Market Review: July 12, 2019

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Closing Recap

Friday, July 12, 2019

Index

Up/Down

%

Last

DJ Industrials

243.61

0.90%

27,331

S&P 500

13.75

0.46%

3,013

Nasdaq

48.10

0.59%

8,244

Russell 2000

12.11

0.78%

1,570


 

Equity Market Recap

·     U.S. stocks rising again, with new record highs for the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 index, with major indexes up more than 2% thus far in July, adding to solid gains in June. The recent rally has been predicated on lower interest rates in the not so distant future after comments by Fed Chairman Powell this week in his testimony to the House and Senate banking Committee appeared to all but guarantee the central bank could cut interest rates to help stave off a global economic slowdown and trade uncertainty impact with China. But economic data over the last week (US jobs, CPI, PPI) have all provided reasons to the contrary, with jobs strong and inflation rising (also positive UK data this week). The Dow gained over 200 points after having topped the 27,000 level for the first time yesterday, while the S&P 500 closed above the 3,000 level for the first time after having topped it the last 2-days. The Nasdaq Composite also traded to record highs, surpassing its early best of 8,228.59 on 7/10. With rate cuts widely forecasted from the Fed in 2-weeks, attention turns to corporate earnings season which kicks off next week unofficially. Regarding trade, White House adviser Peter Navarro said in an interview on CNBC on Friday that the U.S. is in a "quiet period" with China over trade negotiations and that in-person talks would start soon in China. European shares were weighed by a slew of corporate profit warnings this week, including Daimler overnight as concerns about the fallout from various trade disputes mount. The Healthcare sector remained the most active for a second day, led by declines in life science names after ILMN issued a profit warning for the year, JNJ dropped after Bloomberg reported the Justice Department is looking into whether the company lied about cancer risks of its talcum powder, while PBM owners (MCK, ABC, CVS and managed care UNH, ANTM) extended gains after the Trump administration abandoned a plan yesterday to eliminate rebates drugmakers pay to those managers, though drug names remains weak (MRK, LLY, BMY). Big week of earnings coming up, dominated by banks and industrials.

Economic Data

·     The producer price index (PPI) MoM for June rises 0.1%, is lightly above the unchanged estimate while core PPI (Ex: Food & Energy) MoM for June also rises slightly to 0.3% vs. est. 0.2%. PPI rose 1.7% YoY in June, the slowest rate of increase since January 2017, but was still slightly above the 1.6% estimate. Final demand ex food, energy rose 2.3% y/y vs. est. up 2.1%

 

Commodities

·     Oil futures ended flat with WTI crude at $60.21 per barrel, (off highs $60.74 and low’s $59.93) as tensions persisted in the Middle East with Iran and markets watched on possible production disruption with a storm heading towards the Gulf of Mexico this weekend. For the week, WTI oil prices extended recent gains, rising 4.7% after having advanced recently on falling inventories the past four weeks and as the Baker Hughes rig count fell to 958, this after rising from the summer of 2016 to late 2018 before tapering off.

·     Tropical Storm Barry heading to the heart of the Gulf of Mexico with sustained winds of 50 miles per hour (85 km per hour) early Friday and is expected to strengthen into a hurricane, with winds of at least 74 mph (119 km) by the time it comes ashore late Friday or early Saturday, the NHC said. However officials warned that torrential rains posed the greatest danger to the area. Almost 59%, or 1.1 million bpd, of crude oil production in the U Gulf of Mexico has been cut because of Tropical Storm Barry, and daily nat gas output from offshore platforms cut by 49%.

·     Gold prices rose on Friday with August gold up $5.50, or 0.4% to settle at $1,412.20 an ounce as markets overlooked rising inflation fears in the form of CPI/PPI this week potentially influencing the Fed’s decision on aggressive monetary policy easing later this month. Prices touched an intraday high of $1,414.20 an ounce before paring back and settling the week higher by 0.9%. The stronger-than-expected PPI reading failed to shake convictions that the Fed will start cutting interest rates at a policy meeting later this month

 

Currencies

·     The U.S. dollar was lower for a third straight day against a basket of currencies, falling sharply against the safe-haven Japanese yen, down -0.5% at 107.80, while the euro and British Pound inched higher. The U.S. dollar fell to 2019 lows against the Canadian dollar, down at 1.3035 helped by a bounce in oil prices recently. Bitcoin prices rose over 4% despite President Trump coming out against cryptocurrencies such as bitcoin and Facebook’s upcoming Libra project. The negative comments follows several House and Senate members expressing concern over it.

 

Bond Market

·     Treasury yields end the week higher, though were down slightly on the day. Yields got a boost following a jump in inflation expectations given the “hotter” consumer prices reading yesterday and producer prices today (though fed fund futures are still pricing in a 100% chance of a Fed rate cut at the July 31 meeting tempering the move). The yield on 10-year Treasury edged down to 2.1097% lows, slipping over 2 bps after touching highs around 2.15% earlier (but are up from lows of 1.9392 last week). Shorter term yields such as the 2-year are down to around 1.84% but well off last week lows below 1.75%. There were several mixed signals for stocks and bonds with Fed Chairman Powell sounding like a rate cut is a certainty, but other Fed members this week sounded less enthusiastic about cutting. Meanwhile recent economic data (jobs and inflation) have not suggested that a rate cut is warranted at this time.

 

 

Macro

Up/Down

Last

WTI Crude

0.01

60.21

Brent

0.20

66.72

Gold

5.50

1,412.20

EUR/USD

0.0014

1.1268

JPY/USD

-0.63

107.87

10-Year Note

-0.0264

2.114%

 

 

Sector News Breakdown

Consumer

·     Retailers; retailers showing unusual strength with big gains in beaten up names such as M, JWN, KSS, CPRI early on; SFIX was upgraded to buy at Goldman Sachs as sees a more compelling risk/reward in the company’s ability to lean into its existing core customer base

·     Consumer Staples; BUD shares fell after Bloomberg reported they are not pursuing IPO of Budweiser unit citing market conditions (earlier they had delayed pricing); CL agreed to buy luxury cosmetics player Laboratoires Filorga Cosmétiques for around $1.7B; SAM all-time highs as tgt was raised to $421 from $372 at Guggenheim ahead of what they expect will be strong 2Q results, given the growth runway ahead driven by Twisted Tea, Truly, and other new innovations; MO was upgraded to buy at Goldman Sachs saying the valuations in the tobacco sector are trading at a 10-year trough

·     Restaurants; MCD positive mention by Cleveland Research saying strong check growth and modest traffic improvement look to be supporting ahead of consensus US comp growth for 2Q19; DPZ was reiterated buy at Maxim ahead of earnings next week arguing shares have an attractive valuation as they remain 10% below the August 2018 high; LK shares slid launched a new line of tea drinks in China today in an effort to diversify its products line as drinks are listed at prices about 25% below than those at Starbucks and are anticipated to generate margins about 25% lower than coffee for the company; PLAY announced a $200M share buyback

·     Auto sector; Ford (F) and Volkswagen said they would team up to develop self-driving cars and share electric-car components/the agreement calls for Volkswagen to purchase a stake in Ford’s initiative that is developing self-driving technologies, and for Ford to use electric-car components developed by Volkswagen; DDAIF warns that Q2 Group EBIT will be significantly below market expectations and sees FY19 Group EBIT significantly below’ prior year level – last month, Daimler cut that metric to “level” compared with 2018; auto parts maker TOWR being acquired by Autokiniton Global Group for $31 per share/ Including Tower’s debt and pension related liabilities, the total value of the transaction is approximately $900M https://yhoo.it/2XYNdDV

 

Energy

·     Energy stocks quiet though oil prices have been active in recent week on renewed Iran sanction fears, OPEC extending production cuts for 9-months at least meeting in Vienna, ongoing concern from impact of China/US trade uncertainty and now this week, fears of possible production disruption in the Gulf of Mexico given Hurricane Barry path. The Baker Hughes weekly rig count showed total U.S. rig count fell -5 rigs to 958 (a 17-month low), with oil rigs down -4 to 784, gas rigs down -2 to 172

·     In stock news, EOG filed an 8-K wherein it reported a cash hedging gain of $10.4M in 2Q19, which is about $20M lower than KeyBanc said it was expecting and the Company also indicated that it has not added any new hedges from its 1Q19 update; Goldman Sachs said CVX remains preference among big oil names driven by production growth, strong free cash flow generation and capital returns; in utilities, PNM cut 2019 EPS guidance to $2.05-$2.11 from $2.10-$2.20 and sees Q2 EPS 36c-38c, below prior guidance 57c-59c and the 62c estimate

 

Financials

·     Bank movers; analysts remain cautious on banks into earnings season, with many of the lowering estimates and tgt price – more today as well as Citigroup upgraded MS to buy, but downgraded CMA, NTRS, and MTB to Sell and cut WFC, CFG, and FITB to Neutral to more closely reflect the forward curve, including two rate cuts in 2019 and 2020 and terminal yield curve assumptions to Fed Funds of 1.75% and a 10-yr of 2.25%; HBAN was downgraded to underperform at Macquarie noting in the past six months, Huntington has risen 9.7% compared with the financial sector median performance of +4.9%; online discount broker, SCHW received two downgrades as KBW Inc. cut to market perform from outperform and cut tgt to $43.50 from $51, while Bank America cut to underperform given a tougher revenue and margin outlook: earnings next week Monday: C…Tuesday morning: CBSH, FHN, JPM, SNV, WFC…Wednesday: BAC, BK, CMA, PNC, USB…Thursday: ALLY, BBT, BX, MS, MTB, PBCT, STI, COF…Friday: AXP, BLK, CFG, RF, STT, SYF

·     REITs; BMO Capital said they were disappointed by upward revisions in Senior Housing supply (primary markets) reported by NIC today, as units under construction increased by 8% from the prior figure in 1Q19, and 7% dating back to 3Q18. In 2Q19, units under construction represented 6.9% of inventory vs. 6.7% originally reported in 1Q19 (firm said they expect REITs with senior housing exposure will be weaker near term based on these results – WELL, VTR, HCP, NHI, LTC, SBRA, CTRE)

 

Healthcare

·     Pharma movers; Dow component JNJ shares fell after Bloomberg headlines denials of asbestos in baby powder spur criminal probe; HOOK shares spiked after the recent IPO (April) said the FDA gave the go-ahead for its first clinical trial in immuno-oncology: a Phase 1/2 study of HB-201 in HPV-positive cancers; MNOV outlined a late-stage trial plan for ibudilast, its treatment for progressive MS following feedback from the U.S. FDA/says it plans to conduct one late-stage trial, adds that FDA said a single trial can be the basis for marketing approval; in cannabis space, CTST shares fall again after ceasing sale and shipment of all cannabis products, days after the Health Canada inspections revealed the existence of several illegal grow rooms at an Ontario facility

·     Biotech movers; AMGN, NVS and Banner Alzheimer’s Institute announced the collective decision to discontinue investigation of the BACE1 inhibitor CNP520 in two pivotal Phase 2/3 studies in the Alzheimer’s Prevention Initiative Generation Program; Guggenheim said Trump’s plan to walk away from its proposed Medicare Part D "Point-of-Sale Rebate" rule is, negative for most biopharma companies as it maintains the opacity in the pricing environment – says any type of IPI implementation could have an outsized impact on REGN, whose primary drug Eylea is at the top of the list for Part B spending, and a minor impact on ALXN, whose Soliris is #25 on the list.

·     Medical equipment and devices; life science equipment names were under pressure after ILMN drastically cut guidance a day after shares traded to all-time highs/ILMN lowers growth revenue outlook to about 6% from prior view of 13%-14% growth and guides Q2 revs light at $835M vs. est. $876M saying results were impacted by approximately $30M lower revenue than expected associated with population genomics initiatives; MDGS shares jump following announcement that A.M. Surgical has placed an order for 1,400 units of its integrated visualization device that A.M. will pair with its endoscopic surgical product

 

Industrials & Materials

·     Paper & Packaging sector; Bank America downgraded AVY, BERY to neutral and cut BCC, SON to underperform as they expect sluggish 2Q revenue trends which, combined with comps, will burden earnings throughout 2H (said investors can hide in rigid packaging with OI now preferred and GPK in paper); separately, Seaport Global downgraded PKG to neutral saying the stock’s relatively strong performance in a generally negative tide of news flow has made risk-reward less favorable, in their view

·     Industrial & Machinery; MCRN shares soar as HI agreed to acquire the company in deal valued at approximately $2B, including net debt of about $686M, with MCRN holders to receive $11.80 in cash and a 0.1612 shares of HI for value of $18.07 per share https://on.mktw.net/2LiN3kR ; LECO was upgraded to outperform at Baird as the combination of lowered expectations and easier comps create a better setup; OTR Global upgraded shares of farm equipment manufacturers DE and AGCO to positive from mixed

·     Transports; in airlines, ALK Q2 RASM and CASM came in better than expected but the company while reported a 1.7% increase in traffic on a combined basis for all operations, on a 1.9% increase in capacity compared to June 2018; SAVE reiterated their 2Q19 RASM and CASM ex forecast while jet fuel costs came in lower than expected/Cowen said lack of an increase in RASM guidance could be disappointing to some investors given comments from other airlines; trucker JBHT was the top gainer in the S&P index early ahead of earnings on Monday night; USX lowered its guidance and Bank of America downgraded the stock to a Neutral rating from Buy.

·     Chemicals strong despite cautious analyst commentary; in the lithium sector, Morgan Stanley said they are even more bearish on the future of battery raw material lithium, saying it expects prices to fall by 30% over the next six year, though the firm upgraded SQM to equal-weigh but reiterate their underweight rating on ALB and see greater downside to consensus estimates; in the TiO2 sector, Citigroup downgraded CC and VNTR to neutral noting that several chemical companies have guided down, most notably BASF, as the firm has turned more cautious on ethylene/PE (resume LYB coverage at Neutral) – they cut 2Q estimates for commodity companies by ~14%, by ~2% for gases and ~1% for specialties; APD downgraded at Seaport Global on valuation (UBS cut on price yesterday as well)

 

Technology, Media & Telecom

·     Internet; SNAP upgraded to buy from neutral and raise tgt to $18 to reflect our expectation for user growth reacceleration following the company’s new Android app, the launch of Snap Games and new viral lenses; UXIN to issue and sell convertible notes of $50M to investment funds managed by PacificBridge Asset Management in a private placement; YNDX tgt raised to Street high $55 from $49 at JPMorgan; AMZN topped $1 trillion market cap intraday for first time in 10 months yesterday, ahead of its 48-hour Prime Day next week

·     Semiconductors; QCOM tgt raised to $68 from $65 at Mizuho despite saying top-line results could be at risk due to the FTC ruling; HIMX downgraded to neutral from buy and cut tgt to $3.50 from $5 at Roth Capital; NVDA positive mention at Piper after survey saying believe the relatively new technologies of ray tracing and video game streaming garnered strong interest, as both are still in the very early ages of commercialization

·     Software movers; Piper said EA’s new season of Apex Legends has largely in-line player engagement numbers with the firm ore confident in EA’s ability to hit its $300-400M guidance range for Apex in FY20 – calls EA’s overall FY20 outlook as somewhat conservative, with limited downside risk; WORK slips after late yesterday, MSFT reported Microsoft Teams now has over 13M DAUs compared to the 10M DAUs for WORK (in the three months ending on January 31); ORCL lost its court case against the Pentagon’s $10B, winner-takes-all JEDI cloud contract; INST downgraded at Raymond James as reduces 2020 growth projections; OMCL extends losses after falling 13% on Thursday after GlassHouse Research cautious report setting a tgt price of $35.50

·     Hardware & Component news; EMKR falls after cutting Q3 revenue view to $17.0M-$17.5M from $20M-$22M (and below consensus $21.4M); said chip product sales, GPON in particular, experienced significant decline in Q3, largely due to additional negative effects of trade dispute with China; INFY raised year revenue guidance from 7.5%-9.5% to 8.5%-10%; says maintained FY 20 operating margin guidance range of 21%-23%, while Q1 missed revs estimates and met on EPS

·     Worldwide PC demand grew more than expected in Q2, led in part by a phasing out of support for MSFT’s Windows 7 operating system, according to IDC. Sales of PCs rose 4.7% to 64.9 million units from the year ago quarter as supply shortages eased. According to IDC, market share was 25.1% for Lenovo Group Ltd., 23.7% for HPQ, 17.9% for DELL, 6.6% for Acer Group, and 6.3% for AAPL

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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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