Market Review: October 2, 2017

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Closing Recap
Monday, October 2, 17
Equity Market Recap
·      U.S. stocks breaking records on a daily basis, with another +100 points plus performance for the Dow Industrials, up a 4thconsecutive day to a new all-time high, while the S&P 500, Nasdaq Comp and Russell 2000 also traded to new highs. The reflation trade remains the key driver for this market, on hopes the tax reform policy being put in place by the Trump administration drives future growth. Strong ISM manufacturing data that included a higher prices-paid component, helped boost industrials early, as the main index jumped to a reading of 60.8, topping consensus and marked the highest level since 2004. The Dow Transport sector falls for the first time in nine days, slipping from record highs reached Friday amid a pullback in rail stocks after cautious analyst comments. Technology shares were mixed, with the semiconductor index (SOX) touching a fresh 17-year high before paring gains, as INTC outperforms, rising a 5th straight day to its best levels since 2000. Healthcare and Biotech stock outperform, with broad strength in the sector. The U.S. dollar near strongest level since July as markets bet Kevin Warsh, a former Federal Reserve governor, would be Trump’s next choice as Fed chairman (reports last week met with Trump).Commodity prices slide with declines in oil and gold.
·      The story of the day came from Las Vegas, where a gunman identified as 64-year-old Stephen Paddock from Mesquite, Nevada opened fire on a crowd at a country-music concert in Las Vegas on Sunday evening, killing 58 and injuring over 500 in the largest mass shooting in U.S. history. No safe haven buying early despite the domestic terror incident today as gold prices remain under pressure, while bonds were little changed after falling over the last 2-weeks on increased FOMC interest rate hike expectations following Fed commentary and improving US data. In Asia, China and Hong Kong were closed for National Day celebrations (China closed all week). In Europe, Germany’s DAX 30 index posted an all-time closing high after the euro dropped following the chaotic independence referendum in Catalonia. The Dax ended 0.6% higher at 12,902.65, taking out its previous record close set on June 19.

Economic Data
·      September Manufacturing PMI 53.1 vs. Flash Reading 53 and up from 52.8 in August and above the year ago 51.5; said employment rises to 54.3 vs 53.1 in August and highest reading since Dec. 2016 while input prices rise vs prior month to best level since Dec. 2012
·      Construction Spending for August rose 0.5% vs. est. up 0.4% while July was downwardly revised to (-1.2%) from (-0.6%) though June revised to (-0.8%) from (-1.4%); private construction rose 0.4% in Aug while private residential construction rose 0.4%
·      ISM Manufacturing for September rises to 60.8, above est. of 58.1 and vs. 58.8 last month; segment breakdown: new orders rose to 64.6 vs 60.3, employment rose to 60.3 vs 59.9, inventories fell to 52.5 vs 55.5, prices paid rose to 71.5 vs 62.0
·      Crude falls; WTI crude oil prices for November fell -$1.09, or 2.15, to settle at $50.58 per barrel in a bout of profit taking after posting strong weekly, monthly and quarterly gains last Friday on hopes of additional OPEC output cuts. WTI crude rose about 7.7% for the month and climbed about 10.5% for the quarter.
·      December gold prices declined -$9.00, or 0.7% to end at $1,275.80 an ounce, its lowest finish in nearly 8 weeks as the dollar extends its recent advance with markets weighing the potential success for the recently announced Republican tax-cut proposals as well as expectations for another rate increase by the Fed (gold prices fell -2.7% last month). Another good push for U.S. stocks also dampened demand for the safe haven gold. December silver slid 2.2c, or 0.1%, to $16.654 an ounce
Currencies & Bonds
·      The U.S. dollar ended higher against most counterparts extending last week’s 1% advance for the dollar index (DXY) which had snapped a string of six weekly losses Friday. The dollar index touched an intraday high of 93.65, up about 0.5%, as the euro slipped to 1.1750 following the Spanish riots followings its referendum, while the greenback inched higher vs. the yen and pound. The dollar rally over the last few weeks has largely been supported by hints from the Fed that interest rates will go up in December, and rise a few more times in 2018. Stronger manufacturing data also helped boost the dollar this morning.
·      Bonds end little changed, with the benchmark 10-year ending around 2.33% (Friday’s closing levels) holding in a tight range throughout the session as investors dealt with a strong reading on U.S. manufacturing sentiment survey (ISM) and geopolitical concerns, ranging from a Catalonian independence referendum and the deadliest shooting in modern U.S. history in Las Vegas. The shorter 2-year note yield slipped slightly. All eyes on jobs data later this week.
Sector News Breakdown
·      Retailers; JWN shares slipped after the NY Post reported the company has struggled to put together the financing for a buyout deal and may not be able to close the deal ; ANF upgraded to hold at Argus noting new management has taken the reins and is beginning to turn operations around; FINL downgraded to neutral at Susquehanna; generally, retailers (M, KSS, FL) were under pressure after JWN buyout deal said to be faltering
·      Other consumer names; SCSS upgraded to outperform at Raymond James as believe that its new product introductions are resonating with consumers; gun stocks AOBC and RGR jumped in the wake of what has been described as the deadliest mass shooting in U.S. history in Las Vegas; TSCO downgraded at UBS
·      Consumer Staples; Metro Inc., Canada’s third biggest food retailer, said it would buy pharmacy chain Jean Coutu Group for C$4.5 billion ($3.60B) ; PEP was downgraded to hold at Jefferies and cut tgt to Street-low of $108 from $133 citing slowing trends in North American beverages combined with contracting food multiples; proxy advisory firm ISS announced support of Trian’s Nelson Peltz being granted a seat on PG’s board, to match that of peer Glass Lewis; VSI active after announcing its first digital platform in China
·      Housing & Building Products; USG downgraded to hold at SunTrust as expect to continue to lose share in its ceiling unit near term with new product launches attempting to correct this in 2018; FOR sells ownership interest in 10 malls to QIC as part of a $3.2B deal was upgraded to overweight at Morgan Stanley in tools space; LEN to report earnings tomorrow morning in the homebuilder sector
·      Auto movers; GM shares outperformed after Citigroup said they walked away with even more confidence on GM transformation thesis particularly as it relates to future autonomous mobility and our prior LT GM high-end upside potential case of $134 per share (has street high $53 tgt); B Riley said they reiterate buys on both CARS and TRUE as checks indicate that low price options are not as significant of competitive threat as built into the bear thesis
·      Casino, Lodging & Leisure; Casino stocks fall, led by declines in MGM after a gunman fired shots from an upper floor of MGM’s Mandalay Bay Hotel and Casino in Las Vegas into a crowd of concert goers attending an outdoor country music festival, killing 50 and injuring over 300 (shares of WYNN, LVS also active)
·      Oil prices take a break after surging last month and quarter. Brent oil prices hovered near 26-month highs a week ago according to reports of Turkey’s threat to cut crude exports from Iraq’s Kurdistan region and signs of quicker market rebalancing. Turkish President Tayyip Erdogan repeated a threat to cut off the pipeline that carries 500,000-600,000 b/d of crude from northern Iraq to the Turkish port of Ceyhan, intensifying pressure on the Kurdish autonomous region over its independence referendum. This potential loss, combined with 1.8 million b/d of output reductions by OPEC and non-OPEC producers, raised concerns of tighter supply
·      Refiners, Raymond James noted following strong performance in the aftermath of Hurricane Harvey, refining stocks have enjoyed a round of further gains as potential tax (and RINs) reform has added to the optimism/said while the outlook for refining has clearly improved as strong global demand and the disruption of Harvey has tightened refined product inventories and led to much higher margins (VLO, PBF, MPC)
·      Utilities; SunTrust said based on the latest peer group valuations, they are decreasing price targets on CMS, DUK, GXP, PNW, and XEL; GXP and WR upgraded to Outperform at Wells Fargo as believe shares appear modestly undervalued on our base case and see further upside potential should MO and/or KS become more supportive of new investments over time
·      E&P and other movers; LPI and the Energy & Minerals Group P-E firm agree to sell the Medallion Midland Basin pipeline system to Global Infrastructure Partners for $1.825B plus additional cash consideration; LPI owns 49% of the Medallion system, and EMG owns 51%. RDSA along with partners Eneco Holdings and Mitsubishi Corp., is aiming to sell a stake in two Dutch offshore wind-farm projects that may cost $1.4B to develop, Bloomberg reports
·      Financials fell early but rebounded in the afternoon; large cap banks outperformed late day, as well as a bounce in regional banks after analyst downgrades earlier; following the 11-day winning streak for the KRE (SPDR S&P Regional Bank ETF), Baird downgraded FITB, ZION and RF, while Bank America downgraded CFG and USB to underperform (the KRE rebounded to end high late day).  Baird said to trim banks into strength after stocks have rallied back to post-election highs, even while loan growth is weaker, the yield curve is flatter, and there’s been little progress with Trump’s fiscal agenda; 52-week highs for various financial names as well: ETFC, AXP, MCO, BLK, CME, ICE, UNM, TMK, MMC, CBOE, C, STT, JPM, BRK/B
·      Brokers; Goldman Sachs Group Inc. (GS) is weighing a new trading operation dedicated to bitcoin and other digital currencies, the first blue-chip Wall Street firm preparing to deal directly in this burgeoning yet controversial market, the WSJ reported; IBKR said Daily Average Revenue Trades (DARTS) rose 7% to 696,000 in September, flat with August and ending client equity was $115.7B, up 40% from a year ago
·      Insurance; CB estimates 3Q losses for Hurricane Maria, Mexican quakes, other CAT losses, as much as $310M; GNW said it will take additional steps to win U.S. approval for its $2.7 billion deal with China Oceanwide Holdings Group Co 
·      The Nasdaq Biotech index is outperforming its healthcare peers and rising to its highest level since Dec. 2015, while the Amex Biotech index rises to its highest since August 2015; 52-week highs today for CERN, BSX, ISRG, BMY, MTD, CELG in the healthcare space in the S&P 500
·      Large Cap Pharma; VRX launches $1B private bond sale; ECYT reports phase III ready prostate cancer therapy pact; ZYNEupgraded to overweight at Cantor as positive Phase 2 results of its Fragile X syndrome (FXS) drug were encouraging, given the magnitude of its effect; BHVN shares fall early after trigriluzole fails to beat placebo in Phase 2/3 study in spinocerebellar ataxia;LCI rises as the FDA approves its marketing applications for Lansoprazole Delayed-Release Capsules USP, 15 mg and 30 mg, its generic version of Takeda Pharmaceutical’s Prevacid; ABBV was upgraded to outperform at Leerink; ALNY was upgraded to buy at Goldman Sachs saying patisiran is likely to become the next standard of care for patients with a rare disease known to lead to nerve damage, following recent Phase 3 success
·      Biotech movers; MCRB shares fall as SER-287 in combination with vancomycin daily showed similar clinical response rates as placebo; VBLT said the independent Data Safety Monitoring Committee decided that a late-stage study of ofranergene obadenovec (VB-111) in recurrent glioblastoma (GBM), could continue as planned after data didn’t raise any safety concerns;SRPT upgraded to overweight at Morgan Stanley (tgt to $60) saying survey points to 3Q sales of SRPT’s Duchenne Muscular Dystrophy (DMD) drug coming in ~35% ahead of consensus; BLUE was downgraded to underweight at Morgan Stanley, falling over 10% to 1-month lows; REGN announced two new agreements with the Biomedical Advanced Research and Development Authority (BARDA) to develop treatments for infectious diseases.
Industrials & Materials
·      Transports; the Dow Transport sector falls for the first time in nine days, falling from record highs reached Friday amid a pullback in rail stocks after cautious analyst comments; airlines and truckers also taking a breather after surging the last few weeks (Dow Transports traded all-time high on Friday of 9,934); late day spike for car rental stocks
·      Railroads; TRN tgt raised by several analysts after the company received a favorable outcome in its litigation appeal as the court reversed the original verdict; Morgan Stanley turns cautious on rail stocks, downgrading CSX and UNP to underweight saying the easy comps of 1H17 are over and believe Rail consensus EPS risk is skewed to the downside (also lowering price targets for all the U.S. Class I rails by ~3%, on average and cut estimates
·      Metals & Mining; FCX can continue to export copper concentrate even if negotiations over the company’s permit to operate the Grasberg mine are not resolved this month, an Indonesian mining ministry official; CLF said it acquired US Steel (X) 15% equity interest in the Tilden Mining Company for $105M; Longbow downgraded NUE and STLD to neutral in steel sector citing incremental weakness in surveys and cutting 4Q17 and 2018 estimates for the entire steel group
·      Aerospace & Defense; GD shares could jump to $240 from a recent $206 in the next year according to Barron’s as its popular Gulfstream corporate jets may benefit from a comeback in business flying that’s struggled since the Great Recession
·      Industrial and Machinery; GNRC was upgraded to overweight at KeyBanc saying the company was poised to fully capture the sales and earnings potential generated by Hurricane Irma’s impact; MG was downgraded at Baird on valuation; industrials have benefitted recently from the return to reflation trades, but lifted today on the better ISM data
Technology, Media & Telecom
·      Internet; YELP tgt raised to $50 at Citigroup; BABA reit strong buy at Raymond James but lowering FY18/FY19 EBITA by ~8%/5% to reflect expectations for increased 2H investments across core commerce (also cut tgt to $210 from $220); YY tgt raised to $101 at Bank America saying solid traffic trends and new social features lend confidence going into 3Q; AKAM was upgraded to buy at Guggenheim citing valuation
·      Semiconductors; NVDA tgt raised at SunTrust to $200 on increasingly likely bullish datacenter outcome (follows recent + analyst calls last week); CAVM upgraded to overweight at KeyBanc with $80 price target; Craig Hallum said they like connected car plays including ON, STM and CY heading into earnings as he believes automotive end market demand remains robust; AMAT and TSNpositive mentions in Barron’s; CYBE falls after lowering Q3 revenue estimate to $11.5M-$13M from $13M-$15M prior; INTCtraded to 17-year highs, up a 5th day in a row
·      Software movers; ORCL is holding its OpenWorld conference this week in San Francisco; SNCR shares jump as the company said it’s in active discussions with multiple parties after Siris Capital earlier said it was no longer actively pursuing a transaction was downgraded to market perform at Cowen based on valuation; CTXS upgraded to outperform at Wells Fargo and raise tgt to $95 citing several factors; SPLK downgraded at Morgan Stanley
·      Hardware & Storage; WDC downgraded to neutral at Baird and lowers the price target from $120 to $93 citing ongoing litigation against Toshiba and market conditions that might have less favor for NAND flash pricing next year; STX was upgraded to buy at Craig Hallum
·      Media & Telecom; DIS and cable operator ATUS reached a programming deal that keeps ESPN and other channels on the air as the two companies finalize details on a new contract; LILAK mentioned positively in Barron’s saying shares rally after falling by almost 50% in the past 16 months as the region recovers from hurricanes Maria and Irma; UNIT cut at JP Morgan
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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