Market Review: August, 27, 2018

Terrie AmengualDaily Market Report

Closing Recap

Monday, August 27, 2018

Equity Market Recap

· U.S. stocks surged with the S&P 500, Nasdaq Composite and Russell 2000 all pushing deeper into record territory as the US and Mexico reached a breakthrough in their efforts to revamp their trade agreements. As stocks surged, demand for safe haven assets like Treasuries waned, sending yields higher. President Trump said talks with Canada were expected to begin immediately in hopes of reaching a final agreement by Friday. The US dollar added to last week’s declines, falling broadly vs. the euro, pounds, yen, loonie and peso. The Nasdaq Composite topped the 8,000 level for the first time, rising as much as 75 points to 8,024.938 before paring gains while the Dow Industrials moved above the 26,000 level. The auto and transportation sectors were among the biggest beneficiaries from the Mexico/US trade news, while biotech stocks traded near 52-week highs, lifting the NASDAQ and Financials rounded out top gainers, with broad based gains. With the NASDAQ close above 8,000, it took 164 trading days to rise 1,000 points from 7,000. This marks the second 1,000-point advance in 2018. Today’s action once again (much like Friday) came on light volumes given the last week of summer.

· Regarding trade, President Trump terminated the existing Nafta deal, entering a new deal with Mexico eliminating the three-way Nafta trade pact. Trump said U.S. negotiations with Canada to begin “almost immediately” and that the U.S. will get a deal with Canada one way or another, threatening auto tariffs. One of the key features of the new agreement is an increase in the mandated locally-sourced auto content from 62.5% to 75%. European shares climbed as German business confidence rose for the first time in nine months.


· WTI crude oil prices rose 15c to $68.87 per barrel (high $68.97 and low $68.34 per barrel) – barely budging despite the dollar decline as the climb came in subdued trade. The modest move in oil came ahead of a conference call between members of a committee monitoring the agreement between OPEC and non-OPEC producers on output. The meeting will be watched given tensions and differences of opinion within the group. Oil prices snapped a 7-week losing streak on Friday as markets focused on tightening inventories, bullish inventory data.

· Gold prices closed higher by $2.70 to settle at $1,216 an ounce, adding to last Friday’s 1.6% spike as the weaker dollar propels commodity prices higher. Gold prices are coming off its first weekly advance in seven, when it added $19.30 to settle at $1,213.30 an ounce on Friday, its highest finish in three weeks and largest one-day percentage climb since March (rising 2.5% last week). Federal Reserve Chairman Jerome Powell said last Friday Jackson Hole, Wyoming that gradual U.S. interest-rate hikes remain appropriate and there was no risk to the economy overheating.


· Dollar slides; The Dollar Index (DXY) adds to last week declines (fell 1% last week the sharpest weekly slump since February), as rival currencies getting a lift across the board. The dollar index (DXY) dropped back below the 95 level (lows 94.687, its lowest levels since early August – and off 2018 highs of 96.98 on 8/15). The Mexican Peso advanced after agreeing to a new trade deal with the U.S. while the euro moved to highs just shy of 1.17 (best levels in 3-weeks – helped by better German confidence data) and the Pound rose to around 1.29 vs. the dollar. The greenback dropped Friday after FOMC Chairman Jerome downplayed the risk of inflation overheating and emphasized expectations for gradual pace of interest-rate increases. Canada’s dollar inched higher vs. the dollar on expectations they would follow suit with a trade deal like Mexico.

Bond Market

· Treasury market’s slide as yield creep off multi-week lows, with the 10-year yield up a few bps at 2.84% (down from 3.11% multi-year highs in May) and the 2-yr up around 2.64%, but the 30-yr yield holds under 3%; there were no major economic data points to move markets today still as they remain focused on last week’s positive Fed view on the economy. Given the late data, markets focused on bond auction as the US Treasury sold $36B in 2-yr notes at a yield of 2.655%, in-line with when issued yield prior as bid-to-cover (demand) at 2.89 vs. 2.92 prior auction and indirect bidders awarded 43.8% of auction, primary getting 42.5% and directs with 13.7% of auction (ahead of a busy week of issuance).

Sector News Breakdown


· Retailers; a few analyst calls as AEO was downgraded to neutral at Wedbush, HIBB was downgraded to hold at Canaccord after Q2 results last week; GPS upgraded to neutral from sell at Citigroup; GME shares dropped as much as 8%, with Barron’s noting the cloud is the future of video gaming, and it could arrive sooner than many players expect (potentially weighing on hardware related names like MSFT Xbox, SNE PlayStation and GME for games); handful of retailers showed weakness including FOSL, BBW

· Auto sector; TSLA a top story after CEO Elon Musk announced in a blog late Friday that he had concluded taking Tesla private was too complicated and distracting, and that it was better off as a public company; GM, F, FCAU and auto suppliers (BWA, DLPH, MGA) were among advancers on the positive Mexico trade talk

· Restaurants; WING tgt was raised to $80 from $58 at Stifel citing significant comps drivers and improving unit economics encouraging franchisees to accelerate unit growth; CMG was downgraded to underperform at Wedbush saying quarter-to-date checks suggest risk to the current Q3 consensus SSS growth expectation; PLAY tgt was raised to $66 at Jefferies as recent visits confirmed view that Jurassic World provides an attractive entry point into VR; Longbow said they believe SHAK possesses a superior unit growth story in both the near and long-term to WING, while the company generates essentially the same store-level returns

· Services; SERV said shares of Frontdoor, the parent of American Home Shield, are expected to begin trading on NASDAQ under the symbol FTDR on October 1; DBD shares rise after announced it has secured a capital commitment for $650M from two leading institutional lenders and has launched a process to amend its existing credit agreement

· Housing & Building Products; AMWD posted better Q1 EPS results, topping estimates by 12c on mostly in-line revs, bouncing shares off recent 52-week lows; homebuilders rebounded after “softer” monthly existing home sales and new home sales data last week sunk shares (LEN, PHM)


· Energy stocks lagged broader market strength as oil prices failed to benefit from weaker dollar; OPEC+ Joint Technical Committee reviewed implementation of oil-production cuts; meeting delayed from Aug. 20; note Brent’s premium to WTI crude stands at its biggest level in over 2-months

· E&P sector; ECR said it would buy larger rival BRMR in a $1.4B bln all-stock deal where Blue Ridge stockholders will receive 4.4259 shares of ECR stock stock for each share of BRMR valued at $7.44 per share ; in pipelines, re KMI, note Canada court to issue Trans Mountain ruling later this week (8/30)

· Utilities & Solar; BE was downgraded to underperform at Credit Suisse on valuation, saying now trading at a premium even their Blue Sky scenario of $30; California lawmakers outlined a proposal Friday to help PCG, EIX, and SRE cope with potential damages from wildfires that destroyed thousands of homes last year, as well as future costs


· Bank movers; financials and banks surging with Dow components GS, JPM, and AXP among the top leaders in the index, along with broad gains for insurance, brokers and banks; ALLY introduces a set of more than 100 commission-free ETFs to customers through its online trading platform, Ally Invest (group ETFC, EMTD, SCHWrecently hit after JPM free trade promo)


· Pharma movers; PFE tafamidis lowered all-cause mortality by 30% and decreased the rate of cardiovascular-related hospitalizations by 32% for patients with transthyretin amyloid cardiomyopathy in a Phase 3 study comparing the drug to placebo over a 30-month period; Stifel comments on ALNY, IONS, AKCA after PFE news saying tafamidis HR a net neutral as slow onset and lack of dose response are positives for Oligo companies; RIGL positive mention by Citigroup saying US physician survey supports their ~$400M US peak sales estimate for Tavalisse; TLRY extends recent gains amid momentum in stocks leveraged to cannabis with Cowen saying today more alcoholic beverage companies are likely to announce deals with Canadian licensed producers and called TLRY an attractive partner; ENDP spiked after the FDA issued a notice identifying the active ingredient in ENDP’s top drug Vasostrict among three bulk substances the agency wants to leave off a key list for outsourcing facilities that compound drugs

· Biotech movers; PTLA was upgraded at Credit Suisse after a key study of JNJ and BAYRY’s blood thinner Xarelto failed saying the data avoids a worst case scenario for PTLA’s Bevyxxa by essentially removing a potentially strong competitor, but does put the pressure on Portola to successfully change medical practice on their own; ESPR reported positive results in a late-stage trial of a treatment for patients with atherosclerotic cardiovascular disease (ASCVD) saying a 180 mg dose of Esperion’s bempedoic acid in combination with 10 mgs of ezetimibe cut bad cholesterol by 35% in patients treated with maximally tolerated statins vs 3% with placebo; BGNEsaid China Drug Administration accepts its new drug application (NDA) for Zanubrutinib, an investigational Bruton’s tyrosine kinase (BTK) inhibitor

Industrials & Materials

· Transports; Dow Transports trade higher (just off record highs of 11,475.40 on 8/21 before paring gains) led by broad sector gains (KSU up the most on positive NAFTA hopes with Mexico). Shares of auto (GM, F) and auto suppliers (BWA, MGA) rise ahead of news expected at 11:00 AM on a bilateral agreement between the U.S. and Mexico to revamp the North American Free Trade Agreement. Trucking stocks were also strong, as gainers include ARCB, YRCW, KNX, SAIA, HTLD, CVTI, ODFL, WERN, LSTR

· Metals; steel sector active after Morgan Stanley downgraded X to underweight from overweight, and cut tgt to $30 from $44, while upgraded STLD to Overweight with $52 tgt and AKS upgraded to overweight vs equal-weight on free cash flow generation prospects – said U.S. Steel’s operations will likely perform better from 2021 onwards, but doesn’t think the market has an appetite to price-in something so far out at the top of the steel price cycle; BMO Capital upgraded AG to overweight noting since early July, shares of FR have fallen nearly 40% on the back of declining silver prices, downward guidance revisions, and poor H1 results.

· Materials; potash stocks (MOS, NTR) active as Indian potash importer IPL has reportedly settled a 2018-2019 potash contract with Belarus at $290/tonne, which is higher than what the Street was expecting. BMO said the price is $20/tonne above his expectations and about $10/tonne above the consensus; settlement should support the fertilizer stocks and potentially solidify potash prices for at least 6 months; next catalyst would be China’s contract settlement and his estimates for the fertilizer stocks would rise assuming that China settles up $50/tonne y/y to $280/tonne (Morgan Stanley said price is $50/tonne higher from last year and was expecting only $30 more); lithium company Livent Corp. filed for an IPO, saying it aims to raise $100 million

Technology, Media & Telecom

· Tech space; for a change, news was relatively quiet in the broader tech space, with several stocks and sectors extending recent gains on momentum; in semi’ space, AMD trades to new 52-week highs, rising as much as nearly 10% after the chipmaker debuted a new graphics card over the weekend; Internet stocks moved higher, led by large cap names NFLX, GOOGL, TWTR, BABA, BIDU, BKNG and FB; Tech heavy Nasdaq Comp traded to new record highs, topping the 8K level for the first time, getting a boost last week on better earnings in software, while the Biotech space helped propel gains today


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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