotiating committees the authority to implement a strike if necessary at a number of Alcoa’s US facilities/no labor disruptions have occurred. Outside of that, quiet in the beaten up metals sector, a groups that has been pressured amid trade tensions between the two top economies (steel/copper names been weak (X, NUE, STLD, etc.); gold miners higher (AEM, GOLD) after gold prices jumped $16.80 or 1.3% to settle at $1,327.90 an ounce

Technology, Media & Telecom

·     Internet; GOOGL shares pressured, hitting the lowest level in over 4 months after reports the U.S. Justice Department is preparing an investigation of Google to determine whether it broke antitrust law in operating its sprawling online businesses; FAANG stocks in general weak as AMZN and FB both traded below key technical levels; FB fell below its 100-day MA of 170.70- first break below 100-day MA since January while neared 200-day support $161.37) – FB fell to lows midday on reports the FTC is said to open competition probe of Facebook practices

·     Semiconductors; CY to be acquired by Infineon Technologies for an enterprise value of $10.1B, equal to $23.85 per Cypress share in the latest chip deal https://on.mktw.net/316d0sv ; SWKS estimates and target lowered at Craig Hallum to account for the absence of Huawei revenues as believes has similar exposure to Huawei as QRVO, which equates to ~$400-$500M worth of revenues; AVGO mentioned positively in Barron’s noting that semiconductor demand has been soft, U.S. antitrust officials are looking into Broadcom’s dominance in some market, but says investors should still buy Broadcom’s shares noting the promise of speedy 5G capability; AMD said it will license its graphics designs to Samsung for use in smartphones and tablets

·     Hardware & Component news; AAPL shares dropped midday after Reuters report said Justice Department got jurisdiction for possible antitrust probe; the Annual Worldwide Developers Conference taking place this week (6/3-6/7) in San Jose, CA; INFN shares declined after being downgraded to underweight at JPMorgan as they see a heightened level of near-term and medium-term risks from the much more moderate level of capex spending from cable customers