Market Review: July 10, 2019

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Closing Recap

Wednesday, July 10, 2019

Index

Up/Down

%

Last

DJ Industrials

76.67

0.28%

26,860

S&P 500

13.37

0.45%

2,993

Nasdaq

60.80

0.75%

8,202

Russell 2000

2.46

0.16%

1,565


 

Equity Market Recap

·     U.S. stocks touched new intraday record highs again, with broad gains for the Dow Industrials, S&P 500 and Nasdaq Composite while the SmallCap Russell 2000 underperformed. The S&P 500 index briefly topped the 3,000 level for the first time (high of 3,002.98) before paring gains, led by gains in tech, energy (as WTI crude topped $60 per barrel) and interest rate sensitive sectors such as utilities (new all-time highs), REITs, and homebuilders given the dovish commentary from Fed Chairman Powell in his testimony to the House Financial service Committee today regarding the outlook on the economy and monetary policy. In his text prior to speaking on Capitol Hill, Powell said that the Fed stands ready to "act as appropriate" to sustain a decade-long expansion amid concerns over trade policy and a weak global economy. The yield on 10-year Treasury fell to 2.04% after climbing above 2.11% for the first time in 4-weeks on the headlines before leveling off while the dollar weakened and gold spiked. Oil prices jumped overnight following a bullish weekly inventory report. Minutes from the June FOMC meeting showed that many Fed officials thought more stimulus would be needed soon if risks to the U.S. economy did not let up.

·     Fed Chairman Powell: said concerns about trade policy and a weak global economy "continue to weigh on the U.S. economic outlook" and the Federal Reserve stands ready to "act as appropriate" to sustain a decade-long expansion, Fed Chairman Jerome Powell said. Powell contrasted the Fed’s "baseline outlook" of continued U.S. growth against a considerable set of risks – including persistently weak inflation, slower growth in other major economies, and a downturn in business investment driven by uncertainty over just how long the Trump administration’s trade war with China and other countries will last and how intense it will become. Powell will testify again on Thursday before the Senate Banking Committee.

·     FOMC meeting minutes from June were also released today showing that “participants judged that uncertainties and downside risks surrounding the economic outlook had increased significantly over recent weeks. While they continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective as the most likely outcomes, many participants attached significant odds to scenarios with less favorable outcomes.”

 

Commodities

·     Oil prices posted strong gains on Wednesday, as WTI crude rose $2.60 or 4.5% to settle at $60.43, its highest level in 7-weeks while Brent crude rose $2.85 or 4.44% to settle at $67.01 per barrel, helped by a broad “risk-on” buying and bullish inventory data. The EIA, in its weekly petroleum status report showed a larger than expected draw in US crude stockpiles falling -9.5M barrels, while last night, the API reported nationwide stockpiles fell by -8.13M barrels last week. It has been a nice recovery in crude after dropping last week. Additional sanctions expected against Iran, the extended production cuts by OPEC last week, and storms heading in the Gulf of Mexico the next few days also helping boost prices. Gold prices rise $12 or 0.9% to settle at $1,412.50 an ounce, its best levels in roughly a week, as the dollar slipped and markets took Powell comments as very dovish for rates.

 

Currencies

·     The U.S. dollar fell, snapping its 3-day win streak, reversing gains from last Friday’s positive jobs number bounce, as Fed Chairman Powell today did nothing to sway markets view of a rate cut later this month when the FOMC meets. The dollar tumbled vs. the safe-have yen, as well as the Pound (which rebounded off 2-year lows) and the euro, while the Canadian dollar rallied against the greenback amid a spike in oil and results from its central bank rate meeting. The Bank of Canada left rates unchanged (as expected), while revealed some concern over the outlook. Bitcoin prices erased earlier gains (traded as high as $13,190), falling below $12,000 (2.5%) after testimony by Fed Chairman Powell and the barrage of questions from House reps related to FB’s Libra currency and the concerns they expressed.

 

Bond Market

·     Treasury prices were up and down on the day, with the yield on the benchmark 10-year rising above 2.11% earlier this morning and then below the 2.04% level after the release of Powell’s testimony text. However, the 10-year ended not far from where it closed yesterday at the 2.06% level. While the 1-yr was little changed, the shorter-term 2-yr yield fell 8 bps to 1.82%. The U.S. Treasury sold $24B in 10-year notes at a yield of 2.064% vs. 2.057% when issued pre-sale with a bid-to-cover at 2.41 from 2.49 prior and indirect bidders awarded 60.8% of the auction and direct bidders awarded 12.9%.

 

 

Macro

Up/Down

Last

WTI Crude

2.60

60.43

Brent

2.85

67.01

Gold

12.00

1,412.50

EUR/USD

0.0053

1.1261

JPY/USD

-0.50

108.35

10-Year Note

-0.008

2.056%

 

 

Sector News Breakdown

Consumer

·     Consumer Staples; HELE shares rose following a strong beat of Q1 results while raising FY20 earnings above analyst consensus (guided year EPS view to $8.40-$8.65 from $8.25-$8.50 and raises FY19 revenue view to $1.59B-$1.62B from $1.58B-$1.61B); SODA said it will offer steep discounts on its sparkling water makers on Amazon Prime Day for a 3rd straight year; Lady Gaga launches cosmetic line exclusive to AMZN;

·     Housing & Building Products; HD and LOW shares slipped after Cleveland Research said suggests home center demand in 2Q to date has been mixed, including some pressure from unfavorable weather/firm sees LOW sustaining comp growth near the level of HD, sustaining share progress from recent quarters driven by better execution; homebuilders got a boost as Treasury yields fell (subsequent expected drop in mortgage rates) – BZH, TOL, PHM; GVA shares fell over 7% on no specific news – falling below key technical levels today

·     Casino & Leisure movers; CWH estimates lowered at Stephens saying they harbor some concern that consumers will defer RV purchases into F20 given wet and rainy conditions that persisted through June, limiting RV usage; FUN posted prelim net revenues through July 7 of about $579M, an increase of $16M, or 3%, when compared with the same fiscal period a year ago; in auto, NIO shares looked to make it a 7th straight day of gains, boosted early after saying Q2 deliveries was 3,550 more than the prior guidance range of 2,800 to 3,200 units; said delivery volume of ES8, its 7-seater electric SUV, for June was 927

·     Retailers; LEVI shares slide after Q2 gross margin miss and declining U.S. wholesale sales that weighed on shares (Q2 EPS of 7c missed the 13c estimate); overall, consumer discretionary names, retailers (GPS, JWN, UAA, URBN all weak)

 

Energy

·     Energy stocks jump with a spike in oil and overall strength in US equities helped after an industry report showing a continued draw-down in U.S. crude inventories tightened a supply outlook that’s being threatened by rising tension in the Middle East. The EIA weekly energy inventory data bullish with bigger draw for crude – oil spikes as crude stockpiles fell -9.5M barrels vs. est. for a draw of -2.9M barrels and gasoline fell -1.45M barrels vs. est. for draw of -2.0M barrels. Overnight, API reported that U.S. crude supplies fell by -8.1M barrels for the week ended July 5, showed a stockpile decline of -257,000 barrels for gasoline. Also, major oil firms began evacuating rigs in the Gulf of Mexico following weather forecasts that a tropical disturbance might become a storm on Wednesday or Thursday.

·     Utility stocks trade to all-time higher for the index, along with 52-week bests for several names (AWK, NEE, ES, ETR, DTE, SO, WEC, LNT) given the dovish commentary by Fed Chairman Powell and the increased outlook for interest rates cuts later this month. The outlook sent Treasury yields lower, lifting stocks that tend to benefit such as dividend paying names

·     Oil equipment and services; APY was downgraded to neutral at Citigroup and cut tgt to $34 saying several issues are surfacing simultaneously which presents risk around the upcoming quarter; FTSI was downgraded to neutral at Bank America despite recent underperformance as believe FTSI is too exposed to what is likely further loosening of pressure pumping fundamentals in 2H19 and ’20; CLB was upgraded at Bank America as thinks will reverse underperformance; Susquehanna downgraded SPN to neutral from positive and cut tgt to $1.50 while cuts tgts on SLB, FRAC, HP, OIS as sees a difficult path for any material improvement in H2 estimates, with crude prices falling, producers pulling back on drilling more rigs and budgets being front-loaded

·     E&P sector & Majors; Credit Suisse downgraded GPOR and SWN to underperform from neutral citing structural challenges of weaker gas/NGL prices on balance sheets and free cash flow, while they upgraded LPI to neutral from underperform on valuation; TOT agreed to sell a pool of North Sea oil assets – acquired as part of its 2017 deal for Maersk Oil – for $635M; Credit Suisse modestly raising their near-term WTI/Brent oil price forecasts ($/bbl) to $59/$68 from $58/$67 as they mark-to-market for Q2 actuals and expect a tighter global oil market in 2H19 – they upgraded TOT to outperform and cut BP to neutral

 

Financials

·     Bank movers; once again, signs of an overly dovish Federal Reserve and rising rate cut expectations pressured the banking sector with banks lagging; UNM shares fell as was initiated with an underperform at Credit Suisse as estimate that UNM’s long-term care insurance block faces a $(5.7B) after-tax reserve deficiency at NPV; in services, ZG ($58 tgt) and RDFN ($23 tgt) both initiated buys at SunTrust in real estate marketplaces and home-related information portals; FCN was upgraded to buy at SunTrust and raise tgt to $100 as think recent regulatory pressure on auditors in Europe is a key catalyst to pushing experienced consultants to FTI

 

Healthcare

·     Managed care and hospitals – group was active yesterday and today, as analysts weigh in after listening to a more than ninety minute argument yesterday as a 3-panel judge in 5th Circuit Court of Appeals, in Texas vs. U.S., listened to claims as they attempt to strike down the entire Affordable Care Act (ACA). Each side delivered strong arguments. Some analysts said the decision is unlikely to come before Labor Day based on the average ruling times for the Fifth Circuit. Reports indicated that the panel appeared sympathetic to Republican efforts to overturn ACA, expressing skepticism to Democratic calls to overturn the Texas judge’s ruling.

·     Large Cap Pharma movers; GSK said that ViiV Healthcare, its HIV venture with PFE, has met primary endpoint in a phase 3 clinical trial as demonstrated the ability to control HIV with a two-drug regimen of dolutegravir plus lamivudine in virally suppressed patients; SNY said the U.S. FDA accepted for review the company’s biologics license application for isatuximab for patients with relapsed/refractory multiple myeloma

·     Biotech movers; ICPT shares fell with weakness attributed to UBS saying the company’s introducing of a new drug for nonalcoholic steatohepatitis (NASH) patients is likely to be slower than expected; overall though, biotech space generally weak, with the IBB slipping more than 1% midday, with the IBB falling below its 200-day MA of 107.83 with several names weak

·     Generic/Specialty Pharma; AMRX shares drop after cutting year EBITDA forecast to $425M-$475M from $600M-$650M and also cites continuing market pressure and competition for its key generic products; HZNP submitted a Biologics License Application (BLA) to the FDA for its investigational medicine teprotumumab for the treatment of active thyroid eye disease (TED); generic names were weak (MYL, PRGO, TEVA).

·     Medical equipment and devices; VLRX shares jumped after saying its V-Go wearable insulin delivery device has been adopted on formularies of CI, HUM and CVS with preferred status (formularies are drug or device reimbursement lists created by health insurers)

·     Healthcare Services; STE was downgraded at KeyBanc after shares have materially exceeded their previous $138 price target; HQY priced 6.75M share secondary at $61.00, a 3.5% discount to stock’s Tuesday close, for gross raise of ~$411.8M (raised money to fund $2B purchase of WAGE); in hospitals, HCA was upgraded to buy with $160 target at Goldman Sachs

 

Industrials & Materials

·     Machinery; JPMorgan said going into Q2 they remain overweight on CAT and think the company can beat and raise as its backlog will be a key catalyst. The truck stocks (PCAR) should deliver decent quarterly results given the level of production but says would avoid PH and KMT as both companies will have to guide FY’20 and are likely to be cautious (downgraded TRMB and AGCO as part of call); DE was downgraded to neutral at UBS saying after a sharp rebound from May’s weakness, they think the stock now fairly reflects the balance of near term caution vs. the potential for a pick up in the large ag replacement cycle in 2020

·     Industrial sector; MDR shares surged after being awarded an over $1.5B contract from Saudi Aramco to provide engineering, construction and installation of offshore gas facilities and pipelines in Aramco’s Marjan oilfield; MSM shares fell after Q3 top and bottom line results missed estimates and guided Q4 results below views (sees Q4 EPS $1.21-$1.27 on sales $835M-$851M below the est. $1.47/$881.9M); Krones cuts its FY Ebit outlook saying while the revenue growth of Krones in the first six month of 2019 were still satisfactory, the earnings before tax (EBT) for this period will be significantly below the expectations of Krones.

·     Transports; airlines with a boost after AAL raised its Q2 forecast for unit revenue as the grounding of Boeing 737 MAX jets reduced its overall fleet size/said Q2 Prasm to rise between 3%-4% vs. prior view of up 1%-3% and adjusted CASM ex: fuel to rise 4.5%-5.5%; railroads CSX and CP both downgraded to hold at Loop Capital saying freight transportation data continues to paint a picture of a slowing industrial economy, with YoY volumes in negative territory

·     Metals & Materials; steel sector active after NUE announced a second +$40/t flat rolled price increase yesterday following a similar move late June with expectations for others to follow (NUE, STLD, CLF ) other movers; OLN shares slumped after saying it expects a Q2 net loss of $22M to $15M with corresponding adjusted EBITDA of $200M to $210M in Q2

 

Technology, Media & Telecom

·     Internet; FB to its best levels since July of last year, topping the $201 level as stocks make record highs; AMZN rises to its best levels since October a week ahead of its "Prime" 48-hour event which analysts were very bullish on today (Cowen said annual Prime Day on July 15-16 is likely to generate the most gross merchandise value and revenue since it made a debut in 2015"); VIPS signed an agreement to buy brick-and-mortar outlets operator Shan Shan Commercial Group Co for 2.9 billion yuan ($421.4M);

·     Semiconductors; OLED downgraded the stock to perform from outperform following its material outperformance in recent months. Universal Display shares are up 106% so far this year, while the S&P 500 has risen 19%; AMD shares rose for a 4th straight day, while the overall semi group posted strong gains, with MU and IPHI among the best gains in the index

·     Hardware & Components; SGH shares rose as analyst applauded (raised tgts) after announces two acquisitions to gain entry into embedded computing market after buying Artesyn Embedded Computing and Inforce Computing; HLIT announced that CCCM, a CMCSA affiliate, committed to a $175M purchase of software licenses over the next four years, with $50M expected in 2019; VISL shares jumped after being awarded ~$2.8M contract by U.S. Army for supply of intelligence, surveillance and reconnaissance receiver devices

·     Media & Telecom movers; CMCSA was upgraded to conviction buy at Goldman Sachs and raises its target from $44 to $54 citing strong fundamentals in Cable, NBCU, and Sky plus attractive valuation across all metrics; TMUS will replace Red Hat Inc. in the S&P 500 index at the open on Monday, after IBM completed its $34B deal for the company yesterday; IPG was upgraded to neutral at Bank America but said still cautious on ad agencies; DIS shares outperformed in the Dow Industrial, a new all-time high

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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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