Market Review: August, 21, 2018

Terrie AmengualDaily Market Report

Closing Recap

Tuesday, August 21, 2018

Equity Market Recap

· U.S. stocks surge, with several major indices trading to record all-time highs as market concerns over trade issues, rising rates and foreign issues (Turkey, UK Brexit, Iran and Russia sanctions) have been overshadowed by a stronger corporate earnings season and positive economic data. The S&P 500 index traded to a fresh all-time intraday high, taking out the January record high of 2,782.87, along with new record highs for the Small Cap Russell 2000, MidCap 400 Index and the Dow Transport index. Despite the sharp spike early, major averages finished well off the session highs ahead of tomorrow’s FOMC Minutes from the August meeting and the late week Jackson Hole meeting of central bankers. The dollar dropped for a fifth straight session, giving a boost to commodity prices and related stocks, while Treasury yields recovered from yesterday’s declines. Markets started on a positive note after the PBOC said overnight China won’t use competitive currency devaluation or the foreign exchange rate as a tool to cope with trade frictions. In Fed news, which will be a popular topic this week, Federal Reserve Bank of Dallas President Robert Kaplan said the central bank should continue raising interest rates until they hit their neutral level, which he sees as about three or four quarter-point rate increases away. “At that point, I would be inclined to step back and assess the outlook for the economy and look at a range of other factors — including the levels and shape of the Treasury yield curve — before deciding what further actions, if any, might be appropriate,” he said in an essay on economic conditions and monetary policy. Comments follow President Trump’s criticism of the Fed yesterday.


· The expiring Sept WTI crude oil settle at $67.35 per barrel ahead of API weekly inventory data tonight (EIA data tomorrow), rising 92c on the day for its 4th straight gain (and off earlier highs $68.10) while the new front month December WTI contract rose 42c at $65.84 per barrel. Oil prices got a bounce with broader commodity bounce as the dollar tanked, getting a lift off multi-week lows of $65 late last week. Oil prices rose yesterday after President Trump has proposed a sale of as much as half of the 660 million-barrel stockpile from the SPR, although it will only be 11 million barrels released this time around. Markets also keeping a close watch on U.S. sanctions against Iran for the potential to disrupt global supplies. December gold rises $5.40, or 0.5% to settle at $1,200 an ounce, its first close above $1,200 in a week and 2nd straight day of gains (bouncing off 18-month lows last week) amid a pullback for the dollar.


· The dollar extended its recent declines, as the dollar index (DXY) rolled to its lowest levels in about 2-weeks late day, falling to lows around 95.10 (off 2018 highs of 96.98 on 8/15), losing traction late day yesterday after President Donald Trump criticized the Federal Reserve about higher interest rates yesterday. The euro jumped to highs of 1.16 (off recent 52-week lows of 1.1301 last week), with the Pound also off 1-year lows of 1.2662 to trade as high as 1.2922 today, up nearly 1% after Michel Barnier has promised to intensify negotiations with the UK as the two sides enter the final stages of talks over the UK’s planned exit next March. With today’s decline, the dollar fell for a fifth straight session, its longest such streak since the start of the year. Thus far this year, however, the euro is down nearly 4% against the greenback.

Bond Market

· Treasury prices slipped, led by a decline in long-dated Treasuries, paring the yield plunge seen yesterday. After falling 5 bps yesterday to lows around 2.82% (lowest since late May), the yield on the 10-year inched back to around 2.84%, while the 30-yr yield moved back above 3% (though slipped late day). The move in bonds comes ahead of the key Jackson Hole gathering where Fed Chairman Jerome Powell is set to speak.

Sector News Breakdown


· Retailers; KSS shares came into earnings up 47% YTD, and delivered upbeat quarterly results and boosted its full-year earnings outlook; TJX reported Q2 revenue and same-store sales that beat expectations (comparable sales were up 6% during the quarter to triple the 2% consensus expectation) and guides full-year EPS of $4.83-$4.88 vs. prior view $4.75-$4.83 (est. $4.86); JILL shares fall as posted weaker-than-expected 3Q forecasts that offset 2Q results that topped estimates; COST tgt raised by two analysts (Opco to $250 and Argus to $255) saying remains best positioned in our entire food and grocery coverage to deliver sustainable top- and bottom-line performance; expected earnings from URBN tonight, LOW and TGT tomorrow morning and LB Wednesday night; RGS shares jumped after quarterly earnings and sales results

· Consumer Staples; cosmetics space been pressured of late after ELF and REV results, while EL rallied despite lower guidance the other day (upgraded today at Davidson citing strong fundamentals); today, COTY posted mixed Q4 results (sales slight miss) on lower guidance (FY19 EPS 74c-78c vs. est. 82c) and CFO departure; in food, SJM cut its FY19 sales forecast following weaker-than-expected 1Q results as now sees FY sales $8B, down from $8.3B prior and below the $8.08B, while also lowers FY free cash flow view to $770M-$820M from $800M-$850M

· Housing & Building Products; among strongest sectors today after TOL quarterly results topped estimates helped by an increase in contract signings and backlog that the company says set it up for further revenue and earnings growth into fiscal 2019 (backlog rose 22% in dollar terms in Q3 to $6.48 billion, its highest at the end of a third-quarter in a dozen years); FND upgraded to buy at Jefferies as believe the trajectory for continued ~20% unit rollout over the next several years is achievable; LOW was removed from the franchise picks list at Jefferies especially as supply chain investments and store fill-ins will take time

· In autos; Commerce Secretary Wilbur Ross says a report on auto tariffs won’t be out this month as expected. Ross noted the delay is tied to ongoing negotiations with Mexico, Canada and the European Commission; TSLA shares rebound from big losses last week


· Energy stocks got a boost today as oil prices jumped, lifting the recently beaten sector after oil prices hit multi month lows last week; VNOM was upgraded to buy at Citigroup saying the company has successfully demonstrated its ability to acquire mineral interests in acreage that has a clear line of sight on producer activity. The Trump administration has set out new rules for regulating carbon dioxide emissions from electricity generation as part of its strategy to support US coal mining. Solar stocks outperformed, while defensive utilities slumped as broader stock markets jumped and bond yields climbed


· Discount Brokers among the most active names today, with shares of AMTD, ETFC and SCHW falling after CNBC reported JPM will introduce a digital investing service next week that includes free or discounted trades, a portfolio-building tool and no-fee access to JPMorgan stock research (CNBC reports that JPM customers get 100 free stock or ETF trades in first year, offer becomes permanent for those with Premier-level bank accounts); overall, banks outperformed on rising rates and as stocks traded to record highs, solid gains for large cap and regional banks


· Pharma movers; PFE, LLY and MRK pullback slightly from 16-year highs as recent winners lag broader averages today; PFE tgt was raised to $45 at Deutsche Bank ahead of pipeline event; in cannabis sector; TLRY shares rise after partnership with Ontario Cannabis Retail Corp., to supply province of Ontario with a diverse array of cannabis products in anticipation of start of adult-use market on Oct. 17; CRON also rises on partnership announcement

· Medical equipment, devices and services; MDT leads MedTech higher as Q1 EPS and revenue topped consensus estimates and reaffirmed year EPS view; PINC trades to record highs after earnings beat analyst expectations as one analyst noted customer retention remains in the very high 90%’s with solid growth in the customer base and volume under contract; MYGN reports earnings tonight after the close

Industrials & Materials

· Industrial & Machinery; JCI was upgraded to buy with $45 tgt at Argus noting the company recently reported fiscal 3Q results that topped consensus estimates and improved technicals; NDSN shares fell after 4Q sales and earnings guidance fell below analysts’ estimates due to lower demand for Advanced Technology dispense product lines (guided Q4 sales down 4% to flat y/y, while analysts had expected growth of 2.9%); LII cuts FY18 adjusted EPS view to $8.90-$9.30 from $9.95-$10.35 (est. $10.25) amid estimated financial impacts and insurance offsets from tornado that damaged its facility

· Transports; 52-week highs for NSC, UNP, KSU in rail space and UAL in airlines, with transport index at record highs; the Dow Transport index rose more than 100-points to new all-time bests, helped yesterday by a surge in airline stocks and rails today; in car rental, HTZ CFO announced he was leaving, causing some early weakness; UAL President Kirby said in interview midday that he sees an improving environment in Q3 for fares and for demand

Technology, Media & Telecom

· Internet; FB has started to assign its users a reputation score in order to predict their trustworthiness on a scale from zero to one, The Washington Post reported; SPOT co-founder Lorentzon sold shares worth SEK370M ($40M in stocks); NFLX is testing how to bypass iTunes. Until September 30, new or lapsed subscribers in selected markets across Europe, Latin America and Asia will be unable pay using iTunes. They are instead getting redirected to the mobile web version to log payment details directly with Netflix, TechCrunch first reported

· Semiconductors; NVDA cautious mention by Citron Research saying shares on way to $200, noting short interest at an all-time low and datacenter facing major competition not even ray tracing can support these lofty levels; INTC among the top Dow Industrial gainers today, while MU rebounds off recent sell-off

· Software movers; CRM tgt was raised to Street high $181 at Bank America, tgt raised to $165 at Cowen and BMO Capital ahead of Q2 results this week; SEAC shares plunge after the company warned that it will report a wider-than-expected Q2 EPS loss and lower revenue, citing a number of deals that were delayed to Q3 (guided Q3 revs $11.5M-$12.5M vs. est. $18M); APPN 2M share Spot Secondary priced at $35.15; SYMC was upgraded to positive at Susquehanna

· Media & Telecom movers; DISCA upgraded to buy at Jefferies as see several opportunities that could boost DISCA’s FCF, including stronger US distribution growth, addition to a VMVPD offering, acceleration of US ad growth, upside to realized synergies, and the potential for a re-introduction of a buyback sooner; AT&T (T) was added to the US one list at Bank America

· Hardware & Component news; FN shares outperform as Q4 EPS beat by 6c and revs of $345M topped views by $7M while Q3 guidance came in above views; HPE was downgraded to market perform at Bernstein saying despite a robust IT spending environment, the analyst does not see upside to near-term expectations, given tough comparisons, continuing share losses in servers, a headwind from currency


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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