Friday, October 12, 2018
Equity Market Recap
· U.S. equities pushed higher late Friday in another volatile session, with major averages pulling back off earlier highs before recovering in an attempt to get back above key technical levels. All four major indexes closed below their 200-day moving averages yesterday, with the NASDAQ and Dow Industrials, and S&P 500 getting above/near those levels by day’s end. Despite today’s gains, major averages post their worst weekly returns since March as fears of trade tensions with China, surging Treasury yields, European debt issues and fears of the global tariff impact hit markets (several profit warnings over the last week in chemical, and industrial space that fueled fears). In the end, the S&P 500 index snapped its 6-day losing streak, its longest such stretch of losses since a nine-day drop that ended in November 2016.
· U.S. equities opened strong after two days of massive selling pressure in global markets that saw the Dow Industrial Average decline -1,375 points in two days, helped by news overnight that the U.S. Treasury Department’s staff has advised Secretary Steven Mnuchin that China isn’t manipulating the yuan. The conclusion would avert an escalation of the U.S.-China trade war (which has been one of the key drivers for the market pullback). Banks initially led markets higher after mostly better quarterly results from JPM, C and WFC…but that faded quickly with financials actually a drag on major averages (big drop in regional banks).
· Stocks got a midday bounce off lows (Dow Industrial Average erased gains of more than 415 points at one point to turn negative) after JPMorgan Chase & Co.’s Marko Kolanovic said the worst of the rout that’s wiped 5% from the S&P 500 this week is likely over now that selling forced by computer-driven trading strategies has run its course). However, stocks once again slipped after the quick “V” shaped spike around 1:00 after the release of the comments…but managed one more push late day to limit some of the big weekly losses. Oil prices fell for the first time in 5-weeks, while gold ended just off 2-month highs and yields slipped from earlier week multi-year highs as attention turns to earning seasons next week.
· Import prices for September rose 0.5% MoM, easily topping the 0.2% economist estimate while the prior month was upwardly revised to a decline of (-0.4%) from (-0.6%); import prices rose 3.5% YoY in Sept.; import prices ex-fuels unchanged after falling 0.2% in Aug. Export prices unchanged after falling 0.2% in August
· Preliminary Oct. University of Michigan sentiment fell to 99.0 from 1200.1 in prior month and was below the 100.5 estimate; the current economic conditions index fell to 114.4 vs. 115.2 last month while the expectations index fell to 89.1 vs. 90.5 last month
· Oil prices rise as WTI crude gains 37c or 0.5% to settle at $71.34 per barrel, but posted a weekly loss of about 4% amid signs of rising crude supplies (EIA and API both published larger than expected inventory builds for the week). The “risk-off” attitude in markets this week was prevalent as bonds and gold prices advanced, also adding to the selling pressure in oil. Oil prices are coming off more than 4-year highs ahead of the expected resumption of Iran sanctions in November. Brent prices inched higher on Friday but also posted losses of around 4% (its first weekly decline in five weeks for both Brent and WTI)
· Gold prices slipped -$5.60, or 0.5% to settle at $1,222 an ounce, pulling back after its near 3% spike yesterday, but still ended the week higher by about 1.4% (touched 10-week highs yesterday). Gold trickled lower as global stocks attempted to rebound from a two-day downturn that had driven investors into safe haven assets.
· The U.S. dollar ends the week lower, but managed to edge higher on Friday (snapping a 3-day losing streak) as the dollar index (DXY) touched highs of 95.37 (+0.3%) before paring gains (but bounce off earlier 2-week lows). The Pound slipped back below the 1.32 level as the dollar rose vs. most counterparts. Overnight, the People’s Bank of China set the yuan mid-point at 6.9120, its weakest level since March 10, 2017. The euro remains volatile amid the ongoing debt situation in Italy irking the EU. Late Thursday, the Italian parliament passed a new budget bill, which will next head to the government leadership for its approval.
· Treasury prices advanced, adding to gains late afternoon as Treasury yields rolled; the 10-year yield down under 3.14%, the 2-year at 2.83% and the 30-year 3.31% (down 11 bps, 6 bps and 9 bps off weekly highs). After taking out multi-year highs for yields earlier this week on hawkish FOMC rhetoric and expectations for another rate hike this year and three next, bonds have since pared losses after President Trump questioned the Fed and their rate hike cycle. A slower than expected inflation reading yesterday (CPI) also eased bond weakness.
Sector News Breakdown
· Consumer Staples; tobacco stocks slipped, with weakness overnight in BTI and IMB.LN on concern the U.S. FDA is planning to propose strict limits on the amount of nicotine in traditional cigarettes, Bloomberg reported (MO and PM shares also active); CPB said Third Point’s lack of a “cogent” plan poses an “unacceptable risk” in the investor presentation released today; EL was downgraded to neutral at JPMorgan following re-rating of luxury names the last few days
· Housing & Building Products; group falls further after plunging the last few weeks on weak outlooks from homebuilders, lower estimates from analysts and a rising rate environment that will likely slow demand for builders; Longbow downgraded MAS and FBHS saying their cabinets survey and data review show a moderating sales growth pace and margin concerns into 2019; 52-week lows for housing related names today: FBHS, PPG (coatings), SWK, MHK, MAS(building product), WHR (appliances), and builders (PHM, DHI, LEN) as momentum remains to downside
· Energy stocks had a tough week, with oil prices dropping and investors fleeing riskier assets, as oil price pulled back from more than 4-year highs; Baker Hughes (BHGE) weekly rig count rose 11 to 1,63, with oil rigs down up 8 to 869 (first weekly in four that oil rigs were added), gas rigs up 4 to 193 and miscellaneous rigs down -1 to 1
· The International Energy Agency cut forecasts for oil demand this year and next because of growing threats to global economic growth, yet warned that dwindling spare oil supplies will keep prices high. Reduced growth estimates from the IMF, trade disputes and the strain of high oil prices all fed into the downgrade to consumption. The IEA cut its estimate for global oil-demand growth for both 2018 and 2019 by about 110,000 barrels a day to 1.3M-1.4M
· Oil drilling sector; JPMorgan moving to Neutral on both ESV and RDC (upgrading ESV and downgrading RDC) and downgrade DO to underweight while stay underweight NE and RIG – says after a strong run since their August lows (+30% v. OSX +4%), our analysis signals the stocks are now discounting long-term “normalized” drillship dayrates in the mid-$300k range; NE won contracts for two of its idle drillships, according to the company’s latest fleet status report. Societe Generale rotates more fully into offshore drillers as the firm reduces U.S. land exposure amid growth constraints (upgrades ESV, NE and OII to buy from hold; HAL downgraded to hold from buy and WFT cut to sell from buy)
· MLPs; Barclays downgrades AM to equal-weight saying stock fully valued following the run-up in AM on the AM/AMGP transaction announcement while also downgrades HMLP as visibility for near-term growth catalysts has dissipated and cut OKE as well; JPMorgan said with the potential for headwinds to subside in the near-term, especially given that the combination should close soon, they reiterate OW and move ETE to the AFL as a value strategy. Additionally, after outperforming the AMZ by >15% since July, they downgrade SUN to Neutral as the total return profile stands toward the middle of coverage
· Utilities & Solar; defensive sectors such as utilities fell early as broader markets rebound after crushing declines the last few days; CMS was downgraded to neutral at Bank America on valuation as the shares trade at all-time relative highs vs. the group with limited near-term catalysts on the horizon.
· Bank movers; there were around 50 names in the S&P making a 52-week low today (no highs) – financials taking the brunt: IVZ, BEN, FITB, CB, CFG, PBCT, AIG, STT, JEF, HIG, MS, BK, PNC, MAC, AMG, BEN, MTB; no love at all today for the regional banks, with big declines in RF, KEY, USB, FG, STI into earnings and after PNC results as the KRE four-session loss over 10%, the worst four-day drop since August 2015
· 1) JPM Q3 EPS of $2.36 beat by 10c though results were mixed as weakness in fixed income markets were offset by strong performance in equities (FICC sales & trading revenue $2.84B vs est. $2.96B; equities sales & trading revs $1.60B vs est. $1.42B; 3Q investment banking revs $1.73B vs est. $1.82B)/strong performance in its US consumer bank helped JPMorgan Chase to comfortably beat profit and earnings expectations
· 2) WFC Q3 profit rose $6B, but EPS missed estimates and said total average loans were $939.5B, down $4.6B from Q2/NIM of 2.94% was in-line with estimates, while charge offs of $680M was above views but provision for credit losses of $580M missed the $613M Bloomberg est.;
· 3) Citigroup (C) Q3 EPS of $1.73 beat estimates by 5c on mostly in-line revs of $18.4B as 3Q net income rose 12% YoY to $4.62B, mainly due to a lower tax rate and lower expenses and cost of credit; Fixed income markets revs $3.20B vs. estimate $2.95B, equity markets revs rose 1% y/y to $792M and investment banking revs fell 8% YoY to $1.18B
· 4) PNC Q3 EPS beat by 10c on lower net-charge offs of $91M and provisions $88M; on in-line NIM of 2.99% but markets point to Basel III ratio of 9.3% missing the Bloomberg est. 9.46%
· Consumer finance and lending; the FinTech/payments sector (MA, V, SQ) with strong rebound after its recent pullback; SQ was upgraded to buy at Canaccord following pullback in shares, but noting they have been on the wrong side of stock for some time, as believe the recent sharp selloff creates a long-term opportunity in a truly disruptive and well-run company; credit cards also got a boost after KBW one analyst that said JPM, WFC, C credit card volume were in-line to better than expected for the card networks
· Pharma movers; ABBV announced a global resolution of all intellectual property-related litigation with Sandoz over its proposed biosimilar adalimumab product; BMY said Phase III CheckMate-311 study evaluating Opdivo vs chemotherapy in relapsed small cell lung cancer didn’t meet primary endpoint of overall survival; Cannabis stocks; IMDZ downgraded at Leerink after company announced Thursday they will focus on and expand development of intratumoral IO agent G100 and discontinue CMB305
· Managed care; earnings start for group next week with UNH results on Tuesday morning; Jefferies today said they are constructive on MCO fundamentals with a bias to own diversified insurers but downgraded MOH to Hold (after rising 80%+ YTD)/firm likes UNH but are cautious on MGLN and TVTY in the near-term due to low 2H visibility.
· Biotech movers; SRPT initiated outperform and $170 tgt at Bernstein saying a confluence of factors make DMD a best case scenario (and very high value) indication for gene therapy; EQ 4.67M share IPO priced at $14.00; CORI to be acquired by Gurnet Point Capital, a private investment firm focused on the healthcare for $12.50 per share in cash ; IOVA rises as sees enrollment for metastatic melanoma study early 2019/prices 22M share secondary at $9.97 per share; ALDR was downgraded to neutral at Mizuho citing lack of catalysts
Industrials & Materials
· Industrial & Machinery; GE is pushing back its Q3 earnings release to give the new boss more time to review the beleaguered manufacturer; WNC plunges after guides Q3 EPS 27c-30c, below the 52c estimate and sees year EPS $1.50-$1.55, missing the $1.96 est.; says total new trailer shipments/revs below views
· Transports; JPMorgan enter earnings season with a more cautious view as the recent market turmoil provides a reminder that YTD outperformance of the rail group (+9% vs. the S&P 500 and 14% vs. XLI) makes the stocks susceptible to further weakness (downgraded GWR to neutral); in airlines, JBLU was upgraded to peer perform at Wolfe Research on valuation; CP was upgraded to buy at Stifel in the railroad space
Technology, Media & Telecom
· Internet; Morgan Stanley cutting FB 2019 ad revenue estimate on the overweight-rated stock due to growing headwinds, with the largest being lower-monetizing Stories engagement/tgt cut to $175 from $185 and 2019 advertising revenue estimate lowered; Pivotal Research updated Internet space ahead of earnings, upgrading both SNAP (to buy) and TWTR (to hold) saying prior trajectories around growth are only slightly changed, with margin erosion continuing for FB and GOOGL and improving for other companies in the space; NFLX was upgraded to buy at Citigroup and $375 tgt saying fundamentals remain strong and the opportunity to continue growing international subs and to exert pricing power leverage remain
· Software movers; MSFT upgraded to outperform at Macquarie saying they are taking advantage of the market pullback and expecting a strong start to FY’19, view pullback as attractive, and shares relatively defensive. TP to $121; video game stocks very strong early with gains in ATVI, TTWO after Piper noted Activision’s new Call of Duty launched to strong reviews; big rebound in software related stocks after recent plunge (ADSK, CRM, APPN, TTWO); PLAN shares opened at $24.25 after pricing 15.5M share IPO priced at $17.00