Market Review: September 13, 2018

Terrie AmengualDaily Market Report

Closing Recap

Thursday, September 13, 2018

Equity Market Recap

· U.S. stock markets opened higher and maintained their gains throughout the session, overcoming a brief late morning pullback after a “tweet” from President Trump on China and trade, as technology gains paced the market rally. The Nasdaq Composite rose as much as 1% before paring gains amid a recovery in semiconductor stocks, while the S&P 500 index boosted its winning streak to four-consecutive sessions. Healthcare stocks also helped push markets higher, while energy lagged with WTI crude falling 2.5% as the IEA said in its monthly report that crude oil output in OPEC climbed in August by 420,000 barrels a day. Inflation data was “tame” for a second straight session, easing fears about the economy moving “too far too fast” after August CPI data showed inflation unexpectedly cooled (similar to yesterday’s PPI data). In another watchful story this week, Hurricane Florence weakened to a Category 2, now classified as simply a hurricane rather than a major one but its forecast to deliver as much as 30 inches of rain raising major flood warnings by the Carolinas.

· The U.S. dollar finished lower, falling vs. its major counterparts after The Bank of England kept rates unchanged at 0.75% (no change expected after raising rates last meeting) and the European Central Bank also kept its benchmark interest rates unchanged. However, commentary from the ECB and a Brexit report helped boost the euro and Pound respectively. Stocks pulled off the lows late morning after President Trump said in a tweet “The Wall Street Journal has it wrong, we are under no pressure to make a deal with China, they are under pressure to make a deal with us. Our markets are surging, theirs are collapsing. We will soon be taking in Billions in Tariffs & making products at home. If we meet, we meet?” Separately, in an interview on CNBC, hedge fund manager David Tepper said the prospect of China tariffs is among the biggest risks to the current market – as trade/tariffs continue to remain a market factor.

· Back to central banks, the European Central Bank made no change on interest rates, and said it doesn’t expect any changes until summer 2019 at least. The ECB slightly trimmed its GDP growth forecasts for both 2018 and 2019, and ECB President Mario Draghi said that risks to the euro area’s growth outlook were “broadly balanced.”

Economic Data

· Weekly Jobless Claims fell 1K to 204K, below last week’s upwardly revised 205K but below the 210K estimate; the 4-week moving avg. slipped by 2K to 208K; continuing claims fell 15k to 1.696m in the week ending Sept. 1

· Consumer price index (CPI) rose by 0.2% in August to mark the fifth straight increase, but came in below the 0.3% increase forecast by economists while the increase in the cost of living over the past 12 months slowed to 2.7% from a six-year high of 2.9% (first drop in the yearly rate since last fall). The core CPI inflation reading, which strips out food and energy edged up 0.1% last month, missing the 0.2% estimate while YoY core prices rose 2.2%, below the 2.4% estimate

Commodities

· Oil prices dropped sharply, falling $1.78 to $68.79 per barre, down around 2.5% following yesterday’s push back above $70 per barrel on bullish weekly inventory data reports. An OPEC report weighed on sentiment as the IEA said in its monthly report that crude oil output in OPEC climbed in August by 420,000 barrels a day, to average 32.63 million barrels a day. The August report also signaled that global supplies hit a record of 100 million barrels a day. December gold reversed to end lower by -$2.70 and settle at $1,208.20 an ounce, failing to get a lift from tamer inflation data which sent the dollar to two-week lows. Earlier in the session, gold prices climbed to their highest levels in 2-week at $1,218 an ounce, but gave up gains.


Currencies

· The U.S. dollar fell to 2-week lows, with the dollar index (DXY) touching 94.42 before paring losses (off earlier highs of 94.965), falling the most vs. the euro and pound. ECB President Draghi said uncertainty around the inflation outlook is receding and the projection for core inflation as “significantly stronger” and also downplayed the risk of EM contagion, saying the spillover hasn’t been substantial, which helped propel the euro to highs around 1.17. Meanwhile, the British pound rose to a six-week high of $1.3108, compared with $1.3048, amid more Brexit headlines. The Turkish Lira recovered off lows after the Central Bank of the Republic of Turkey surprised investors with a 625 bps hike of its benchmark interest rate, lifting the one-week repo rate to 24% from 17.75% before. Lastly, the Russian ruble fell more than 1% on reports the U.S. is planning a second round of sanctions by November on Russia for a chemical weapon attack, a State Dept official tells lawmakers at a House hearing.


Bond Market

· Treasury markets advance as yields pullback (modestly) falling from earlier highs after a second inflation report in as many days (CPI today after PPI yesterday) shows prices not rising as much as economists expect; the 2-yr yield falls back to 2.75% from earlier highs above 2.76% while the 10-yr yield stands at 2.966% after highs above 2.97% prior to the data.


Sector News Breakdown

Consumer

· Retailers; TGT said it would hire 120,000 seasonal workers, 20% more than last year; OXM posted in line Q2 EPS on lighter revs though Q2 comp growth of +7% comps were the strongest since 1H15/also mid-point of year EPS view below estimates; TLRD Q2 comps beat consensus expectations while inventory declined 17%; FRED shares fell after 2Q comparable store sales down 3.5% vs 3.0% decline in the year-earlier period; VNCE slipped after earnings

· Consumer Staples/Restaurants; in grocer sector, KR shares fell as reported sales growth that missed expectations and a quarterly drop in margins, while comp store sales of 1.6% missed the 1.8% estimate, while maintains year outlook; HSY said it would buy Pirate Brands from BGS for $420 million in an all-cash deal https://reut.rs/2xaAAGH ; TXRH downgraded at BTIG to sell (4th analyst downgrade in a week); MCD shares slide, falling below the 200-day moving average support earlier of $163.43 after recently pulling back from 4-month highs

· Housing & Building Products; Homebuilders were among the top sector decliners today (DHI, LEN, TOL) after research firm Zelman said survey points to Q3 order downside, Bloomberg reported; lumber futures fell to lowest levels in over a year; FND10M share Spot Secondary priced at $37.25; shares of home improvement retailers LOW and HD pullback from recent highs as Hurricane Florence downgraded to category 2 storm (from 4 yesterday)

· Casino & Leisure movers; in auto space, NIO shares surged more than 40% on its second day of trading after 160M share IPO priced at $6.26 on Wednesday (shares actually fell as low as $5.35 yesterday before rebounding); gaming stocks got a boost after several days of selling pressure (LVS, MLCO, WYNN, MGM)

· Education sector; Citigroup downgrade the China after-school tutoring segment, as they believe the govt is launching another round of regulation. They maintain Buy on EDU given its non-K12 tutoring exposure (~55% of net profit) and attractive valuation, while downgrade TAL to Neutral, Puxin to Neutral/2H, and FEDU to sell and open Negative Catalyst Watches for these players

Energy

· Energy stocks sank after the IEA said in its monthly report that crude oil output in OPEC climbed in August by 420,000 barrels a day, to average 32.63 million barrels a day, making up for a decline in Iranian supply due to U.S. economic sanctions – IEA has warned of higher oil prices unless supply losses from Iran and Venezuela are offset. The news offset yesterday oil prices gains following bullish weekly inventory data from the API and EIA

· E&P sector; MTDR announced the successful acquisition of 8,400 gross (8,400 net) acres for approximately $387 million, or a weighted average cost of approximately $46,000 per net acre, in Lea and Eddy Counties, New Mexico; HFC announced a $1B stock buyback; prices for coal used to create steelmaking coke have surged 15% since the start of August and are enjoying a sizeable gain this week, as Hurricane Florence has shut down three major coal export facilities in and near the Norfolk, Va. According to one report

Financials

· Bank movers; JPM said at conference investment banking fees will be stronger, lifting shares midday but also said sees Q3 market revenues down about mid-single digits; GS looked to snap 11-day losing streak; ZION won its fight with the government to remove it from the list of systemically important financial institutions that are subject to heightened regulation. The Financial Stability Oversight Council announced it would grant Zions the waiver it requested; STI was downgraded to neutral at Piper on concerns STI is getting ahead of itself; Fidelity said it will start two additional zero-expense-ratio mutual funds, stepping up its push to lure cost-conscious individual investors (res of AMTD, SCHW, ETFC active)

· Asset managers; IVZ reported preliminary month-end assets under management (AUM) of $988.0 billion, an increase of less than 0.1%. The increase was driven by favorable market returns and non-management fee earning AUM inflows; partially offset by net long-term outflows, foreign exchange, and a decrease in money market AUM; APAM reported that its assets under management as of August 31, 2018 totaled $117.4 billion.

Healthcare

· Biotech & Pharma movers; PGNX shares weaken after the cancer drug company said one of its imaging agents was not sensitive enough to detect prostate cancer in a clinical study; BHC upgraded at Piper to neutral given greater visibility into the durability of Xifaxan; ACOR shares fall after the FDA delayed by three months (to Oct 5th) a decision on its drug-device combination therapy, Inbrija, for Parkinson’s disease symptoms; XENE 4.5M share Spot Secondary priced at $14.00; GLPG 2.575M share Spot Secondary priced at $116.50; ABBV rises after announces patient reported outcome data for Phase 3 study of Risankizumab

· Healthcare services and providers; DVA was upgraded to Neutral from Underweight at JPM as now believes is it much more likely that California Governor Brown will veto the recently passed SB1156, which he notes would curtail the financial arbitrage that dialysis providers enjoy from charitable premium assistance; HOLX was downgraded to neutral at Bank America following last night’s 8-K filing updating the impact from the Vitalia recall and now expects a $15M hit and lowered sales of MonaLisa Touch

Industrials & Materials

· Transports; UPS unveiled transformation initiatives, including revenue quality improvements and cost cutting moves, that it expects will boost adjusted earnings; Dow Transports slipped after early highs of 11,577.43 (just shy of record intraday highs 11,599.60 yesterday); weakness led by CAR, UPS and LSTR while airlines UAL, JBLU, LUV top gainers

· Industrials MMM shares rebound after falling 2% yesterday, warning about a bigger-than-expected headwind from material costs; the industrial sector also closely watching the trade/tariff situation between the US and China, which greatly impacts machinery, among other industrial names

· Chemicals; VNTR said it would not rebuild its Pori facility while also confirmed TiO2 prices are experiencing their normal H2 seasonal weakness and that input cost inflation (ores and energy) are tracking at the upper end of Q3 expectations – RBC downgraded VNTR on expectations of softer than expected TiO2 margins and significant amount of capex and spending…firm also lowered estimates on peer CC); AVY was upgraded to buy at Loop Capital

Technology, Media & Telecom

· Internet; overall bounce for Internet names, though FB continues to lag; W was downgraded to neutral from buy at Bank America ahead of likely growth deceleration and mounting investments into 2019 (notes shares up 86% YTD); after falling to record lows yesterday on an analyst downgrade to sell and $5 tgt, SNAP was upgraded to neutral at Pivotal; online travel names (BKNG, EXPE, TRIP) positive mention by Raymond James

· Semiconductors; group looks to rebound from recent pullback on lower shipments guidance last week from KLAC and analysts getting overly cautious, especially on DRAM, memory, with several downgrades weighing of late (LRCX, MU, MXIM); QCOM was reinstated with an overweight and $95 tgt at Barclay’s (separately, QCOM initiates $16B accelerated share repurchase); many of the names that have fallen over the past week (INTC, MU, KLAC) rebounding while AMD finally took a breather after hitting 12-year highs earlier today (sold off); CRUS shares weak after KeyBanc said the removal of the dongle from new and previous iPhones creates the most headwinds for CRUS; KeyBanc said see the new phone launch as most positive for QRVO, SWKS, and SYNA.

· Software mover; PI stock rockets after internal audit completed and posts smaller-than-expected Q2 loss per share and revenue beat while forecasts current-quarter revenue above estimates, narrower-than-expected loss (had delayed filing Q2 results/10-Q prior); ADBE expected to report earnings later tonight; PVTL shares drop after mixed Q2 results with subscription growth beating estimate at +51% y/y and total revenue upside leading to raised FY19 guidance, but stock pressured on a ~$30M billings miss vs. consensus and grew less than 2% YoY; WAGE downgraded at JMP Securities after the company filed two 8Ks yesterday after the market close which disclosed: 1) the departure of Executive Chairman; 2) the reaffirmation of the previously stated impact of potential restatement on historical financial results

· Media & Telecom movers; VZ said at a conference today that it is not interested in acquiring cable or TV companies; DISCA adds to yesterday gains after positive comments at investor conference; IAC and MTCH both at 52-week highs today

· Hardware & Component news; in the optical sector, FNSR and CIEN were both downgraded to equal-weight from overweight at Morgan Stanley saying while they think both stocks could continue to move toward their bull cases, they think those catalysts for further positive moves are in CY19, causing them to move to the sidelines for now

· Apple (AAPL) recap from yesterday: Apple unveiled iPhone Xs, Xs Max, Xr, and Apple Watch Series 4. New Apple Watch gets major upgrades in display, motion tracking, and heart rate monitoring, an overall bigger design leap comparing to last year’s. New iPhones come with widely anticipated performance improvements in processors, displays, cameras, and machine learning capabilities. The 6.5″ iPhone Xs Max pushes iPhone pricing to a new high of $1,499. Apple finally adds dual SIM support to iPhone. One LCD (iPhone XR) and two OLED models (iPhone Xs and Xs Max) were announced with pre-orders for the OLED model starting this Friday

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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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