Equity Market Recap
· U.S. stocks hold up very well despite a strong rally in Treasuries (yields touched lowest of 2017), as Fed rate hike odds crumble amid growing concerns about another North Korea ballistic missile test and the potential for several tens of billions dollars in hurricane damages as Irma comes baring down on the Caribbean, with Florida in its path this weekend. Strength in Healthcare, Utilities and Tech helped offset the big losses in Banks and Insurers. The euro jumped and dollar sank after ECB President Mario Draghi indicated the central bank will continue its stimulus measures after leaving interest rates unchanged.
· The combination of the soft weekly jobless claims today, the worsening trajectory of Hurricane Irma, markets dealing with the new December fiscal deadlines (after yesterday’s extension), and Fed uncertainty (after Fisher announced resignation yesterday and Yellen up for renewal in February) – not to mention the North Korea has not gone away – bonds have strengthened and the dollar has dropped, though stocks continue to remain in holding pattern near record highs.
· Hurricane Irma approaches landfall in Florida this weekend: Hurricane Irma expected landfall times (as per CNBC): tonight Turks & Caicos, Friday Southern Bahamas, Saturday Central Bahamas, Sunday/Monday Florida, Monday/Tuesday N. Florida, Georgia and South Carolina. The storm may have the potential to slow the U.S. economy enough to prevent the Federal Reserve from raising rates again this year, with estimates rising if the trajectory remains the same.
· Stocks/sector movers: the media sector got hit late morning after Dow component DIS essentially guided down numbers for 2017, while CMCSA had cautious comments as well; Dow component GE was also lower after JPM analyst said in note today he now views $24 per share as a ceiling as opposed to a floor prior; healthcare sector outperformed following positive data points for BMY, ABBV; after making multi-month highs and looking like they might be able to jump start their post-Trump election rally, the banks and insurers have dropped over 8% in a month as bond yields have tanked to 10-month lows and concerns of impact from hurricanes. Lots of uncertainty, but overall stock markets remain strong.
· Weekly Jobless Claims soared 62K to 298K, well above estimates for 245K, following the aftermath from Hurricane Harvey leaving many unable to work and boosting new applications for unemployment benefits to the highest level in more than two years; the 4-week moving avg. stood at 250.25K, up 13,500, while overall prior week claims unrevised from 236K; continuing claims fell 5K to 1.940M in the week ending Aug. 26
· Nonfarm productivity for Q2 increased at a 1.5% annual pace in the spring (vs. est. 1.3%), up from an initial 0.9% estimate, while Unit labor costs rose 0.2% in 2Q (vs. est. 0.3%) and below up 0.6% preliminary; output rose 4% in 2Q vs. up 3.4% preliminary
· Oil prices ended lower, but rebounded off the lows to settle at $49.09 per barrel, down only 7c (high $49.33 and low $48.63) amid mixed weekly inventory data. EIA data showed U.S. crude supplies climbed by 4.58M barrels last week, the first build since June, while gasoline inventories declined as one-week average consumption fell by 6.94% to 9.163M barrels a day. Texas refineries restarting following Hurricane Harvey as refiners in Corpus Christi, Texas, including Valero, Citgo and Flint Hills have restarted key fuel-making plants
· Gold prices jumped $11.30, or 0.8% to settle at $1,350.30 an ounce, its highest closing total in a year as another decline in the dollar boosted demand for commodity prices. Today’s weaker economic data (jobless claims) in the wake of the hurricanes, raises expectations the FOMC will keep rates unchanged the remainder of the year. Elsewhere in metals trading, silver for December delivery rose 20.6c or 1.2%, to $18.116 an ounce, the highest since April 19. Copper pulled back but remained near a three-year high at $3.144 a pound
Currencies & Bonds
· The U.S. dollar was slammed on the day, falling sharply s. most counterparts; the euro rallied to an intraday high of $1.2059 after the ECB press conference (52-week high 1.207 on 8/29) – last time above those levels January 2015), as Draghi was seen as putting more emphasis on the economic recovery than on the recent strengthening exchange rate (the euro is up around 14% this year vs. the dollar). The dollar index (DXY) touched lows of 91.40, ending lower by about -0.7%. The dollar fell to an intraday low of 108.05 vs. the Japanese yen (a new 2017 low), while the dollar fell to a fresh 2-year low vs. the Canadian loonie of 1.2119.Bonds jumped while yields traded to the lowest levels since November before slightly rebounding; the 10-year yield slid under 2.05%, a new low for 2017. Lower chances of a rate hike this year from the Fed given Hurricane devastation to economy and mixed economic data helping bonds.
European Central Bank Meeting Results
· The ECB left key interest rates unchanged, while ECB President Mario Draghi indicated that the decision on how to taper the quantitative-easing program will come in October. Overall, rates were left unchanged and expected to remain at present levels for “extended period” and beyond the end of the ECB’s bond-buying program. Asset buying to continue at a 60 billion euros a month through year-end or beyond and said QE could be ramped up if the outlook deteriorates.
Sector News Breakdown
· Retailers; group mostly lower today after strength yesterday; URBN filed its 10Q, noting its retail comp quarter to date is running low-single-digits (in line with expectations), though when reporting Q2, mgmt noted August Anthropologie comps were running slightly ahead of Q2’s -4%; sporting goods retailer CAB jumps after the Federal Reserve approved the sale of the company’s credit-card unit to SNV; DEST with Q2 EPS loss and announces CEO transition plan; book retailer BKS falls on larger Q1 EPS loss and sales miss of $853M (est. $872M)
· Restaurants; QSR was upgraded to outperform at Credit Suisse and increased its price target to $74 from $60 saying shares are undervalued and don’t fully capture above average unit growth, improving cost of capital, low tax rate, and low capex; BBRG andFRGI were both downgraded to underweight at Piper citing weakening industry trends; impact to restaurants could loom large given the path for Hurricane Irma as it approaches Florida this weekend
· Housing & Building Products; home furnishing stocks got a boost after RH reported strong second quarter results and boosting year guidance as sees the transformation of its business model and its supply chain redesign driving continued growth in 2017 and beyond (shares of other home-goods retailers: BBBY, ETH, HOME, W, PIR were active); JELD received its third analyst upgrade (Bank America today after GS and JPM yesterday) in as many days; BLDR 13.48M share Spot Secondary priced at $16.30; LEG cuts year EPS view while reaffirms year sales outlook
· Casino, Lodging & Leisure; boating companies have been active given the Hurricane impact (MBUU said today it is “bullish on expectations” for 2018 (BC and MCFT other boat designers); B Riley said given storms, short-term boat sales will be disrupted, but medium-term delayed and replacement demand likely to see increase; MGP 11.5M share Secondary priced at $30.60
· Consumer Staples; Reuters reported that GNC is said not to consider sales of whole company and is seeking a partner to boost sales in China; NOMD 33.33M share Secondary priced at $14.30; 52-week highs for Dow component PG; grocer KR reports earnings tomorrow
· Auto movers; RACE double-downgrade to underweight at Morgan Stanley on valuation concerns, emerging competitive threats from McLaren, Aston Martin, and Lamborghini and risk to the brand from a potential entry into the SUV market; rental car industry raised to neutral from cautious at Goldman Sachs citing expected benefits to both revenue and costs (between CARand HTZ, still sees downside risk at HTZ); GPI was upgraded to neutral from sell at Goldman
· Energy sector was mixed amid inventory data and as markets continue to assess the economic damage from Hurricane Harvey. Regarding inventory data: The API reported that U.S. crude supplies rose 2.8M barrels for the week, but gasoline stockpiles fell by -2.5M barrels; data also showed that inventories of distillates edged down by -603,000 barrels. The EIA crude data was mostly in-line, with a weekly build of 4.58M barrels (est. 4M), while gasoline stockpiles fell a smaller than expected -3,2M vs. est. -5M and distillates fell -1,396M. Gasoline demand plunged. One-week average consumption fell by 6.9% to 9.163M barrels a day, the lowest since April 28
· In stock news; CRZO was downgraded to neutral at Mizuho and slashed tgt by 47% to $17 from $32 amid near-term uncertainties, less clear visibility on deleveraging, unlikely outperformance relative to other small-cap E&Ps; AM 10M share Spot Secondary priced at $31.45; FTK reports that its direct facilities suffered minimal-to-no damage on its critical infrastructure
· Utilities jump today with the UTY up 0.7% around 693 level (record high on 8/29 of 697.43) -52-week highs XEL; sector gets a boost on lower yields making dividend paying sectors (such as utilities) more attractive
· Large Cap banks/regional banks under pressure again, falling as bonds gain and yields reverse lower, hitting regionals early (CMA, RF); reinsurers (XL, RNR, RE) continue to be among biggest losers given the path of Hurricane Irma and the potential economic impact; JMP Securities noted AMSF and PRA have little-to-no exposure to Harvey or Irma and offer attractive buying opportunities; UVE, FNHC, HRTG and HCI shares have been hammered on Hurricanes
· Consumer finance; MA hosted analyst day today and raised its 2017 revenue outlook as now targets 2017 revenue growth in the “high end of low double-digits” percentage range, up from previous guidance of “low double-digits.” (stocks traded at new all-time high); shares of Dow component Visa (V) also at 52-week highs today on MA
· Pharma/Managed Care; BMY rises, said the FDA has placed a partial clinical hold suspending patient recruitment in three studies of Opdivo (nivolumab) combinations in multiple myeloma: CheckMate-602, CheckMate-039 and CA204142 after determining that the risk of PD-1/PD-L1 treatment [MRK) KEYTRUDA (pembrolizumab) may not be worth the risk. In a positive for BMY, results from a Phase 3 clinical trial, CheckMate-214 as study met its co-primary endpoint of demonstrating superior overall survival (OS) compared to sunitinib (PFE drug) and secondary endpoint as well; ITCI shares active after announces positive topline data from safety switching study w/Lumateperone in patients w/Schizophrenia; LLY to cut about 3,500 jobs/sees 80c charge
· Biotech movers; ALNY shares dropped after providing update on fitusiran and givosiran investigational RNAi therapeutic programs, suspending dosing on all fitusiran studies due to a patient death with hemophilia A without inhibitors; INSM 12.281M share Secondary priced at $28.50; U.S. drug regulators halted CELG’s studies of its immunotherapy drugs, which were being tested in combination with AZN’s Imfinzi therapy, on types of blood cancer following reports of deaths in MRK trials of a similar therapy; REGN falls after ABBV’s Upadacitinib met its primary endpoint in a Phase 2b study in adult patients with moderate to severe atopic dermatitis; NLNK rises after updated data from an ongoing Phase 2 study of its indoximod in combination with Merck’s Keytruda showed a 20% improvement in complete response rate vs 12% prior
· Medical devices & equipment and services; DXCM and FIT announced a collaboration to develop and market products to help people better manage their diabetes and get a more complete picture of their overall health with easy-to-use mobile tools; shares of CERN outperformed; hospitals little rebound after weakness related to disruptions due to hurricanes (UHS, THC)
Industrials & Materials
· Industrial and Multi-industry; Dow component GE shares fell after JP Morgan reiterated its underweight rating and cut tgt to $22 saying outlook worse than thought; generator maker GNRC upgraded to neutral at Bank America pending more details of Hurricane damage and into today’s investor day; FAST net sales grew 12.8% compared to last year to $411.49M in August. Daily sales of $17.89M were up 12.8% as well; ABM falls after mixed Q3 results (EPS miss/revs beat) and removed outlook
· Paper & Packaging; the group remains active due to Hurricane Harvey; CLX and other names fell yesterday after NWL reduced forecast saying that Hurricane Harvey caused nearly all of NWL’s resin suppliers with facilities in Texas, Louisiana to declare force majeure- shares of packaging companies such as SON, BMS, BERY, SEE were active on this as well; SEE was downgraded to neutral at Citigroup saying while they expected Hurricane Harvey to impact near-term resin prices, was surprised at the expected duration of PE price inflation
Technology, Media & Telecom
· Software movers; FEYE upgraded to overweight at Morgan Stanley and raises tgt to $19 stating that the firm’s customer survey suggests the adoption potential for the company’s new Helix solution is significantly higher than consensus assumes; SEACreported mixed Jul results w/ rev miss but EPS beat and mixed guidance; DSGX Q2 EPS misses lowest Street estimate on revs beat; GWRE rises early to 52-week highs after earnings and guidance beat
· Hardware and equipment movers; GPRO rises as said it sees 3Q revenue and gross margin at high end of forecast ranges of $290M-$310M and 36%-38%; AAPL slipped midday after the WSJ reported the new iPhone is said to have seen production glitches
· Internet, Media & Telecom; DIS shares fell after CEO Iger said that year EPS to be roughly in-line with FY16 (which was $5.72 vs. est. $5.90 for 2017); DIS also said direct to consumer app to debut in late 2019 (NFLX shares moved on headlines); Despegar.com (DESP) sets IPO terms as will offer 12.77M shares at $23 to $26 a share; CMCSA said at investor conference that this quarter was “most competitive in recent memory” and said expects to lose 100K-150K video subscribers, though said will hit financial numbers this quarter; VZ raised its dividend; SNAP and TWTR shares jumped after DIS says M&A likely to continue
· Movie Theater stocks dropped again as FOXA Film CEO Stacey Snider said at the Bank America Conference that premium video on demand will take effect in 6-12 months. Snider says that premium video on demand talks are “starting to coalesce” and the movies will cost less than $50 (shares of AMC, RGC, CNK, NCMI, IMAX dropped)
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.