Market Review: May 16, 2019

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Closing Recap

Thursday, May 16, 2019

Index

Up/Down

%

Last

DJ Industrials

215.74

0.84%

25,863

S&P 500

25.41

0.89%

2,876

Nasdaq

75.90

0.97%

7,898

Russell 2000

8.99

0.58%

1,557


 

Equity Market Recap

·     U.S. stocks managed to rally a third straight day, with Treasury yields bouncing off weekly lows helping support financials while tech was mixed after the U.S. placed China based Huawei Technologies Co on a blacklist which bans it from acquiring components and technology from U.S. firms without prior approval. U.S. stocks posted broad gains, with nearly every major sector rising outside of a few pockets of weakness like chip suppliers to Huawei such as XLNX, SWKS, QRVO and others (escalating already tense trade negotiations with China), but software and Internet strength helped offset the weakness. Stocks ripped from the open as the S&P and NASDAQ traded back above their 50-day moving averages, but slipped from the highs around midday after Secretary Ross said that the Huawei order will be effective tomorrow. The Dollar Index strengthened 0.3% to 97.85 on the back of upbeat economic data (jobless claims, housing data and manufacturing all topped views). Also helping markets were better results from Dow components WMT and CSCO. Back to the potential ban for Huawei, MKM Partners said the ban is devastating for NPTN and ACIA; bad for LITE, IIVI, QRVO, and CRUS; negative impact for the others. European stocks extended a rebound, recouping about half the losses recently from escalating trade tensions earlier. Late day headlines lifted Dow component BA, rising over 2% after saying it completed development of the updated software for the 737 MAX, along with associated simulator testing and the company’s engineering test flight.

Economic Data

·     Housing Starts for April rose 5.7% to 1,235M annualized, above the 1,209M estimate, while the prior month was revised up to 1.168M from 1.139M. Building permits rose 0.6% to 1,296M vs. 1,288M in March and slightly above 1,289M estimate

·     Weekly Jobless Claims fell 16K to 212K, below the 220K estimate while the 4-week moving average stood at 225K; prior week claims were unrevised from 228K; continuing claims fell 28k to 1.660m in the week ending May 4

·     Philadelphia Fed Index for May rises to 16.6, well above the 9.0 estimate; general business conditions were 8.5 in the prior month while prices paid rose to 23.1 vs 21.6 MoM, new orders fell to 11.0 vs 15.7 and employment rose to 18.2 vs 14.7. The Six-month outlook rose to 19.7 vs 19.1 and the six-month outlook for capex fell to 23.3 vs 30.9

·     The 30-year fixed-rate mortgage (FRM) averaged 4.07% with an average 0.5 point for the week ending May 16, 2019, down from last week when it averaged 4.10%. A year ago at this time, the 30-year FRM averaged 4.61%. The 15-year FRM this week averaged 3.53% with an average 0.4%, down from last week when it averaged 3.57%

 

Commodities

·     Oil prices advanced alongside the rally in U.S. stocks, with WTI crude rising 85c or 1.4% to settle at $62.87 per barrel, its best close since May 1st, while Brent jumped 85c or 1.18% to settle at $72.62 per barrel. Also supporting prices, Saudi Arabia accused Iran of ordering this week’s attack on key oil facilities, raising concerns that the oil-producing region is edging toward another war. Oil overall climbed for a third day, the longest run of gains in three weeks.

·     Gold prices slumped, as June gold fell -$11.60 or 0.9% to settle at $1,286.20 an ounce, its lowest settlement in a week as the dollar rallied against most rival currencies and as investors rotated out of safe-haven assets with stocks surging a third-straight session

·     Chicago corn futures headed for the highest close since March, with soybeans and wheat both trading higher this week with Bloomberg noting increased rain slowed planting across the Great Plains, Mississippi Delta and Midwest, which could hurt crops and push prices higher.

 

Currencies

·     The U.S. dollar advanced vs. most rivals, gaining steam vs. emerging market currencies (AUD, CAD) and major currencies such as the yen (as investors sell safe-havens), the euro and British Pound, which dropped to a three-month low below $1.28 against the dollar as the risk of a no-deal Brexit increased again. The main opposition Labour Party said it wouldn’t back Prime Minister Theresa May’s latest attempt to get her withdrawal agreement through Parliament. Stronger economic data in the U.S. was a boost to the greenback.

 

Bond Market

·     Treasury markets slip after positive solid returns over the last week, as yields bounced across the board after hitting multi-week lows yesterday for the 10 and 2-yr yields; the 10-year yield bounces back above 2.41% and the 2-year above 2.2% (lows around 2.33% and 2.13% yesterday respectively) as investors jump back into stocks which are rebounding for a third session. Treasury prices fell following a good day of U.S. economic data (manufacturing, jobs), a welcome relief after disappointing retail sales sunk sentiment yesterday.

 

 

Macro

Up/Down

Last

WTI Crude

0.85

62.87

Brent

0.85

72.62

Gold

-11.60

1,286.20

EUR/USD

-0.0023

1.1178

JPY/USD

0.27

109.87

10-Year Note

0.031

2.407%

 

 

Sector News Breakdown

Consumer

·     Retailers; WMT with mixed Q1 results as comp-store sales of 3.4% met estimates, while EPS beat the street on mostly in-line revenue/U.S. e-commerce sales up 37% y/y vs up 43% in 4Q while WMT U.S. transactions down 30 basis points y/y, avg ticket up 160 bps; WMT did warn that increased tariffs lead to increased prices (may impact dollar stores); DDS shares dropped as EPS beat estimates driven by lower SG&A expenses and asset sales while comp results disappointed and retail GPM was down 141 bps vs. Deutsche Bank est. down 50 bps, driven by increased markdowns; Macy’s (M) was upgraded to neutral at Goldman Sachs as sees a more balanced risk/reward in the wake of the stock’s recent underperformance; FTCH posted solid 1Q results and reinforced its focus on growth & market share over N-T profitability while JPM said shares likely fell on the lower Q/Q take rate & less than expected 2019 topline guide upside

·     Staples & Restaurants; JACK posted Q2 results that beat expectations while also concluded a review of strategic alternatives, and said it would resume a stock buyback program; 52-week highs for PG in the Dow Industrial Average; FLO posted a beat on the top and bottom line for Q1 (32c/$1.26B vs. est. 30c/$1.23B) while guidance forecast bracketed estimates

·     Housing & Building Products; homebuilders KBH and TMHC both upgraded to outperform at RBC Capital (and raised tgts); in building products, Nomura downgraded BLD, GMS, IBP, and OC saying housing fall out hinges on equity market and trade spat duration and there is no roadmap to help quantify the impact from escalated tariffs on U.S. housing demand; MHK was upgraded to buy at Stifel and raised target to $180 from $135 saying the recent volatility in the shares has created a nice entry point, as the stock has discounted the possibility of further downward earnings revisions; EXP reported in-line Q4 EPS and sales of 87c/$284.7M

 

Financials

·     Bank movers; after falling sharply over the last week, large cap and regional banks stocks advanced as Treasury yields recovered off recent multi-week lows with the KRE and XLF both advancing; Fed’s Kashkari said in speech today that he hears from banks that they are nervous about the yield curve and said biggest banks are still a risk; ALL estimates April catastrophe losses of $290M pretax, or $229M after tax. In consumer finance and lending; PAGS upgraded to buy at Guggenheim following Tuesday’s announcement regarding a significant product expansion which underscores that the company is rapidly transforming into becoming a full-fledged acquiring and financial services platform

 

Healthcare

·     ASCO abstracts moving several names in the biotech space: The abstracts were released last night for the ASCO 2019 conference (American Society of Clinical Oncology) – largest clinical oncology conference held May 31-June 4: IOVA rises after updated cervical and skin cancer results last night showed data from one arm of the "InnovaTIL-01" study with the drug lifileucel showed a 38% overall response rate in skin cancer, including two patients whose cancer went into remission; MGNX ASCO abstracts provided incremental details surrounding the magnitude of the absolute median PFS benefit and emerging OS trend (both favoring margetuximab) observed in the P3 SOPHIA trial; AGIO said the randomized Phase 3 ClarIDHy Trial of Tibsovo (ivosidenib) achieved its primary endpoint in previously treated IDH1 mutant cholangiocarcinoma patients; ADRO said it will not proceed with the Phase 2 part of its Phase 1/2 clinical trial evaluating APRIL pathway candidate BION-1301 in multiple myeloma; NKTR slides as abstract on NKTR-214 plus BMY’s Opdivo data from a study of patients with various sarcomas shows some responses but no full data; REGN and SNY report results for Libtayo in squamous cell carcinoma

 

Industrials & Materials

·     Industrial & Machinery; AOS shares fall following a short report from J Capital Research’s Anne Stevenson-Yang saying channel checks indicate the company’s China revenue will fall by as much as 21% in 2019; DE reports earnings tomorrow morning, while Citigroup lowered estimates to reflect less favorable Ag & Turf product mix saying early April checks pointed to more cautious North America farmer sentiment; CFX agreed to sell its Air and Gas Handling business to KPS Capital Partners for an enterprise value of $1.8 billion including $1.66 billion in cash and $140 million in assumed liabilities

·     Transports; the sector rallied along with strong economic data in hopes that the U.S. economy is strong after disappointing retail sales data yesterday sunk sentiment; ZTO shares rallied as revenue and earnings above expectations, with revs up 29% YoY beating consensus by 2.7%; top gainers were spread across with rails (NSC), shipping (KEX) and parcel (FDX)

·     Metals & Materials; LTHM was downgraded to hold at Argus based on the company’s deteriorating near-term outlook after mgmt recently noted weaker demand and pricing for its high-performance lithium hydroxide; gold miners (AEM, GOLD) sunk as gold prices decline on stronger dollar, while industrial metals a modest rebound; VALE shares sunk late day after Brazil prosecutors said its Soco mine risks failing

 

Technology, Media & Telecom

·     Semiconductors; sector volatile as the revenue-risk profile to Huawei’s chip suppliers has increased, as the U.S. Commerce Department added Huawei to its entity list, which could be a framework for a potential U.S. supplier ban – companies such as LITE, SWKS, NPTN, AVGO, ACIA, IIVI, CRUS, QRO, XLNX, INTC among others will be negatively impacted if the new Trump executive order goes into effect versus Huawei and ZTE unless they could get an exception; NVDA expected to report earnings tonight after the close

·     Software movers; where the semi space hammered (XLNX, SWKS, QRVO) on Huawei news, money rotating into software with gains in names like TWLO, TEAM, SPLK, CRM, AYX, ZEN; APPN was upgraded to outperform at William Blair saying the company will benefit from secular tailwinds over the coming years to drive share appreciation.

·     Networking sector; Dow component CSCO alleviates slowing growth in the sector (after ANET shares tumbled 2-weeks ago on miss) as Q3 earnings beat with a 4% rate of growth in organic revenues and new product orders, while guiding July-quarter revenues above consensus and EPS in line while strength was relatively broad-based across most geographies

·     Services & Hardware movers; VRTU shares plunged after Q4/FY19 miss on both revenues and CEPS reflecting weaker-than-expected results from large clients Citi and BT (17% and 5% of mix, respectively) as well as an unexpected tax according to several analysts; AAPL shares dropped initially after Trump threatened to blacklist Huawei Technologies Co. from buying essential components in a possible disruption to advancing 5G technology; SNE rallies after partnering on streaming games, chips and AI with MSFT

·     Internet; NTES reported in-line revenue and stronger-than-expected earnings (40% higher than the Street estimate) amid higher gross margins helped by gaming business; WIX missed the Street’s bottom-line estimates, but edged above estimates on the top line (shares pulling back from 52-week highs yesterday of $143.82); GRUB positive mention at Craig Hallum saying following its first monthly decline in April since we began tracking data in Aug-2017, Grubhub’s restaurant network growth rebounded sharply in May, growing 4.8% month over month in the top 50 markets; PINS reports earnings after the close, its first as a public company

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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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