Market Review: May 21, 2019

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Closing Recap

Tuesday, May 21, 2019

Index

Up/Down

%

Last

DJ Industrials

197.63

0.77%

25,877

S&P 500

24.16

0.85%

2,864

Nasdaq

83.35

1.08%

7,785

Russell 2000

20.28

1.33%

1,545


 

Equity Market Recap

·     U.S. stocks were broadly higher, with nearly every major S&P sector rising on the session as even retailers recovered off early weakness following the gloomy outlook from Kohl’s (as shares fell over 10%). Tech stocks paced the gains with the Nasdaq Composite outperforming (after leading declines on Monday), rising over 1% after the U.S. temporarily eased trade restrictions on China’s Huawei Technologies Co, allowing them to buy U.S. goods until Aug. 19 to maintain existing telecoms networks and provide software updates to its smartphones. The news helped (for now) alleviate some near-term concerns after what has been a tough week of news regarding trade between the U.S./China given the combination of 25% tariffs on Chinese goods 2-weeks ago (and China retaliation) as well as the U.S. blacklisting news of Huawei. The dollar rose against rival currencies, sending gold to two-week lows while oil dipped ahead of inventory data. Shares of U.S. suppliers to Huawei, such as chip makers (QCOM, XLNX, AVGO, LITE, NPTN) helped pare recent declines, even as QRVO lowered its guidance citing the Huawei situation.

·     For tomorrow, markets get the FOMC minutes from the prior meeting. Also overnight, the OECD lifted its growth forecast for Eurozone, U.S., U.K. despite a cut in the global projection to 3.2% from 3.3% expected previously and versus 3.5% in 2018. The organization warned that China developments continue to weigh on the outlook, but Eurozone growth is now seen at 1.2%, the U.S. economy expected to expand 2.8% and U.K. growth is now expected at 1.2%. Also tomorrow, another round earnings results with LOW set to report in the AM (after mixed results from HD this morning) as well as retailing giant TGT earnings.

Economic Data

·     Existing-home sales for April fell -0.4% to 5.19M, below the est. of 5.35M after falling -4.9% in the prior month; March was unrevised from 5.21M; there was 4.2 months’ supply in April vs. 3.8 in March while inventory rose 9.6% to 1.83M homes; the median home price rose 3.6% from last year to $267,300

 

Commodities

·     Oil futures pull back from earlier highs (high $63.60 per barrel), as WTI crude slipped 11c or 0.2% to settle at $62.99 per barrel while the new front-month WTI contract loses 8c to $63.13 per barrel ahead of weekly inventory data tonight (API) and tomorrow (EIA). Oil prices have held up well during the recent stock market pullback, supported by the prospect of U.S.-Iran tensions disrupting supply (though the China trade issue with the U.S. is bearish). Yesterday, U.S. President Trump threatened Iran if it attacked U.S. interests in the Middle East. On Tuesday, Iran said it would resist U.S. pressure. Note OPEC said it is moving the date of their next oil policy meeting in Vienna to July 3-4 from June 25-26th.

·     June gold prices slipped -$4.10 or 0.3% to settle at $1,273.20 an ounce, its lowest since May 2nd as the dollar was generally higher and investors rotated back into riskier assets. Copper prices steadied around three-month lows

 

Currencies

·     The U.S. dollar was mostly higher vs. rival currencies, while the British Pound was volatile. The UK pound slipped overnight below the $1.27 level for the first time since January before jumping late morning to highs of 1.2813 (off overnight lows 1.2685) after UK PM May offered MPs a vote on holding a second Brexit referendum but only if they backed her deal. The Pound erased those gains after Jeremy Corbyn said Labour would not support the deal. Outside of the GBP, the dollar was mostly higher, reversing earlier losses vs. the CAD as oil pulls back from highs.

 

Bond Market

·     Treasury prices fell slightly as yields inched higher, with the 10-year yield topping 2.42% after lows just above 2.3% early last week. The pullback comes after a bounce in global stocks after recent market jitters from U.S.-China trade uncertainty weighed on sentiment. Stocks got a reprieve from market selling after U.S. officials said they would offer some exceptions to an export blacklist against Huawei Technologies, granting a 90-day reprieve for suppliers and customers of China’s telecom company. Comments from Fed officials the last few days (Clarida, Bostic and Rosengren today) all appear to be in no rush to change rates in either direction.

 

 

Macro

Up/Down

Last

WTI Crude

-0.11

62.99

Brent

0.21

72.18

Gold

-4.10

1,273.20

EUR/USD

-0.0005

1.1161

JPY/USD

0.60

110.66

10-Year Note

0.016

2.43%

 

 

Sector News Breakdown

Consumer

·     Retailers; mixed bag for retail today as TJX Q1 comp sales topped views (5% vs. est. 3.5%) and gross margin beat, helped as customer traffic led to increases, helping to overcome margins dented by increased supply chain/freight costs; meanwhile KSS shares plunged after mixed Q1 (EPS missed by 6c on better sales of $4.09B) and cut its year forecast to $5.15-$5.45 from $5.80-$6.15 (below est. $6.04); DECK was upgraded to buy at Bank America and raising tgt to $180 as still see upside risk to consensus EPS and an attractive valuation; the WSJ reported URBN is introducing an $88 monthly service that allows consumers to borrow six items from brands such as Free People and Anthropologie; JCP drops on larger quarterly miss and weaker comp sales

·     Auto movers; TSLA shares weak again (fell to lowest levels since Dec ’16 yesterday) after Morgan Stanley slashed their worse-case scenario for the stock price to just $10 because of concerns the electric-car leader has saturated the market; Morgan also said Ford’s (F) global light vehicle volume is estimated to fall 5% this year, with a further 4.4% drop in volume by 2022; in auto retail, AZO Q1 EPS/sales beat and U.S. same-store sales increased 3.9%, topping the 3% estimate while gross profit improved 10 bps to 53.6% of sales; MNRO Q1 EPS missed and comp sales unexpectedly fell -5.7% vs. est. 2.4% and last year 10.3%

·     Consumer Staples; ABEV was upgraded to neutral at Bank America saying despite persistent structural risks for the beer business in Brazil valuation is now more reasonable; KR was upgraded to outperform at Bernstein saying market valuation has had a tough start this year, and they believe it is at a level where short term and long term capabilities are not being completely factored in; recent IPO darling BYND fell over 10% midday on profit taking; in restaurants, Dow component MCD traded to 52-week highs (positive comments by Cleveland Research as well)

·     Housing & Building Products; Dow component and home improvement retail giant HD posted better Q1 EPS of $2.27 (est. $2.18) on in-line revs $26.38B and reaffirmed its year outlook, though Q1 comp sales of 2.5% missed the 4.3% est./HD also said FY guidance did not include the recent tariff hike and that falling lumber prices may cut FY sales by $800M; LOW expected to report earnings tomorrow morning

 

Energy

·     Energy stocks have held up well over the latest market pullback on trade fears the last two-weeks, with oil prices steadily higher on supply fears due to conflict with Iran. Oil rose on signs OPEC and its allies will extend production cuts beyond June, while a steadily deteriorating U.S.-China trade relationship kept prices from pushing higher. Weekly inventory data in the form of API and EIA reports tonight and tomorrow expected. Utilities once again strong, with several components in the S&P setting fresh 52-week highs early (AEP, WEC, SO, SRE, XEL).

 

Financials

·     Bank stocks rallied in sympathy with broader market strength, with solid gains in large cap, regional banks as well as insurance and FinTech names; in investment/PE movers; Credit Suisse upgraded APO to Outperform from Neutral as they are refocusing on the alts that will benefit from recent/future C-Corp conversions and generate stronger than expected FRE; the firm remains outperform rated on ARES and BX at Outperform while downgraded KKR to Neutral from Outperform due to a lower relative 12-month total return forecast (20-25% forecast slightly lower than 25-40% for our Outperforms); EV posted better-than-expected Q2 with strong market returns as EPS of 89c beat by 13c with Q2 consolidated net inflows of $4.6B

·     Consumer finance, lending and services; SPGI was upgraded to buy at UBS and raised tgt to $252 from $228 on the back of recent data which suggest that upside from Chinese debt ratings opportunities will materialize much sooner than the 3-5 years that management and the market is currently expecting; Dow component AXP traded to 52-week highs today; PYPL was removed from the Bank America US 1 list while FIS was added the list

 

Healthcare

·     Pharma movers; MRK said its Phase 3 trial evaluating Keytruda as monotherapy for the second- or third-line treatment of patients with metastatic triple-negative breast cancer didn’t meet its pre-specified primary endpoint of superior overall survival compared to chemotherapy; MRK said a subsidiary to buy privately held Peloton Therapeutics for $1.05 billion in cash (shares were supposed to go public via IPO this week under symbol PLTX); ARWR to be added to the S&P SmallCap 600 on Friday

·     Specialty Pharma; MNK shares dropped over 20% early after filing a lawsuit in federal court against the U.S. Dept. of HHS and CMS, challenging a regulatory move that would change the calculation of Medicaid drug rebates for Acthar Gel/suit seeks to hold unlawful a recent decision to require that Mallinckrodt change the base date average manufacturer price used to calculate the rebates; OCUL shares fell after its OTX-TP failed to meet its primary endpoint/reported the failure of OTX-TP in a Phase 3 study for the treatment of glaucoma

·     Biotech movers; CLVS said recurrent ovarian cancer patients who received Rubraca had longer periods of quality-adjusted time without clinically relevant symptoms, according to Phase 3 ARIEL3 study results; BCRX shares plunge after saying its Phase III ApeX-2 trial of oral BCX7353 for the prevention of hereditary angioedema attacks achieved its primary endpoints at both 110 mg and 150 mg doses; GH filed to sell 4.5% shares of stock in offering

·     Medical devices and equipment; ABMD active after the FDA disclosed the most recent, interim post-approval study results for Abiomed’s Impella RP system, indicating a lower survival rate for the subgroup of patients who would not have qualified for the premarket clinical studies, compared to the premarket clinical study survival rate; VAR to acquire privately held Cancer Treatment Services International for $283M/cuts FY19 adj. EPS view after deal

 

Industrials & Materials

·     Aerospace & Defense; Dow component BA shares rebound after the WSJ reported U.S. aviation authorities believe a bird strike most likely caused the troubles with the Boeing sensors that caused an Ethiopian Airlines jet to crash earlier this year, citing officials; AAL has suspended cabin modifications to add 12 seats to its Boeing 737-800 fleet until next year amid the grounding of the separate Max model and a contract dispute with maintenance workers

·     Industrial & Machinery; CR submitted a proposal to acquire CIR for $45 per share in cash, representing a 47% premium over yesterday’s closing price; the total deal price is valued at about $1.7B (including debt) https://on.mktw.net/2VPdWCK (CIR rejected the offer); DY jumped on better earnings as trades near its 100-day MA higher at $52.51 (hasn’t closed above 100-day MA over the last year); ag stocks rallied off recent weakness (DE, AGCO) while corn has posted its biggest rally in 4-years as only about half of U.S. corn had been planted because of storms and flooding according to Bloomberg (industry could get further boost if China/U.S. trade improves)

·     Chemicals; PPG said it decided to keep itself intact, saying “keeping the architectural-paints and industrial-coatings businesses together is “the best opportunity to drive long-term shareholder value,” while also plans to trim low-profit operations and cut about $125M a year in costs; DWDP said it intends to announce a $2 billion share buyback program after its transition to an independent company upon the separation of its specialty products and agriculture businesses effective June 1, 2019; NDSN rallied despite a miss on the top and bottom line for Q2

 

Technology, Media & Telecom

·     Semiconductors; MRVL to acquire the Avera Semiconductor chip-design unit from Globalfoundries Inc. for $650M in cash, adding the ability to produce more specialized semiconductors needed for 5G phone networks and cloud-data centers; QRVO lowers Q1 revs to $730M-$750M from prior $780M-$800M view citing Huawei impact; sees gross margin about 45.5% vs. prior view of 45%-45.5% and EPS $1.15 at midpoint of guidance vs. prior view $1.30; optical movers; Huawei suppliers (IPHI, NPTN, LITE, AAOI, ACIA) rebound after the U.S. granted temporary relief on restrictions related to purchases of Huawei products

·     Internet; SNAP announced new leadership appointments Monday night as promoted Derek Andersen to CFO from VP of finance and named interim CFO Lara Sweet chief people officer; TRIP was assumed coverage at Needham with a buy saying the risk/reward too good to pass up while Guggenheim upgraded to neutral from sell noting the multiple has compressed to the low end of TRIP’s historical range; TCEHY warned of slower growth in China video ad sales, according to a report in the Nikkei

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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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