Market Review: September 24, 2018

Terrie AmengualDaily Market Report

Closing Recap

Monday, September 24, 2018

Equity Market Recap

· U.S. stocks slipped as trade fears weighed on markets, pulling the Dow Jones Industrial Average and S&P 500 from record highs last week as tensions between the U.S. and China ratcheted up over the weekend. Beijing withdrew from the negotiations that had been tentatively scheduled to take place later this week after U.S. tariffs on $200B worth of Chinese goods went into effect overnight, prompting China to launch retaliatory tariffs on $60B worth of U.S. products. Technology shares outperformed as the Nasdaq Composite moved into positive territory late session, rising more than 80-points off its morning lows. Stocks added to weakness late morning after Axios first reported that Deputy Attorney General Rod Rosenstein is expected to leave his post. An Axios report indicated that Rosenstein has verbally resigned to White House Chief of Staff John Kelly. However, the White House later confirmed that Rosenstein and President Trump will meet on Thursday, with no departure news at this time. OPEC and Russia didn’t take action on output over the weekend and opted to keep production unchanged, helping boost oil prices on the day and push Brent to 4-year highs. U.S. stocks remained weak most of the session, though technology shares pared losses. European markets closed lower, while the Hang Seng declined over 1.5% while Japan’s Nikkei and China’s Shanghai Composite were closed on holiday. The FOMC will hold a two-day policy meeting starting Tuesday, with economists forecasting another rate hike. M&A the other top story today as CMCSA shares slide after outbidding FOXA for Sky PLC in $38B offer, in music space, Pandora acquired by SIRI for over $3B, and a big tie-up in the gold mining space as GOLD and ABX for $18B gold mining giant. The dollar was mixed while Treasury yields inch higher ahead of the FOMC this week. Small Caps under perform as Russell 2000 dropped below the 1,700 level.


· Oil prices rose, as WTI crude gains $1.30 or 1.8% to settle at $72.08 per barrel, its best closing level since July 10th, while Brent crude prices jumped to 4-year highs after major energy producers (OPEC) declined to commit to increasing crude output this weekend at its meeting in Algiers to address expected supply disruptions (note last week, WTI crude advanced 2.6%) – despite pressure from President Trump to do so. Members delivered no formal plan to boost output to offset an estimated 2 million barrels a day of oil that will be lost due to U.S. sanctions on Iran’s exports set to take effect Nov. 4. Gold prices inched higher on Monday, as December gold rose $3.10, or 0.3% to settle at $1,204.40 an ounce, paring gains late day as the dollar rebounded off earlier lows. All eyes on the FOMC meeting mid-week, where they are expected to raise rates again by 25 bps to range of 2%-2.25%


· The U.S. dollar ended mixed, bouncing off earlier lows – dollar index fell to 93.84 before rebounding back to 94.20 (unchanged on day) as the dollar gained vs. the yen, pared losses vs. the euro and pound. Early on, the greenback slid vs. the euro after ECB President Mario strengthened his message on inflation from that of a few weeks ago, saying he sees a “relatively vigorous” pickup in underlying euro-area inflation, signaling that the ECB is well on track to raise interest rates late next year. The euro touched highs 1.1815 before paring gains, falling to around 1.175. The British Pound also pared gains after earlier highs of 1.3167, calming after falling the most in day last Friday after fears Brexit from the EU is not going well. The USD/JPY to highs of 112.75 in afternoon trade as yields rise. The Australian dollar weakened though the Turkish lira jumped 5% vs. the greenback after Secretary of State Mike Pompeo told reporters that Pastor Andrew Brunson, who has been detained in Turkey, could be released this month. He is next scheduled to appear in court on Oct. 12.

Bond Market

· Treasury markets slipped as yields bounce after ECB Draghi’s comments on inflation. Market also prepares for busy week of supply with over $250B on the auction block, including $106B in short/intermediate dated notes; the yield on the 10-year rose 2 bps at 3.08% while the 30-yr yield topped 3.21%. A weaker bond auction did not help matters as the U.S. Treasury sold $37B of 2-year notes at a yield of 2.829% (vs. 2.825% when issued prior) and was highest yield since July 2008, with bid-to-cover (demand) at 2.44, down from 2.89 prior auction and indirect bidders awarded 40% of auction (46.6% to primary dealers).

Sector News Breakdown


· Retailers; FIVE tgt raised to $153 at JPMorgan as remain constructive on FIVE’s 2H18 and multi-year outlook as management drives top-line expansion through its R-I-D-E initiative; ASNA to report earning tonight after the close; SHLD after CEO Lampert proposes asset sales to pay down debt; KORS shares slipped after reports is nearing an agreement to buy Gianni Versace SpA, Bloomberg said ; SIG, TIF active after Business Insider reported AMZN has applied for patent for ‘online retail sales of jewelry

· Consumer Staples; SFM was downgraded to market perform at Wells Fargo calling it a solid, well-run growth company yet it faces intense industry competition which limits upside; AVP was upgraded to buy at Davidson on confidence in the beauty company’s new management team and its growth targets; UNFI was upgraded to sector perform at RBC Capital citing valuation

· Restaurants; BMO Capital downgraded BLMN, CHUY, EAT all to market perform from outperform and downgraded EAT and TXRH to underperform from market perform as the firm said they expect decelerating industry trends beginning in 4Q18 as recent commodity deflation drives a widening food-at-home/food-away-from-home gap, likely creating valuation and earnings risk across the group

· Housing & Building Products; in roofing, Longbow lowers estimates as we see a deceleration in volume in September due in part to weather/roofing prices are largely stable to slightly up q/q in 3Q (said favors BECN); NWL shares fell while Wells Fargo defended shares saying weakness likely due to concerns surrounding a potential Sears bankruptcy, along with ongoing China tariff negotiations but think this is a complete overreaction given exposure to Sears is fairly limited; homebuilder extend losses after last week analyst negative comments (at least two analysts downgraded sector) and as rising yields lifting mortgage rates (MTH, LEN, TOL lower)

· Casino & Leisure movers; in leisure, SEAS tgt raised to $36 at SunTrust and maintaining positive view following our recent investor meeting; in online travel, Thomas Cook (TCG.LN) shares fell overnight after the group warned full-year profits would fall 15% from last year as unseasonably hot weather in northern Europe hit late bookings (watch TRIP, BKNG, EXPE); cruise lines active ahead of CCL earnings later this week (9/27); Stifel raised tgt to Street high $165 on RCL; CZR was initiated sell and $9 tgt at UBS


· Energy stocks were among the top gainers this morning as oil prices jumped across the board (WTI crude and Brent at 4-year highs) after OPEC and non-OPEC members delivered no formal plan to boost output to offset an estimated 2 million barrels a day of oil that will be lost due to U.S. sanctions on Iran’s exports set to take effect Nov. 4. U.S. shale oil production will peak by the late 2020s, OPEC said Sunday. In its latest forecast, OPEC said it expects U.S. shale growth to “slow significantly” after 2023, before peaking at 14.3 million barrels a day between 2027 and 2028. Output should then fall to an average of 12.1 million barrels a day by 2040, OPEC.

· In stock news, TOT said that it made a major gas discovery the Glendronach prospect, located offshore U.K., west of Shetland. Tullow Oil PLC said that it has plugged and abandoned its Cormorant-1 exploration well in offshore Namibia after finding “non-commercial” hydrocarbons. Tullow said its net expenditure on the well is estimated at around $5 million. Stifel upgraded PAGP to buy and PAA also raised to buy saying recent pullback provides buying opportunity but CEQP was downgraded to hold on valuation though continue to favor CEQP long-term given its presence in multiple basins, increased capital investments and an improving financial profile


· Pharma movers; 52-week highs for EW, ABT, HUM, PFE, BSX, TMO in the healthcare space; AMRN shares soared over 275% after its Vascepa, when taken as an add-on to cholesterol-lowering statin therapy, reduced the number of major cardiovascular events such as heart attack or stroke in about 25% of patients in the study. The topline results from the Vascepa cardiovascular outcomes trial, REDUCE-IT, met its primary endpoint; ENDP agrees to added stay of FDA litigation follow FDA’s commitment to best efforts to finalize vasopressin clinical needs determination by December 31

· Biotech movers; SRPT FDA’s decision to lift a clinical hold for its early-stage gene therapy trial in Duchenne muscular dystrophy (DMD) is in line with expectations; ANAB slips after topline results from a Phase 2a clinical trial evaluating IL-33 inhibitor etokimab in patients with severe eosinophilic asthma; NKTR, BTAI expands ongoing research collaboration into a new clinical partnership; EPZM said the FDA has lifted partial clinical hold that paused U.S.-based enrollment of new patients in its tazemetostat clinical trials; NITE price tgt raised by several analysts after co reports positive proof of concept data from dose escalation study in XIRIUS trial; ALXN Soliris shows treatment effect in late-stage rare CNS disorder; AGTC upgraded at Wells Fargo; GILD announced a plan to launch authorized generic versions of its top-selling Hepatitis C drugs, Epclusa and Harvoni

· Cannabis sector; TLRY tumbled early, as the “pot stock” plummets 66% from record highs of $300 per share mid-last week as shares fell below $100 per share (Barron’s cautious on shares amid price over the weekend); XON rises in response to its progress in developing a microbial platform to produce cannabinoids for medical use

· Medical equipment and devices; ABT shares active after a study showed that its MitraClip device cut the length of hospital stays and led to longer lives for heart-failure patients who were suffering from reverse blood flow through their mitral valves; TMO tgt raised to $275 at Barclay’s; DGX announced it has acquired ReproSource, a national leader in specialty fertility diagnostic services; BIO tgt raised to $420 and added to franchise picks list at Jefferies saying its droplet digital PCR (ddPCR) franchise is under-appreciated by investors; BSX 14-year highs after U.S. health regulator approves its drug-coated stent Eluvia for treating narrowed leg arteries

· Healthcare services and providers; MD was upgraded to outperform at Leerink after recent selloff as the hedge fund Elliott Management cut its stake as well as a margin turnaround and improving share in neonatal sales; ABMD jumps after strong performance of Impella heart pumps

Industrials & Materials

· Transports; DAL falls amid early weakness in transports, specifically airlines as oil prices spike; UAL, LUV, JBLU, AAL down over 3% as the broader Transport index pulls back nearly 200 points of 1.6% to around 11,350 (about 300 points off record highs on 9/14) as a spike in energy related costs took a toll on truckers and airlines

· Metals & Materials; gold miners active after GOLD and ABX agreed to an all-share merger that will create an $18.3 billion gold-mining giant. Under the terms of the deal, each Randgold shareholder will receive 6.1280 new Barrick shares for each Randgold share held and Barrick holders will own around 66.6% of the combined business – gold miners were active across the board amid the tie-up; shares of aluminum producers CENX, AA, CSTM weak as s aluminum prices fall -1.5% to settle at $2,060/mt

· Chemicals; Morgan Stanley said Titanium Dioxide price to fall in 2H and 2019 (CC, TROX, VNTR); PPG was downgraded to neutral at Credit Suisse saying the ~15%+ rally in PPG shares since the June low of ~$100 share is justified, but in our view it has run its relative course

Technology, Media & Telecom

· Internet; SIRI agreed to acquire Pandora (P) in a stock deal valued at $3.5B with an implied deal price $10.14 per share/SiriusXM reiterates 2018 guidance; SNAP spike as announces shopping partnership w AMZN; NFLX outperformed in the Internet space

· Semiconductors; Citigroup removed AMAT from focus list and also cut its WFE estimate for 2019 to $44B or down 14% Y/Y from prior $53B or +4% Y/Y on memory oversupply in 2019, particularly NAND. Moreover, equipment makers have initiated hiring freezes and shutdowns recently which show low confidence going into 2019; CY shares fall after Morgan Stanley said “a very strong rebound in memory has inflated CY’s earnings and stock price, but this only exacerbates the near-term cyclical risks we see/estimate memory contributes over 55% of operating profit for CY and will shift from tailwind to headwind within the next six months as the NOR market softens”

· Software movers; in security space, SYMC rises after its audit committee said that after its audit committee completed its investigation, the company doesn’t expect a restatement of results; BILI downgraded to equal-weight at Morgan Stanley as push back our profitability estimate to 2020 due to growth in investments outpacing revenue and slower ramp-up of its ad business despite MAU doubling over 2017-20; AAPL and CRM announce a strategic agreement for Salesforce to redesign its app with exclusive features for iOS. The new features will include Siri Shortcuts integrated with Salesforce Einstein Voice.

· Media movers; CMCSA shares fall after the company topped FOXA in a weekend auction for Sky PLC, winning the British broadcaster with a $38.8B bid that ends a month’s long takeover battle. Comcast’s offer of £17.28 a share, or about $22.59 a share, surpassed Fox’s highest bid of £15.67 after three rounds of bidding Saturday, in a rare auction held by British regulators. ; DIS shares rallied after CMCSA beat them out for Sky PLC; CMCSA shares fell as much as 8% after analysts downgrade following deal to buy Sky PLC – Opco noted Comcast is acquiring Sky for 14 times EBITDA, or double its own multiple

· Telecom and Hardware; AT&T (T) added to Catalyst Call Buy list at Deutsche Bank, given what they believe is an attractive setup for the stock ahead of 3Q results; NTNX downgraded to negative at Susquehanna while company also announced filing to sell 2.45M shares of common stock for holders


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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