Market Review: August, 20, 2018

Terrie AmengualDaily Market Report

Closing Recap

Monday, August 20, 2018

Equity Market Recap

· U.S. stocks end the day higher, starting the week off on a positive note with major averages trading closer to record highs. Trading was thin as major averages trade in tight ranges this afternoon as volumes dry up. The S&P 500 index made it a third straight day of gains, about 15 points from its all-time highs in January (2,872.87), while the Nasdaq Comp remains about 100 points off its record close of 7,933.30 (on July 25th). Small Caps remain strong, with the Russell 2000 trading back to 1,700 (about 8-points from its record best), and the Dow Transport index also knocking on its all-time best levels, led by gains in airlines and rails. Gains were led by Consumer Discretionary (retail) and Healthcare stocks as stocks rallied alongside bonds as yields slip ahead of potential market moving catalysts this week. Markets await a meeting of central bankers later at Jackson Hole, while also keeping an eye on the situation in Turkey and trade relations with China, Canada, Mexico and others. The dollar dropped late session, moving to the lows (and helping lift commodity prices) after President Trump said he had expected Jerome Powell to be a cheap-money Federal Reserve chairman, expressing his displeasure (again) about the current rate hike cycle). The 10-year Treasury yield declined to the lowest level in six weeks amid a warning by Jeffrey Gundlach of a short squeeze, while the spread between the 2 and 10-yr yield moved to its narrowest (22 bps) in 10-years.


· Gold prices jump, rising $10.40, or 0.9% to settle at $1,194.60 an ounce for its biggest one-day of the month, helped by a sliding dollar. Gold prices with a nice rebound after posting a weekly decline of -2.9% last week, getting a boost (along with other commodity prices) as the dollar slid to afternoon lows. Gold remains down around 8.9% year-to-date and below the psychologically significant level at $1,200. Copper rebounds back above $6K/metric ton after data showed orders to withdraw metal from London Metal Exchange warehouses rose by the most in three years.

· Oil prices end higher, with WTI crude rising 52c, or 0.8% to settle at $66.43 per barrel (high $66.47 and low $65.59 per barrel), as commodity prices benefit from a weaker dollar today. Oil also getting a boost on reports the U.S. plans to release 11 million barrels of oil from its emergency stockpile as part of a regular program of sales.


· The U.S. dollar slipped slid to afternoon lows after President Donald Trump said he expected Jerome Powell to be a cheap-money Fed chairman and lamented to wealthy Republican donors at a Hampton’s fundraiser on Friday that his nominee instead raised interest rates, according to Bloomberg, citing people at the event. Note the Federal Reserve has raised rates five times since Trump took office, including twice this year under Powell. The U.S. dollar index fell to lows of 95.93, well off its overnight highs around 96.40, dropping vs. most currencies. The move lower reversed recent gains on rising rate hopes and an improving US economy.

Bond Market

· Treasury market’s rise as yields decline from last week; the 10-year yield has been trending lower this month. It’s down another 4 bps to move around 2.82% after starting August at just above 3%; the 2-yr yield moves under 2.60% and the 30-yr yield under 3%. Over the weekend, Jeff Gundlach noted a massive increase in short interest in 10- and 30-year Treasury bond futures. “Highest for both in history, by far,” he says. “Could cause quite a squeeze.” The move in yields helped to narrow the yield gap between the two maturities, one of the most popular measures of the yield curve’s slope, to around 22 bps (between 2 and 10-yr), flattening the yield curve, to its tightest since August 2007.

Sector News Breakdown


· Retailers; retail extends recent gains on better earning late last week, ahead of others this week; NKE was upgraded by two analysts as Piper raised to overweight and Susquehanna to positive citing share gains from competitor Adidas AG, as well as specialty retailers like FL and HIBB (tgt raised to $93 at both firms); JWN extended Friday’s gains after better earnings results lifted shares to fresh 52-week highs; 52-week highs for consumer names: COST, JWN, K, HRL, MKC, DG, ORLY, AAP, ADM, CTAS; LULU trades to all-time highs after JPMorgan raised tgt to $146 citing momentum in North America and Asia, helped by bottoms innovation

· Consumer Staples; in the beverage sector, PEP agreed to buy SODA for $3.2B, paying $144 a share in cash, an 11% premium to Friday’s closing price; TSN agreed to buy the Keystone Foods business from Marfrig Global Foods for $2.16B in cash; EL shares active on mixed quarterly results as EPS and sales beat, though year guidance fell short of consensus views (recall cosmetics space been hurt on soft REV, ELF results)

· Auto’s; TSLA tgt cut to $195 from $308 at JPMorgan as the firm reverting to valuing Tesla shares on the basis of fundamentals alone, arguing that funding for a deal to go private has not been secured; auto sector in general with a nice bounce today (GM, F, AXL, LEA)


· Energy stock top movers; COP reached a $2 billion settlement with Venezuelan state-owned oil giant PDVSA on an arbitral tribunal convened under the rules of the International Chamber of Commerce. PDVSA has agreed to recognize the judgment and make an initial payment of about $500 million within 90 days (the balance will be paid over a period of 4 1/2 years);


· Financial movers; banks held up well despite the pullback in Treasury prices, with most majors and regionals climbing; STT shares look poised for a recovery after slumping since the bank agreed to buy Charles River Systems Inc. earlier this year; IVZ to lower fees on three U.S. ETFs following similar moves by Fidelity and others (lowers fees on DJD, SPHQ and SPVM)


· Pharma movers; LLY, PFE and MRK extend recent gains to the best levels in about 16-years; LCI shares plunged as it announced that its agreement to distribute products from Jerome Stevens Pharmaceuticals (JSP) will not be renewed after it expires in March 2019 (AMRX received the licensing agreement); CBPO shares jumped after a consortium composed of David (Xiaoying) Gao, GL Capital Group, Bank of China Group Investment Limited and CDH Investments offered to buy the company in an all-cash deal valued at $3.9B/$118 a share ; NOVN announced an update on the SB414 nitric oxide-releasing cream product candidate and its application to two therapeutic indications

Industrials & Materials

· Transports; Dow Transports traded up as much as 100 points, about 100 points from its all-time highs of 11,423.92 on 1/16/18 (and about 1,000 points from its June lows) – LUV, AAL, DAL, JBLU, UAL the top gainers (airlines) in the index

· Metals & Materials; gold miners; KGC was downgraded to sector perform at RBC Capital on valuation; NGD was upgraded to hold from sell at Canaccord as the recent selloff created a more balanced risk-reward trade-off for the shares; copper prices rebound off recent yearly lows, lifting some stocks (FCX); steel stocks with modest gains early; potash names mentioned positively in Barron’s (CF, NTR, MOS) saying shares got a lift in early August after second quarter earnings but the stocks still have a way to go

Technology, Media & Telecom

· Internet; FB remains weak, giving back some of its rebound after shares plunged during earnings season a few weeks ago; Bloomberg reported the U.S. gov’t is trying to force Facebook Inc. (FB) to break the encryption in its popular Messenger app so law enforcement may listen to a suspect’s voice conversations in a criminal probe; CMCM rises as Q2 revenue beat consensus and guides quarterly revenue will resume sequential growth trends (sees Q3 revenue 1.29B yuan (US$194.9M)-1.35B yuan (US$204.0M) vs. Q2 revenue of 1.10B yuan); DBX falls for 6th time in last 7 days and down 22% during that stretch after recent earnings

· Semis and Software movers; SSC shares soared after the company said it has won a $24 billion, three-year deal to provide fixed income lease financing-based products to fund upgrades of China’s buses and make them electric by 2021 as mandated by the government; NVDA shares jumped late afternoon following the company’s unveiling of its next-generation gaming graphics cards available September 20th

· Media & Telecom movers; NWSA was downgraded to underweight at Morgan Stanley on Foxtel OTT risks, after cuts to estimates/value for its Australian pay-TV unit

· Hardware & Component news; BBOX shares rise amid agreement to sell its Federal Government IT Services Business to a private equity firm for a cash purchase price of $75M; INFY was downgraded to equal-weight at Morgan Stanley while firm also accepted the resignation of its CFO; HPE announced as the first technology vendor in Asia Pacific (outside of China) to deliver next-generation on-premise hybrid cloud solutions with Alibaba Cloud’s Apsara Stack


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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