Market Review: August, 31, 2018

Terrie AmengualDaily Market Report

Closing Recap

Friday, August 31, 2018

Equity Market Recap

· U.S. stocks settle mixed on light volumes, as major averages end up pulling off their record closing highs set earlier this week for the S&P 500 index, Russell 2000, Dow Transports and Nasdaq Composite (Dow Industrials about 2% away from its all-time bests) as trade concerns weighed on sentiment. Late in the afternoon, Dow Jones reported that the US/Canada talks end with no agreement and that President Trump is expected to notify congress to proceed with Mexico-only deal to replace NAFTA, though is expected to suggest Canada can still join revised NAFTA deal. Those headlines took markets lower in the final hour of trading before recovering on news the talks will resume again next week.

· Prior to the Canada news, trade concerns with China, which dragged markets lower late Thursday on reports that President Donald Trump is set to back tariffs on $200 billion worth of Chinese goods next week, took its toll on Industrials and Materials. Emerging markets remained volatile as the Turkish Lira and Argentine Peso rebounded after sharp declines this week after the IMF said “Argentina has the full support of the Fund and we are confident that the strong commitment and determination of the Argentine authorities will help the country overcome the current difficulties.”

· Europe ends day/month lower as the Stoxx Europe 600 Index fell 0.8% to 382.26 in its second straight daily drop, down 0.3% lower for the week. For the month, it declined by 2.4% in its weakest monthly performance since March. Germany’s DAX dropped 1% to 12,364.06. For the week, it fell 0.3%, bringing its August decline to 3.5%. The FTSE 100 fell 1.1% to 7,432.42, its third straight daily drop and dropped 4.1% for the month, biggest decline since August 2015. For domestic markets, the Dow and the S&P posted their third straight weekly gain while both the S&P and NASDAQ record their fifth positive month in a row, while the Dow has gained for two straight months.

Economic Data

· Chicago Purchasing Managers Index fell to 63.6 from 65.5 in the prior month but slightly better than the 63 estimate by economists (after rising 1.4 points to 65.5 in July). The decline breaks a string of four monthly gains, but is only the lowest since May. Prices paid rose at a slower pace, signaling expansion while new orders rose at a faster pace, also signaling expansion

· The Aug. Final Michigan Sentiment fell to 96.2 from 97.9 last month, but was above the 95.5 estimate and the 95.3 in the preliminary reading; expectations index fell to 87.1 vs. 87.3 last month while current economic conditions index fell to 110.3 vs. 114.4 last month


· WTI crude oil slipped -45c, or 0.6% to settle at $69.80 per barrel, dipping just below the $70 per barrel mark (had moved above that level for the first time since July yesterday), while ended the week higher by 1.6% (its 2nd straight weekly advance after snapping 7-week losing streak last Friday), and closed August up 3.2%. Crude-oil futures retreated from their highest levels in about six weeks (highs of $70.36) amid escalating trade tensions. Crude moves this week have been mostly supported by potential disruptions to global crude supplies, including U.S. sanctions on Iran that take effect in early November.

· Gold futures gained $1.70 to settle at $1,206.70 an ounce, ending the week lower by -0.5% (after snapping its 7-week losing streak last Friday) and fell -2.2% for August (its 5th straight monthly decline). The US dollar strength in August (despite the hiccup the last few weeks) and surging stocks sapped buying interest for defensive gold prices.


· The U.S. dollar rebounded from losses earlier this week, as the dollar index (DXY) ends little changed above the 95 level (off weekly lows 94.43 and off 52-week highs of 96.98 on 8/15) following a very busy week of market moving currencies, highlighted by emerging markets. The euro dropped -0.6% back to the 1.16 level (off intraweek highs of 1.1733) despite cooling inflation data while the British pound slipped to $1.2961 from $1.3013, continuing to give back some of the upward momentum it gained at midweek as Brexit talks hit snag on EU food labelling protections. The U.S. dollar, meanwhile, was little changed versus the Japanese yen.

· Now to emerging market currencies: Argentina’s peso rebounded from its double-digit plunge against the US dollar Thursday (traded up at record ow 40USD) as the currency strengthened to roughly 36.88 pesos. The rebound came as the IMF said it is working closely to strengthen the Argentina loan program, which helped the Peso. The Turkish Lira also rebounds after yesterday’s pullback on reports the deputy governor of the nation’s central bank will step down. The dollar traded at 6.578 lira, down from 6.7895 lira overnight. The Argentine peso overtook the lira as the worst performer among major emerging-market currencies this year.

Sector News Breakdown


· Retailers; LULU shares jump as easily beat on both the top- and bottom-line, driving a 19% FX comp (vs. est. 9.5%) including 47% growth in e-commerce, a 10% B&M comp, 47% international growth, and double digit comps across women’s, men’s, and accessories; ANF shares remained weak after falling -17% on Thursday after weaker quarterly sales with Morgan Stanley saying shares have further downside ahead as comps get tougher

· Discount/dollar stores fall for a second straight session, hit today after BIG 2Q EPS missed estimates by 8c and cut its year adjusted EPS forecast to $4.40-$4.55 from $4.50-$4.70; the group declined yesterday led by a 15% decline in DLTR after Q2 EPS, sales and comps all just below and lower Q3 guidance (note FIVE reports next week)

· Auto’s; U.S. automakers, suppliers and parts retailers active after President Donald Trump rejected an EU proposal to eliminate tariffs on auto imports. Trump also announced that he wanted to move ahead with a plan to impose tariffs on $200 billion in Chinese imports – shares of GM, F, FCAU, AXL, LEA, MGA, DLPH among movers

· Consumer Staples; KO said it would buy British coffee-shop chain Costa for $5.1B from London-listed Whitbread PLC, giving it a strong position in coffee overseas ; in beauty care, ULTA moves back to 52-week highs after Q2 EPS beat by 5c on in-line revenue but weaker comps, while lower 3Q guidance ($2.11-$2.16 vs. $2.31 est.) was overshadowed by higher-than-expected margin and backed its year EPS, rev and comp sales views (also announces Kylie Jenner brand pact)

· Firearms; gun stocks (RGR) and sporting goods stores (DKS, HIBB, SPWH) shares rise after AOBC Q1 results handily topped consensus and raised FY19 adjusted EPS view to 62c-66c from 40c-50c and ups year revs to $620M-$630M from $570M-$600M

· Casino & Leisure movers; in gaming, Jefferies said the July Nevada results are incrementally supportive of their positive view on the non-Strip operators (BYD, GDEN, MCRI) and believe, confirms expectations for a challenging comparison for the event and convention-driven Strip operators (CZR, MGM, WYNN, LVS)


· Energy stocks dropped on the rebounding dollar, profit taking after a good week of gains for WTI crude, and trade impact concerns. The Baker Hughes weekly rig report showed the total U.S. rig count rose 4 to 1,048 rigs, with oil rigs rose 2 to -862, up 2 to 184, and miscellaneous rigs unchanged at 2.

· Other top stories included: CNQ announces that it has entered into an agreement to acquire a 100% working interest in the Joslyn oil sands project from TOT for a total consideration of $100M cash on closing and annual cash payments of $25M over each of the next five years; Brazil oil regulator ANP has approved the applications of six companies – including BP, RDSA, and TOT – to bid in the government’s Sept. 28 oil auction of four blocks in the pre-salt layer; SN filed to sell 10.5M in shares

· Utilities & Solar; utilities underperform, with the UTY dropping off off intraday highs of 684.04, as nearly all 20 components trade to the downside, led by AES, PCG(profit taking – still up 7% on the week after CA wildfire bill late last week) as well as EIX and ETR


· Pharma movers; AZN slips after a phase 3 trial for anifrolumab, which targets systemic lupus erythematosus, didn’t meet its primary endpoint of a statistically significant reduction in disease activity in patients with systemic lupus erythematosus; Cannabis stocks rebound after the pullback yesterday in TLRY (on analyst downgrade) and CRON (negative Citron Research comment), with TLRY setting new all-time highs today

· Biotech movers; it has been a great week for biotech (IBB), trading to 52-week highs early today before paring gains; CRSP rises after the company started recruiting patients for its European study of CTX001 for the treatment of beta thalassemia (partnered with VRTX); AMRX announces a 5-year supply and distribution agreement with American Regent for the only preservative-free generic alternative to AMAG Makena (hydroxyprogesterone caproate injection, USP, 250mg/mL). The injectable is used to reduce the risk of preterm birth in certain women

· Healthcare services and providers; COO Q3 EPS fell short of expectations and management lowered 2018 guidance due to unfavorable FX, but several analysts defended shares, helping pare the intraday losses; DVA and ARA active again after dropping sharply Thursday after a state bill that would limit the company’s reimbursement rates for dialysis passed the final hurdle in California before reaching Governor Jerry Brown’s desk. HCA announced a definitive agreement to acquire Mission Health, a nonprofit North Carolina health system for about $1.5B

Industrials & Materials

· Transports; index was little changed on the day, down about 175 points from its record highs on Tuesday of 11,574.74, with weakness in CAR, KEX, FDX offset by gains in LUV, JBHT, UNP and UAL

· Metals & Materials; CRB Commodity index (CRY) up slightly on the day despite the sharp decline in industrials metals (aluminum, copper, nickel all down over 1.5%), as strength in grains (soy, corn, wheat) help offset the weakness; precious metals little changed as oil prices slip after touching 1-month highs this week. Industrial metals dropped after reports that U.S. President Donald Trump wants to move ahead with a plan to impose tariffs on $200 billion in Chinese imports as soon as a public-comment period concludes next week.

Technology, Media & Telecom

· Semiconductors; IDTI shares jumped as Japan’s Renesas considers buying U.S. chip maker, Reuters reported saying the deal could be worth as much as $6 billion ; AMBA shares decline to fresh 52-week lows after Q2 EPS and sales topped views, but 3Q guidance sales and EPS were well below Street estimates as slower-than expected transition away from legacy consumer markets is depressing EPS and guided for continued weakness in all consumer camera categories (downgraded to underperform at Bank America)

· Video gamers; EA adds to yesterday’s 9% decline following its lower booking guidance and push out release of one of its top games; downgraded (along with ATVI) at Bank America today; Bank America cut ATVI and EA to neutral as believes Electronic Arts’ guidance cut highlights the risks of a back-end loaded year, a “crowded” holiday title slate and continued Fortnite pressure; shares of Ubisoft and Tencent among names in video game space that declined overnight after plans by China’s regulators to curtail the number of online games and discourage play-time

· Software mover; a group that has seen stellar gains this quarter given better earnings for the most part; YEXT reported a solid 2Q, with revenue beating by ~3% and billings beating by 9%, while slightly raising its guidance on both revenue and EPS for the full year, but shares fell after recent surge to 52-week highs; CSOD positive mention at Piper as raises tgt to $68 after mgmt meeting as came away incrementally positive both on near- and longer-term trends; VHC rises after AppleInsider reported a federal district judge denied AAPL’s motion for a new trial in the patent dispute on certain merits of VirnetX’s case then denied-in-part and granted-in-part VHC’s motion for entry of judgment; ZUO shares slip after better Q2 results and raised guidance as analysts notes shares fairly valued at current levels after the 140% surge since its April IPO

· Internet movers; AMZN new record highs again, trading above the $2,020 level after topping $2,000 for the first time this week; President Trump singled AMZN, FBand GOOGL out as a possible antitrust situation, while China Internet names too (BIDU, HUYA, BABA, IQ), are also down pre-market, likely on renewed tensions

· Hardware & Component news; NTNX exceeded top-line expectations in the quarter, but guided EPS lower to reflect higher spending on both S&M and R&D


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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