Market Review: September 19, 2018

Terrie AmengualDaily Market Report

Closing Recap

Wednesday, September 19, 2018

Equity Market Recap

· U.S. stocks were mixed, as the Dow Industrials and S&P 500 traded near all-time record highs, while the tech heavy Nasdaq Composite and SmallCap Russell 2000 lagged. The Dow Industrials moved to within less than 1% of its January record high of 26,616.71, as large cap gains were led by financials and industrials. There also remains no fear as the CBOE Volatility index (VIX) spent most of the session below the 12 level as the potential impact on global economies from trade wars between the U.S. and counterparts are not causing near-term concern. Emerging markets also playing catch-up after stocks/currencies were recently battered amid several concerns, rising US rates (China, Turkey). Stocks have completely shrugged off the U.S.’s decision to slap a 10% tariff on $200 billion of Chinese goods yesterday, while those import duties will rise to 25% by the end of the year. China retaliated by imposing tariffs on $60 billion in U.S. exports, prompting a threat by President Donald Trump to target an even wider range of Chinese goods.

· European stocks posted a fourth straight session gain, though gains have been modest, paced by gains in the material and financial and chemicals sector. Meanwhile the euro was little changed vs. the greenback while stocks in Asia closed mostly higher. Germany’s DAX, finished 0.5% higher at 12,219.02, while France’s CAC 40 added 0.6% to end at 5,393.74. The U.K.’s FTSE 100 closed 0.4% higher at 7,330.11. Gold held its gain and the dollar index remained stuck near unchanged after data showed a rise in housing starts, a report that fits in with expectations that the Federal Reserve will nudge interest rates higher when it meets next week.

· In stock news, interest rate sensitive stocks active along with the extended spike in treasury yields, as the 10-year tops 3.08% (highest in 4-months), providing a boost to financials, while utilities and REITS slide. While large cap markets were steadily higher, financials rising (on yields spiking) and tech slipping, the big story the past 2-weeks has been cannabis stocks and the incredible outperformance of recent IPO TLRY which had priced its 7.5M IPO back in mid-July at $17, but spiked to highs of $300 today in a dramatic momentum push. However, shares plunged late day, being halted 5-times due to volatility, before nearly erasing all of its 50% plus gains.

Economic Data

· Housing Starts for August rose 9.2% to a 1.282M seasonally adjusted annual rate, tops the view of a 5.7% rate to 1.238M and 9.4% higher than a year ago (prior month fell -0.3% to 1.174M); single family starts rose to 876K and multifamily starts rose to 406K in August. Building permits fell (-5.7%) to annualized rate of 1,229M, missing the 1.31M estimate and below 1,303M in July;

· The Q2 Current account deficit narrowed to (-$101.5B) from (-$121.7B) last quarter and was below the economist estimate of (-$103.4B); the current account deficit is the smallest since 4Q 2015, when it was (-$99.6B); the balance of goods and services deficit narrowed to (-$133.8B) compared to (-$154B) prior quarter; current account deficit represents 2.0% of gross domestic product in the second quarter after 2.4% in the prior quarter


· Oil prices bounced higher on Wednesday, ending near the best levels of the day amid a spike in commodity prices. WTI crude rose $1.27, or 1.8% to settle at $71.12 per barrel, its best closing level since July after weekly inventory data. Gasoline stocks posted a surprise weekly drop and crude inventories fell to their lowest levels since February 2015 according to the EIA. Domestic crude supplies fell by 2.1 million barrels for the week ended Sept. 14 (EIA has reported declines in each of the previous four weeks).

· Gold futures gained, closing at $1,208.30 an ounce, rising about $5.40 as the contract remained above the $1,200 line for a seventh straight day amid a recent spike in commodity/metals prices. Gold maintained its gain as the dollar index remained stuck near unchanged after mixed housing data and as markets deal with trade issues. December copper settled nearly flat at about $2.730 a pound Wednesday after a rise of 3% Tuesday. December palladium rallied by 2.6% to $1,030.80 an ounce, its highest level since April


· The U.S. dollar bounced off overnight lows, ending the day slightly lower just above the 94.50 level for the dollar index (DXY). The British Pound volatile all day, spiking to overnight highs of 1.3215 after U.K. inflation unexpectedly accelerated in August to 2.7% from a prior 2.5%, with the core reading picking up to 2.1% from 1.9% – however, prices dropped to lows just below 1.31 following a report that Prime Minister May plans to reject a revised offer from the EU on the Irish border issue. Emerging market currencies (Rand, Turkish Lira, Rupee, Ruble, and Peso) have been bouncing over the last few days after getting bludgeoned last two weeks. The dollar index is down 0.6% month to date, trimming its 2018 gain so far to about 2.6%.

Bond Market

· Treasury markets extend declines over the last week, sending yields surging as the U.S. 10-year and 30-year yields rose to the highest level since May 18, while the two-year U.S. rates climbed to the highest level in a decade. The 10-year yield rises as high as 3.08% (best levels since May), while the 2-year yield above 2.8% (back near 10-year highs) and the long bond 30-year yield topped 3.247% (which was above the YTD closing high – 4-year highs). Yields have been rising into next week’s FOMC meeting where another rate hike is widely expected. Treasury yields extended this week’s climb, as investors looked past trade tensions.

Sector News Breakdown


· Retailers; ULTA tgt was raised to $320 from $288 at Cowen after meeting with management and anticipating the upcoming launch of Kylie Cosmetics products in stores; mattress makers like TPX and SNBR may benefit from an antidumping duty on Chinese imports, according to Wedbush saying antidumping duties over 200% could tip the scales back in favor of U.S. producers of low-end U.S. mattresses such as Sealy; FIT rises after HUM selects Fitbit Care as preferred coaching solution/over 5M Humana members will have the potential to access Fitbit health; Deloitte is forecasting a 5% to 5.6% year-over-year increase in retail holiday sales this year, with spending expected to exceed $1.1 trillion between November and January ex auto and gas; SFIXdeclined after CNBC reported AMZN is testing a shopping site called Scout that recommends furniture and women’s shoes based on your likes; saw afternoon weakness in TGT and WMT following AMZN headlines that is considering a plan to open as many as 3,000 new Amazon Go cashierless stores in the next few years

· Auto sector; in auto retailers, CPRT shares fell after Q4 EPS of 42c missed estimates by 6c and operating income $134.8M missed the $161M estimate (Q4 revs slightly beat); TSLA shares volatile again after falling over 3% yesterday on reports the company is under investigation by the US DoJ following Elon Musk’s claim last month that he had secured funding to take the company private; BWA rebounds as analysts very positive following its investor day; autos in general posted a very strong day (F, GM, FCAU)

· Housing & Building Products; lumber stocks Interfor, Resolute, West Fraser and Western Forest Product were all downgraded to neutral at CIBC citing mounting housing concerns and expects the sector to be range-bound through the end of the year; furniture retailers (W, WSM) slipped after CNBC reported AMZN is testing a shopping site called Scout that recommends furniture and women’s shoes based on your likes

· Casino & Leisure movers; in casinos, MGM rose early after the NY Post reported overnight Starboard had built a stake valued at more than $500 million in the company and was planning to push for changes – but Starboard later responded by saying it has no economic exposure to the company


· Energy stocks were mostly higher given positive analyst commentary coupled with bullish inventory data, rising commodity demand (metals have been surging) and a recent slip in the dollar all helping crude prices. The EIA said weekly crude stockpiles fell -2,05M barrels vs. an est. draw -2.5M, while Cushing crude fell -1,250M – gasoline inventories fell a greater -1,7M barrels while distillates rose a smaller +839K barrels. Overnight API data showed that U.S. crude supplies increased by +1.249M barrels for the latest week (which follows last week’s decline of -8.6M barrels); also showed supplies of gasoline declined -1.485M barrels, while distillate stockpiles climbed by 1.536M

· E&P sector, equipment and drilling movers; RIG upgraded to outperform at Wells Fargo and raise tgt to $16 from $13 as significantly increased EBITDA and NAV estimates across the offshore drilling space to reflect increasing demand combined with tightening availability for high spec ultra-deepwater rigs

· Oil services; Morgan Stanley raised its industry view for oil services to attractive from in-line as they see increasing visibility on a broadening global capex upcycle and recommend balanced long positioning across all OFS verticals – firm top picks are over weighted BHGE, HAL, NBR, RIG as they think the stage is set for a coordinated global increase in upstream capex in 2020.

· Utilities were among the top sector decliners as interest rate sensitive sectors/high dividend paying names pulled back as Treasury yields spiked, making them less attractive; shares of DTE, NEE, FE, CMS among the top decliners in the utility index

· Solar; in solar space, analysts turn positive on SPWR after shares rallied 14% Tuesday after being granted an exclusion from the U.S. tariffs on imported solar panels. Credit Suisse upgraded shares to outperform and raised tgt to $10 saying near-term tariff overhang is removed; Goldman Sachs reiterated sell rating on SEDG saying its facing increasing competitive risk, and this will be on “full display” at the Solar Power International (SPI) show next week. Roth Capital said news SPWR was granted an exclusion from Section 201 import tariffs, is also positive for ENPH, given SWPR’s “exclusive relationship” as a supplier of its residential microinverter


· Bank and broker movers; sector moved higher as yields on Treasuries moving to best levels in 4-months for the 10-yr, topping 3.08% earlier; the KBW Bank Index (BKX) climbed the most since mid-July as U.S. yields rip higher. The U.S. 10-year and 30-year yields rose to the highest level since May 18, while the two-year U.S. rates climbed to the highest level in a decade. Note last week, the Index suffered its worst weekly slump since June 29 when it fell to the lowest level in nearly two months – C, JPM, WFC, BAC, KEY, COF, USB, BBT gained

· Online broker ETFC shares active after Jefferies upgraded to buy saying as speculation around timing of a potential sale gets pushed, they view the current valuation as attractive for the core business while the financial and strategic benefits as a take-out candidate remain intact; 52-week highs for AON, CINF, AFL, BRK/B, PGR, MA, V in S&P 500 financial space


· Cannabis sector euphoria continues as TLRY surged as much as 50% this morning, bringing its rally to more than 160% since the end of August (and up about 500% over the last 30-days) – getting another boost after CEO Brendan Kennedy was a guest last night on Jim Cramer’s Mad Money program on CNBC, touting the company’s growth prospects. TLRY soared 29% Tuesday after announcing the U.S. DEA approved plans for it to import medical marijuana to supply a clinical trial in California (shares of CRON, ABCFF, GWPH, CGC, WEED have also rallied)

· Pharma/Biotech movers; FATE shares extend gains to around 15% last 2-days in response to its collaboration with ONO Pharmaceutical to jointly develop and commercialize two off-the-shelf CAR-T therapies; GTHX 3M share Secondary priced at $60.00; ARGX 3.48M share Secondary priced at $86.50; NVS slipped on NICE rejection of Kymriah for adults; MDGL rebounds after falling -9% yesterday as Goldman defended early saying shouldn’t be down with competitor positive results (VKTX) on liver disease

Industrials & Materials

· Metals & Materials; Strength on metals for a second day, led by FCX after copper prices jumped 3% to $2.712/lb. on Tuesday for its largest one-day increase since April after the U.S. and China announced fresh tariffs that were less severe than some investors had feared; gold prices gained as market weighs developments in the U.S.-China trade war and awaits confirmation of the Fed’s rate hike strategy which is fully expected next week for another 25 bps; zinc was also a positive standout member in the metals group on signs of Chinese demand.

· Chemicals; LYB was downgraded to underweight at JPMorgan after being at neutral since June 2016 and slashed tgt to $95 driven primarily by the big jump in ethane prices, which has increased 50% since August; PX shares advanced on Bloomberg reports moving closer to antitrust approval for $45B merger with Linde

Technology, Media & Telecom

· Internet; space weak as shares of AMZN, NFLX, GRUB, GOOGL, TWTR all negative; NFLX tgt to $420 from $360 at Guggenheim as believe that Netflix subscriber penetration will significantly exceed what is implied in the company’s current valuation; AMZN business model is under the spotlight in Europe after the EU’s antitrust watchdog launched a preliminary investigation into how the platform uses data about merchants

· Semiconductors; AMD remains underweight at Morgan Stanley, though raised its tgt to $28 from $11 saying INTC’s 10-nanometer processor delays are proving to be more disruptive than previously expected, opening the door for AMD in a number of ways; Morgan Stanley cut its tgt on INTC to $50 from $56; SWKS positive mention by Longbow after an iPhone-related meeting with the company

· Software mover; MSFT announced new AI and mixed-reality applications for its Dynamics 365 online business software, putting to use its augmented-reality goggles HoloLens for businesses; MSFT also boosted quarterly dividend to 46c from 42c (Morgan Stanley said dividend increase below growth in trailing 12-month operating income may fall short of investor expectations; SAPand BABA said they plan to expand their partnership in online platform services; RHT expected to report earnings later tonight; PANW failed to invalidate FNJN patent 8,225,408 for methods and systems to detect malware in data streamed from a network, U.S. Court of Appeals for the Federal Circuit said

· Hardware & Component news; JNPR outperformed early after Nomura upgraded shares to buy and raised price target to $34 as believes Juniper will finally be able to catch the webscale capex growth tailwind in 2019; ERIC and NOK were both upgraded at Credit Suisse


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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