Mid-Morning Look: September 4, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Tuesday, September 4, 2018


U.S. equities were under pressure to start the week and month, paring gains after stellar returns in August (S&P 500 posting a 3% monthly rise, the Dow advancing 2.2% and the NASDAQ rallying 5.7%) as investors and traders say goodbye to summer, returning from the long Labor Day holiday. However, stocks have rallied since the open, paring losses. Economic data was upbeat this morning, with the ISM Manufacturing index touching its best level in 16-years, reinforcing the likelihood of additional rate hikes from the FOMC (weighing on gold prices while lifting the dollar and Treasury yields). Markets also appear hesitant ahead of President Trump’s meeting with Canada this week, as trade tensions remain a key market factor. The dollar strength once again weighing on emerging market currencies with declines in Turkey, Argentina, Mexico and South Africa currencies. Oil prices jumped as a storm threatened U.S. production on the Gulf Coast.


Treasuries, Currencies and Commodities

· In currency markets, US dollar continues to recover from 2-week pullback from 2018 highs; the US dollar rises above 1.32 vs. the Canadian dollar for the first time since mid-July; the dollar index (DXY) rises more than 0.5% above 95.70, 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 peso slides as concerns about emerging markets and uncertainty over the future shape of Nafta ahead of talks between the US and Canada on Wednesday

· Precious metals drop sharply, with gold moving back below the $1,200 an ounce level after a brief rally early last week took prices off 18-month lows; a recent bounce in the US dollar is weighing once again on industrial and metals prices

· Energy futures rise with WTI crude above $70 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. WTI crude ended August with a 3.2% gain

· Treasury market’s drop and yields surge (10-yr around 2.9%) 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


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)


Sector Movers Today

· 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. 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

· 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

· 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

· 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 https://bloom.bg/2Ci1q5w ; 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

· 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

· 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

       Stock GAINERS

· AMD +5%; outperforms again in semi space with both Cowen and Jefferies both raising their tgt to $30 as see continued market share gains

· CRON +12%; as it is partnering with Ginkgo Bioworks Inc. in a $122 million deal to genetically engineer the active compounds in marijuana

· ORIG +11%; to be acquired by RIG in a cash/stock transaction valued at about $2.7B, with holders getting $32.28 per Ocean Rig share https://on.mktw.net/2wD45BA

· PCG +4%; 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

· REPH +23%; 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

· ROKU +4%; 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

· 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.

· TA +28%; on news to sell Minit Mart convenience store business for ~$330.8M to EG Group

Stock LAGGARDS

· CTSH -3%; downgraded 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

· JD -6%; after CEO Liu Qiangdong was arrested Friday in Minnesota on suspicion of sexual misconduct but then released, and went back to China this weekend

· NKE -2%; after company announces Colin Kaepernick as the new face of its “Just Do It” ads

· TAHO -22%; after Guatemala’s Constitutional Court reversed a Supreme Court decision to reinstate the company’s Escobal mine license.

· STX –7%; 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

· TSLA -1%; 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

· WPP -7%; after Q2 results showed a weak performance in North America and also lowered the guidance for its operating margin this year

_______________________________________________________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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