Mid-Morning Look: August 15, 2018

Terrie AmengualDaily Market Report

***Please note this will be the last “Mid-Morning Look” for the week and will resume on Monday August 20th***

Mid-Morning Look

Wednesday, August 15, 2018


U.S. equities in straight sell-mode, falling to lowest levels since the start of the month following weakness in retailers despite better results from Macy’s, while tech is hit by another round of disappointing earnings in the Chinese tech sector. Metals and materials among the biggest drag on the S&P, with broad declines in commodity prices (steel, copper, gold, oil all falling) as the dollar pushes to new yearly highs. European stocks are lower, led by declines in commodity-related stocks as the Stoxx Europe 600 falls over 1% and remain on track for its third decline of the past four sessions. Investors are monitoring the spat between the U.S. and Turkey, after the country fired its own tariffs against imports of American cars, alcohol, tobacco, and other goods on Wednesday. This comes after President Donald Trump slapped a tariff increase on Turkish aluminum and steel last week that has weighed heavily on the Turkish Lira (all-time lows), raising contagion fears to ECB banks that have exposure. While Turkey fears remain in the headlines, problems with China have not improved related to trade and tariffs, and the impact is starting to be felt in markets. Note the Shanghai index fell more than 2% overnight, holding not far off 52-week lows, and hurting commodity prices.


Treasuries, Currencies and Commodities

· In currency markets, the US dollar extends its recent gains, touching 15-month highs on risk aversion demand emerging from concerns about Turkey’s financial turmoil; the Canadian dollar fell to lows vs. the dollar after oil prices declined; Bitcoin prices rebound, trading up over 5% and topping the $6,400 level after lows of $5,887 yesterday; the euro and Pound at new 52-week lows as well, though the safe-haven yen bounces off recent decline vs. greenback

· Commodity prices tank across the board, led sharp declines in gold to fresh 18-month lows, down over 1% to below $1,190 an ounce (down 2% for the week), with silver and palladium falling by wider margins as the U.S. dollar continued to strengthen; copper prices at 13-month lows

· Energy futures fall on double whammy, falling on bearish inventory data overnight from API (3.3M barrel build) and amid broad pullback in commodity prices on dollar strength, impact of China trade dispute/tariffs with the U.S. WTI crude prices drop below the $66 per barrel mark. Oil prices fell further after the EIA said weekly stockpiles rose 6.8M barrel vs. expected draw of -2.5M

· Treasury markets gain as yields pulled back, following a handful of mixed market moving economic data this morning (better manufacturing and retail sales but softer industrial production data); the 10-yr yield falls over 5 bps to 2.85%, while the 2-yr slips to 2.60% – both well off 2018 highs two weeks ago after hawkish FOMC meeting


Economic Data

· The Empire State manufacturing index rose 3 points to 25.6 in August, topping the 20.0 estimate and above the prior month reading of 22.6; the new-orders index was little changed in August, falling 1.1 points to 17.1 while the shipments gauge jumped 11.1 points to 25.7; Prices paid rose to 45.2 vs 42.7 and the six-month general business conditions rose to 34.8 vs 31.1

· Nonfarm Productivity for Q2 rose 2.9%, the largest rise since 1Q 2015 and topped the 2.4% estimate; Nonfarm output per hour rose 0.3% prior quarter. Unit labor costs fell (-0.9%) in 2Q vs. up 3.4% prior quarter and compared to consensus of unchanged; the amount of time employees worked rose 1.9%.

· Retail Sales for July rose 0.5%, topping the 0.1% estimate, though the prior month was downwardly revised to 0.2% from 0.5%; retail sales less autos rose 0.6% in July, beating the est. 0.3%; retail sales rose to $507.533B in July vs. $504.948B in June; auto dealer y/y sales rose $3.5B in July to $95.5b

· Industrial Production for July rose 0.1%, missing the 0.3% economist estimate (though last month was revised higher to up 1% from 0.6%); Capacity utilization unchanged at 78.1% in July, revised up from 78% in June; Factory production rose 0.3% in July after rising 0.8% in June

· U.S. Home Builders’ Confidence index in August falls to 67 vs 68 last month, according to NAHB/Wells Fargo; confidence fell to 67, the lowest since September; present single family sales falls to 73 vs 74 last month; future single family sales falls to 72 vs 73 last month


Sector Movers Today

· Metals and materials tumble as the sector gets hit by concerns over Turkey’s financial crisis and a trade war with China. Copper prices are nearing bear market as the metal fell with China’s yuan; investors track talks to avert strike at BHP’s Escondida mine; LME copper prices fell for a 4th day to lowest levels since July 2017; dollar strength also weighs on metals (FCX, X, BHP fall)

· Chinese ADRs fall again, amid a 2% decline in Shanghai index overnight, as China trade war with U.S. not getting better; handful of weak earnings/guidance results yesterday from YY, VIPS, HUYA yesterday weighed heavily on the sector; today, TCEHY the latest to disappoint as Q2 net income 17.9 billion yuan missed the estimate 19.3 billion yuan as China regulatory uncertainties hurt the company’s ability to make money off its most popular gaming titles (note shares of JD remain weak ahead of earnings tomorrow and BABA ahead of results next week; BIDU falls as well)

· Retailers slide, with sector falling KSS, JWN) despite better Macy’s results (group outperformed yesterday); Macy’s (M) shares fall as much as 10% despite better Q2 results and raised guidance for the year, perhaps on profit taking as shares were up around 70% YTD ahead of results; COLM upgraded to outperform at Cowen as believes consensus estimates are too conservative and that innovation in footwear and apparel within Columbia, PFG and Sorel is being unappreciated; in toy retail, HAS was upgraded to buy at MKM citing key product drivers for revenue growth in 2019; mattress stocks (TPX, SNBR) slide after Macy’s warns about weaker mattress sales

· Cannabis sector active after STZ, the maker of Corona and Modelo beer raised its stake in Canadian cannabis producer Canopy Growth (WEED.CN) to 38% from 9.9% following a $4B investment; Constellation is not planning to sell a drinkable cannabis product in the U.S. before legalization happens across the nation, but it may begin doing so in Canada next year (shares of other marihuana stocks TLRY, or ETF MJ very active today)

· Credit card monthly data: COF July credit card net-charge-offs 4.39% vs. 4.40% MoM, while July credit card delinquencies 3.46% vs. 3.32%; SYF July charge off rate 5.01% vs. 4.73% last month and reports July 30-plus day delinquencies 2.70% vs. 2.72% last month; JPM July Credit-Card Charge-Offs 2.30% vs 2.39% MoM and July delinquencies 1.10% vs. 1.11% MoM; ADS July Charge-Offs 5.9% vs. 6.6% last month and July delinquencies of 5.7% vs 5.1% in June; DFS July Charge-Offs 3.1% vs. 3.4% MoM and July delinquencies 2.2% vs. 2.2% in June; BAC July Credit Card Charge-Offs 2.57% vs. 2.66% MoM and July delinquencies 1.55% vs. 1.55% in June


        Stock GAINERS

· CMG +3%; upgraded to Overweight at Morgan Stanley, EPS above consensus to ~$13 for ’19 and ~$16 for ’20, and PT to $600, blending our bull and bases cases

· EGN +4%; to be acquired by FANG in stock for about $9.2B (includes $830M EGN debt), with EGN holders getting $94.95 per share, of 0.6442 shares of FANG shares https://bloom.bg/2nBbhsG

· INCY +1%; upgraded to outperform at RBC Capital with $79 tgt as conclude that INCY is uniquely positioned to derive increased efficiencies and better monetize its portfolio and business

· KMG +15%; to be acquired by CCMP for $79.50 per share, total deal valued at $1.6B in cash and stocks; KMG holders to receive $55.65 in cash & 0.2000 of stock https://on.mktw.net/2OE3je4

· PCG +2%; as defensive utilities outperform broader markets

· PETQ +20%; after higher-than expected sales of its distributed products, as SunTrust raised its price target to $40 from $30



· A –1% despite solid Q3 results with organic growth beat driven by the end markets and raised FY18 core revenue growth guide to 6.1% (vs prior 5.5%), and raised EPS to a new midpoint of $2.70 (+5c from prior)

· CASA -25%; as lowers FY18 EPS view to 80c-88c from $1.08-$1.19 (est. $1.14) and sees FY18 revenue $330M-$350M vs. est. $390.57M (downgraded at Macquarie); says moderation in topline growth during the quarter is related to the timing of several projects

· M -12%; despite lifting its full-year sales guidance against a backdrop of strong US economic growth and consumer spending (shares were up about 70% YTD into earnings)

· MU -5%; after Wells Fargo cut its price target to $63 from $70 and said it sees downside risk to earnings and revenue estimates through 2020 which reflects assumptions on DRAM and NAND Flash capacity and pricing (WDC also down in sympathy)

· PGFC -12%; as Q4 EPS and sales fell short FY19 earnings views missed estimates; RBC Capital noted organic volume growth of 2.9% trailed its estimate of 3.4%

· SCHN -8%; amid weakness in materials and as Morgan Stanley downgraded to underweight saying the forecast for the next four years may need to come down as the Turkish lira weakens and Chinese tariffs and import restrictions weigh on U.S. low-quality aluminum scrap prices

· TCEHY -8%; Q2 net income 17.9 billion yuan missed the estimate 19.3 billion yuan

· YOGA -32%; results exceeded estimates helped by the acquisition of two smaller studios and recent pricing increases, but mgmt lowered EBITDA guidance to reflect higher payroll/marketing



· Carrizo Oil & Gas (CRZO) 9.5M share Spot Secondary priced at $23.00

· GoDaddy (GDDY) 10.399M share Spot Secondary priced at $75.75

· ViewRay (VRAY) 16.216M share Spot Secondary priced at $9.25

· Weight Watchers (WTW) 6M share Block Trade priced at $76.00


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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