Mid-Morning Look: July 23, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Monday, July 23, 2018


U.S. stocks opened slightly lower to start the week, as markets deal with a fresh round of tweets from President Donald Trump aimed at Iran, which overshadowed positive corporate earnings. The S&P 500 index dropped back below the 2,800 level while the Dow Industrials tests 25,000 to the downside. Treasury prices and the dollar extend last week’s declines, with the yield on the 10-year topping 2.94% and the 30-yr now up about 10 bps from Friday morning. This week marks the busiest of quarterly earnings with some 180 names in the S&P 500 index alone expected to report earnings. So far, 91% of the S&P 500 that have reported (approx. 90 names) have beaten EPS expectations, while 79% have beaten on sales according to RBC. Big names coming this week with GOOGL reporting in the tech space tonight. This morning, financials leading markets higher given the jump in yields, energy prices rise as oil spikes on the Iran/US rhetoric and semi’s lead tech lower after Morgan Stanley comments about potential impact of tariffs on the space. Also several news items in the auto sector, with shares of FCAU, RACE and TSLA lower on the day (see more below).


Overnight, President Donald Trump lashed an all-caps tirade against Iranian President Hassan Rouhani, warning him never to threaten the U.S. — or else. “NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS!” Trump tweeted. Trump’s tweet came hours after Rouhani warned Trump not to pursue a hostile policy toward Iran, saying that “war with Iran is the mother of all wars.”


Treasuries, Currencies and Commodities

· In currency markets, the dollar is mixed, rising slightly vs. the euro but down against the Japanese yen; dollar index holding around the 94.50 level; the dollar also down vs. the British Pound after last week outperformance, while Bitcoin prices up over 4% back around the $7,700 level

· Commodity prices are mixed as gold prices slump over $6, back below $1,225 an ounce, but holding above last week’s 1-year low levels around $1,210 an ounce as volatile currency markets have wreaked havoc on prices over the last few weeks. Crude oil prices outperform given the threats between the US and Iran overnight, raising fears of supply concerns

· Treasury markets slump to start the week, as Treasury yields move higher across the board, with the 10-year topping the 2.94% level, up about 5 bps (best level in weeks), while the 2-yr inches back above 2.6% and the 30-yr yield extends last week’s late rise, jumping to 3.06% (had climbed 5.6 basis points Friday to 3.023%, marking its highest level this month)


Economic Data

· U.S. existing home sales for June declined (-0.6%) to 5.38M, below the 5.4MM estimate and marked a third straight monthly decline, after falling (-0.7%) to 5.41M in May (revised from 5.43M); single family sales declined to 4.76M following May’s slip to 4.79M; months’ supply rose to 4.3 from 4.1 in May; median home price rose 5.2% from last year to $276,900


Sector Movers Today

· Auto sector busy; TSLA falls as has asked some suppliers to return a portion of its payments to them in an attempt by the electric-car maker to turn a profit, the WSJ reported, citing a memo sent to a supplier last week. https://bloom.bg/2mDh804; RACE shares fall as CEO Marchionne steps down following complications from shoulder surgery last month that meant he could not resume his duties; in addition, FCAU’s slides as Alfredo Altavilla is said to step down as head of the company’s European operations following the decision to name Mike Manley as the new CEO; Automotive spinoffs offer exposure to autonomous, electric future according to Barron’s (ALV/VNE and DLPH/APTV); DLPH upgraded to outperform at Oppenheimer as believes fundamentals have not meaningfully deteriorated

· Semiconductors underperform, weighing on the tech heavy Nasdaq Comp after Morgan Stanley said tariff uncertainty could be a risk to demand that leads to an inventory unwind and a correction in the semiconductor stocks/said expects fundamentals for the quarter to be OK after a recent survey suggested strong business conditions, “but recent tariffs increase the risk of Analog/MCU stock underperformance in 2H (MU, NXPI, NVDA, KLAC shares fall)

· Internet; GOOGL kicks off earnings for tech this week, reporting after the close; BABA and TCEHY are involved in talks to buy a minority stake in WPP’s Chinese unit, according to Reuters, citing Sky News. Companies are said to be in early stage discussions about buying about 20% of WPP China in a deal that would value the business between $2B-$2.5B https://reut.rs/2A6RLgK ; SPOT rated new buy and street high $230 tgt at BTIG; AMZN shares slipped after Trump tweets about the company’s deal with the post office; BIDU downgraded at OTR Global

· Banks and other financials among the top gainers today as bonds slide and Treasury yields increase to best level in a few weeks, with the 10-year yield above 2.92%; bulk of large cap bank and regional earnings now behind us, with mostly mixed results

· Hospital providers; LPNT to be acquired by private equity firm APO in a deal valued at $5.6 billion, including debt, paying $65 per share in cash (1 35% premium to Friday close) https://reut.rs/2uXekiq (shares of CYH, UHS, HCAalso active on news); THC tgt raised to Street high $44 (from $37) at Citigroup noting heightened expectations, particularly around a potential Conifer sale, but believe there is an underappreciation for additional upside within the hospital segment citing margin improvement

       Stock GAINERS

· CLF +6%; upgraded to overweight and tgt raised to $15 at JPMorgan given the strong, steady performance of CLF’s core remaining asset USIO among other reasons

· HAS +13%; reported Q2 net sales that topped the highest Street estimate despite admitting an overhang due to the Toys R Us liquidation (MAT, JAKK also active)

· HCLP +18%; raised its quarterly distribution to 75c from 22.5c and agreed to acquire FB Industries, a manufacturer and marketer of silo-based frac sand management systems, for ~$60M

· LPNT +33%; to be acquired by private equity firm APO in a deal valued at $5.6 billion, including debt, paying $65 per share in cash (1 35% premium to Friday close) https://reut.rs/2uXekiq

· RETA +26%; said Phase II data show statistically significant improvement in kidney function maintained in Alport Syndrome patients after 48 Weeks of treatment

· SYNT +3%; acquired by Atos SE of France for $3.4B deal, paying $41 a share in cash; including debt, deal valued at $3.57B https://on.wsj.com/2OaGChV

Stock LAGGARDS

· HAL -7%; posted a Q2 operational miss (profit $789M vs. est. $816M) though revs of $6.15B beat

· ITW -7%; after earnings match, but cut its full-year outlook citing a negative currency impact and trimmed its margin guidance sees year EPS outlook to $7.50-$7.70 from $7.60-$7.80

· MU -3%; after Morgan Stanley said tariff uncertainty could be a risk to demand that leads to an inventory unwind and a correction in the semiconductor stocks

· NTGR -10%; reports Q2 beats and downside guidance

· PETS -14%; as Q1 EPS and revs fall short of consensus views

· PZZA -7%; after poison pill, and downgraded at Stifel saying the company is in “precarious position,” with brand damage growing after the chain’s founder used a racial slur

· RACE -4%; as CEO Marchionne steps down following complications from shoulder surgery last month that meant he could not resume his duties

· TSLA -5%; on reports it has asked some suppliers to return a portion of its payments to them in an attempt by the electric-car maker to turn a profit, the WSJ reported, citing a memo sent to a supplier last week. https://bloom.bg/2mDh804

 

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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