Market Review: May 17, 2019

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Closing Recap

Friday, May 17, 2019

Index

Up/Down

%

Last

DJ Industrials

-98.68

0.38%

25,764

S&P 500

-16.80

0.59%

2,859

Nasdaq

-81.76

1.04%

7,816

Russell 2000

-21.48

1.38%

1,535


 

Equity Market Recap

·     U.S. stocks were volatile on Friday, opening lower after China’s state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat to escalate tariffs while the government looks to boost its economy. Stocks managed a strong bounce late morning, turning positive for major averages (more than 1% move) on positive economic data (University of Michigan consumer sentiment survey for May rose to 102.4, the highest since January 2004) and as stocks looked to close higher for a 4th straight day on hopes a deal would arise between the U.S. and China. There were also two positive trade developments (though neither related to China), on reports the United States closed a deal to remove tariffs on steel and aluminum imports from Canada and Mexico, which could help the three countries’ trade pact get ratified in the U.S. Congress. Meanwhile in autos, President Trump confirmed earlier reports this week that the U.S. is delaying the decision on auto tariffs for the EU and Japan for at least 180-days.

·     While stocks were strong late morning, the rally couldn’t hold, with major averages sliding after a Bloomberg headline the USTR opens comment period about $300B on China trade tariffs (which would cover the rest of Chinese goods that are being hit with tariffs), adding another blow to the already tense trade situation. Stocks made another leg lower in the final hour after CNBC’s Washington correspondent Kayla Tausche said trade negotiations between the US and China appear to have stalled as both sides dig in. That tipped markets significantly lower heading into the weekend and erasing any hopes of a 4th straight day of gains. Also not helping were geopolitical concerns after Reuters reported Syrian state media reported Syrian air defenses brought down projectiles from Israeli controlled territory.

·     It has been a tough two-weeks between China and the U.S. since the U.S. boosted tariffs on $200B of goods last Friday and China responding early this week with its own tariffs. Stocks even managed to overcome yesterday’s news that 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 (though that crushed shares of semiconductors and optical suppliers to Huawei the last two-days). Trade talk overshadowed weaker Deere earnings in industrials and mixed earnings in tech (AMAT advanced while PINS, BIDU, NVDA shares slumped).

Economic Data

·     The preliminary University of Michigan consumer sentiment survey for May rose to 102.4 (the highest since January 2004) vs. 97.2 prior month; the current economic conditions index rose to 112.4 vs. 112.3 last month and the expectations index rose to 96.0 vs. 87.4 last month.

 

Commodities

·     Oil prices reversed earlier gains, ending the day lower by 11c to settle at $62.76 per barrel (off earlier highs of $63.64 per barrel) ahead of a meeting this weekend of OPEC and Russia — without Iran. Brent crude fell 41c to $72.21 per barrel while natural gas fell 0.8c to settle at $2.631 mln Btu’s. After posting gains in the previous three sessions, WTI crude tallied a 1.8% for the week (around 2-week highs), gaining momentum on Mideast tensions with Iran and this weeks aforementioned OPEC related meeting.

·     Gold futures dropped again on Friday, with June futures sliding -$10.50 or 0.8% to settle at $1,275.70 an ounce, its lowest levels since May 2nd and ended the week lower by -0.9%. Gold had briefly traded above the $1,300 an ounce Tuesday amid a push into safe-haven instruments given the uncertainty between China/U.S. trades, but the resurgence of the dollar the last few days on strong economic data overshadowed macro concerns.

 

Currencies

·     The U.S. dollar rose again on Friday, with the dollar index (DXY) nearing the 98 level (up 0.65% on the week), not far from 52-week highs of 98.33 (on 4/26) following strong U.S. economic data the tail end of the week. The dollar gained against the British Pound and euro on concern about next week’s European parliamentary elections with Sterling falling to a four-month low on worries about Britain’s exit from the European Union. The dollar has been favored as a safe-haven currency even as the U.S.-China trade war escalates given its strong economic outlook vs. rival countries. The euro fell yesterday after Italian Deputy Prime Minister Matteo Salvini’s comments that European Union rules harm his country. Back to the UK, six weeks of talks between Prime Minister Theresa May’s Conservative party and Labour, led by Jeremy Corbyn, ended without agreement on Friday.

 

Bond Market

·     Treasuries end the day and week higher, with yields falling sharply the last 5-days as the 10-year Treasury note posted its best week in nearly two months as trade concerns with China drew investors back to haven assets. On the day, the 10-year yield fell around 2 bps to 2.38%, but for the week was down around 8 bps and the 3-month-10-year curve inverted again for a third time this week. Yields fell after Chinese state media suggested a resumption in trade negotiations may not take place as soon as anticipated…and extended losses after reports that China/US talks have stalled. The shorter-term 2-year note yield slipped to around 2.19% (off earlier lows below 2.17%). The trade fears overshadowed a good round of economic data in the U.S. as the University of Michigan said its consumer sentiment index increased 5.3% to 102.4, the highest reading since 2004. Treasury prices also benefited from a collapse in Britain’s Brexit talks.

 

 

Macro

Up/Down

Last

WTI Crude

-0.11

62.76

Brent

-0.41

72.21

Gold

-10.50

1,275.70

EUR/USD

-0.0011

1.1163

JPY/USD

0.18

110.03

10-Year Note

-0.021

2.384%

 

 

Sector News Breakdown

Consumer

·     Retailers; UAA was upgraded to overweight at JPMorgan and raised tgt to $29 saying mgmt meetings portrayed confidence in the company’s brand direction; BOOT rises after reported a strong quarter as comps grew 8.7% and gross margin expanded 180bps while guidance of 20% at the high-end on comps of 5%; FL was upgraded to buy at B Riley/FBR and up tgt to $73 driven by improving trends in FL’s core footwear business, as well as in their international channels; WWW was downgraded to hold from buy at Argus as reported disappointing 1Q19 revenue and lower gross profit

·     Auto sector gets a boost after President Trump confirmed earlier reports this week that the U.S. is delaying the decision on auto tariffs for the EU and Japan for at least 180-days; TSLA traded to fresh 52-week lows as momentum remains to the downside, hurt by reports it is starting to push a new software update that is pulling back some autopilot features in most European markets due to new regulations; CPRT was downgraded to neutral at Guggenheim as analysis indicates that industry growth will significantly slow in coming years due to declining accident frequency and more gradual increases in total loss frequency; Ford (F) said it aims to stay on track to deliver 40 hybrid and fully electric vehicles by 2022.

·     Consumer Staples; LK 33M share IPO priced at $17.00 (shares opened at $25); PM was upgraded to neutral at Bank America as and raise tgt to $94 from $81 saying IQOS, the company’s heated tobacco product, is gaining traction in several European and Asian markets and the FDA approved the pre-market application for the sale of IQOS in the US

·     Housing & Building Products; markets get a look at the home improvement retail sector next week as HD and LOW are expected to report earnings

·     Casino & Leisure movers; CWH downgraded to Sector Weight at KeyBanc saying the RV industry is performing about as expected, but higher fixed costs and an uninspiring Gander trajectory are likely to result in further downside to estimates.

 

Energy

·     Energy stocks; note a meeting this weekend of OPEC and Russia is expected (though without Iran), which has could push prices higher dependent on comments about production (if any). In other macro news, Reuters reported Russian oil output from May 1 to May 16 fell to 11.156 million barrels per day (bpd), below the 11.18 billion bpd level set as part of the global oil deal between OPEC and its allies

·     Stock movers on news; the Baker Hughes weekly total rig count fell -1 to 987 as oil rigs dropped -3 to 802 and gas rigs rose +2 to 185; ESV says an arbitration tribunal has awarded it $180M in damages in its proceedings against Samsung Heavy Industries stemming from a 2016 drillship case; several utility names in the S&P setting 52-week highs again today: NEE, CMS, AWK, ES, WEC, LNT, XEL, and ED among them; PCG shares however traded down over 5%

 

Healthcare

·     Pharma movers; ABBV said Phase 3 INTELLANCE-1 study did not meet primary endpoint of overall survival at the interim analysis and demonstrated no survival benefit for patients with newly diagnosed glioblastoma; managed care stocks outperform across the board (ANTM, HUM, UNH) as well as select healthcare services (CAH, ABC) as a final rule on negotiating medicines for Medicare left out some more forceful policies that would have lifted price protections on HIV, depression and cancer treatments (lifting shares of GILD as well). The rule also stopped short of earlier proposals that would have passed on some price savings for Medicare Part D drug plans to patients

·     Medical equipment and devices; Reuters reported the FBI is probing JNJ, GE, PHG and Siemens (SIEGY) for allegedly paying kickbacks as part of a scheme regarding medical equipment sales in Brazil, citing two Brazilian investigators. https://reut.rs/2JqqMko

 

Industrials & Materials

·     Industrial & Machinery; agricultural and farm equipment stocks weak after DE quarterly earnings fell short of consensus and lowered FY net income to $3.3B down from prior view of $3.6B and sees FY sales up about 5% down from prior view of up 7%, hurt by a trade war with China, a delayed planting season and slowing demand for soybeans and other commodities (shares of CNHI, AGCO among names active on results); AOS adds to yesterday losses, after the short call by J Cap yesterday sent shares lower by over -6% saying channel checks indicate the company’s China revenue will fall by as much as 21% in 2019

·     Metals & Materials; U.S. steel rebar producers (CMC, NUE, STLD) declined after the U.S. announced a rollback of steel tariffs against Turkey to 25% from the 50% it had originally placed in August; iron ore prices topped $100/mt for the first time since May 2014 and up 38% YTD), following reduced supply from big miners and strong steel demand from China, causing low inventories at steel mills. Ore supplies have been restricted since January’s dam disaster in Brazil at a mine owned by Vale (shares of CLF, BHPand VALE active). Copper prices fell for a fifth weekly loss as concerns deepened about the impact of a prolonged trade war between the US and China – FCX, SCCO – (the price of copper has fallen 8% since April 17)

 

Technology, Media & Telecom

·     Internet; BIDU shares fell two multi-year lows after a broad earnings miss and lower guide as Q1 adjusted profit 2.77 yuan vs., est. 2.94 yuan and sees Q2 revenue 25.1B-26.6B yuan below the 29.32B est.; PINS falls after year rev guidance fell short of $1.06B-$1.08B, consensus $1.09B and reported a larger than expected quarterly loss of (33c) vs. est. (11c) in its first earnings as a public company; IQ shares fell after lower Q2 guidance  amid greater regulatory scrutiny/sees Q2 revenue $1B-$1.1B, below consensus $1.11B

·     Semiconductors; sector active after earnings results with equipment names higher after AMAT reported F2Q results above estimates, while the guide was generally in line for Q3/FY inline guidance and an unchanged outlook for wafer fab equipment (WFE) in 2019 (-15 -20% YoY); NVDA turned in a slight beat to 1QFY20 revenue estimates and handily beat non-GAAP EPS by 7c (helped from higher net interest income and lower taxes than guided) while 2Q revenue guidance was again a slight beat to estimates (withdrew year revenue outlook citing data center spending pause persists in the 2QFY20)

·     Optical sector under pressure a second day given placement of Huawei and affiliates on U.S. trade blacklist; group led by weakness in NPTN after being downgraded to neutral/hold at Needham and MKM today citing the uncertainty associated with the U.S. government move against China’s Huawei, whose business is tied to nearly half of NeoPhotonics’ revenue (as per MKM); ACIA said it is taking steps to suspend transactions affected by the U.S. Dept. of Commerce’s recent order regarding Huawei Technologies and specific license requirements and intends to fully comply with the order (also weak LITE, AAOI, IIVI)

·     Software & Hardware movers; EA was added to Wedbush best ideas list on expectations the stock will benefit from a string of near-term catalysts, including updates on Apex MAUs, game reveals at the E3 Expo in June among others; FSLY 11.25M share IPO opened at $21.50 after pricing at $16; one M&A deal as HPE to acquire CRAY in a deal valued at $1.3 billion as HPE will pay $35 per share in cash a17.4% premium from yesterday https://on.mktw.net/2w1afdZ

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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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