Closing Recap

Friday, June 07, 2019

Equity Market Recap

·     U.S. stocks in cruise control higher into the weekend, with major averages posting their best weekly returns this year as the Dow Industrial Average gained more than 1,300 points for the week (low 24,680 on 6/3 – to above the 26K level late day) on rate cut hopes and trade optimism. The S&P 500 and Dow Industrials both traded back above their 50-day moving averages while the tech heavy Nasdaq Composite outperformed, as all major S&P sectors climbed on Friday. A sharp slowdown in US job growth this week (ADP private payrolls 9-year low Wednesday and Nonfarm Payrolls missed today) boosted expectations of Fed rate cuts. Hopes for a potential trade resolution with Mexico ahead of Monday’s imposed tariffs (as the U.S. pushed out tariff hikes a few days) and news China tariffs won’t go up for some Chinese goods until June 15^th helped lift sectors leveraged to trade as well: autos/equipment this week by about 9%, semiconductors were up about 6%, metals and mining +6% and transports 5%.

·     As non-farm payrolls rose by a lower than expected 75K in May, marking the second straight month of monthly jobs growth below 100K and well below the 175K estimate, markets once again supported by increased expectations for the Fed to cut rates (as early as this summer). Fed rate cut outlook estimates growing: after today’s jobs data miss, fed fund futures rose to a 36% chance for a June rate hike and over 85% chance for a cut in July. Barclay’s changed its rate forecast as now sees a 50 bps cut by the Fed in July, while Citigroup said it sees a 50 bps cut in September and 25 bps cut in December with a material risk of 25 bps in July as well. U.S. Treasury yields dropped after the weak jobs report, with the two-year yield tumbling 8 bps to 1.81% and the 10-year yield slumping 5 bps to 2.08% while the dollar also has weakened.

·     Bottom line is the S&P 500 index posted its best weekly performance of the year thus far (since November), which follows the worst five-day return of 2019 to date, with markets boosted by dovish commentary this week from Federal Reserve Chairman Jerome Powell as well as other Fed members, and weaker economic data. Note a midday Trump tweet said there’s a “good chance” a trade deal will be struck, though he added that instituting tariffs was still a possibility.

Economic Data

·     Jobs report weak; payroll report showed slowing job growth as the change in nonfarm payrolls rose a modest 75K, below the 175K estimate while private payrolls added 90K jobs vs. est. 174K and manufacturing payrolls in-line at 3K; the unemployment rate steady at 3.67% while average hourly earnings rose a lower 0.2% vs. est. 0.3%; the labor force participation rate steady at 62.8%

Commodities

·     Oil prices end higher by $1.40 or 2.66% to settle at $53.99 per barrel, bouncing for a 2^nd straight day after hitting its lowest levels since January yesterday ($51.17), recovering after falling as much as 22% from its April highs. Also helping beaten up oil prices, weekly rig report showed oil drillers cut U.S. activity to 15-month lows as prices falter amid oversupply.

·     August gold prices rose $3.40 or 0.3% to settle at $1,346.10 an ounce its best levels, rising for an 8th straight day (longest streak in nearly 18-months – which was a streak of 11-days in January ‘18), and posted a 2.7% for the week (biggest weekly gains since April 2016). Gold has benefitted from a drop in the dollar as weaker economic data has boosted expectations that the Fed would cut interest rates this year. Gold has also benefited from concerns that U.S. trade wars with Mexico and China will slow the global economy.

Currencies

·     The U.S. dollar had a rough day and week, with the dollar index (DXY) down roughly -0.5%, falling to its lowest levels since late March (96.45) and down nearly 200 bps from its 2019 high 98.37 just last Thursday – trading to its 200-day MA support of 96.53. The dollar sunk after the monthly jobs report showed growth slowed sharply in May and wages rose less than expected. The weak report suggests that the loss of momentum in economic activity has spread to the labor market, boosting expectations that the Federal Reserve will cut interest rates this year. The euro rose 0.5% to an 11-week high of 1.1348, Pound rose to 2-week highs around 1.2750, while the buck fell over -0.7% to lows around 1.3265 against the Canadian dollar, lowest since early March.

Bond Market

·     Treasury market’s end the day and week higher, with yields plunging across the curve after the US jobs market stalled in May, sharpening expectations that the Federal Reserve will have to cut interest rates this year. The 2-yr yield fell to lows of 1.81% from 1.88% prior to the jobs report; the 10-year Treasury yield falls to lows around 2.053% (from 2.105% before the jobs report) and down from 2.12% late yesterday, while the yield on the 5-year Treasury dropped below 1.80%, both at their lowest since September 2017. Global yields falling as well with German 20-yr yield to all-time lows of 0.126% while Italian 10-year yield hits one-year lows.

Sector News Breakdown

Consumer

·     Retailers; WMT said starting this fall, about 1 million people in Pittsburgh, Kansas City, and Florida, will have employees (with wearable cameras) arrive in company-owned cars and unpack the food in customers’ kitchens; BKS agreed to be acquired by funds advised by Elliott Advisors for $6.50 per share in cash, in deal at approximately $683M https://on.mktw.net/2MuJdXk ; RVLV 11.8M share IPO priced at $18.00; ZUMZ shares jumped after better Q1 results; GES reported a narrower than expected Q1 EPS loss on in-line revs while Q2 guidance of 27c-30c fell below the 38c estimate; OLLI shares fell as Q1 comp sales missed (+0.8% vs. 1.5% est.)

·     Consumer Staples; BYND shares spike over 35% in its 1st earnings report as a public company (IPO priced at $25 back on May 1^st), as it beat on the top and bottom line and said it doesn’t see any obstacles in working with large fast-food chains in the future; MNST strong gains as analysts overly positive following annual shareholder meeting yesterday as mgmt was upbeat about the Reign launch and cited faster growth in the unmeasured channels; another day of 52-week highs for names in staples/restaurants: SBUX, MCD, IFF, HSY, KO, PEP, KMB, BF

·     Casino & Leisure movers; in gaming, the NY Post reported CZR dismissed a takeover bid from ERI as too low, though continued talks could soon lead to improved offer https://nyp.st/2Wt7kKv ; in leisure, MTN shares rise after earnings/strong season pass sales through for the upcoming 2019/2020 N.A ski season increased about 9% in units and 13% in sales dollars; in cruise lines, NCLH followed RCL commentary yesterday that the Trump administration’s sudden ban on cruises to Cuba would hit its 2019 profit (said would hit by 35c-45c per share); in camping, CWH was downgraded to Market Perform amid growing concerns that the RV industry may be taking longer than anticipated to right size and that channel inventory, especially Camping World’s, remain at higher-than-desired levels

Energy

·     Energy stocks rallied along with broader markets and a bounce in oil prices; Saudi Arabia’s top oil official said he was sure that OPEC+ will extend production cuts into the 2H of the year after holding talks with Russia. Oil prices recovered off five-month lows this week and posted its biggest two-day gain since April. The Baker Hughes weekly rig count fell -9 total rigs to 975, as drillers cut rigs for the 4^th week in the last five, as oil rigs fell -11 to 789 (was the lowest count since February 2018) and gas rigs rose 2 to 186

·     E&P sector; JPMorgan with a few changes in the sector as they upgraded MTDR but downgraded CDEV to neutral and QEP to underweight – for CDEV’s outspend as a percentage of market cap is the highest on our coverage list in downside cases (15%-20%) while for QEP believe inventory is more limited than what most believe; TUSK said it stands by the "quality and reasonableness of its work" in Puerto Rico and welcomes an open inquiry into its performance (the commentary follows a recent article in the WSJ saying the FBI was looking into its work in Puerto Rico)

·     In oil service & equipment sector; SLB was upgraded to buy at Stifel with $50 tgt citing compelling risk/reward at current levels, solid free cash generation and belief that the $2.00 per share annual dividend is safe and investors are getting paid to wait and rising international activity; HLX was upgraded to strong buy at Raymond James as raising 2020 EBITDA estimates by ~5% to $222 million increasingly confident about Helix’s outlook and cash flow generation ability; HP was upgraded to overweight at Piper citing the company’s fortress balance sheet, history of returning capital to shareholders, and generous current dividend yield

·     Utilities & Solar; EXC was upgraded to buy at Goldman Sachs citing solid regulated EPS growth and strong non-regulated FCF ahead; another day of 52-week highs for several names in the utility sector as ongoing lower Treasury yields boost appeal for high dividend paying names

Financials

·     Bank stocks were one of the few sectors not to rally with the spike in stocks today as the weaker jobs report, fueling slowing growth concerns, boost expectations for the Fed to cut rates as soon as this summer, which is expected to narrow lending margins banks have. In the insurance sector, AEL shares dropped after the company announced today that its Board of Directors is no longer in discussions regarding a potential transaction; meanwhile several other insurance names touched 52-week highs today (AFL, CINF) and payment/FinTech names (V, MA, TSS, GPN, FIS)

Healthcare

·     Pharma movers; SNY said that CEO Olivier Brandicourt will retire and that he will be replaced Swiss pharmaceutical giant NVS CEO Hudson; AXSM fell after its pipeline update that included a revised timeline for a data readout from a Phase 2 clinical trial, CONCERT, evaluating AXS-12 in narcolepsy (results are now expected in H2 instead of this quarter); MRTX was downgraded at Guggenheim noting shares have almost tripled (+186% vs. -1% for BTK) post ESMO

·     Biotech movers; VRTX announced a build-out of its gene editing footprint via acquisition of privately held Exonics Therapeutics and expansion of the existing CRSP collaboration with the goal of developing therapies for Duchenne muscular dystrophy and myotonic dystrophy type 1; CBAY shares slipped but defended at Leerink saying shares down on an "overreaction" to the FDA’s recommendation regarding endpoint for compensated cirrhosis

·     Medical equipment, devices and services; DXCM, PODD, TNDM shares among those active into the American Diabetes Association (ADA) meeting this weekend; HZN gained after announced earlier today that the Company has initiated a formal process to explore the sale of its Asia-Pacific business segment, with Jefferies engaged to run the process; DVA shares active on FTC ‘s expected recommendation of approval for UNH to buy DaVita’s physician group unit

Industrials & Materials

·     Industrial & Machinery; as well as Metals & Materials were among the top performing sectors (S&P Materials sector up over 9% for its best week in over 10-year according to CNBC) on no specific news, but more just a positive outlook on trade and general upside market momentum; FCX shares got a boost after filing showed CEO Adkerson bought 172,000 shares at $10.14 on June 6^th; gold miners have had a nice run over the last week during gold’s rally, with prices touching best levels in 6-months. Transports quiet in terms of news, but overall index gained in reaction to “risk-on” day of stocks. FDX did announce that it decided not to renew its express contract with AMZN as company will focus on serving broader e-market

Technology, Media & Telecom

·     Internet; FAANG stocks outperform, led by gains across the board in FB, AMZN, AAPL, NFLX and GOOGL; FB is no longer allowing pre-installation of its apps on phones from China’s Huawei Technologies Co. Ltd, Reuters reported. Customers who already have Huawei phones will still be able to use its apps and receive updates, but new Huawei phones will no longer have Facebook, WhatsApp and Instagram apps pre-installed; GRUB shares rose after a report from Hedgeye analyst Howard Penney speculated AMZN may be interested in company, citing AMZN’s recent investment in UK food delivery company Deliveroo

·     Software movers; ZM shares surge in first earnings report as public company as Q1 results easily topped views and provided guidance for F2Q20 and FY20 that exceeded current Street estimates; PLAN was upgraded to overweight at KeyBanc with a price target of $57 as firm has increasing confidence in PLAN’s revenue growth potential; DOCU shares slump as reported mixed Q1 results with EPS and revs beating (7c/$214M) beating (6c/$208M) but billings of $214.9M, up 27%, just missed the consensus of $216.3M; DOMO with better-than-expected Q1 results, on billings growth of 22% y/y (vs. est. 20% YoY), and revenue growth of 28% YoY, but was a deceleration from 31% last quarter; TLND resumed with sell rating at Goldman Sachs hit shares

·     Video gamer software; several analysts highlight details ahead of next week’s E3 video game conference next week (ATVI, TTWO, EA all active); GLUU was upgraded at Wedbush following pullback in shares and sees multiple potential positive catalysts this year and next

·     Hardware & Component news; ANET shares weak as several analysts weigh in fairly positively after analyst day yesterday (CSFB, Nomura) – while KeyBanc noted "at Arista’s analyst day multiyear revenue guidance was provided of mid- to high-teens revenue CAGR from CY18-CY21, implying CY21 revenue in the $3.2B-3.5B range (vs. a limited consensus CY21 estimate at $3.6B); PD shares another recent IPO with first earnings results as public company as shares jumped; in tower sector, AMT and SBAC were both downgraded to neutral at UBS