Mid-Morning Look: May 20, 2019

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Mid-Morning Look

Monday, May 20, 2019

Index

Up/Down

%

Last

 

DJ Industrials

-34.03

0.13%

25,729

S&P 500

-9.29

0.32%

2,850

Nasdaq

-89.18

1.14%

7,727

Russell 2000

-12.82

0.83%

1,522

 

 

U.S. equities open the week lower, dragged down by technology stocks as fears over the impact from Washington’s crackdown on China’s Huawei Technologies last week adds to concerns over worsening trade dispute between the U.S. and Beijing. Last week, the White House executed an executive order that imposed a ban on all communications equipment that could pose “an unacceptable risk to the national security of the United States.” This ban has aimed more specifically at communications equipment sourced from Chinese vendors, such as Huawei and ZTE. Companies with significant exposure to China’s communications industry have been punished over the last week (revenue hit) including LITE, NPTN, FNSR, AAOI, ACIA as well as several semi-chip companies including XLNX, AVGO, QRVO and others. This weekend, reports indicated that INTC, QCOM, XLNX and AVGO decided to cut their ties with Huawei until further notice. Also this weekend, Reuters reported GOOGL has suspended some business with Huawei that requires the transfer of hardware, software and technical services. In other negative, market unfriendly headlines also weighing on sentiment, President Trump warned Iran not to threaten the U.S. or face ruinous consequences as tensions mount between Washington and Tehran (keeping oil prices steady along with commentary at on OPEC minister this weekend). Regarding rates, Atlanta Fed President Bostic does not see a rate cut this year like the market is telegraphing. In emerging markets, Indian stocks rallied the most in three years while the rupee climbed after exit polls in the world’s biggest election signaled that Prime Minister Narendra Modi’s ruling coalition is poised to retain power. The Telco industry active as FCC Chairman gives blessing on S/TMUS deal, banks rebound early, focus on retail this week ahead of earnings (HD, LOW, and TGT).

 

Treasuries, Currencies and Commodities

·     In currency markets, the dollar is down slightly after last week’s gains vs both major and emerging market currencies on strong economic data late week. No major U.S. data this morning. The dollar index down modestly just below the 98 level. U.S. Treasury prices are little changed despite the lower start in equities, with the two-year yield down a basis point to 2.20% and the 10-year yield flat at 2.39%. WTI crude oil rises to around $63 per barrel as U.S.-Iran tensions remain high after President Trump warned Iran not to threaten the U.S. or face ruinous consequences. Gold prices are little changed around the $1,277 an ounce level after falling 1% last week

 

 

Macro

Up/Down

Last

 

WTI Crude

0.23

62.99

Brent

0.26

72.47

Spot Gold

0.10

1,277.70

EUR/USD

0.0009

1.1167

JPY/USD

-0.11

109.96

10-Year Note

-0.00

2.391%

 

 

Sector Movers Today

·     Semiconductors; The Philly semiconductor index (SOX) has dropped about 15% from its April all-time highs (1,604.56 on 4/24) as a bad month is getting worse for U.S. and European semiconductor stocks amid the escalation of trade tensions between the U.S. and China. The story today was some Huawei Technologies Co. suppliers were said to have halted shipments to the Chinese company (XLNX, INTC, QCOM, AVGO, and Infineon). The move comes after the White House blacklisted Huawei and threatened to cut it off from buying U.S. products last week.

·     Optical stocks were slammed last week following the blacklist add of China tech company Huawei to US suppliers (some names get good revenue from Huawei), as LITE cut its Q4 forecast from $405M to $425M in revenue to $375M to $390M with EPS dropping to 65c-77c form 85c-$1.00 and non-GAAP operating margin is trimmed from 18% to 20% to a range of 15.5% to 17% on the news (note last week, LITE shares were down over 21% last week on the Huawei blacklist ban, NPTN was down -36% last week, AAOI -14% last week and ACIA -11% last week – so lots of bad news “baked in” coming into today)

·     Transports; Morgan Stanley with rating changes in airline sector as UAL upgraded to overweight from equal-weight and up tgt to $110 from $101, DAL downgraded to equal-weight from overweight and AAL downgraded to underweight from equal-weight and cut tgt to $26 from $40; the U.S. Supreme Court turned away a UPS appeal that aimed to force the U.S. Postal Service to raise its prices for delivering packages.

·     Paper stocks weak (PKG, IP, WRK) as pricing reported by PPW on late Friday showed a $10/ton m/m decline for all domestic containerboard grades (linerboard and medium) and continued export pricing declines in May, according to analysts. The containerboard and pulp updates were negative, with prices down in both markets on weak demand and oversupply

 

Stock GAINERS

·     GD +2%; upgraded to buy at Goldman Sachs saying valuation relative to its defense peers has moved to the low-end of historical range

·     MDCO +4%; after presented data Saturday for inclisiran, its cholesterol-lowering medication as interim results from an ongoing study showed LDL, the “bad” cholesterol, was lowered by more than 50% out to three years, when receiving twice-a-year dosing of inclisiran

·     SATS +3%; rises and DISH falls (-10%) after the company executed an agreement to buy EchoStar’s (SATS) Broadcast Satellite Service business in an all-stock deal valued at about $800M

·     Sprint (S) +22%; after FCC Chairman Ajit Pai said, “In light of the significant commitments made by T-Mobile and Sprint as well as the facts in the record to date, I believe that this transaction is in the public interest and intend to recommend to my colleagues that the FCC approve it.” https://on.mktw.net/2YAvn6Y

·     VZ +3%; strength in Telco space along with AT as well on the Sprint/TMUS news above

 

Stock LAGGARDS

·     BIDU -6% falls to fresh 2-year lows on China/US trade concerns; company plunged last week after sharply lower guidance for upcoming quarter revenues

·     DB -2%; after the NY Times reported that anti-money laundering specialists at the firm flagged activity in Trump and Kushner accounts/UBS cuts Deutsche’s future EPS estimate for 2020 by 25%, 2021 by 18%, and 2022 by 12% due to lower revenue assumptions

·     KEYS -10%; downgraded to neutral at Baird saying trade restrictions add more uncertainty for KEYS’ communications business/estimates China accounts for about 17%-18% of KEYS total revenue but “most overt risk falls on 5G related growth opportunities in China

·     LITE -3%; cut its Q4 forecast from $405M to $425M in revenue to $375M to $390M with EPS dropping to 65c-77c form 85c-$1.00 and non-GAAP operating margin is trimmed from 18% to 20% to a range of 15.5% to 17% on the news citing the U.S. supplier ban to Huawei

·     PKG -4%; paper stocks weak (IP, WRK) as pricing reported by PPW on late Friday showed a $10/ton m/m decline for all domestic containerboard grades (linerboard and medium) and continued export pricing declines in May, according to analysts

·     SPTN -9%; posted mixed Q1 results as sales grew 6.6% to $2.54B after the acquisition of Martin’s (beating views) while generated $54.7M of EBITDA during the quarter down from $67.2M YoY

·     TSLA -5%; falls below $200 to the lowest levels since December 2016, now down 40% YTD with Wedbush the latest to sound cautious cutting tgt to $230 to reflect reduced confidence in the company’s ability to hit its 2019 unit demand guidance

·     XLNX -6%; as chip stocks broadly lower again on Huawei blacklist ban with US suppliers; reports indicated that INTC, QCOM, XLNX and AVGO decided to cut their ties with Huawei until further notice

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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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