Market Review: August, 23, 2018

Terrie AmengualDaily Market Report

Closing Recap

Thursday, August 23, 2018

Equity Market Recap

· U.S. stocks slipped on Thursday, pulling back slightly from near all-time highs in the S&P 500, Nasdaq Composite and Russell 2000 index ahead of the Jackson Hole central banker symposium which kicks off today. Several Fed members (George, Kaplan, and Bostic) already weighed in with side interviews today, with most suggesting the Fed is on track for additional rate hikes and that the Fed’s job is independent of politics (Kaplan said in reference to President Trump’s displeasure about the current rate hike cycle and also said favors 3 or 4 more rate hikes over the next 12 months). But the markets await Friday’s speech from Fed Chairman Powell at 10:00 AM tomorrow. The Fed comments help snap the dollar 6-day losing streak, sending commodity prices lower with gold back below the $1,200 an ounce level. Energy, industrials, materials and financial sectors underperformed, while transports fall for a 2nd day after record setting highs on Tuesday.

· So far this month, better corporate earnings and a strong economy have helped overshadow macro market distractions such as the Washington drama over the last 48-hours (Cohen, Manafort), ongoing trade/tariff issues with China (another round of tariffs on imports from China – this one targeting $16B worth of goods – went into effect overnight despite a two-day summit in Washington between U.S. and Chinese officials), news that Mexico appears close to an agreement on NAFTA, the Brexit negotiations in Europe and the start of the Fed’s annual symposium at Jackson Hole tonight (with Powell speaking tomorrow).

· Kansas City Federal Reserve President Esther George said Thursday that she thought two more interest-rate hikes would be appropriate this year and “several more” would likely be needed next year (one of first comments ahead of Jackson Hole meeting and in response to President Trump’s latest displeasure about the recent Fed rate hike cycle).

Economic Data

· Weekly Jobless Claims fell 2K to 210K, below the 215K estimate while prior week claims unrevised at 215K; the 4-week moving average declines 1,750 to 213,750; continuing claims fell 2k to 1.727m in the week ending Aug. 11

· New Home Sales for July fell to 627K, well below the 645K estimate, while the prior month was upwardly revised to 638K from 631K; previous three months’ new home sales data revised down by 13K; median new home price rose 1.8% y/y to $328,700; average selling price at $394,300

· The 30-year fixed mortgage rate for week ended today fell to 4.51% from 4.53%, Freddie Mac said, while the 15-year rate avg 3.98%, down from 4.01% a week earlier and 5/1-year ARM rate avg 3.82%, down from 3.87% a week earlier.

· IHS U.S. flash services PMI drops to 55.2 in August from 56; August U.S. PMI Composite Flash 55.0 vs. 55.6 consensus, 55.9 prior and Manufacturing PMI 54.5 vs. 55.1 consensus, 55.5 prior

Commodities

· Energy futures end little changed, with oil snapping its 5-day win streak (barely), by slipping 3c to settle at $67.83 per barrel, off lows of $67.32 per barrel. Oil prices jumped yesterday following bullish inventory reports from both the API and EIA in the latest week. The bounce in the dollar weighed on commodity prices today, but not enough to disrupt energy. Gold prices end lower, sliding -$9.30 or 0.8% to settle at $1,194 an ounce, falling back below the $1,200 level as the dollar rebounds. It was the first decline in gold in five-sessions.

Currencies & Treasuries

· The U.S. dollar rises, posting a strong performance and rebounding off 6-consecutive days of declines, rising vs. the South African Rand, the Aussie dollar and the Canadian Loonie following a pullback in commodity prices. The euro dropped -0.5% to around 1.154 (off recent highs above 1.16), rises above 111.25 vs. the yen and the Pound falls to lows of 1.2805. Currencies leveraged to health of commodities such as the Canadian and Aussie dollar slipped as the US dollar staged its rebound. The South African Rand falls after President Trump commented overnight about land and farm seizures and expropriations. The dollar had been under siege this week following comments by President Trump on interest rates, voicing his displeasure (again) about the current rising rate hike cycle. However, today Fed President George said Thursday that she thought two more interest-rate hikes would be appropriate this year and “several more” would likely be needed next year – giving hopes that the Fed won’t be deterred by Trump. Treasury prices were stagnant all-day, awaiting the Jackson Hole meeting tonight with central bankers.

Sector News Breakdown

Consumer

· Retailers; LB shares drop sharply as Q2 top/bottom line beat, but guided Q3 EPS well below views (0c-5c vs. 16c est.) and cut its FY18 EPS view to $2.45-$2.70 from $2.70-$3.00 (est. $2.77), while sees Q3, FY18 comps up in the low-single digit range; PLCE Q2 EPS of 70c beat by 11c on better revs of $448.7M and comp sales jumped 13.2%/firm also raised year profit and revenue outlooks; TPX was upgraded to overweight at KeyBanc given likely changes ahead at Mattress Firm; DECK tgt raised to $104 from $89 at Susquehanna as firm upgraded to positive from neutral; other movers on earnings CTRN, SSI, CATO, SMRT, SPWH

· Protein/packaged food names under pressure after SAFM and HRL quarterly results; HRL lowered its year revenue outlook to $9.4B-$9.6B from prior view $9.7B-$10.1B while reporting 2Q decline in operating margin vs last year noting a dramatic decline in commodity profits; separately, SAFM posted weaker-than-expected 3Q report reflecting “significant counter-seasonal weakness in market prices for boneless breast meat produced for food service customers,” as per the company (watch shares of TSN, PPC as well on results)

· Restaurants& Consumer Staples; CMG cautious mention at William Blair saying its survey of 900 consumers after the late-July illness outbreak related to a store in Ohio suggests potential for an increase in “customer resistance”, potentially similar or worse vs. last year’s slowdown after norovirus; CPB mentioned cautiously at UBS saying that they see downside risk to shares ahead of the company’s strategic review presentation on Aug 30; MCD shares slipped late day after the New York State Department of Health is investigating after 22 people reported illness after eating breakfast sandwiches from a Jamestown, N.Y. McDonald’s

· Housing & Building Products; housing related furniture/furnishing got a boost yesterday after LZB better quarterly results sent shares to all-time highs (downgraded today at KeyBanc on price rally); overnight, WSM the latest to lift the sector after headline adjusted results were better, with a 9c EPS beat, healthy comps +4.6%, and higher gross margin (though analysts were mixed) – shares moved to new 52-week highs after results; homebuilders fall for a second straight day on weaker economic data as new home sales drop to 9-month lows (followed weak existing home sales data yesterday) – and giving back much of the gains from Tuesday after TOL earnings

Financials

· Financial sector has been absent major market moving catalysts of late outside of FOMC policy and Treasury yield volatility; banks have been sliding of late as yields pullback from yearly highs just a few weeks ago; in consumer finance and lending; ONDK was initiated buy and $14 target at B Riley saying the Street has been slow to react to business momentum that appears to be turning positive; QD downgraded at Bernstein to market perform after Bloomberg report that Ant Financial is said to plan end to partnership with Qudian

Healthcare

· Pharms/Managed care movers; AZN said that a phase IIIb clinical trial of its Bevespi Aerosphere drug combination for lung disease didn’t show it to be superior to an existing inhaler treatment; NVS said a phase 3 trial evaluating alpelisib has met the primary endpoint in improving progression-free survival for advanced breast cancer patients (the trial, called SOLAR-1, is evaluating BYL719, or alpelisib, in combination with fulvestrant); in research, Morgan Stanley upped its tgt on MRK to $74 from $68 based upon our expectation for operating leverage to become visible in 2019 and pipeline progress to improve and upped PFE tgt to $45 from $43 as project Pfizer 5-yr CAGR (2018-2023) rev growth of 3% and EPS growth of 7%

· Specialty/generic pharma; HNZP positive mention at Goldman Sachs saying is confident in sales forecast for the company despite the potential threat from SELB’s SEL-212; LCI issued an 8K this morning noting that the JSP contract nonrenewal triggers a goodwill impairment analysis under GAAP and LCI expects that the analysis could result in a material impairment impacting Q1 results; GBT announced a global licensing deal with RHHBY for the development and commercialization of inclacumab (GBT will pay $2M upfront, up to $125M in milestones and tiered royalties on net sales); AKRX added to Deutsche Bank short-term catalyst buy list

· Biotech movers; sector dropped late morning with broader decline in Nasdaq; BCLI said that the Phase 3 clinical trial evaluating its NurOwn cell therapy in patients with amyotrophic lateral sclerosis (ALS) will continue as planned.

· Healthcare services and providers; CRL was upgraded to outperform from market perform at Raymond James saying the portfolio is better positioned to expand after diversification efforts into higher growth businesses; AET was downgraded to neutral at Cantor

Industrials & Materials

· Industrial & Machinery; HON raises guidance as spin-offs near completion, as now sees it’s full-year 2018 EPS $8.10-$8.20, up by 5c on top/bottom line as Garrett and Residio file Form 10 registration statements with the SEC; ABM was downgraded at Baird to neutral from outperform, citing a more balanced risk/reward; U.S. machinery and auto stocks dropped amid lingering trade concerns as the latest round of China tariffs became effective on Thursday (among notable decliners early on PCAR, CAT, SWK, CMI, DE, PH, ITW)

· Metals & Materials; lithium stocks (ALB, FMC) active after SQM said prices could decline slightly in 2H of 2018/said in its 2Q earnings press release that “considering our higher sales volumes and the new supply, prices could be slightly lower in the second half of the year but significantly higher than average prices reported last year; Metals and mining stocks (FCX, X, AKS, CENX, AA) among the worst sector performers following stronger dollar and resurfacing trade tensions

· Transports; after setting all-time highs of 11,475.40 on Tuesday, the index has slipped, led by declines in airlines after oil prices jumped for nearly a week straight, while profit taking likely part of the pullback given gains in rails and truckers

Technology, Media & Telecom

· Internet; BABA posted mixed Q1 results as EPS of 8.04 yean missed estimates of 8.19, but sales and adjusted Ebitda topped consensus views/said has mobile monthly active users of 634M (shares had traded higher, but Chinese ADRs reversed off early gains amid rising concerns between US and China trade/tariff negotiations)

· Semiconductors; AMD traded new 52-week high as tgt raised to $30 at Rosenblatt citing a renewed conviction post-meetings of a multi-year double digit growth profile for AMD; QCOM tgt was raised to $88 at Canaccord saying they can generate $8.04 in FY2020 non-GAAP EPS if the company finalizes a new royalty pact with Huawei.

· Software movers; SNPS trades new highs after results beat expectations, as Q3 EPS and revs topped views, with better outlook for Q3 and raised its FY18 profit and sales outlook citing strong products and customer relationships in EDA and IP; Overwatch League (ATVI) and TWTR today announced a new multiyear deal to bring highlights and livestream content to the platform; ADSK, INTU, SPLK, VMW, VEEV among those in software reporting tonight; Internet security stocks jump, led by FEYE after GOOGL said “to complement the work of our internal teams, we engage FireEye, a leading cybersecurity group, and other top security consultants, to provide us with intelligence”

· Optical sector active after two analyst upgrades; Piper upgraded ACIA to overweight (and raised tgt to $46) from neutral saying overall demand for optical is improving, and sees Acacia’s leadership in certain products (Coherent DSPs, PiCs and DCOs) as the best way to play the upcoming 400G cycle; firm also upgraded FNSR to overweight from neutral saying China demand is returning, and FNSR has easy comps following five quarters of depressed demand

· Media & Telecom movers; NLSN was upgraded to neutral from sell at Goldman Sachs noting activist Elliott Management pushing for a sale and increased deal activity in the Information Services sector; MSG tgt raised to $350 from $265 at Guggenheim which reflects the company’s June 27 announcement to explore a spin-off of 2/3 of the sports business

 

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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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