Market Review: June 12, 2019

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Closing Recap

Wednesday, June 12, 2019

Index

Up/Down

%

Last

DJ Industrials

-42.66

0.16%

26,005

S&P 500

-5.77

0.20%

2,879

Nasdaq

-29.85

0.38%

7,792

Russell 2000

0.67

0.04%

1,519


 

Equity Market Recap

·     U.S. stocks slipped on light volumes, with defensive assets rising (gold, Treasury prices, utilities) as markets pullback a bit more after snapping their week long winning streak yesterday. Lingering trade tensions and questions over the direction of Federal Reserve policy continue to move the broader markets with calls for the Fed to cut rates getting louder after inflation readings the last 2-days (PPI and CPI) coming in soft. The upcoming G20 meeting at the end of the month is a focus for global stocks on hopes China and the U.S. can come to a compromise on trade.

·     Sector movers showed defensive and interest rate sensitive sectors outperform (Utilities, Homebuilders and REITs), while those impacted from lower rates (Banks) fell hard. Energy stocks were absolutely pummeled again, with big declines in services, drillers and equipment names as oil prices plunged to lows at its close, down 4% to January lows on bearish inventory data. Semiconductors fell apart, with the index down over 2% on cautious analyst commentary, while software remained strong following the $15B deal earlier in the week (CRM bought DATA). Generic and Specialty Pharma names (TEVA, ENDP, and MYL) fall while large cap Pharma is strong (LLY, JNJ, MRK). Consumer Staples has remained a bright spot in the turbulent markets of late, with shares of MDLZ, KMB, PG, SBUX, CMG 52-week highs today.

·     On trade, President Trump said midday he expects to make a deal with China, but noted that if the U.S. cannot make a deal with china, he will put tariffs on $325B of Chinese goods. Later Trump said he has no deadline for implementing further tariffs on Chinese products. Regarding Mexico, while the U.S. suspended implementing tariffs earlier this week, Trump said today he may take additional steps vs. Mexico in 45-days.

Economic Data

·     Inflation data “tame” as CPI in-line to slightly below views: Consumer Price Index (PPI) Final MoM for May in-line at 0.1% vs. est. 0.1%; CPI Ex: Food & Energy (core) MoM for May slightly below at 0.1% rise vs. est. 0.2%; Consumer Price Index (PPI) Final YoY for May at 1.8%, below the est. 1.9%; CPI Ex: Food & Energy (core) YoY for May at 2%, below the est. 2.1%

·     The U.S. ran a $208 billion deficit in May, a jump of 41% from a year ago, the Treasury Department said. Most of the jump can be explained by June 1 occurring on a weekend, which forced some federal payments into May. Excluding those calendar adjustments, the deficit still would have increased by 8%, with spending up by 6% and revenue up by 4%

 

Commodities

·     Oil prices collapsed into the close, with WTI crude settling at $51.14 per barrel, down $2.13 or 4% on the day marking its lowest settlement since January 14th. The bearish inventory data started the drop in prices as API showed that U.S. crude stockpiles climbed more than expected last week (reported weekly crude stockpiles rose +4.852M barrels), implying weakening demand. The EIA also reported bearish inventory data with larger than expected crude builds (Crude barrels rose 2.21M barrels vs. est. for a draw of -1M barrels). The combination of bearish inventory data, coupled with slowing global demand and possible implications from the China/US trade dispute, has weighed heavily on demand concerns, pushing energy prices and stocks lower. Brent prices also lower, settling below $60 per barrel at $59.97, down 3.72%.

·     Gold prices end higher, rising $5.60 or 0.4% to settle at $1,336.80 an ounce, its 10th day of gains in the last 11-sessions as a pullback in stocks, ongoing trade tensions provide support. The weaker dollar has also provided support for gold prices, though the greenback turned higher. Corn prices moved higher amid the ongoing record downfall of rain across the Midwest.

 

Currencies

·     After initial weakness in the U.S. dollar on a second day of tame inflation data (CPI), the greenback rebounded in strong fashion late afternoon (DXY highs above 97 vs. intraday lows 96.58) vs. rival currencies after falling the last few sessions. The dollar rebounded off lows (108.25) vs. the Japanese yen back around the 108.50 level, while the euro dropped below the 1.13 level after earlier session highs of 1.1343. The dollar gained vs. the Canadian Loonie following the 4% plunge in oil, while the Pound dropped back below the 1.27 level.

 

Bond Market

·     Treasury yields slid to lows this morning as expectations for Fed rate cuts increased given the tame inflation reports the last two days in the form of PPI and CPI; the 10-year yield fell 2 bps to below 2.12% before paring losses later in the day, while the 2-year was at 1.88% and the 30-year yield 2.62%. The U.S. Treasury sold $24B in 10-year notes at a yield of 2.13% vs. 2.129% when-issued prior to auction, with the bid-to-cover at 2.49 vs. 2.17 in prior and indirect bidders awarded 65.6% and directs 13.6%.

 

 

Macro

Up/Down

Last

WTI Crude

-1.97

51.30

Brent

-2.32

59.97

Gold

5.60

1,336.80

EUR/USD

-0.0039

1.1287

JPY/USD

-0.01

108.51

10-Year Note

-0.016

2.124%

 

 

Sector News Breakdown

Consumer

·     Consumer Staples & Restaurants; tobacco stocks weaker after BTI warns global cigarette sales volume will fall around 3.5% this year (had seen 3% drop), driven lower by a 4% to 5% drop in the U.S. market; BYND shares jump after Tim Hortons said it’s now offering faux-meat breakfast sandwiches at almost 4,000 locations across Canada after a strong consumer response to testing; PLAY shares plunge on weak Q1 revs and comps as Q1 EPS $1.13/$363.6M vs. est. $1.13/$371.7M, while Q1 comp sales fell (-0.3%) vs. est. +1.6% and lowered year rev outlook

·     Auto’s; TSLA CEO Elon musk said at the company’s annual shareholder meeting on Tuesday that the company has “a decent shot at a record quarter on every level.” Musk also said the company was on track to hit its volume production goal by the end of this year; Ford (F) said it was recalling over 1.3 million vehicles, mainly in North America, to fix rear suspension and transmission control software problems; UBER and LYFT slipped after the NY Post reported ten months after the City Council voted to halt the issuance of new licenses for app-based for-hire vehicles, Mayor de Blasio has decided to make the limit permanent

·     Retailers; in toy sector, MAT shares rallied early after MGA Entertainment Inc. said Mattel last week rejected another merger offer from the Bratz doll maker; MGA’s CEO Isaac Larian had said offer would be a premium to Mattel’s current market price https://cnb.cx/2KGHZpq ; LULU to report earnings after the close tonight

·     Housing & Building Products; housing stocks benefit (KBH, LEN, PHM) as weekly MBA mortgage data showed the applications index spiked 26.8% amid the recent plunge in rates while the purchase Index rose +10.0% vs. -2.0% and the refinance Index jumped +47.0% as the average 30 year mortgage rate was at 4.12% vs. 4.23%; building material names slumped early for a second day (VMC, USCR, MLM), this time as White House acting chief of staff Mick Mulvaney said that Trump and Pelosi can still work together, but an infrastructure deal is likely not happening

 

Energy

·     Energy stocks decline along with the drop in oil prices overnight following a large build in weekly crude oil inventories reported by the API. The American Petroleum Institute (API) reported weekly crude stockpiles rose +4.852M barrels, with gasoline inventories rising +829K barrels and distillates falling -3.461M barrels. The EIA data also bearish as crude barrels rose 2.21M barrels vs. est. for a draw of -1M barrels while gasoline build of 764K barrels vs. est. for build of 950K

·     In stock news; MUR says it targets over 50 wells online in Eagle Ford in 2H; ESV shares fell to fresh 52-week lows after shareholder Luminus Management called on the company to sell debt to fund $2.5B dividend; in refiners, PBF shares slid after agreeing to acquire RDS Martinez refinery in North California for about $1B (Morgan Stanley said the refinery in a deal that is 20-25% EPS accretive and is on strategy to drive regional diversification and synergies); oil drillers (NE, RIG, DO) and service names (HAL, SLB) hit very hard

·     Utilities & Solar; defensive utility stocks led the gains today as the UTY rises to high’s up over 1% early as Treasury yields fall and making dividend paying sectors more appealing

 

Financials

·     Bank movers; large cap and regional banks fell further given the Treasury rise and yield decline, along with cautious comments from several big names yesterday (STT, C, MS) at a financial services conference on lower fees and trading revs; banks with exposure to New York City residential real estate such as SBNY and NYCB were weak after state leaders reached an agreement on a package of bills that would be the biggest rewrite of rent regulations in decades.

·     Canadian financials downgraded at Barclay’s saying thematic preference skews to companies with greater exposure outside of Canada: Changing ratings on seven of our remaining 12 names under coverage, all to the downside (downgraded Sun Life, Intact, Power Financial and ECN Capital are downgraded to Equal Weight. Great-West, CI Financial and Power Corporation are downgraded to Underweight); MKTX was downgraded at Buckingham to underperform saying enthusiasm over the company’s growth prospects has become excessive

·     Insurance; MMC was downgraded at KBW Inc. which mostly reflects valuation as MMC’s shares have returned 24.7% YTD, versus the S&P 500’s 15.1% – along with slightly lower EPS estimates

·     Asset managers with month end AUM data: LAZ said prelim assets under management of $228.67B at May 31, 2019 rises from $239.64B at April 30, 2019/AUM included market depreciation of $8.7B, net outflows of $1.4B, and foreign exchange depreciation of $0.9B; TROW reported assets under management of $1.07 trillion, +2.9% YoY/May client transfers from mutual funds to other portfolios $300M, -88% YoY; LM said prelim AUM of $757.9B at May 31, 2019 declines 1.3% from $767.5B at April 30, 2019/long-term net outflows of ~$0.6B, driven by equity outflows of $1.6B; IVZ preliminary month-end assets under management (AUM) of $1,159.3B, an increase of 18.9%; APAM reports AUM $106.9B as of May 31; WDR says its assets under management at end of May was $68.6B, down from $72.9B at the end of April and total May outflows were $641M

 

Healthcare

·     Pharma movers; specialty pharma and generic names under pressure, specifically those leveraged to the opioid industry (TEVA, ENDP, MYL) after the Oklahoma judge demanded changes to TEVA’s $85M opioid settlement announced two-weeks ago; meanwhile, large cap Pharma names outperformed (LLY, JNJ, BMY, MRK); CPRX filed a lawsuit against the U.S. Food and Drug Administration, to challenge the recent approval of a cheaper rival drug

·     Biotech movers; CRBP announces longer term data on lenabasum in mid-stage studies in systemic sclerosis (SSc) and dermatomyositis (DM)/results are being presented at EULAR in Madrid; CBAY was upgraded to strong buy at Raymond James saying 1) NASH is now a "free call option", 2) PBC provides "valuation floor," 3) market reaction to surrogate endpoint data is "overblown" after 45% drop on Tuesday on results; AXGT posted a narrower-than-expected Q4 EPS loss and saying it expects a data-rich second half of the year

 

Industrials & Materials

·     Aerospace & Defense; Third Point’s Dan Loeb joins Pershing Square’s Bill Ackman in opposing the UTX merger announced on Monday. President Trump has also voiced opposition to the deal, saying it made him "a little concerned" that it may weaken competition. Ackman last night said the deal makes no strategic sense

·     Transports; Deutsche Bank lowered Q2 earnings forecasts by 4% on average on rails, taking him below consensus for all the U.S. Class 1 Rails/despite estimate cuts, remains positive reflecting the sector’s volume-agnostic cost opportunity/cuts tgt for CSX to $87 from $89, KSU to $138 from $142, NSC to $196 from $198 and for UNP to $197 from $200; in airlines, JBLU said May traffic increased 5.7% YoY on a capacity increase of 5.4% and the load factor was 86%

·     Chemicals; CE announced late yesterday it will raise prices of all acetate tow product grades sold globally by up to 10% (shares of EMN active as well on price hike); CF, NTR and MOS shares outperformed amid broad strength in ag chemical sector today

 

Technology, Media & Telecom

·     Semiconductors; QCOM shares fell as the FTC said in a court filing that the mobile chip supplier should not be allowed to put a sweeping antitrust ruling against it on hold as it pursues an appeal. LG Electronics said that it is negotiating chip supply and patent license agreements with QCOM and could be forced into signing another unfair deal unless a federal judge’s protections remain in place; LRCX was downgraded to In-Line at Evercore/ISI and cuts the target from $225 to $195 as sees the memory recovery as pushed back to H2 2020; MX shares urge as it raises Q2 revenue view to at least $194M from $173M-$181M (est. $177M) and gross profit margin is expected to be at least 21% (up from prior view to be in the range of 16%-18%); NXPI was upgraded to equal-weight at Morgan Stanley and ups target from $99 to $114 citing valuation with NXPI "at the biggest discount in its history" compared to its peers and also notes they have aggressively reduced inventory in auto chips

·     Media & Telecom movers; TTD downgraded to sell at Nomura with $144 tgt saying that expectations about the company’s prospects had gotten too far ahead of themselves/ says the fundamentals are "relatively solid" but "out of sync" with near- to mid-term expectations and "the story being told." FCC Chairman Pai in a Senate hearing today said they will take action on proposals to monetize C-band spectrum "as quickly as we can." Such an auction calls for a complex design that still needs to be evaluated (shares of Intelsat “$I” leveraged to news); VZ slipped as Huawei says it owes licensing fees for more than 200 patents, Reuters reports

·     Info services; DASTY announced a definite agreement for U.S. technology group MDSO, in an agreement valued at $5.8 billion. Under terms of the all-cash deal, the French technology group will offer $92.25 for each share of Medidata https://on.mktw.net/2ZpfErZ

·     Software, Hardware & Component news; Dow component AAPL came into the day having risen more than 1% for six-consecutive session, CNBC notes that’s the first time since 2000 (lows around $170 on 6/3 and closed at $194.81 last night); CRWD priced its 18M share IPO at $34, above the expected range of $28-$30 (opened at $63.50); ROKU rises to new record highs, as Cinedigm announces subscription video on demand services (SVOD) on the Roku Channel for faith-based Dove Channel

·     Networking and Equipment; CSCO was downgraded to market perform from outperform at William Blair as sees signs of tightening demand across IT infrastructure, which he believes could pressure growth; COMM and JNPR both upgraded at Rosenblatt to buy and neutral respectively saying both stocks could see a tailwind from the trade tensions between the U.S. and China and sees 2019 U.S. wireline spending to grow +5% yoy, following a flat 2018

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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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