Mid-Morning Look: October 10, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Wednesday, October 10, 2018

Equities come for sale to start the day, led by weakness in industrials and transports for a second session, with technology shares also sliding, while staples and utilities were among the early sector leaders. Markets continue to monitor a rise in bond yields and the implications it could have on equity prices, as well as trade tension concerns with China following several new developments over the last week and concerns into quarterly earnings. China fears remain an issue after U.S. Treasury Secretary Steven Mnuchin stopped short of accusing China of purposely depressing its currency, yesterday, but warned Beijing against engaging in a competitive devaluation of the yuan. That follows recent new revelations from Bloomberg that China used a tiny chip in a hack that reached U.S. companies including Amazon and Apple and reports yesterday that a major U.S. telco company discovered manipulated hardware from SMCI in its network and removed it in August, fresh evidence of tampering in China.

The benchmark S&P 500 index is on track for its fifth straight daily drop, which would represent its longest streak of losses since November 2016 while it fell below its 50-day moving average. Markets also watching Hurricane Michael and its potential impact as it strengthened to a “dangerous” Category 4 storm ahead of making landfall later today near Panama City, Florida. The fast-moving weather system has already cut oil production by 40% and natural gas output by 28% in the Gulf of Mexico (watch insurers, utilities, restaurants and retail in the area). Overall, markets breaking below key technical levels today (S&P below 50-day, Transports below 200-day MA and the Nasdaq Comp recently falling below its 100-day MA). Broad sector selling heading into earnings season thus far.

Treasuries, Currencies and Commodities

· In currency markets, the dollar erased overnight gains, as the defensive/safe-haven Japanese yen extends recent gains as investors rotate out of stocks and riskier assets; the dollar index (DXY) near lows down -0.2% around 95.50 (overnight highs 95.80); the dollar sliding against the euro, pound and yen, while inches higher vs. the Canadian dollar

· Commodity prices mixed with oil prices pulling back from recent 4 plus year highs as “riskier” assets falling across the board today; oil prices not falling as bad as broader stocks with the upcoming storm in the Gulf and sanctions reimpose on Iran in November keeping prices steady

· Treasury markets slip as yields inch higher, weighing on market sentiment as Fed maintains pace of interest rate hikes given strong economic data; 10-year yield 3.225%

Economic Data

· Producer Price index (PPI) for September rose 0.2%, in-line with consensus while core PPI prices (ex food and energy) also rose an in-line 0.2%; The increase in wholesale inflation over the past year, however, slowed again to 2.6% from 2.8%. The 12-month rate hit a seven-year high of 3.4% just four months ago; final demand ex food, energy rose 2.5% y/y vs. est. up 2.5%

· Wholesale Inventories for August rose 1%, slightly above the 0.8% estimate as Aug. wholesale inventories increased to $642.7B vs. $636.3B in prior month; the total and auto inventories both largest increases since Oct. 2013; wholesale sales rose 0.8% in Aug. after rising 0.2% prior

Sector Movers Today

· Retailers; Luxury stocks all under pressure (TIF, KORS, RL) after LVMH confirms China is enforcing customs rules more strongly on non-declared imports, adding that Louis Vuitton sales growth to Chinese shoppers has slowed “slightly” to the mid-teens; SHLD has hired M-III Partners LLC to prepare a bankruptcy filing that could come as soon as this week, according to reports https://on.mktw.net/2C6V5YH (shares of JCP, KSS, and retailers with appliance sales exposure such as BBY, HD, LOW may benefit from a bankruptcy

· Consumer Staples; Household products CHD, CLK, KMB downgraded to sell from hold at Deutsche Bank as structurally more cautious on this group versus the beverages and tobacco names ahead of earnings and the remainder of the year as well as into 2019; CAG 16.312M share Secondary priced at $35.25; Morgan Stanley also downgrades the European luxury goods sector to “underweight”, adding to pressure on industry stocks

· Asset managers: monthly assets under management (AUM) released: AB said preliminary AUM decreased to $550 billion during September 2018 from $551 billion at the end of August; APAM said prelim AUM totaled $116.6 billion; IVZ prelim AUM was $980.9 billion, a decrease of 0.7% (from $985.1B), driven by unfavorable market returns, net long-term outflows, lower money market AUM and foreign exchange; LM September AUM includes net long-term inflows of $3.4B, driving by net inflows in fixed income of $2.1B

· Chemicals; PPG rebounds after activist hedge fund Trian Fund Management has bought 2.59M shares of paints and coatings maker PPG according to a filing late Tuesday (note PPG shares fell 10% yesterday after lower EPS guidance); SHW was downgraded to neutral at Citigroup on slowing China growth, rising raw material costs, while upgraded MOS to buy due to more favorable phosphate outlook; TSE shares fall after saying Q3 results are expected to be below previously issued guidance as results in the Latex Binders, Synthetic Rubber, Performance Plastics, and Polystyrene segments were below previously issued guidance due to several factors

· Housing & Building Products; home improvement retailers LOW, HD as well as GNRC (generators) rally as storm approaches Florida; Citigroup initiated SMID home improvement retail sector with Buy ratings on FND ($44 tgt) and TTS ($9) and a Neutral rating on LL ($15) as the hard-surface flooring sector in which FND, LL and TTS operate is an attractive one due to its favorable growth profile

       Stock GAINERS

· DISCA +1%; upgraded to outperform at Credit Suisse and up tgt to $40 from $30 as recalibrated distribution trends leading to an increase in his U.S. revenue forecast

· ESL +30%; TDG will purchase ESL for $122.50 per share in cash, a 38% premium to yesterday’s closing prices, in a deal valued at $4B https://on.mktw.net/2Oh4Vi4

· KSS 3%; as consumer discretionary/retail among days top gainers/may also benefit from Sear’s bankruptcy news

· IMPV +27%; being taken private for $55.75 per share from Thoma Bravo in deal valued at $2.1B (Internet security stocks active on news – PFPT, FEYE, SYMC) https://on.mktw.net/2pL6TIM

· MYGN +5%; upgraded to overweight at Piper saying if Myriad were to capture all the incremental revenue from its GeneSight, NIPT, Vectra and Prolaris testing, it would suggest earnings power of $9 per share

· PPG +1%; rebounds after activist hedge fund Trian Fund Management has bought 2.59M shares of paints and coatings maker PPG according to a filing late Tuesday

· RARX +11%; upgraded to strong buy from outperform at Raymond James ahead of Phase 2 data for lead subcutaneous C5 inhibitor zilucoplan in generalized myasthenia gravis around YE18

Stock LAGGARDS

· AMD -4%; as bloodbath in semi space continues into its second week; group lower

· BABA -4%; shares at 15-month low as analysts from Deutsche Bank and KeyBanc trimmed their price targets, citing Sept. quarter GMV and lower expectations on core commerce

· FAST -5%; Q3 EPS beat but gross margins fell 100 bps YoY and 60 bps QoQ to 48.1% with fears margins may remain challenged amid inflationary pressure and new tariffs on China goods

· SHLD -33%; has hired M-III Partners LLC to prepare a bankruptcy filing that could come as soon as this week, according to reports https://on.mktw.net/2C6V5YH

· TIF -7%; after LVMH confirms China is enforcing customs rules more strongly on non-declared imports, adding that Louis Vuitton sales growth to Chinese shoppers has slowed “slightly” to the mid-teens

· TSE -15%; after saying Q3 results are expected to be below previously issued guidance as results in the Latex Binders, Synthetic Rubber, Performance Plastics, and Polystyrene segments were below previously issued guidance due to several factors

 

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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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