Tuesday, November 14, 17
Equity Market Recap
· Major U.S. averages end the day down, but again closing well off its earlier session lows (S&P 500 recouped most of an opening loss of 0.7%), with a fairly broad sell-off highlighted by energy and biotech related weakness. Energy declined as WTI dropped nearly 2% after softer China data and as the International Energy Agency report suggests the 2018 supply/demand balance won’t be as tight as some traders had hoped. In economic data, the PPI for October came in higher than expected, yet the big inflation news comes tomorrow with the release of the CPI. Bond performance for a second session was split with the 10-year rallying and the two-year note sliding (lifting yields around 1.69%, highest since 2009). There were several headlines pertaining to the tax bill from Gary Cohn and Steve Mnuchin (few headlines below) as well as the general economy with the ECB conference ongoing (Yellen, Draghi, Kuroda speaking) as macro remains the key driver for markets with the bulk of earnings season behind us. Dow component GE slid further after its plans to address company weaknesses were not received favorably by the market. Despite the market reaction, major U.S. averages remain around 1% from their all-time closing best levels as optimism remains strong in stocks. Retail earnings were mixed with TJX, DKS sliding on results while Dow component HD pares gains despite beat and raise quarter. European stocks drop for a sixth session in a row Tuesday, hurt as the euro leaps to a three-week high on the back of stronger-than-expected economic growth figures from the EuroZone, while miners slump on worries about growth in China.
· Producer Prices for October rose 0.4%, above the 0.1% estimate, while core prices (ex food and energy also jumped 0.4% vs. est. 0.2%; final demand rose 2.8% y/y vs. est. up 2.4%
· Sentiment among small-business owners rose in October as the promise of tax reform buoyed expectations for sales and growth. The optimism tracker from the National Federation of Independent Business rose to 103.8 from 103, vs. est. of 105
· Household debt rose by $116 billion, or 0.9%, to $12.96 trillion in the third quarter, the New York Fed said Tuesday. Credit-card debt rose by 3.1% while home equity lines of credit, or HELOC, balances fell by 0.9%. There were small gains in mortgage, student and auto debt
· Energy futures end sharply lower, falling $1.06, or 1.9% to settle at $55.70 per barrel after touching more than 2-year highs just over a week ago. Prices weakened after the International Energy Agency cut its global oil-demand forecasts, offsetting a more bullish outlook from OPEC released a day earlier. The EIA report cut its crude-demand outlook by 100,000 barrels a day for 2017 and 2018. Natural gas prices dropped around 2% to $3.106 mln btus also hurt gas leveraged names. The final piece of news that weighed on commodity prices was China data overnight as China’s industrial output expanded 6.2% YoY in October, slowing from September and below analyst expectations. Note both crude benchmarks hit 28-month highs early last week
· Gold prices ended higher Tuesday for a second-consecutive session, buoyed by a weaker dollar, which pushed the ICE U.S. Dollar Index to its lowest level in nearly three weeks. The dollar index (DXY) declined around -0.7% as the euro rallied on the back of strong German economic data. December gold rose $4, or 0.3%, to settle at $1,282.90 an ounce.
Currencies & Bond Markets
· The dollar index (DXY) fell to its lowest level in almost three weeks as uncertainty over the outlook for U.S. tax reform weighed on the greenback. European stock indexes slipped with the regional benchmark posting its sixth straight loss, as the euro hit its highest level in three weeks on the back of stronger-than-expected German economic growth figures. The euro climbed above $1.1800 at one point against the dollar, up over 1% for the first time since Oct. 26
· Treasury markets gain slightly as yields dip; however, the short-dated Treasury yields hold steady after jumping Monday on rising rate hike expectations by the FOMC in December even in the absence of stronger inflation numbers; the two-year note inched higher to above 1.69%, its highest since Oct. 20. 2008, though the 10-yr note yield was down slightly at 2.38%
Other Interesting headlines
· The White House is considering Mohamed El-Erian of Allianz for the vice chairman’s position at the Federal Reserve, according to a Dow Jones report.
· As for tax policy, Treasury Secretary Steven Mnuchin late Monday ruled out any increase in the corporate tax rate to above 20% in an interview at The Wall Street Journal CEO Council event. “It’s not going up,” Mnuchin said.
· A bill to improve U.S. roads, bridges and waterways is next on President Donald Trump’s agenda after the push for tax reform, White House National Economic Council Director Gary Cohn said Tuesday. Speaking at The Wall Street Journal CEO Council meeting in Washington, Cohn predicted an infrastructure package would have “pretty broad bipartisan support.” He said “it is the very next thing on our agenda.”
· Gary Cohn said he was confident the House of Representatives would pass its tax bill this week, and assumed the Senate Finance Committee would complete work on its own bill this week
· Republican senators are strongly considering adding a repeal of Obamacare’s individual insurance mandate to an updated version of their tax bill, Politico reported Tuesday
Sector News Breakdown
· Retailers; few highlighted earnings results, with auto retailers getting a boost after AAP posted an EPS beat and reaffirmed year outlook, helped by cost cutting; TJX fell as Q3 revs and comp sales miss estimates and year guidance below estimates; in sporting goods, DKS shares fell despite quarterly beat as said 2019 EPS is expected to decline by as much as 20% from the $2.92-$3.04 adj. EPS it expects for the current year; Goldman Sachs Initiates on: DLTR buy $106 PT, DG neutral $89 PT, KR neutral $22 PT, SFM sell $18 PT, SVU sell $14 PT
· Consumer Staples; KO was upgraded to outperform at Wells Fargo with $51 target; in food, group trades higher post Nielsen data, as RBC noted GIS, CAG remain the top sequential improvement stories with sales in the latest 12 weeks up 0.1% and down 0.7%, respectively, versus down 3.6% and down 4.3% in August
· Restaurants; BWLD soars on reports it received a takeover bid valued at more than $2.3 billion from private-equity firm Roark Capital Group, according to people familiar with the matter; Roark made an offer of more than $150 a share in recent weeks https://goo.gl/ZXL9gq
· Housing & Building Products; sector gets a good earnings and guidance result from HD, helped by the hurricane effects during the quarter; HD said it estimates that hurricane-related sales aided comp. sales growth by ~$282M; in 3Q, but that gross margin on these hurricane-related sales was “considerably less than” its avg; LOW, BLD, LL, FBHS, MAS, DOOR, among those leveraged to HD; Lumber prices at a 23-year high can’t be good for homebuilder stocks which have been surging
· Energy stocks were among the top market decliners following a sharp decline in natural gas prices and after the IEA cut its crude-demand outlook by 100,000 barrels a day for 2017 and 2018. However, on Monday, OPEC raised its forecast for oil demand this year and in 2018.
· Natural gas prices slumped (weighing on RRC, NFX) as an early cold snap has limited gains in gas stockpiles and may bring the earliest withdrawal since 2014, leaving inventories below normal before the winter, when consumption of the fuel peaks. Note that gas futures surged over 8% during the report week…but slid over 1% to settle at $3.167 per million Btu on Monday, declining from a five-month high…prices fell further today.
· Refiners active after Barclay’s upgraded PBF to overweight and CVRR to equal-weight while downgrading PSX to underweight and replaced ANDV with HFC as Top Pick and also raised price targets by an average of 20%saying the sector’s strong operating and financial momentum, as well as the companies’ continuing generous cash return, could push share performance; Morgan Stanley downgraded RES to underweight from as sees better opportunities elsewhere, and upgraded CJ to overweight citing recent underperformance; in services; BHGE shares fell in part with GE weakness though SunTrust analyst said sees “interesting long-term potential” in the company but do not expect it to be realized soon due in part to “merger-related disruptions.”
· Large Cap Pharma/Biotech was another pocket of market weakness as the IBB (biotech) dropped over 2% at one point before paring losses; MRTX declined after reshuffling its pipeline and stopping development of glesatinib; LOXO shares dropped as announced a deal to develop cancer drugs with Bayer for up to $1.55B in upfront and milestone payments, but shares slide as reduced M&A taken off the table said one analyst; SGYP dropped as BTIG cut its tgt to $7 from $11, to reflect the potential risks associated with the need for additional equity funding by late 2018/early 2019; n other movers; EVHC shares jumped midday after Bloomberg first reported that the health-services provider under pressure from activist investor Starboard Value, has attracted buyout interest from firms Carlyle Group LP and a group including Onex Corp https://goo.gl/KwsMLc
Technology, Media & Telecom
· Tech movers; earnings mostly behind the tech sector, though KLIC rises after Q4 rev beat and guidance $185M-$195M top $164M estimate; AAPL down for a 4th day after supplier Hon Hai Precision Industry Co. Ltd. posted a 39% YoY drop in profit to the equivalent of $695.5 million, well below expectations of roughly $1.2 billion; in 3D stocks, SSYS 3Q EPS beat estimates and it raised full-year forecast (though fell from highs of day); in Telco and Media, ATUS slides after Jana Partners dissolves stake in company according to 13F filing; in research, JD was downgraded at Morgan Stanley after the 63% rise in shares this year; TWX upgraded to buy at Pivotal