Market Review: July 16, 2019

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Closing Recap

Tuesday, July 16, 2019

Index

Up/Down

%

Last

DJ Industrials

-24.45

0.09%

27,334

S&P 500

-10.38

0.34%

3,003

Nasdaq

-35.39

0.43%

8,222

Russell 2000

0.12

0.01%

1,561


 

Equity Market Recap

·     U.S. stocks ended mixed, slipping from intraday highs amid a decline in energy stocks as oil prices dropped over 3%, while the dollar and Treasury yields gained following a stronger-than-expected retail sales report raising the possibility the Fed could move towards a less dovish stance. Stocks took a turn lower mid-afternoon after President Trump told reporters at the White House that a trade deal with China has a long way to go, and also said he could impose more tariffs on China if he wanted. Markets proceeded to rebound after Fed Chair Powell reiterated comments from last week’s testimony to Congress and the Senate saying the Fed will "act as appropriate to sustain the expansion," in his speech from Paris, adding that low unemployment and solid overall growth, inflation pressures remain muted. Financials were mixed following key earnings results from banks/brokers (JPM, WFC, GS), with each posting better headline earnings and revenues but lower trading revenue and softer NIM and NII figures (and outlooks) weighed on sentiment. Back to data, U.S. retail sales rose 0.4% in June, as households stepped up purchases of motor vehicles and a variety of other goods. While the Fed is still largely expected to cut rates by 25 bps at its July 30-31 policy meeting, expectations for a more aggressive half a percentage point cut have been scaled back. Transports outperformed, rising around 2% led by gains in truckers and rails after better results from JBHT and CP (while CSX reports tonight).

Economic Data

·     Import Prices MoM for June fell more than expected at (-0.9%) vs. est. (-0.6%) while export Prices MoM for June fell a greater (-0.7%) vs. est. (-0.2%).

·     Retail Sales MoM for June rose a greater 0.4%, topping the 0.2% economist estimate as retail Sales Ex: Auto & Gas for June jumped 0.7% vs. est. 0.1%; strong retail sales data across the board

·     Industrial production was unchanged in June MoM vs. est. 0.1% and after rising 0.4% in May (was unrevised in May), while capacity utilization fell to 77.9% from 78.1% in May (which was also the est.). Factory production rose 0.4% in June after rising 0.2% in May

·     U.S. business inventories rose 0.3% in May with sales up 0.2%. Inventories had increased 0.5% in April, while sales had declined -0.2%

·     U.S. July NAHB housing market index rebounded 1 point to 65 after falling 2 points to 64 in June. The index was as high as 74 in December 2017

 

Commodities

·     Oil prices took a sharp turn lower mid-afternoon, with WTI crude settling at $57.62 per barrel, down $1.96 or 3.3% and Brent crude dropped -$2.13, or 3.2% to $64.35 per barrel following reports U.S. Secretary of State Mike Pompeo said Iran is ready to enter negotiations over its missile program, easing concerns about tensions between the two. Prior to the headlines, oil prices were higher into weekly inventory tonight (API) and tomorrow morning (EIA data) which has been bullish for oil of late. Oil adding to yesterday losses after production in the Gulf of Mexico began its recovery as Tropical Storm Barry passed through this weekend, causing less damage that feared for markets. Gold prices dip -$2.30 or 0.2% to settle at $1,411.20 an ounce – off afternoon lows of $1,403.70 but held up well despite strength in the US dollar. Natural gas prices slide 4% to $2.31 mln btus.

 

Currencies

·     The U.S. dollar was broadly higher vs. majors, and emerging market currencies; the British Pound traded to lows below 1.24 before, hitting its lowest levels since April 2017 and 6-month lows vs. the euro with more Brexit fears weighing on the UK. Both leadership contenders Boris Johnson and Jeremy Hunt have said the so-called backstop plan to avoid a hard border in Ireland, considered essential by Brussels, would need to be scrapped. The Chinese yuan fell to session lows after Trump’s comments about trade midday sent stocks lower. Bitcoin prices dropped sharply midday, falling over 11% to below the $9,600 level – lowest levels since late June. The dollar was higher vs. the Canadian dollar and Japanese yen as well amid strong economic data.

 

 

Macro

Up/Down

Last

WTI Crude

-1.96

57.62

Brent

-2.13

64.35

Gold

-2.30

1,411.20

EUR/USD

-0.0052

1.1206

JPY/USD

0.42

108.33

10-Year Note

0.031

2.12%

 

 

Sector News Breakdown

Consumer

·     Autos; auto parts supplier LEA lowers year net sales view, core operating eps and adjusted ebitda views – watch other auto parts names on lower guidance (shares of VC, MGA, AXL, BWA moved in reaction) – LEA guides FY adj net $885-965M, down from prior $1.08-$1.17B and cuts year sales view to $19.8B-$20.3B from $20.9B-$21.7B; TSLA dropped the standard-range variants of its Model X and Model S from its product lineup and adjusted prices across its range. The discontinuation of the standard-range variants, however, means a rise in starting prices – to $84,990 for the Model X and $79,990 for the Model S, excluding potential buying incentives

·     Consumer Staples and Restaurants; DPZ shares dropped after posting sales growth in the U.S. that missed analysts’ estimates, as Q2 revs were $811M vs. est. $837M and comp sales growth rose 3% in the second quarter, trailing the 4.6% estimate while U.S. company-owned same-store sales grew 2.1%, below the FactSet guidance for 3.3% growth; WING downgraded to neutral at Wedbush saying current valuation largely incorporates investor expectations for sustained comp sales growth momentum above consensus expectations; DRI downgraded to hold at Maxim; APRN said it will begin including BYND recipes on its signature two-serving plan starting in August

 

Financials

·     Bank movers; earnings out for large caps JPM, WFC and GS, with lower net interest income and margins weighing on sentiment; JPM reported beat on earnings, but shares slipped after cutting its year net interest income view to about $57.5B, down from prior view of at least $58B – (follows Citigroup Inc.’s net interest margin miss yesterday) while overall JPM profit beat as higher interest income and a modest increase in loans more than made up for lower trading. WFC Q2 EPS and revenue topped consensus ($1.17/$21.6B vs. est. $1.15/$20.9B) while net interest income missed the lowest analyst estimate as $12.1B, down -3.6% YoY vs. est. $12.33B and said total average loans $947.5 billion, -0.3% QoQ; GS Q2 revs were $9.46B, 2% lower YoY but topped estimates of $8.8B while EPS beat/GS said Q2 revenues in fixed income, currency and commodities client execution were $1.47B, 13% lower YoY; in research, LYG was downgraded to neutral from overweight at JPM – noting the rising probability of a no-deal Brexit which creates rising pressure on revenues and EPS (from lower rates, higher impairment) and could weigh on capital build/return for all domestic UK banks

·     Regional banks; KEY shares fell after saying it discovered "fraudulent activity" associated with transactions conducted by a business customer of its subsidiary – KeyBank National Association – in Q3 of 2019/the company estimates impact of up to $90M, net of tax; PBCT to acquire UBNK in a 100% stock transaction valued at approximately $759M as PBCT sees the transaction adding 7c per share to earnings https://on.mktw.net/32sX8kx ; in earnings, WTFC shares slip as Q2 miss driven by higher credit costs; SNV Q2 EPS beat by a penny as NIM 3.69% vs est 3.71%, charge-offs $11.8M vs est $16.3M; FHN Q2 EPS beat by 6c and NIM 3.34% vs est 3.31%; FRC falls as Q2 eps 1.24 vs. est. 1.27; charge offs $1.2M and NIM misses at 2.85% vs. 2.93% est.; CBSH Q2 EPS 96c vs. est. 94c; and provision for loan losses $11.8M, +18% YoY

·     Brokers, Services; FDS was downgraded to underweight at Morgan Stanley on potential for earnings deceleration to lead to valuation contraction. While much of this expansion is likely a result of investor positioning into high quality stocks, of which FDS is one, they see heightened risks to this continuing over the next year; SCHW Q2 EPS of 66c beat estimates while net interest revenue rose 14% Y/Y to $1.6B, and net interest margin rose 10 bps from a year ago to 2.40%, reflecting the Fed’s 2018 rate hikes

 

Healthcare

·     Pharma movers; Dow component JNJ reported a quarterly beat on both the top and bottom line, while raising its year sales forecast to $80.8-$81.6B from prior view of $80.4B-$81.2B and back its year EPS view of $8.53-$8.63 vs. est. $8.60 (note Pharma names have been weak of late following the Trump Administration’s abandonment of proposed "Rebate Rule"); VTVT rises on news to present at 2019 Alzheimer’s Association International Conference; MLNT preannounced EPS, and FDA accepted Baxdela sNDA for priority review

·     Medical equipment and devices; in life science equipment, A and WAT were both downgraded at Bank America based on China generic drugmaker risks after both companies missed in 1Q, while upgraded LH to neutral and raised tgts for EXAS, GH and DGX due to lack of macro risk exposure; TMO was downgraded to buy from strong buy at Needham after the stock’s gains this year have topped the S&P 500 index’s performance and on the expectation for decelerating near-term organic revenue growth; CDNA shares slipped after short call from Kerrisdale Capital

·     Healthcare services and providers; CAH said it expects to meet at least midpoint of adjusted EPS guidance range for FY19; SunTrust made several price target changes in managed care and hospitals into earnings season saying they remain bullish on HC Services tied to strong core trends, secular drivers, M&A tailwinds and attractive FCF (upped tgts on ANTM, UNH, HUM and cut tgts on THC, CYH)

 

Industrials & Materials

·     Multi industry; Goldman Sachs downgraded shares of PH, CGNX and KMT as cyclicals outperformed defensives by ~500bps in June supported by macro driven catalysts and they expect that to reverse in Q2, while upgraded TKR (believe expectations are more appropriately calibrated and relative valuation is compelling) – bottom line is that they don’t see the setup as favorable for Multi’s into C2Q prints with the exception of HON

·     Transports; JBHT the first trucker to report as missed both EPS and revenue estimates but analyst applauded the better-than-expected Q2 performance in DCS unit (several analysts raised tgts including high of $113 at Cowen) – shares of truckers were among top gainers including KNX, SNDR, XPO, YRCW). Markets overlook Intermodal volumes still weak (down 7% yoy over the last two months) and truckload price expectations continuing to be negative; in rails, CP Q2 EPS and revs topped views while operating ratio was a second-quarter record 58.4%, a 580 bps improvement YoY/said saw revenue growth across every line of business

·     Metals & Materials; iron ore prices (and stocks CLF) jumped to 5-year highs overnight in China amid tight global supply and record steel output in China (follows recent dam disaster at VALE in Brazil and bad weather curtailing shipments); FCX was upgraded to equal-weight at Barclay’s; RIO said the estimated cost of its giant Oyu Tolgoi copper and gold mine in Mongolia could blow out by $1.9B and the project may be delayed by as much as two and a half years

·     Materials; SON was downgraded to underperform at BMO Capital as the stock is trading on the higher-end of its historical valuation while also expresses concern about cyclical easing; BERY was resumed at Overweight at JPMorgan after period of restriction and added to focus list saying it should post solid earnings and FCF growth over the next couple of years; paper & packaging stocks (SEE, IP ) rebound after recent weakness as analysts have taken down estimates and ratings due to worsening fundamentals in containerboard, pulp and uncoated freesheet (note paper industry data points expected tomorrow that may move needle for stocks)

 

Technology, Media & Telecom

·     Internet; GOOGL shares active after President Donald Trump said his administration will take a look at accusations that Google has worked with the Chinese government (follows Peter Thiel treason accusations made yesterday); FB estimates raised at Deutsche Bank largely modeling 4Q top line to re-accelerate revenue to 27% ex-FX in 4Q (from 25.5% in 3Q) and our view that easing comps, and improving checks around the Stories ad unit performance and pricing can expand; BABA announced a one-for-eight stock; GRUB slid after MCD announced partnering w/DoorDash in test market with Houston

·     Semiconductors and Software movers; semi’s slide as the Philly semi index (SOX) drops below the 1,500 level on the Trump/China comments (July hi’s 1,531.37 on 7/1); QTT slips after saying it will temporarily suspend content updates and certain commercial activities on Midu Novels/the suspension starts today and ends on October 15; EA lost the rights to Juventus for the latest installment of its popular FIFA franchise

·     Hardware & Electrical Component news; ARW shares fell after guiding Q2 adjusted EPS $1.50-$1.62 on revs $7.30B, below est. $1.96/$7.61B in revs and said to wind-down PC and Mobility Asset disposition business as initiates $130M expense reduction program; ROKU shares traded to new all-time highs rising more than 8% late day

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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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