Tuesday, October 9, 2018
Equities open the day lower but have quickly risen into positive territory, led by a sharp spike in technology and biotech stocks, as the Nasdaq Composite rises around 0.7% (after underperforming major averages over the last 2-weeks). S&P 500 futures initially fell as the International Monetary Fund cut its economic growth forecasts overall to 3.7% from 3.9% and for the US and China as the countries clash over trade. Despite healthy momentum in the US, IMF economists now expect growth here to slow to 2.5% next year from 2.9% this year. They cut the 2019 forecast by 0.2% because of trade conflicts. China’s growth is now expected to drop to 6.2% from 6.6% this year. The S&P 500 and NASDAQ are each trying to snap 3-day losing streaks, while Treasury yields briefly touched 7-year highs of 3.25% for the 10-year earlier (but have since pulled back). Commodity prices are little changed while the dollar gains.
In sector news, more concerns in materials space today as paint/coatings Company PPG falls on lower revenue guidance, while paper stocks (WRK, IP, PKG) fall to fresh 52-week lows after BMO Capital downgraded the sector and homebuilders extend recent gains on a somber outlook from DHI. Industrial stocks led declines with CAT and MMM big drags in the Dow Industrial average, while financials fail to rally as the 10-year yield touched a fresh 7-year high above 3.25% (MS 52-week lows). Meanwhile defensive utilities and Pharma names leading gains again (PFE, LLY and CMS, AEE, FE 52-week highs).
The Bank of England Tuesday urged the European Union to take action to allow existing financial contracts to be honored after the U.K. leaves the bloc, warning of large costs to banks and businesses if the fate of derivatives and insurance agreements were to be legally uncertain. The U.K. is set to leave the bloc at the end of March 2019
Treasuries, Currencies and Commodities
· In currency markets, the dollar pushing higher again vs. most currencies, with the dollar index (DXY) moving back above the 96 level, rising firmly against the pound and euro; South Africa’s rand dropped to its weakest level against the dollar in nearly a month amid uncertainty surrounding the future of its finance minister; no major US economic data today
· Commodity prices are little changed, with small moves in the energy complex as concerns of tropical storm Michael near the Gulf weighs on production concerns, while markets also await expected sanctions to take effect on Iran next month; API weekly data pushed out to tomorrow due to the Columbus Day holiday; gold little changed at $1,190 an ounce and WTI crude holding above the $74 per barrel level. The IEA made a direct appeal to OPEC and other major oil producers to boost output, warning that high prices are inflicting damage on the global economy
· Treasury markets have reversed higher, with yields pulling back off earlier highs; earlier this morning, the yield on the benchmark 10-year jumped above 32.5% to its best levels since 2011, but has since pulled back, down around 3.21% (down 2 bps) Note the move comes as the market braces for $74 billion in new supply this week with sales of three, 10- and 30-year bonds due. The yield on the 2-yr down at 2.87% and the 30-yr just under 3.4%
Sector Movers Today
· Homebuilders, home improvement/products/furnishing; DHI forecast fiscal 2018 home sales and orders below Wall Street estimates, as rising home prices and mortgage rates hurt ordinary Americans’ ability to borrow/said Q4 net sales orders rose 11% to 11,509 homes and 10% in value to $3.4B; JPMorgan cautious on building products companies as downgrade MHK to underweight and WHR to neutral, following last month’s more circumspect view of homebuilders; sees continued tepid housing recovery, moderating home price appreciation resulting in softer repair/remodel demand growth next year, and expects product mix to decline in 2019; HOV was upgraded at JMP Securities
· E&P and service sector; BHGE was upgraded to buy and $38 tgt at Jefferies citing progress and added confidence in the oilfield services and equipment sector, along with optimism about liquefied natural gas orders; COG lowers its FY 2018 daily production growth guidance range to 7%-8% from 10%-12% to reflect the impact of Q3 actuals/trims its full-year capital budget by $20M to $940M; CLR downgraded to market perform at BMO Capital as view shares as fully valued and see better risk-reward in other E&Ps
· Utilities; Dominion (D) CFO Mark McGettrick to retire after over 9 years in the role, 38 years at the company; JPMorgan added CNP to its U.S. Analyst Focus List as a long value idea and UW-rated SR as a short idea, and are upgrading D to Overweight and downgrading EXC to neutral (said into Q3 also favor XEL, PEG, ATO and BKH and are mildly cautious on DUK); Citigroup upgraded PEG to a Buy and downgraded EXC to a Neutral saying while EXC’s strong story is now reflected in its price, PEG’s 9% utility growth and uplift from ZECs + fast start isn’t captured in its price; SCG was upgraded to buy at Mizuho based on our assumption that the South Carolina Public Service Commission (SCPSC) will adopt the Office of Regulatory Staff (ORS) recommendation to securitize $2.6B in the abandonment
· Paper stocks fall with IP, PKG, WRK all at 52-week lows today after BMO Capital downgraded the sector as industry supply is rapidly rising and Nine Dragons’ $300MM conversion projects at coated paper mills in WI and ME dropped another ‘nail’ in the cyclical coffin. Notes growing list of containerboard supply additions which they call the biggest capacity surge in over two decades
· Casino & Leisure movers; casino stocks (WYNN, LVS, MLCO) tried to bounce off 52-week lows, with analysts weighing in as JPMorgan said according to checks and industry consultants, they estimate average daily revenue (ADR) of around MOP1.2-1.3B/day during a 7-day Golden Week (October 1-7) – this points to ADR growth of well over 15% Y/Y; ISCA was upgraded to neutral at Citigroup saying risk/reward has shifted as most of the bear thesis is currently priced into the stock; Jefferies positive on regional gaming names saying momentary weakness in Las Vegas and Macau has not likely impacted the otherwise stable regional casino operators. The opportunities for PENN and ERI in their acquisitions and MCRI with its development project remain robust.
· AAL ; said it sees Q3 revenue per available seat mile growth of 2% to 3% vs. a prior range of +1% to +3% and said guidance includes factoring in the impact from Hurricane Florence
· DLTR +3%; after the company disclosed earlier in 8-K that the board’s compensation committee revised a change in control retention agreement for certain executive offers following a change in control of the company
· NFLX +2%; rebound in recently beaten up Internet names (FB, AMZN, TWTR higher)
· PZZA +9%; following a report that hedge fund Trian Fund Management was exploring a takeover bid. Trian recently contacted the pizza chain for information https://on.mktw.net/2PoEx2g
· WYNN +1%; at highs up 1.3% as bounces off 52-week, follows analyst comments about positive channel checks after China’s Golden Week in Macau
· AFMD -18%; as the company placed its AFM11 program on clinical hold following three serious adverse events (SAEs), one death in a Phase 1 ALL study and two life-threatening events in a Phase 1 NHL study
· BLKB -12%; lowered its 2018 revenue, EPS, and FCF guidance, citing lower one-time services and some softness in its payments business as the two largest factors driving the guidance shortfall
· HA -3%; revises Q3 ASM view to down 1.5%-down 2.5% from prior view of flat to down 2%
· MYL -4%; downgraded to equal-weight at Morgan Stanley (was cut at Mizuho last Friday) saying their thesis is broken as no longer expect improving prospects and rising pipeline expectations
· PPG -7%; lowers Q3 adjusted EPS to $1.41-$1.45 on revs $3.8B, below the $1.59/$3.88B est. and sees Q4 adjusted EPS $1.03-$1.13 vs. est. $1.35
· PRGO -3%; announced the resignation of its President & CEO Uwe Röhrhoff/has only been with the company since January 2018
· WRK -7%; amid weakness in paper stocks after BMO Capital downgraded IP, WRK, PKG
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.