Market Review: September 4, 2018

Terrie AmengualDaily Market Report

Closing Recap

Tuesday, September 4, 2018

Equity Market Recap

· U.S. stocks end mostly lower, though finish well off their worst intraday levels, as gains in tech giants (AAPL, AMZN) and financials (on rising yields) help propel markets off session lows. Major U.S. initially started the week and month lower, paring gains after strong returns in August (S&P 500 posting a 3% monthly rise, the Dow advancing 2.2% and the NASDAQ rallying 5.7%). But weakness was short lived with the dollar recovering, commodity prices ending mixed (oil up on production disruption fears as tropical storms make landfall) as stocks rallied from depressed levels. MSCI’s index of emerging market stocks posted its 5th consecutive decline as contagion risks across markets persist. Economic data was upbeat this morning, as the ISM manufacturing index touched its best level in 16-years, reinforcing the likelihood of additional rate hikes from the FOMC. Trade talks with Canada later this week also playing a role in currency markets today.

· Dow component and tech giant AAPL climbed for a 9th straight session to a new all-time highs along with a record best for AMZN as a handful of tech standouts continue to support the market. Semiconductor stocks were mixed, but AMD and NVDA both extend recent gains to fresh 52-week highs (positive analyst commentary again). In fact, Bloomberg noted that the three largest U.S. public companies (AAPL, AMZN and MSFT) now account for 11.6% of the total market cap of the S&P 500 Index. In social media, executives from Facebook, Twitter and Google on Wednesday testify on social media, Russia meddling.

Economic Data

· Construction Spending for July rose 0.1%, missing the 0.4% rise estimate; June was revised to 0.8% drop from 1.1% while May revised to 0.7% gain from 1.3%; Private construction fell 0.1% in July and private residential construction rose 0.6%

· U.S. ISM Manufacturing for August jumps to 61.3 from 58.1 last month and above the 57.6 estimate (PMI was highest level since May 2004); new orders rose to 65.1 vs 60.2, while employment rose to 58.5 vs 56.5 and prices paid fell to 72.1 vs 73.2; backlog of orders rose to 57.5 vs 54.7 and new export orders fell to 55.2 vs 55.3

· Markit Manufacturing PMI 54.7 vs Flash Reading 54.5 for August as index falls to 54.7 from 55.3 in July; Year ago 52.8 (lowest reading since Nov. 2017)


· Energy futures end only modestly higher, as WTI crude settled up 7c at $69.87 per barrel, off intraday highs of $71.40. Prices jumped earlier as tropical storm Gordon raises supply disruption fears along with concerns about risks to Iranian supply from U.S. economic sanctions. Tropical storm Gordon is set to become a hurricane as it makes landfall along the U.S. Gulf of Mexico coastline later Tuesday, prompting oil producers to take precautionary measures and shut production at offshore oil platforms. Reports showed, 54 production platforms, which represent nearly 7.9% of all manned platforms in the GoM, were evacuated because of the storm. About 9.2% of oil production and nearly 9.1% of natural-gas production in the Gulf has been shut in.

· December gold prices slipped -$7.60 or 0.6% to settle at $1,199.10 an ounce, settling below $1,200 an ounce for the first time in more than a week as the dollar rebounded following data showing that U.S. business conditions surged to a 14-year high in August and pressure on emerging-market currencies provided a boost to the dollar

Currencies & Treasuries

· The U.S. dollar advanced, extending late last week’s rally as it recovers from the recent 2-week pullback of 2018 highs; the euro moved back below the 1.16 level, but finished well off its 1.153 intraday lows; the US dollar rose above 1.32 vs. the Canadian dollar for the first time since mid-July before paring gains; the dollar index (DXY) rises as high as 95.73, off last week lows of 94.43, getting a boost from strong manufacturing index data today, reinforcing the rate hike cycle by the FOMC; the Mexican and Argentine peso slides on trade concerns, debt issues; the Turkish lira sank 0.6 percent to 6.6771 per dollar, the weakest in more than three weeks; South Africa’s rand fell over 2% to the weakest in more than two years.

Bond Market

· Treasury market’s end lower as yields surge (10-yr around 2.9%) for biggest advance in over a week after the ISM manufacturing index surges to a 14-year high, jumping to 61.3 from 58.1 the previous month (est. for a slight dip to 57.7), while new orders spike to 65.1 from 60.2 in the prior month. The 2-yr yield was around 2.65% and the 30-yr yield ticked higher to 3.06%.

Sector News Breakdown


· Auto’s; monthly auto sales data out today: 1) Ford (F) US August auto light sales rose 4.1%, topping the expected decline of (-0.8%); 2) NSANY U.S. auto sales rose 3.7%, below the expected gains of up 9.2%; 3) TM August US auto sales fell (-2.0%), slightly more the (-0.7%) decline estimate; 4) HMC Aug sales up 1.3%, below the 2.2% Bloomberg estimate; 5) FCAU Aug total US sales rose 10%, missing the 12% Bloomberg est. In research, TSLA was reinstated as sell at Goldman Sachs with a $210 tgt as remains negative on Tesla’s ability to reach production ramp/margins and maintain free cash flow generation; CONN shares dropped after earnings

· Retailers; SIG was downgraded to sell at Citigroup noting the stock increased significantly on the 2Q comp beat and guidance increase…but while 2Q top line was better than expected with overall comps of +1.7% beat, underlying fundamentals do not suggest that business is healthy; NKE shares slide after company announces Colin Kaepernick as the new face of its “Just Do It” ads; TA shares rise on news to sell Minit Mart convenience store business for ~$330.8M to EG Group; Goldman Sachs initiated some retailers, with buy ratings on KSS, JWN and TJX but sell rated on Macy’s (M) as view strategic initiatives as insufficient to offset traffic headwinds

· Restaurants; DNKN rises after the Financial Times speculated that the company could be a possible target for companies such as JAB, Nestle and Coke especially after Coke’s purchase of Costa last week

· Casino & Leisure movers; casino stocks (MGM, WYNN) weaker; Stifel noted that Macau’s Gaming Inspection and Coordination Bureau reported August gross gaming revenues (GGR) of 26.56B patacas ($3.35B), representing an increase of 17% versus the prior year. The month lapped a +21% August 2017 comparison though was slightly ahead of the +15% street estimate


· Energy stocks mixed; in equipment, services, drillers; ORIG +16%; to be acquired by RIG in a cash/stock transaction valued at about $2.7B, with holders getting $32.28 per Ocean Rig share; Saudi Aramco awards the first large-scope integrated services contract for its Marjan offshore oilfield to BHGEwhich will provide drilling, coiled tubing and drilling fluids engineering services; SLB shares slid after saying at a Barclays conference that, thus far in 3Q, the frac market has softened “significantly” more than SLB expected

· E&P sector; SWN announced a deal to sell its Fayetteville Shale E&P and related midstream gathering assets for $1.87B in cash to Flywheel Energy LLC. In addition, Flywheel will assume about $438M in future contractual liabilities. CPE raises midpoint of annual 2018 production view by 1,500 BOE/d citing year-to-date performance in the Spur area and impact of production from closing of Delaware Basin acquisition (sees total production for year 31.5-33 mboe/d)

· Utilities & Solar; PCG was upgraded by both Bank America and Evercore/ISI as believe total claims are likely to settle below the $10B insured loss figure and see management tapping short/medium term debt to bridge claims in the interim/believe the worst is likely over


· Bank movers; group failed to rally despite the uptick in Treasury yield, with group little changed; in research, STT was upgraded to overweight at Morgan Stanley as expect catalysts over the next 6-12 months as STT gives more clarity on CRD acquisition and synergies, announces large clients signing up for CRD’s products, and resumes buybacks; EVR was downgraded at UBS noting shares have outperformed the S&P 500 by about 10% so far this year, and as investors are increasingly concerned the cycle is entering “later innings; FITB was upgraded to outperform at Wedbush noting shares are cheap after recent underperformance down 13% since acquisition of MFBI


· Pharma movers; REPH shares rise after the company said that it would resubmit a new drug application for its intravenous painkiller, meloxicam, to the FDA by the end of this month; SHPG was downgraded to market perform at Bernstein saying current controversy on Shire is the risk/reward into the closing of the Takeda acquisition; ZGNX said its ZX008 shows positive effect in mid-stage study in rare childhood epilepsy; MNKD rises after pact for development and commercialization of a dry powder formulation of treprostinil with UTHR

· Biotech movers; PBYI said the EC granted marketing approval for Nerlynx as an extended adjuvant treatment for adults with early stage hormone receptor positive HER2-overexpressed/amplified breast cancer; NBIX tgt raised to $140 at Opco based on a series of recent events including clinical data for Ingrezza and opicapone, top-line Ph3 results for elagolix and setback for a competitor in uterine fibroids

· Cannabis sector; CRON shares rise as it is partnering with Ginkgo Bioworks Inc. in a $122 million deal to genetically engineer the active compounds in marijuana; TLRY shares rose as much as 15% earlier before paring gains – Citron Research said they are shorting the stock after rally in shares (Citron noted it loved TLRY at $26 but said expect an equity raise at these levels…by far most expensive in space)

Industrials & Materials

· Industrial & Machinery; LNN slides after Stifel lowers his price target on the stock to $91 from $94, saying a dealer survey showed overall sentiment from the domestic dealer network was weaker vs previous survey, and below their forecast; PWR authorized a new stock repurchase program to repurchase up to $500M in common shares through August 30, 2021

· Transports; UPS was upgraded to Strong Buy from market perform at Raymond James as believe the market is underappreciating UPS’ long-term (2021) Domestic EBIT and Free Cash Flow outlook, which they estimate at greater than $8 billion

· Metals & Materials; Metal prices slide on a stronger U.S. dollar as emerging-market assets sink as copper and silver miners underperform; TAHO shares fall after Guatemala’s Constitutional Court reversed a Supreme Court decision to reinstate the company’s Escobal mine license; UBS remains cautious on steel stocks saying based on recent meetings, there’s more flat steel (HRC) downside than long steel (rebar) – which is more negative for X/AKS than NUE/STLD; STLD announces added stock buyback of up to $750M

Technology, Media & Telecom

· Internet; JD shares slumped after CEO Liu Qiangdong was arrested Friday in Minnesota on suspicion of sexual misconduct but then released, and went back to China this weekend; FB was downgraded at MoffettNathanson saying revenue slowdown and heightened regulatory scrutiny amounts to a “toxic brew”; AMZN market cap briefly reaches a trillion dollars today at new highs

· Semiconductors; Evercore/ISI with several rating changes, upgrading KLAC to outperform and upped tgt on NVDA to $300 and positive on shares of MU, XLNX, ASML, OLED saying the sector should drive the market higher after investors pulled money from the sector on concerns from political risk, China and potential tariff escalation (form downgraded ADI, WDC, STX); QCOM tgt raised to $80 at Macquarie as see Qualcomm getting a significant boost from an Apple settlement; Needham downgraded SMTC to hold from buy on valuation with shares up 75% YTD; IDTI tgt raised to $48 at Craig Hallum saying content/unit growth in multiple markets on top of takeout potential will likely drive shares higher

· JPMorgan positive on semis as well as they continue to recommend the group and expect it to outperform the broader indices this year as top picks include OW-rated MU, MXIM, INTC, MCHP, IPHI, and IDTI. In Semicaps they continue to like AMAT and LRCX as the market appears to be discounting an equipment spending scenario that will be down >10% in 2019

· Hard disk drive makers weak; STX falls after being downgraded to underperform at Evercore/ISI and cut tgt to $45 as see limited upside from current levels, given that the company has already guided above seasonal for both 3Q/Q4; WDC also downgraded at Evercore, down to in-line form outperform and lower tgt to $75 as see it hard for shares to rally into year end with NAND pricing expected to decline more aggressively through 1H19, FY20 consensus estimates expected to decline by 20% and GM’s not bottoming until 3Q19

· Telecom movers; CHU and CHA shares active after Bloomberg reported China is exploring a merger between the two wireless carriers in order to accelerate the development of 5G mobile services amid a race with the U.S. over the technology ; Barclay’s downgraded VZ in broader Telco note, saying valuation to cap upside potential from present levels. Barclays also cut T tgt to $31 from $40 while maintained overweight on TMUS

· Media movers; NWSA was upgraded to buy at Loop Capital noting have declined 13% over the past month despite reporting a good quarter as the Street has become too negative with the consolidation of Foxtel and the prospects for the newly named Subscription Video Services; in advertising, WPP shares slide after Q2 results showed a weak performance in North America and also lowered the guidance for its operating margin this year; CMCSA shares slipped after President Trump again threatened NBC’s license in tweet as claimed questionable conduct

· Hardware & Component news; AAPL tgt raised to $250 at Canaccord saying checks indicate resilient iPhone sales even though the most recent iPhone models are close to a year old; ANET downgraded to equal-weight at Morgan Stanley valuation implies a balanced risk/reward; CTSH cut to underperform at Bank America saying CTSH faces headwinds which could cause revenue growth to decelerate, while potentially jeopardizing consensus revenue forecasts for next year; ROKU rated new buy at Guggenheim with $74 tgt as view the company as well positioned as an industry leader in the growing digital-video advertising marketplace

· Opticals; JPMorgan positive on LITE saying channel checks done by them are pointing to an increasing likelihood of adoption of time-of-flight based 3D sensing on the rear of Apple’s OLED iPhone models starting in 2019; however, overall group mostly lower after B Riley downgraded IIVI and FN to neutral from buy citing valuation and macro uncertainty; AAOI slides after Craig Hallum reiterated sell as believes that INTC is poised to increase its 100G module manufacturing capability and it will be an increasing competitive threat to AAOI by 4Q


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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