Monday, September 17, 2018
Equity Market Recap
· U.S. stocks end Monday lower, led by a decline in tech stocks as the S&P 500 index snapped its 5-day win streak and the Dow Industrials snapped its 4-day streak as trade fears were again the lead story. Stocks fell overnight on reports the Trump Administration is said to plan to announce as early as Monday that it’s imposing a 10% tariff on $200 billion of Chinese goods (which Beijing has already said it will retaliate against) weighing on sentiment. President Trump confirmed late this afternoon that the China trade announcement will come after the market close. Markets extended declines on the headlines. Asian equities slumped overnight with the latest American threats to expand tariffs on Chinese goods, sending the Hang Seng and Shanghai markets lower (region also hurt by catastrophic typhoon in region) while the Nikkei was closed for holiday. Tech and small caps underperformed while the dollar weakened and commodity prices edged higher. Earnings tonight from ORCL in software and FDX in transports. Emerging-market stocks weakened and their currencies were led lower by a slide in Turkey’s lira.
· Stocks got a little bounce off lows mid-afternoon (before slipping again) after Bloomberg reported The Trump administration will spare a category of high-tech products that includes the Apple Watch and AirPods headphone from the next round of tariffs it’s imposing on Chinese goods. The government is expected to release as early as Monday the final list of as much as $200 billion of Chinese products that will be hit with a new 10% tariff. Market concerns all day on fears how China will retaliate as well to the US move.
· Events to watch later this week: South Korean President Moon Jae-in visits Pyongyang for a summit with Kim Jong Un Tuesday, The Bank of Japan holds its policy meeting on Wednesday while the UK releases inflation data on Wednesday and European PMIs are due on Thursday. Lastly, OPEC and its allies meet in Algiers this weekend.
· Larry Kudlow, the White House economic adviser said at an Economic Club of New York event that he doesn’t think a tax cut 2.0 will happen before November. Kudlow said there may be a vote on the measure and that would send a “good message,” but he doesn’t think it will get all the way through Congress before the midterms. And in CNBC interview, Kudlow said Trump has ‘not been satisfied’ with China trade talks
· Empire Manufacturing index for Sept fell to 19.0 from 25.6 prior and was below the 23.0 estimate as prices paid rose to 46.3 vs 45.2 prior while new orders fell to 16.5 vs 17.1; the number of employees rose to 13.3 vs 13.1 and inventory rose to 8.9 vs 0.0; six-month general business conditions fell to 30.3 vs 34.8
· Oil prices finish the day lower, erasing earlier gains and closing well off the highs of $69.72 per barrel (settles at $68.91, down 8c). The EIA mid-afternoon released data showing that crude-oil production from seven major U.S. shale plays (Permian, Eagle Ford among them) is expected to see a monthly climb of 79,000 barrels a day to 7.594 million barrels a day in October. Gold pricesend the day higher, rising $4.70 or 0.4% to settle at $1,205.80 an ounce, pulling back from earlier highs, but ending higher following a pullback in the US dollar.
Currencies & Treasuries
· The U.S. dollar started and ended sharply lower on the day as fears about trade weighed on broader averages. The euro rises vs. US dollar, up more than 0.5% as approaches the 1.17 level (overnight lows 1.1618). The Turkish lira and Indian Rupee leading the emerging market currencies lower. Japanese markets were closed for a holiday today and the week’s highlights include the BOJ meeting. British Pound holding near highs up 0.6% at 1.135 vs. the dollar ahead of Brexit talk this week.
· Treasury markets end little changed across the board after early volatility saw the 10-year more to its highest level since May, back above the 3% level as expectations build the Federal Reserve will lift interest rates again next week – slide below 2.99% before ending back around 3%. The 2-year yield finished around 2.78% and the 30-year around 3.14%. Bonds gained early as the lone piece of US economic data today (NY Manufacturing) missed views.
Sector News Breakdown
· Retailers; LULU was upgraded to outperform at Wells Fargo and upped tgt to $200 as views the upscale yoga-wear maker’s “industry-leading momentum” as sustainable through 2H/year; GPS said to hire 65K seasonal workers; TJX announced a two-for-one stock split; WHR shares active after U.S. shipments of major home appliances fell 1.2% y/y to 5.56m units last month, while monthly shipments of AHAM 6 (washers, dryers, dishwashers, refrigerators, freezers, ranges, ovens) fell 5.3% to 3.50m units – AHAM reported as per Bloomberg; online retailers OSTK, ETSY slip as Amazon launched a section of its website dedicated to small business, called Amazon Storefronts.
· Auto retailers: AZO was downgraded to neutral from buy at Bank America due to overexposure to the DIY segment and competition and upgraded AAP to neutral from underperform based on expectations for accelerating growth in DIY auto parts demand, but believes most of the opportunity is reflected in valuation/ORLY tgt raised to Street high $390 tgt at Banc America
· Consumer Staples; TSN CEO to step down after less than 2 years on the job citing personal reasons; HRL downgraded to market perform at BMO as believe the near-term upside may be limited given its current valuation and trade uncertainties; in Food & Staples, Barclay’s downgraded COST and SFM to equal-weight from overweight. In restaurants; MCD a drag on sector after Stifel said store remodels related to its Experience of the Future initiative “will likely remain a drag” on U.S. same-restaurant sales through at least 1H19 and “may not have a material net sales benefit until 2020
· Housing & Building Products; in home improvement retail, BBBY upgraded at Raymond James ahead of earnings on view that sales results for F2Q18 now seem more likely to reflect a better consumer sales environment; cement and rock stocks should rise according to Barron’s as cities shore up infrastructure (noted shares of SUM, VMC, MLM)
· Casino & Leisure movers; Casino stocks hold up well despite Macau casino closures amid typhoon that crushed Hong Kong (WYNN, LVS, MLCO, MGM). Hong Kong was on lockdown and gambling was halted in Macau as Typhoon Mangkhut bared down on China’s Guangdong province. Macau casino revenue estimate cut as typhoon shutters operations. In lodging, HLT announced a strategic alliance with PLYA, marking a landmark expansion of the hospitality company’s all-inclusive resort portfolio
· Energy stocks were mixed; North Dakota’s oil production hit a record 1.27 million barrels a day this summer, thanks to a drilling revival in the Bakken. That puts the state’s output on par with Venezuela, Bloomberg reported; PXD was upgraded to positive at Susquehanna; NBL discloses its NBL Midstream subsidiary entered into agreements with multiple buyers to sell more than 14.2M common units of CNXM, all of its remaining ownership of partnership.
· Utilities & Solar; NI shares active as analyst cautious amid uncertainty/shares fell nearly 12% on Friday following the series of deadly gas explosions and fires in three towns near Boston that occurred after too much natural gas was pumped into a section of pipe owned by the company’s Columbia Gas subsidiary; DUK says power restored to roughly 1.2M in Carolinas, 300K left to fix. Duke Energy said its crews are fully focused on restoring power to the remaining 300,000 customers who lost electricity when Hurricane Florence rolled through the Carolinas
· Bank movers; In the first half of 2018, many large US banks reported a decline in their average noninterest-bearing deposits versus the comparable year ago period, Moody’s said; Barclay’s said in sector note after its Global Financial Service conference last week that bank stocks appear under-owned and unloved; in card news, MA was added to Goldman Sachs conviction buy list and removed Visa (V); AXP was upgraded at Stephens; ADS trades best levels since February after positive initiation at Bank America overshadowed downgrade at Stephens); European banks outperformed US banks on the day – several US banks have failed to rally with names like C, STI, PNC, USB, FITB about only 10% off 52-week lows
· Monthly Master Trust credit card data: 1) AXP August net write-off rate 2.2% vs. 2.2% last month and 30 day delinquency 1.3% vs. 1.3% last month; 2) ADS August net charge offs 5.8% vs. 5.9% last month and delinquency rate 5.6% vs. 5.7% last month; 3) COF August net charge-offs 4.54% vs. 4.39% last month and delinquencies 3.58% vs. 3.46% last month; 4) BAC August card write-offs 2.75% vs. 2.57% last month and delinquencies 1.56% vs. 1.55% last month; 5) JPM August net credit losses 2.36% vs. 2.30% last month and delinquencies 1.10% vs. 1.10% last month
· Brokers: monthly metrics showed for 1) ETFC, Daily Average Revenue Trades (DARTS) for August 267,619, a 7% increase from July and a 30% increase from the year-ago period and added 58,119 gross new brokerage accounts in August; 2) SCHW core net new assets brought to the company by new and existing clients in August 2018 totaled $20.8 billion/new brokerage accounts totaled 132,000 in August, up 7% from August 2017 and up 12% compared to July 2018
· REITs; SIR rises after agreeing agreed to be acquired by fellow real estate investment trust GOV with SIR shareholders to receive the equivalent of $29.26 for each Select Income share they own, or 46% above Friday’s $20.06 closing price
· Pharma movers; MRSN said the FDA lifted a partial clinical hold on its phase I trial of its cancer treatment XMT-1522/the hold was imposed in July after a patient enrolled in the trial died/the trial is testing the drug in individuals with breast, gastric and non-small cell lung cancers; TEVA rises after FDA approval of its migraine drug, Ajovy/medicine is the second of its kind, behind Amgen’s Aimovig; CLRB said the FDA granted Rare Pediatric Disease Designation (RPDD) to CLR 131 for the treatment of a rare pediatric cancer called osteosarcoma; RVNC was cut at JMP Securities due to the changing competitive landscape, noting AGN recently released data in BOTOX responders with a >1 point improvement
· Cannabis sector active again; ACBFF outperforms on Bloomberg report that KO is in discussions with Aurora Cannabis Inc. about new products (KO did say that its considering the opportunities in CBD-infused beverages, drinks that contain the non-psychoactive ingredient in marijuana; CGC said its Tweed Farms Inc. site has received license amendments that approve remaining greenhouse space, expanding the company’s licensed footprint to about 3.2 million square feet
· Other movers; ARGX announced positive results from a 38-subject Phase 2 clinical trial evaluating ARGX-113 (efgartigimod) in adult patients with immune thrombocytopenia (ITP); in medical equipment and devices; TMO shares slipped early after Goldman Sachs removed it from conviction buy list (firm added shares of A)
Industrials & Materials
· Aerospace & Defense; LMT was awarded a $7.2 billion contract to build 22 next-generation Global Positioning System satellites; ARNC was downgraded to neutral at Longbow after recent rally as thinks shares seems to be at a good exit point/jet engine market survey shows mixed data for Sept. vs. positive in 2Q18
· Transports; FDX to report earnings after the close; airlines early strength with AAL, ALK, JBLU all rising – though Dow Transport index falls, led by weakness in trucking/logistics R, LSTR, WERN, CHRW after the truckers index touched an all-time high on Sept. 10, falling 4% since (had rallied into Hurricane Florence – profit taking since)
· Metals & Materials; mining shares and metal prices have rebounded off early declines following reports that President Trump plans to unveil an additional $200B in tariffs on Chinese goods; shares of steel, aluminum, iron ore and copper producers mostly higher; VALE was downgraded to Underperform at RBC Capital citing negative short-term outlook for iron ore suggests Vale is at risk of underperformance until expectations for key iron ore buyer China settle; NEM, AEM, ABX, GG get a lift as gold miners benefit from bounce in gold as dollar slips
· Chemicals; MOS, MTR, IPI shares advanced early after BMO Capital said Chinese potash buyers agreeing to a new 2018-2019 deal at $290/ton positive for potash exposed companies; said the new deal is at the same price as India, even though historically China settles at a discount to India; Citigroup downgraded LYB to neutral as rising ethane price are likely to persist for 2-3 quarters and says higher ethane price likely to hurt WLK as well, but the impact will be mitigated for the company due to its short position in ethylene; SHW was downgraded at Seaport Global on valuation while firm upgraded VVV to buy as believes last week’s selloff is overblown
Technology, Media & Telecom
· Internet; AMZN underperformed broader tech and Internet space, trading down as much as 3.5% around its 50-day moving average support 1,880; YELP tgt raised to $62 at RBC as are incrementally more confident on Yelp given positive skew from our proprietary survey and RAQ opportunity analysis; TWTR tgt cut to Street low of $21 from $23 by MoffettNathanson who flagged “smoke and mirrors on the cost line.” JD tgt cut to Street low $25 from $37 at Morgan Stanley, citing downside risk to near-term earnings and margins
· Semiconductors; an active group after analyst calls; AVGO was upgraded to outperform at Nomura/Instinet, MU tgt cut by $18 to $45 at BMO Capital, saying while NAND pricing weakness has been a concern, DRAM fundamentals on pricing front have decelerated as well; Bank America downgraded MCHP to neutral saying it already well appreciated by the Street, while they upgraded NXPI to buy based on a potential sales growth recovery driven by new auto/IoT products
· Software, Services, Hardware & Component news; ORCL to report earnings after the close; TEL to sell is subsea communications business for $325M to Cerberus Capital; ST downgraded at Morgan Stanley as automotive data points have gotten progressively worse in the past month, heightening the risk of a Sensata miss in Q4; ACN Federal Services receives a position on the ONE IT contract from the SEC/the multi-award, indefinite delivery contract has a total estimated value of $2.5B.; NTNX lower after a report that Alphabet Inc.’s Google Cloud Platform is looking to offer a competing service that would consolidate cloud-storage and computing systems. The Information reported that Google is planning to build custom-designed computers for customers that would combine server, storage and networking functions in a private data center; QTT slides more than 30% in its 2nd day of trading after surging 128% on its IPO last Friday