Market Review: September 25, 2018

Terrie AmengualDaily Market Report

Closing Recap

Tuesday, September 25, 2018

Equity Market Recap

· U.S. stocks yielded some of their earlier gains, with major averages closing mixed amid subdued activity as investors await the Federal Reserve’s monetary policy decision. Note the FOMC began its 2-day meeting today and will announce its monetary policy decision at 2:00 PM EST tomorrow afternoon, accompanied by the Fed’s new estimates and Fed Chairman Powell’s 2:30 PM EST press conference. Markets are widely expecting a 25-bps rate hike along with indications that another tightening is likely at year-end. Concerns about continuing trade tensions between the U.S. and both China and Canada also lingered, limiting the market’s upside momentum (Trump said today that China is taking advantage of the U.S. on trade). Weakness in transports given another bounce in oil prices (hurting airlines and truckers) while autos fell amid another profit warning in space. Weakness in both overshadowed strength in technology (excluding semiconductors which fell after another round of negative analyst comments). U.S. Treasury yields moved back to 5-month highs with the 10-year topping 3.10%, while the dollar ended flat. Consumer confidence data handily topped expectations for September, rising to its highest level in 18-years. UK Prime Minister Theresa May said a ‘no-deal’ Brexit would be better for Britain than any Canada-style agreement put on the table by Brussels.

Economic Data

· Consumer Confidence for September rose to 138.4, well above the 132.1 estimate and vs. 134.7 prior month; the present situation confidence rose to 173.1 vs. 172.8 last month and the consumer confidence expectations rose to 115.3 vs. 109.3 last month

· S&P CoreLogic Case-Shiller 20-City Index rises 5.92% YoY vs. Bloomberg est 6.20%; S&P CoreLogic Case-Shiller National Home Price index rose 6.00% y/y in July after rising 6.22% in prior month; S&P/Case-Shiller 20-city NSA index at 213.76 after 213.17 in June

· Richmond Fed’s Sept. Manufacturing Survey rises to 29 from 24 last month and above the 20 economist estimate; shipments rose to 33 after 23 the prior month while new order volume increased to 34 after 25 the prior month and order backlogs rose to 20 after 15 the prior month


· Oil prices rise but finish off their best levels; WTI crude rises 20c or 0.3% to settle at $72.28 per barrel, off earlier highs of $72.78, but still highest settlement since early July and not far off 10-year highs (which is where Brent ended). Oil prices pared much of their earlier gains as President Donald Trump again pressured OPEC to lower oil prices and said the U.S. won’t put up with “horrible” prices much longer. Oil climbed ahead of weekly inventory data from the API (tonight) and EIA (tomorrow morning). Natural gas prices up slightly at $3.08 mln btus, highest levels since February of this year, rising over 4c.

· Gold prices end the day little changed, paring gains late day but close higher by 70c at $1,205.10 an ounce, holding steady above the $1,200 an ounce level ahead of FOMC policy meeting tomorrow where a 25 bps hike is widely expected


· The dollar index (DXY) erased overnight gains and then morning losses to end the day little changed ahead of the FOMC decision tomorrow afternoon where a 25 bps rate hike is widely expected. The euro posted modest gains vs. the US dollar (fell form highs 1.1793), while the dollar slowly pushed higher to around 113 vs. the yen. The Argentina Peso fell as much as 6% after its Central Bank head unexpectedly resigned. The pound added to gains by increasing talk of a second U.K. referendum on the final Brexit deal.

Bond Market

· Treasury prices extended recent declines, pushing the 10-year note yield above 3.10% to its highest since May (which was up around 3.13%) a day ahead of a Fed decision that is expected to deliver the third rate increase of 2018. The yield on the 10-year Treasury rose around 3 bps to 3.105% (on track for its highest close since July 2011), while the 2-year yield rose to 2.843% and 30-year nears 3.24%. The U.S. Treasury sold $38B in 2-year notes at a yield of 2.997% vs. 2.993% prior to auction, with a bid-to-cover at 2.39, down from prior auction of 2.49 and indirect bidders awarded 57.9% of auction and 32.9% to primary dealers.

Sector News Breakdown


· Retailers; KORS said an agreement has been signed to acquire all of Gianni Versace S.p.A. for a total enterprise value of EU1.83 billion or about $2.12 billion. ; Dow component NKE expected to report earnings after the close tonight; ASNA, the parent of Justice and Dressbarn, gained after 4Q consolidated comparable sales grew for first time in more than three years, led by a 15% increase at children’s brand Justice; WMT Q3 comp sales trending above consensus according to Cleveland Research

· Auto movers; sector was pressured after BMWYY was the latest car company to lower its profit outlook, citing trade tensions and pricing pressure (follows suit of major auto OEMs in the past month GM, F, FCAU); there was also related weakness in auto supply chain; watch DAN, THRM, MPAA, MTOR, SMP, LEA, APTV, ADNT, TEN, VC, SRI, AXL, BWA

· Consumer Staples; CLX was upgraded to buy and $175 tgt at Argus as they like Clorox’s low-cost operations, strong market share in mid-price product categories, and efforts to boost revenue through innovation; VIOT priced 11.4M share IPO at $9.00; TAPbounced off the lows after the company said they are trying to figure out how to participate in cannabis space

· Restaurants; SONC to be acquired by Inspire Brands for $2.3B, with holders to receive $43.50 per share; Inspire portfolio includes over 4,700 Arby’s, Buffalo Wild Wings and Rusty Taco locations worldwide ; SBUX is planning an organizational overhaul that will include corporate layoffs, Bloomberg reported; WEN initiated buy and $20 tgt at BTIG

· Housing & Building Products; in homebuilders, KBH is expected to report earnings after the bell tonight (builders have slid in recent weeks on rising rates and as analyst get cautious)

· Casino & Leisure movers; cruise stocks in focus as Wedbush said CCL, RCL and NCLH should see yield benefit from “a hurricane season that left the cruise industry largely unhindered and commentary from our travel agent contacts that continues to be quite positive as boosts 3Q yield estimates for all 3 operators but lowers eps estimates on unfavorable FX; motorhome makers WGO, THO, CWH active after RV Industry Association (RVIA) reported a 12.5% y/y decrease in RV wholesale shipments in August, citing monthly survey of manufacturers.


· E&P sector; CXO was upgraded to buy at SunTrust as think a shift to a manufacturing play is taking shape given the strong asset position with the timing potentially being ideal to handle Permian takeaway, while the firm downgraded CHK, MTDR (both on valuation) and SBOW to hold; BAS says its board rejected the unsolicited merger proposal from KEG, saying only that the deal is not in the best interests of the company and its shareholders

· Other movers; HP was upgraded to buy at B Riley/FBR and upped tgt to $83 as foresees HP reaping the rewards from a proven growth strategy for a U.S. super-spec land drilling market with bullish cyclical and secular dynamics; HEP was downgraded at Barclay’s on premium valuation despite tight coverage and limited growth opportunities


· Insurance; Property & Casualty names active (TRV, ALL, CB) as CoreLogic reported that residential and commercial properties in the Carolinas and Virginia sustained between $19 billion and $28.5 billion in damage, including damage resulting from storm surge and inland flooding; in insurance brokerage, AON was upgraded to outperform at Raymond James as believe AON is positioned to report mid-single-digit or better organic revenue growth and margin expansion over the next several quarters and also downgraded MMC to underperform

· Consumer finance and lending; EBAY has now begun managing payments on its Marketplace platform in the U.S., allowing shoppers to complete their purchases without leaving eBay (watch shares of PYPL); SQ tgt raised to $125 at Nomura/Instinet saying similar to FANG stocks that have disrupted traditional markets with massive global TAMs, SQ’s fully cohesive solutions and rapid rate of innovation suggest that it is en route to disrupt the global payments ecosystem

· Info services; FDS reported Q4 EPS and revs slightly below consensus while midpoint of year guidance ($1.41B-$1.45B missed the $1.44B est.); INFO Q3 EPS beat and raised its full-year forecast for revenues and earnings; payroll service stocks ADP and PAYX slipped after SQ said it introduced a payroll app

· Exchanges declined (CBOE, NDAQ, ICE, VIRT) after the SEC released the agenda for its Oct. 25-Oct. 26 roundtable on market data and access; Bloomberg noted KBW analyst calling the agenda “quite exhaustive,” which may signal that the agency seeks to prioritize the topic, and may be willing to make regulatory changes to the U.S. cash equities data ecosystem; that would mean risk for U.S. equities exchanges


· Pharma movers; TGTX shares fall sharply as backs away from response rate endpoint in late-stage study of U2 in CLL/accelerated approval off the table; in cannabis space, TLRY volatile again after issuing a press release touting successful efforts to export medical cannabis to critically ill children in Australia; Aurora Cannabis reported a 19% MoM jump in Q4 revenue and medical cannabis gross margins zooming to 74% vs year-ago 28% and Benchmark initiating CGC with a buy and a Street high price target of C$100

· Biotech movers; SNDX shares slide after announcing a one month delay of its Phase 3 “E2112” trial of entinostat plus exemestane in advanced hormone receptor positive, human epidermal growth factor receptor 2 negative breast cancer; ALXN tgt raised to Street high $195 at Citigroup after late-stage study of Soliris exceeded expectations; VSTM shares fell after FDA approval the company’s lead product, Copiktra , while also included a boxed warning highlighting the increased risk of serious infections, diarrhea, and colitis

· Medical equipment and devices; TDNM boosted estimates amid sustained domestic sales and the recent launch of the t:slim X2 Insulin Pump in select international markets – raised year sales guidance to ~$150M-$158M vs. prior guidance of $140M-$148M

· Healthcare services and providers; MDXG published a positive new clinical study in International Wound Journal, evaluating safety & efficacy of using dehydrated human umbilical cord (dHUC – EpiCord) for chronic diabetic foot ulcers; NEOG falls as Q1 EPS 29c in-line with estimates but revenues of $99.6M missed estimates

Industrials & Materials

· Industrial & Machinery; AOS shares weakened after SunTrust earlier said is incrementally more cautious in the near term owing to a slowdown of A.O. Smith’s China growth story

· Transports; sector was punished yesterday, led by declines in truckers and airlines as oil prices touched their highest levels in 4-years; CNI was upgraded to buy at Citigroup today and raised its tgt to $100 as see upside to estimates in 2019, when the company should see incremental benefits from Intermodal, Coal and crude by rail shipments.

· Metals & Materials; aluminum stocks underperformed yesterday (AA, CENX), while today, Credit Suisse lowered estimate for AAsaying Q3 results will be negatively impacted by dynamics with higher profitability in the alumina segment and some cost creep in the smelter portfolio; VALE was downgraded to neutral at Macquarie; gold miners jumped yesterday after $18B tie-up between ABX/GOLD – today Citigroup downgraded GG given outperformance vs. ABX this year, while raised ABX to buy with $14 tgt seeing the Randgold merger as a win; GLNCY announced stock buyback of up to $1B in shares; TS upgraded to buy from underperform at Bank America and raised its price target to $40 as expects to benefit from a sustained, broad based recovery in its end markets that should result in a multi-year period of strong earnings momentum

· Chemicals; estimates cut for chemicals DWDP, LYB, WLK, OLN by two firms (Susquehanna and RBC Capital) noting ethane prices have nearly doubled to $0.60/gal from June levels of $0.30/gal which has increased ethylene production costs by $0.12/lb (1 lb of ethylene requires 0.43 gal of ethane); says ethane represents 70-80% of the US ethylene cracker feedstock slate due to its low-cost position

Technology, Media & Telecom

· Internet; XOXO agreed to be acquired, and merge with WeddingWire, in a deal valued at $933M, getting $35 per share in cash; Jefferies raised its tgt on AMZN to $2,350 sum-of-the-parts suggests >50% upside to potential value of $3,000 by 2020; FB shares slipped after the company confirmed the departure of the co-founders of its Instagram app (shares of SNAP benefitted early from Instagram news)

· Semiconductors; lot of analyst commentary today; Bank America raised tgt to street high $360 on NVDA; Raymond James turned cautious as they cut INTC to underperform (after meetings in Asia showed a negative shift in sentiment and several trends that have “clearly worsened”), cut AMD, MCHP, ON to market perform and MPWR downgraded to outperform; KeyBanc downgraded CY to sector weight, citing concerns about a slowdown in the automotive market.

· Software & Services movers; WK was upgraded to outperform at Baird; DFIN was downgraded to underweight at JPMorgan; Jefferies upgraded SAIC to buy as views the 10% pullback in shares since the Engility (EGL) deal announcement as a buying opportunity while firm downgraded CACI to hold saying recent rise in shares largely captures the upside; Dreamforce Conference in San Francisco (day 1 of 2): CRM, FIVN, MSTR, PRFT

· Media & Telecom movers; CTL falls as CFO Sunit Patel departs, leaving for similar role at TMUS as plans to lead strategic integration business with Sprint; VZ offers early retirement plans to cut costs according to the WSJ; Intelsat (I) shares jump after bids for Italy’s auction of 5G frequencies rose to EU4.74b on Monday, Bloomberg reported

· Hardware & Component news; JBL Q4 results that beat estimates with a 15% Y/Y revenue growth; in-line Q1 guidance has revenue from $5.8B-$6.4B (vs. est. $5.91B) and EPS of 79c-99c vs. est. 88c; AAPL shares active after CNBC reported QCOMunveiled explosive charges against Apple for stealing “vast swaths” of its confidential information and trade secrets for the purpose of improving the performance of chip sets provided by Qualcomm’s competitor INTC


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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