Mid-Morning Look: August 27, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Monday, August 27, 2018

Equities in rally mode again, with new record highs for both the S&P 500 index and Nasdaq Composite along with gains in the Small Cap Russell 2000 as stocks start the final week of summer sharply higher on positive trade hopes (with Mexico today). The Nasdaq Composite topped the 8,000 level for the first time, rising as much as 75 points to 8,021.21 before paring gains. The Dow Industrials also trades to big round number – topping the 26K level (all-time highs 26,616 back in January) up over 200 points. Sentiment positive this morning on reports the U.S. and Mexico reach partial agreement to resolve trade conflict, Washington Post reported – saying the preliminary deal, which doesn’t include Canada, requires that a larger portion of autos traded on a tariff-free basis be made by higher-wage workers. Several sectors outperform following the trade news with Mexico as autos (GM, F) and rails (KSU) getting a boost. Note the S&P 500 index broke out of a 7-month trading range Friday after Fed Chairman Jerome Powell signaled that the central bank sees little need to tighten policy aggressively and momentum continues. Volumes again light amid the last week of summer (recall Friday saw the lightest daily volume of the year (excluding the 4th of July half day).

Treasuries, Currencies and Commodities

· In currency markets, the U.S. dollar slides to session lows as the dollar index (DXY) drops back below the 95 level (lowest levels since early August – and off 2018 highs of 96.98 on 8/15). Talk of an imminent agreement between the U.S. and Mexico that could pave the way for a new version of Nafta in 2019 has the Mexican peso outperforming today; the euro and Pound rise

· Commodity prices getting a boost as the dollar falls to session lows; gold prices rebound to trade higher by a few bucks at $1,217 an ounce, while oil prices moderately higher around $69 per barrel for WTI crude ahead of a conference call between members of a committee monitoring the agreement between OPEC and non-OPEC producers on output levels

· Treasury markets slip from Friday closing levels, with the 10-yr yield edging higher around 2.84% (only up about 2 bps despite new record highs for stocks), though the shorter term 2-yr yield up at 2.64% (about 4 bps off last week lows); the 30-yr yield remains below 3%; no major economic data to move markets today still focused on last week’s positive Fed view on the economy

Sector Movers Today

· 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

· 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

· Transports; Dow Transports approaching its all-time highs – traded as high as 11,475.40 on 8/21 before paring gains – index last up 1.4% around 11,440 led by gains in all 20 components (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

       Stock GAINERS

· ALNY +16%, along with gains in IONS on lower perceived threat from Pfizer’s tafamidis in ATTR

· AMD +6%; leading chip stocks higher as extends recent upward momentum

· AMWD +6%; posted better Q1 EPS results, topping estimates by 12c on mostly in-line revs, bouncing shares off recent 52-week lows

· DBD +10%; 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

· ESPR +5%; reported positive results in a late-stage trial of a treatment for patients with atherosclerotic cardiovascular disease (ASCVD)

· MOS +3%; potash stocks (MOS, NTR) active as Indian potash importer IPL has reportedly settled a 2018-2019 potash contract with Belarus at $290/tonne – better than Street views

· PTLA ; 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

· TLRY +16%; as momentum in stocks leveraged to cannabis extend gains; Cowen saying today more alcoholic beverage companies are likely to announce deals with Canadian licensed producers and called TLRY an attractive partner

Stock LAGGARDS

· BE -3%; downgraded to underperform at Credit Suisse on valuation, saying now trading at a premium even their Blue Sky scenario of $30

· CMG -3%; downgraded to underperform at Wedbush saying quarter-to-date checks suggest risk to the current Q3 consensus SSS growth expectation

· EIDX -32%; after PFE presented data for the drug in patients with a rare, fatal condition called transthyretin cardiomyopathy

· TSLA -3%; 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

· X -2%; Morgan Stanley downgraded X to underweight from overweight, and cut tgt to $30 from $44 saying operations will likely perform better from 2021 onwards, but doesn’t think the market has an appetite to price-in something so far out

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