Market Review: July 19, 2019

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Closing Recap

Friday, July 19, 2019

Index

Up/Down

%

Last

DJ Industrials

-67.00

0.25%

27,155

S&P 500

-18.43

0.62%

2,976

Nasdaq

-60.75

0.74%

8,146

Russell 2000

-7.81

0.50%

1,547


 

Equity Market Recap

·     U.S. stocks finished the day and week lower, erasing morning gains which were led by earnings strength in tech after Dow component MSFT better results, and increased hopes that the Fed will follow through with an aggressive rate cut at its July 30-31 meeting. But stocks couldn’t hold their gains, sliding into the close as a “clarification” from the New York Fed poured cold water on the theory the Fed is ready to cut rates by 50bps later this month saying Fed Williams dovish comments yesterday were no intended to be a policy signal. The dollar rebounded as a 25 bps cut now seems more likely, while Treasury yields were volatile as well. Oil prices popped late day amid more reports of UK tankers being seized by Iran in the Strait of Hormuz, intensifying tensions. Even a 4% gain in Dow component Boeing on news of its $4.9 billion charge on the grounding of the 737 Max jets meeting some expectations couldn’t push the Dow higher. All three indexes ended slightly lower on the week after touching record highs on Monday. Afternoon declines were led by biotech stocks along with technology and financials. Regarding the debt limit, the White House and House Speaker Nancy Pelosi were set to continue talks over how to pay for a two-year agreement to raise overall spending limits and increase the U.S. government’s borrowing limit, looking to finalize the agreement before the House leaves town next week.

Treasuries

·     Treasuries end lower as yields inch higher on the day, but declined on the week as the yield on the 10-year note rose 3 bps to 2.06% (up 2bps) while the 2-year-note yield climbed to 1.83% from 1.805% earlier, after falling in recent sessions (10-yr off week high of 2.1463% 7/15). Comments from BY Fed President Williams yesterday garnered a lot of attention, saying that central banks must take swift action when faced with adverse economic conditions, which markets interpreted as signaling a 0.5% rate cut in July (as fed fund futures jumped to more than 50% chance for a 50 bps cut). However, the New York Fed Bank overnight backtracked those comments saying Williams didn’t intend to signal any specific policy changes. In recent weeks, Fed policymakers have identified a host of economic concerns, including the prolonged U.S.-China trade war, a global manufacturing slowdown; and inflation below the Fed’s target of 2%.

 

Commodities

·     WTI crude oil prices end the day higher, rising 33c to settle at $55.63 per barrel, getting a boost late day following multiple reports that Iran has seized a U.K.-flagged oil tanker, as the British government said it is urgently seeking further information after Iranian state media said the Revolutionary Guard had captured the tanker. Despite the small pop in prices, oil prices fell more than -7.5% on the week, bouncing off its lowest level in about a month yesterday. Prices were volatile yesterday after the U.S. said it had destroyed an Iranian drone in the Strait of Hormuz.

·     August gold futures slipped -$1.40 to settle at $1,426.70 an ounce, well off earlier highs of $1,454.40 – but still posted a 1% gain on the week – falling from 6-year highs. The move in gold late day appeared to be profit taking after a strong rally since the beginning of June (prices were around $1,275 an ounce) as the Federal Reserve has made an about face/180 from an aggressive rate hike policy last year (raised rates 4-times) to expectations of ultra-easing as a 50 bps point rate cut is on the table at the July meeting. Slowing global growth fears, low inflation and uncertainty pertaining to trade tensions between the U.S. and China have been the reasons several Fed members, including Fed Chairman Powell, have echoed for the change in policy.

 

Currencies

·     The U.S. dollar bounced back from yesterday lows after the New York Federal Reserve walked back dovish comments from its President Williams the prior day, as odds of a 50 bps cut from the FOMC at its July meeting dropped to 25% late day from above 70% yesterday and 41% earlier this morning after the clarification. The euro dropped 0.4% to $1.123, while the safe-haven Japanese yen dropped against the dollar, falling 0.35% after hitting 3-week hi’s yesterday. Overall, the greenback has held up reasonably well as investors bet other central banks also will ease policy. Bitcoin prices were lower, falling around 2% under $10,400 in another volatile week of trading (highs of week $11,074 on 7/15 and lows $9,083 on 9.17 – vs. last week closing level of $11,907) – government/regulatory concerns for FB’s Libra crypto currency has been a key driver.

 

Economic Data

·     University of Michigan Confidence for July-P reported at 98.4 vs. est. 98.8 (after 98.2 prior); while the current economic conditions index fell to 111.1 vs. 111.9 last month and expectations index rose to 90.1 vs. 89.3 MoM

 

 

Macro

Up/Down

Last

WTI Crude

0.33

55.63

Brent

0.54

62.47

Gold

-1.40

1,426.70

EUR/USD

-0.006

1.1217

JPY/USD

0.51

107.80

10-Year Note

0.029

2.053%

 

 

Sector News Breakdown

Consumer

·     Retailers; SKX shares jumped after Q2 tops Q2 profit estimates while Q3 sales and profit forecast was also above expectations as believes international growth remains (sales rose 19.8% int’l) the primary growth driver; direct-to-consumer and domestic wholesale business also expected to grow (it was the company’s first rev beat in three quarters); CHWY posted a better-than-expected forecast after its first earnings as a public company that showed it is continuing to grow at a robust pace, with sales expectations that topped analyst estimates; JCP shares fell on a Reuters report that the retailer has hired advisers to explore debt restructuring options; MIK was downgraded to underperform and tgt cut to $5 at Bank America sending shares lower

·     Consumer Staples & Restaurants; PEP agreed to acquire South Africa’s Pioneer Food Group for $1.7B; WW was upgraded to buy from neutral and raise tgt to $32 from $24.50 at Davidson saying data pointed to improved sentiment and subscriber trends; BUD said it’s selling its Australian subsidiary for A$16 billion ($11.3 billion) just days after scrapping the IPO of its Asia business; POST was upgraded to overweight at Piper given the outlook for its Active Nutrition IPO given better than expected improvement in trends and potential IPO valuation; PM upgraded at Barclays; RRGB shares jumped after Vintage Capital, which holds an 11.6% stake, proposed to acquire the restaurant chain at $40 per share https://on.mktw.net/2LZ0Ahe

·     Housing & Building Products; in home furnishing, PIR shares rose after naming a new president and CFO announces creation of new office of CEO to be led by Cheryl Bachelder, interim CEO in large mgmt shake-up; Wayfair (W) was defended at Piper following the ~6% pullback in shares on the management transition announcement and said they view this pullback as a good buying opportunity ahead of the Q2 print

·     Autos; ALV lowered its year adjusted operating margin to 9-9.5% (was around 10.5%), sees FY org sales +1-3% (was +5%) due to auto production cuts in China, but analysts say the forecast cut was widely expected by investors; ATHM was downgraded to hold at Benchmark as sees continued weakness in auto sales – evidenced by recent Q2 data, which is likely to result in reduced OEM ad spending across all channels, including ATHM

 

Energy

·     E&P sector; QEP shares fell after the NY Post reported that Elliott Management cut the price of its takeover bid for the company, throwing the $2B deal into doubt https://nyp.st/2O55xrs ; RRC shares rose after sells $634M in Appalachia assets which will reduce total debt by 17%, and it will have cut debt by $1B over the past 12 months; CXO and GPOR shares moved in reaction to pricing updates with CXO natural gas/NGL price realization considerably weaker than expected

·     Oilfield services; first major earnings result as SLB said its CEO will retire after eight years in the role and 22 years with the company, and will step down as chairman of the board, while posted a 14.4% increase in Q2 profit, helped by demand in international markets and maintains view that international E&P investment will grow 7% to 8% in 2019; HAL to report earnings on Monday; the Baker Hughes (BHGE) total rig count fell -4 rigs to 954, with oil rigs down -5 to 779, gas rigs up 2 to 174, and miscellaneous rigs fell -1 to 1

 

Financials

·     Bank movers; good day of results in banking sector as STT shares outperform after Q2 profit, revenue beat estimates, while raising its target for job cuts to 2,300 by year end and said Investment Management AUM as of quarter-end increased 7% driven by higher equity markets and growth from institutional and ETF inflows; RF posted in-line Q2 EPS of 39c with net interest income and other financing income $942M, down 0.6% qoq and NIM of 3.45% falling from 3.53% in Q1 and 3.49% YoY; CFG shares rise after better Q2 profit, topping estimates as Q2 mortgage banking fees more than double to $62M and capital market fees rose ~19%

·     Brokers & Asset manager BLK earnings missed that average analyst estimates, reflecting lower operating income and a higher effective tax rate; ETFC shares active after the online broker reported earnings and revenue that were mixed with lots of noise

·     Insurance; AIG was upgraded to outperform at William Blair saying current management has laid ground work for a long-term rebound with significant repositioning and shift in underwriting strategy; Buckingham Research downgraded ACGL and TRV while upgraded AXS to buy as they urged investors to review valuations as we head into 2Q19 earnings, as several stocks in the insurance/reinsurance space are already reflecting any potential for margin improvement, with many stocks up high DD% YTD

·     Consumer finance and lending; mixed after earnings: AXP reported Q2 profit that topped estimates, fueled by higher spending though total expenses rise 9.2% YoY and the company said it expects operating expenses to rise more this year compared to recent years as AXP drives revenue growth; COF shares rallied after posting Q2 adjusted EPS of $3.37 handily topped estimates of $2.86 while provision for credit losses rose 5.2% YoY to $1.34B and NIM rises to 6.80% vs. 6.66% YoY, and net interest income $5.75B up 3.5% YoY; SYF Q2 EPS topped consensus by a narrow margin while said active accounts up 9% in Q2; ADS starts a "modified Dutch auction" tender offer to buy back up to $750M of its outstanding shares

 

Healthcare

·     Pharma & Biotech movers; GILD signed a license deal with NVS for global rights to three preclinical small molecule antiviral programs, where GILD will pay NVS an undisclosed upfront payment, up to $291M in milestones and royalties on net sales; AMRN 22.222M share Secondary priced at $18.00. In healthcare services and providers; CMNC reported AMZN threatens to sue major pharmacy if it prevents PillPack from accessing patient drug data; HIIQ and EHTH shares were active after a judge rejects Trump challenge to non ACA compliant healthcare plans

 

Industrials & Materials

·     Industrial & Machinery; in E&C sector, Cowen upgraded KBR to outperform given abating overhangs, strong sales/EPS growth, an extreme SOTP discount, and improving balance sheet flexibility; EXPO shares hit record high after the company raises FY revenue and Ebitda margin outlook; in machinery, Reuters reported CMI shares rallied after Reuters reported midday it has made an indicative offer for Volkswagen’s MAN Energy Solutions unit

·     Transports; KSU the latest railroad to report earnings Q2 revs of $714M topped estimates on better earnings with operating ratio of 70.9% – sees volume growth flat to slightly down in 2019 and sees earnings per share low to mid-teens CAGR 2019 – 2021; in trucking, MRTN reported Q2:19 results that exceeded estimates on both the top and bottom line – the highest operating revenue and operating income for any quarter in the company’s history

·     Metals movers; big strength early in metals with copper, aluminum and streel stocks rising; CLF posted Q2 results that beat estimates, with record high Q2 sales volumes of 6.23M long tons, up 4.3% Y/Y, and a six-year high average pellet realization of $113/lt and maintained its full-year sales and production volume expectation of 20M long tons; AA was downgraded by both Jefferies and Argus post earnings yesterday saying the stock is inexpensive on some metrics following Q2 results but that alone is not reason enough to buy

·     Aerospace & Defense; Dow component BA announced a $4.9 billion charge on the grounding of the 737 Max jets which met some expectations on the Street/ guidance assumes the 737-MAX will return to service in early Q4:19 (shares of suppliers also rise in sympathy (SPR)

 

Technology, Media & Telecom

·     Software movers; Dow component MSFT reported all revenue segments, operating profit, and EPS near the high end of guidance and above consensus ests, driven by strong execution and robust demand across the entire portfolio/ IC’s 19% growth (21% constant currency) in the quarter was driven primarily by Azure, which grew 64% (68% CC); in video games, Piper noted NPD video game sales data is down 13% for the full June quarter and said believe June quarter NPD results are positive for TTWO and less positive for EA MDLA 15.5M share IPO price $21.00; PAYC was downgraded to hold at Jefferies based on valuation not a call on fundamentals

·     Internet Security; CRWD price target was raised by several analyst following strong earnings results, as reported Q1 revenue of $96.1M, slightly exceeding expectations by 0.5%, billings of $121.2M exceeded expectations of $119.5M and operating margin of -22.8% was slightly ahead of consensus and better guidance; for PFPT Wedbush said channel checks are anecdotal but point to strong YTD demand trends for PFPT within select North American territories.

·     Internet; GRUB was initiated with a buy at Benchmark and $95 tgt saying although shares have rebounded ~25% from recent lows, the stock remains down almost 50% from its 52 week high due to multiple compression from perceived threat of increasing competition, and expects it to remain one of the winners in online food delivery space; NFLX added to yesterday losses, falling over 2%, down a 7th straight session (dropped over 10% yesterday on subscriber miss)

·     Media & Telecom movers; MSGN was downgraded to underweight from neutral at JPMorgan and cut tgt to $19 from $23 ahead of a challenging period for video subs; NWSA also downgraded to underweight at JPM saying while the stock may appear attractively valued, they have little conviction in our forward estimate amid challenges persisting in the News and Information Services and Subscription Video Services divisions; GCI is in advanced talks to combine with GateHouse Media, Dow Jones reported, saying a deal could be announced in next few weeks https://on.wsj.com/32xpvy8

·     Hardware & Component news; ZBRA shares dropped sharply yesterday, Needham this morning part of move likely due to HON results as its Productivity Solutions business, which has overlap with ZBRA, declined 6% (and 7% organically) in Q2, with mgmt citing weakness in its short-cycle productivity products business; IIN lowers FY19 revenue outlook to $115M-$117.5M from $128M-$133M saying the reduced guidance primarily reflects lower order volume related to its largest customer’s on-going global commercial product launch to continue through at least Q3

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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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