Thursday, September 6, 2018
Equity Market Recap
· U.S. stocks end mixed as the Dow Industrials post modest gains (after slipping yesterday), but the technology sector falls sharply, sending the Nasdaq Composite lower by around 1% for a second straight day, led by weakness in semiconductors. The sector fell as KLAC lowered its 2H shipment expectations, dragging equipment stocks lower, while MU shares fell as much as 10% after cautious analyst comments about memory. Tech underperformed yesterday as well, amid a drop in Internet names as social media executives faced questioning on Capitol Hill. Outside of tech, global trade remains a key market topic ahead of the deadline for tariffs targeting $200 billion of Chinese goods tonight while the U.S. and Canada continue trade talks regarding a new Nafta. Emerging-market stocks and currencies fell again, 7th straight session of losses driven by a drop in Russia’s ruble, with the currency and local bonds hitting their lowest levels since 2016. The move came as U.K. and foreign allies including the U.S. issued a joint statement saying Putin’s government was responsible for the use of the nerve agent in the Salisbury spy poisoning. There was also an onslaught of economic data today with mixed jobs data (ADP private payrolls missed while jobless claims slide again), better services data with ISM topping estimates while factory goods orders missed and nonfarm productivity reported mostly in line with a decline in labor costs – all ahead of the key nonfarm payroll report tomorrow morning. Oil ends lower as demand concerns persist, despite drop in U.S. crude supplies. Treasuries advanced to session highs as yields declined.
· Private payroll data missed as the U.S. created 163K private-sector jobs in August, payrolls processor ADP said, down from 217,000 in July and below the 200K estimate. By sector, professional and business, education and health and leisure and hospitality drove the growth. The natural resources and mining sector lost 1,000 jobs.
· ISM Non-Manufacturing for August rises to 58.5, topping the 56.8 estimate and above the 55.7 prior month; business activity rose to 60.7 vs 56.5 prior month; new orders rose to 60.4 vs 57.0 prior and employment rose to 56.7 vs 56.1; prices paid fell to 62.8 vs 63.4
· Nonfarm productivity rose 2.9% in Q2, mostly in-line with the 3% estimate (prelim 2Q productivity was also up 2.9%), while unit labor costs fell (-1%) in 2Q vs. the (-0.9% est.); output rose 5% in 2Q vs. up 4.8% preliminary while compensation per hour rose 1.9% in 2Q
· Weekly Jobless Claims fell 10K to 203K, below the 213K estimate and was in line with last weeks unrevised 213K figure; the 4-week moving average drops 2,750 to 209,500; continuing claims fell 3k to 1.707m in the week ending Aug. 25
· Markit Services PMI for Aug was 54.8 vs. flash reading 55.2 as index falls from 56 in July and was the lowest reading since April 2018; new Business falls to 55.2 vs 56.6 in July (lowest reading since Dec. 2017); employment falls vs prior month
· Factory Goods Orders fall (-0.8%) in July vs. est. (-0.6%); Factory orders for June revised down to 0.6%; new orders ex-trans. for July rise 0.2% and new orders ex-defense for July fall 0.4% after rising 0.9% in June
· Oil prices reverse, ending the session lower by 95c, or 1.38% at $67.77 per barrel (more than 2-week low), and well off earlier highs of $69.02 per barrel. Mixed inventory data weighed on prices along news the tropical storms in the Gulf of Mexico had little effect on operations. Overnight, the API reported that U.S. crude supplies fell -1.2M barrels for the week ended Aug. 31, while supplies of gasoline rose 1 million barrels and distillate stockpiles climbed by 1.8 million barrels. The EIA was mixed with bullish oil inventory data on a bigger draw, but bigger builds for gasoline and distillates. Reinstatement of sanctions, trade tariffs and broader geopolitics drive near-term positioning.
· Gold prices edge higher, as December gold futures rise $3 to settle at $1,204.30 an ounce, getting a lift amid the weaker dollar, but still down slightly for the week with one day left of trading. Note gold had settled beneath the psychologically important level of $1,200 earlier this week for the first time since Aug. 23rd.
Currencies & Treasuries
· The U.S. dollar dipped vs. most currencies following a weaker than expected private payrolls report from ADP; the dollar index (DXY) falls slightly back to the 95 level, while the yen, pound rallied; emerging markets are mixed after recent selling pressure (Canadian dollar, Turkish Lira, Argentine and Mexican peso). The Canadian dollar popped late afternoon after Bank of Canada’s Wilkins made hawkish comments saying the BoC debated dropping gradual approach to rate hikes. Russia’s ruble joined the ranks of emerging market currencies to descend to multiyear lows, with the currency near its weakest close since 2016. US dollar slipped to a 1-week low vs. the Japanese yen below 110.75 (off overnight highs 111.53). Bitcoin prices dropped over 7% to around $6,400, bringing its 2-day decline to roughly 13%. Euro ends little changed.
· Treasury markets edged modestly higher late day, as yields pulled back from 3-week highs following a very busy day of economic data; the 10-yr yield fell about 2 bps to 2.87%, with the 2-yr at 2.633% and the 30-yr down around 3.06%. Yields have moved higher over the last week as strong data has reinforced view of additional rate hikes from the FOMC this year.
Sector News Breakdown
· Retailers; 52-week highs for DG, TJX, COST, ROST, TGT, JWN in the retail sector; LB reported August Comp Sales up 1%, slightly better than the 0.3% estimate as Victoria’s Secret comp sales fall (-5%), below the (-3.8%) est. while Bath & Body Works comp sales up 15%, topping the 5.1% est.; URBN falls over 8% after quarterly comps show deceleration from Q2; BKS shares weak after the book seller reported a Q1 loss that widened and sales that fell from a year ago; LE posted larger than expected Q2 EPS loss of (16c), missing estimates by 12c and on lower revs; GIII reports net sales rose 16.1% in Q2, driven by excellent results across wholesale businesses and also raised its FY19 outlook
· Casino & Leisure movers; boating stocks (BC, MPX, MCFT) active after MBUU Q4 results topped estimates across the board (EPS beat by 16c on higher sales and Ebitda) – said results driven by a robust retail demand environment and Cobalt’s increasing contributions; PII said it will acquire WSCI for $7.00 per share in cash, enterprise value of ~$23.9M https://bit.ly/2PJJ2nP ; casino stocks were broadly lower, with declines in MLCO, WYNN, LVS after People’s Bank of China and Macau’s monetary authority signed memorandum on Sept. 5 to strengthen coordination in financial policies and regulation, Macau gov’t said (also note earlier in week lower RevPAR guidance from CZR and monthly Macau GGR data); theme parks move higher after FUN provides an uplifting update on August sales and traffic (SEAS, SIX also rise)
· Energy stocks lower; Oil service stocks HAL and SLB slide again – each touched 52-week lows yesterday on lower guidance from HAL and FRAC; Bank America downgraded shares of both COP and CVX to neutral from buy; SWN downgraded to market perform from outperform at BMO Capital, a moved prompted by the recent sale of the Fayetteville Shale operation
· Inventory data showed: 1) overnight the API reported that U.S. crude supplies fell -1.2M barrels for the week ended Aug. 31, while supplies of gasoline rose 1 million barrels and distillate stockpiles climbed by 1.8 million barrels; 2) this morning, the EIA reported a weekly drawdown of -4.3M barrels vs. est. -2.9M, while Cushing stockpiles rose 539K barrels; also gasoline reports unexpected build of 1.84M vs. est. -1.5M and distillates up 3.1M barrels vs. est. 700K build
· Bank movers; WFC shares slipped on a WSJ article that the Justice Department is probing whether employees committed fraud in Wells Fargo & Co.’s wholesale banking unit, following revelations employees improperly altered customer information, https://on.mktw.net/2wVsDVN ; BEN falls to 52-week low after being downgraded to underweight at JPMorgan underweight saying recent weakness in emerging markets, and EM debt in particular, will weigh on the company’s organic growth and earnings potential; Brokers and asset managers (AMTD, ETFC, SCHW) underperform other financial and bank stocks, dropping to their lowest levels in several months after Fidelity rolled out retirement fund that blend passive/active funds
· REITs; PEB said it reached an agreement to buy fellow real estate investment trust LHO in a deal valued at $5.2 billion. Separately, LaSalle said it terminated its previously announced merger deal with affiliates of Blackstone Group LP (Pebblebrook will exchange either $37.80 in cash or 0.92 Pebblebrook shares for each LaSalle share outstanding) https://on.mktw.net/2Nn9XIw ; CXP shares spiked midday after the WSJ reported the company has hired an adviser after receiving takeover interest, according to people familiar with the matter https://bloom.bg/2wNG6yB
· Pharma movers; SPPI Phase 2 clinical trial evaluating poziotinib in EGFR exon 20-mutant non-small cell lung cancer continues to show positive action (results will be presented at the World Conference on Lung Cancer in Toronto on September 24); Elanco Animal Health, a subsidiary of LLY, announced it has launched a roadshow for the initial public offering of its common stock. Elanco is offering 62.9 million shares of its common stock in the IPO; in cannabis space, TLRY received a purchase order for cannabis from the Prince Edward Island Cannabis Management Corp. ahead of the launch of the adult-use market in Canada on October 17 (shares pressured early after a downgrade by Northland Research)
· Biotech movers; IOVA slides after disappointing initial results in an abstract for the World Conference on Lung Cancer for an immunotherapy using what is known as tumor-infiltrating lymphocyte; ARWR rises as presents new ARO-HBV Clinical Data Demonstrating HBsAg Reductions at World Gastroenterologists Summit (says study shows HBV surface antigen reductions); ZLAB 7.5M share Secondary priced at $20.00
· Medical equipment and devices; ILMN tgt raised to Street high $400 form $315 at Cowen and raising numbers post meetings with management that increased conviction in ~15%+ sequencing consumable growth over the balance of our forecast period
Industrials & Materials
· Industrial & Machinery; Heavy duty trucks get a double dose of positive news as NAV boosted its industry and financial forecasts for the year after quarterly results; also helping the group (CMI, PCAR, ALSN) was prelim Class 8 truck orders for August setting an all-time monthly record again at 53,100, or up 150% y/y and 1% MoM (the data follows impressive data the month prior); in non-machinery, AVAV shares jumped on earnings results, while REVG shares dropped on results
· Transports; Dow Transports again trading little changed, much like most of yesterday, just off recent record highs of 11,475.74 on 8/28; KEX, along with airlines AAL, ALK, UAL DAL biggest decliners while truckers LSTR, CHRW top gainers
Technology, Media & Telecom
· Internet; NFLX tgt raised to $440 at RBC Capital following positive U.S. & UK survey results and a deep dive into the Indian market; AMZN debuts Fire HD 8 with hands-free access to Alexa and Fire HD 8 Kids edition; CTRP Q2 ADS beat by 9c as revs of $1.11B top estimates; SNAPshares traded to all-time lows, dropping below the $10 mark while FB shares dropped below $165 to its lowest levels since April; social media names (FB, TWTR, SNAP) lower last few days as the gov’t probes whether these platforms are intentionally stifling the free exchange of ideas
· Semiconductors; sector broadly lower, led by a sharp sell-off in equipment names as AMAT, LRCX, KLAC, MKSI drag the group lower (many speaking at Citi tech conference today); MU falls after being removed from top picks list at Baird and tgt cut to $75 from $100 – DRAM pricing is likely peaking in C3Q, while NAND oversupply has worsened recently. Given C1H19’s weak seasonality in NAND, they say they do not expect a stabilization in NADN flash pricing until C2H19; KLAC drops after saying now expects shipments in H2 to be “flat to down a few single digits or so” vs. prior view of “flat to up low single digits”; INFN falls amid $275M convertible note offering; note Morgan Stanley recently commented on space saying memory markets are worsening into the fourth quarter on inventory and pricing concerns
· Software movers; CLDR Q2 results beat estimates with a 23% Y/Y revenue growth, billings beat by 7% and raised its annual guidance outlook $440M-$450M vs. est. $441.69M; ZS posted a beat and raise quarter but shares slipped early as the company’s lock-up period expires next week (September 12th); MDB Q2 results beat across the board with total revenue of $57.5M growing ~57% Y/Y topping estimates; GWRE posts better Q2 results and raised guidance
· Media & Telecom movers; CBS shares active after CNBC’s David Faber first reported the board of CBS is deep in settlement talks that would result in the departure of embattled CEO Les Moonves, and the board is offering a roughly $100M exit package (though notes Moonves due as much as $180M); VOD upgraded to buy at Citi saying there is upside in the near term depending on credit markets holding up and not threatening the dividend; MDP shares slipped as earlier co. forecast FY 2019 adj. Ebitda of $720M-$750M vs. est. $748.2M from presentation slides