Mid-Morning Look: July 11, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Wednesday, July 11, 2018

U.S. stocks appear on track to snap their 4-day winning streak (for the Dow and S&P), falling on renewed trade war fears after the U.S. tacked on an additional $200 billion of Chinese goods up for U.S. tariffs. Metal prices slumped across the board, as concerns grow about the impact of US tariffs on the Chinese economy. Other tariff related sectors moving lower include autos (GM, F), handbags (KORS, TPR), industrials/agriculture (CAT, MMM), semis (NXPI, MU). Transports also hit hard this morning after AAL lowers its Q2 CASM view to 2.5% ex-fuel from prior 3.5% and lowers TRASM Q2 guidance to 1%-3% from prior 1.5%-3.5% view. Oil prices lower early on reports Nigeria production back online, but pared losses after bullish weekly inventory data by the EIA (weekly draw of -12.6M barrels). Currency markets very active as the Canadian dollar rises following the BoC raising rates, Turkish Lira falling as PM talks down rates, and the Euro bounces off lows on ECB rate timing commentary. Trade news overnight certainly impacting global stock markets, with expectations for China to retaliate again vs. the U.S., but the start of quarterly earnings in the next few days likely to garner much attention. Economic data today showed rising inflation (PPI), while wholesale inventory data was stronger.

Treasuries, Currencies and Commodities

· In currency markets, the euro bounced off lows (1.1695) earlier after Reuters reported that policymakers are split over when the ECB might raise interest rates next year, with some officials saying an increase is possible as early as July 2019 and others rule out a move until autumn; the Canadian dollar erased early losses (on tariff fears) after the Bank of Canada raised benchmark overnight interest rate to 1.5% (was expected), while the Turkish Lira falls more than 2% after Erdogan said sees lower rates ahead; the dollar rises vs. the safe haven yen back to 111.25

· Precious metals lower around the $1,250 an ounce level, failing to get lift with defensive rotation in stocks, as trade tariff impact on metals overshadowed

· Energy futures slide initially after U.S. President Donald Trump escalated a trade war with China, heightening fears that global economic growth could be caught in the cross-fire. Also, news that Libya’s state-run National Oil Corp. lifted force majeure on eastern oil ports on Wednesday after the ports were handed back from an armed faction added to glut fears. OPEC also said earlier expects there will be more than enough new oil supply from outside the group to meet extra demand next year, as U.S. shale continues to grow. Oil inventory data was bullish from API and EIA which helped rebound oil prices off the lows

· Treasury market’s rise only slightly as yields remain above its earlier lows following the surge in wholesale sales, which followed hotter PPI (inflation) data earlier and the downdraft in stocks; the 2-year yield above 2.58% from under 2.55% prior, the 10-year neared 2.86% from 2.825% lows and the 30-year held near 2.95% from 2.935% lows

Economic Data

· Producer Price index (PPI) hotter than expected as wholesale cost of goods and services rose in June at the highest yearly rate in almost seven years. The producer price index rose 0.3% June, topping the 0.2% estimate while core prices (ex: food & energy) also rise 0.3% vs. the 0.2% estimate). The 12-month rate of wholesale inflation climbed to 3.4% from 3.1%, marking the highest perch since the waning months of 2011. Core inflation rose 2.8% YoY vs. est. 2.6%

· Wholesale Inventories rose 0.6% in May, topping the 0.5% estimate; May wholesale inventories increased to $633.5B vs $629.9B in prior month, while April inventories unrevised at 0.1%; wholesale sales rose 2.5% in May after rising 1.4% the prior month

Sector Movers Today

· Metals among hardest hit sectors after the U.S. slaps additional $200 billion tariffs on Chinese goods. Nickel, copper are underperforming the group as intensifying trade war increasing investors’ fear that increasing protectionism will hurt global raw-material demand (CENX, AA, FCX, BHP, VALE, X, STLD, CLF among movers)

· Transports; Airlines fade after AAL lowers its Q2 CASM view to 2.5% ex-fuel from prior 3.5% and lowers TRASM Q2 guidance to 1%-3% from prior 1.5%-3.5% view; Wolfe Research lowered estimates and tgts for airlines; BMO Capital positive on rails UNP and CP ahead of earnings and see favorable set-up for CSX and CNI; in truckers, JPMorgan downgraded WERN to underweight saying estimates appear too high in 2019 unless the company can boost rates and productivity while growing the fleet, while upgraded CHRW to neutral noting pullback in shares

· Industrial distributors active after earnings results from MSM and FAST; FAST gross margin performance slightly higher than anticipated and June daily sales accelerating more than expected/said it expects a return to more typical organic growth levels after a couple of quarters; MSM shares slide as it forecast 4Q earnings and sales below analysts’ estimates ($829M-$844M vs. est. $848.7M) after mixed Q3 results (EPS beat/sales miss); comps GWW, WCC active

· Restaurants; DNKN named David Hoffmann CEO and said he will remain president of Dunkin’ Donuts U.S., while Nigel Travis, who became CEO in January 2009, is retiring and will become executive chairman; DPS positive mention by OTR Global saying checks indicate strong demand for leading value deals, continued growth of Rewards; MCD downgraded at Cleveland Research; JACK was added to the best ideas list at Wedbush

· Housing & Building Products; furniture and home product stocks also hit by new tariffs announced, with Goldman Sachs saying shares of WSM, RH, HOME could be hit as all furniture imported from China ($28B) will be covered vs. Goldman economists’ initial expectation of $11B, adding adds that China supplies 65% of furniture imported into U.S

        Stock GAINERS

· DIS +2%; outperforms in media space, top gainer in the Dow

· FAST +8%; as quarterly gross margin performance slightly higher than anticipated and June daily sales accelerating more than expected

· MYGN +14%; upgraded to Overweight at Morgan Stanley after raising estimates by more than 20% given his view that its earnings profile is “dramatically changing; raise tgt to $55

· TRIP +3%; upgraded to overweight at Barclay’s with street high $70 tgt saying they believe fundamentals are starting to turn around

· V +1%; as financials outperform in tough trade fear related tape; trades to fresh 52-week high


· AAL -6%; lowers its Q2 CASM view to 2.5% ex-fuel from prior 3.5% and lowers TRASM Q2 guidance to 1%-3% from prior 1.5%-3.5% view

· ABBV -2%; after an update on a phase 3 study evaluating the addition of ibrutinib to a chemotherapy regimen failed to meet its primary endpoint of improving event-free survival

· AIR -9%; Q4 in line with the co’s preannouncement while all aspects of the FY19 outlook were reaffirmed, but Q4 aviation services revenue growth decelerated sharply

· FUN -6%; reported preliminary net revenues through July 8 fell 2% y/y to ~$563M, on a 3% decline in attendance

· KORS -2%; as well as TPR, M among hardest hit retailers as latest round of tariffs by the US include items such as handbags

· NXPI -3%; after the WSJ reports China is reviewing plans to retaliate against U.S. with additional measures as it doesn’t import enough from the U.S. to match tariffs on a dollar for dollar basis

· TDS -10%; as shares downgraded along with USM by JPMorgan


· Adesto Technologies (IOTA) 6.7M share Secondary priced at $6.00

· Ares Management (ARES) 10M share Block Trade priced at $20.70

· ArQule (ARQL) 11M share Spot Secondary priced at $5.50

· Cousins Properties (CUZ) 8.5M share Block Trade priced at $9.60

· National Storage (NSA) 5.9M share Spot Secondary priced at $30.00

· Saratoga Investment (SAR) 1.15M share Spot Secondary priced at $25.00

· Sempra Energy (SRE) 9.75M share Spot Secondary priced at $113.75


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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