Monday, October 22, 2018
Equity Market Recap
· U.S. stocks end mixed to start the week, as the Nasdaq Composite advanced led by gains in technology, while the Dow Industrials and S&P 500 lagged behind following weakness in financials, energy, industrials and material stocks ahead of a busy week of central banks, corporate earnings and other macro driers (Brexit talks, Saudi journalist update). An overnight rally that began in Asian equities failed to hold while the U.S. dollar rose to the highest level in two months and the Pound fell the most in a month. Macro concerns remain a key driver of market weakness as well as the impact of trade and tariffs to corporate earnings (which has been cited on several occasions thus far for lower guidance amid materials and industrials). European stocks dropped a fourth consecutive session, erasing early gains, while the UK FTSE ended only slightly lower following several headlines from UK Prime Minister Teresa May regarding her country’s update on Brexit. Several Dow components are expected to report earnings tomorrow morning including VZ, CAT, MMM, UTX and CAT (five of the 30 components). It’s also a big week of central bank meetings as the Bank of Canada is expected to raise interest rates by 25 basis points Wednesday, while Sweden’s Riksbank and Norway’s Norges bank are also meeting Wednesday, ahead of the European Central Bank on Thursday. US markets overlooked the bounce in Asia overnight as China’s Shanghai index by over 4%, its biggest one-day gain in over 3-years after Chinese officials pledged to support the economy as Chinese President Xi Jinping emphasized China’s support for the private sector.
· Oil prices bounce off lows as WTI crude for expiring Nov delivery rise 5c to $69.17 per barrel while December futures rise 8c to finish at $69.36 per barrel (off intraday lows $68.46 per barrel). Driving stocks lower initially was a stronger dollar as well as reports that Saudi Arabia is ready to boost output to 11m b/d soon and has no intention of using its oil wealth as a has no political tool, Energy Minister Khalid Al-Falih said in interview with Russian news agency. Gold prices underperformed in the metals space, with December gold slipping -$4.10 or 0.3% to settle at $1,224.60 an ounce, while December palladium rose $37.80, or 3.5%, to settle at $1,107.70 an ounce. Industrial metals outperformed early with a rebound in China markets.
Currencies & Treasuries
· The dollar advanced early vs. most rival currencies only to remain steady in afternoon trade and maintain those gains; the U.S. dollar index (DXY) traded up around the 96 level; the British pound fell around -0.75% vs. the dollar after several comments by UK PM May regarding Brexit; the euro influenced by positioning ahead of EC meeting this Thursday, while Italian bonds stabilize after a ratings downgrade Friday; the greenback moved to 2-week highs vs. the Japanese yen, topping at 112.89, despite broader stock averages pulling back. Treasuries were little changed, with the 10-year yield holding under 3.19% most of the day and the 2-yr steady at 2.90%.
Sector News Breakdown
· Retailers; in toy retail, HAS falls as Q3 impact of the Toys R Us liquidation may have been worse than analysts were expecting, as it missed EPS and revenue estimates, with U.S. and Canada revenue falling 7% YoY and international revenue dropped 24% YoY (MAT moves as well); retail outperforms with gains early for KSS, JWN, ANF, TGT, URBN
· Consumer Staples; KMB shares pulled back with a broader sell-off in stocks despite top and bottom line Q3 results beating estimates and the mid-point of its year profit outlook topped views/did announce CEO Falk will resign effective 2019; the group little retrace after jumping on Friday behind better earnings from Dow component PG
· Restaurants; CMG was upgraded to outperform at RBC Capital and raised tgt to $510 from $450 saying while 3Q results (reported 10/25) are likely to be lackluster, they are now modeling a ramp up in SSS growth from 4% to 6% through 2H19 (raise estimates); PZZA founder John Schnatter sent a letter to the pizza chain operator’s board asking for a change in the recent poison pill provision/he claims third parties are asking to speak with him about the company; WING was downgraded at Wedbush as believe current valuation largely incorporates investors’ expectation of comp, unit growth, and FCF upside in 2019
· Housing & Building Products; weakness continues in the sector, with the XHB ETF falling for the 22nd time in last 24 days, as builders, and product names set new year lows (MAS, FBHS, VMC, DHI, LEN, MHK, PHM, MLM); Deutsche Bank downgraded PHM, TOL, TMHC while upgraded LEN, MTH noting that homebuilding stocks (and the broader building sector) have dramatically underperformed the market year-to-date (-33% for the builders vs. +4% for the S&P 500) on housing slowdown and price-cost fears – firm becomes selective
· Casino & Leisure movers; CZR shares slipped after the NY Post reported the company to reject merger offer from Golden Nugget ; in leisure vehicles, PII shares were active following earnings results, getting a lift late morning; HOG shares traded at 52-week lows ahead of earnings tomorrow morning (cautious checks at UBS today); 52-week lows today for casino stocks WYNN and LVS
· Auto sector; auto parts maker owned by American buyout firm KKR & Co. said it is acquiring FCAU auto parts arm, Magneti Marelli, for EUR6.2B ($7.1B). The combination will create a company with EUR15.2B in annual revs
· Energy stocks fall; sector weak after HAL lowers guidance, dollar jumps, Saudi Arabia’s energy minister said the country is likely to raise oil production close to 11m barrels a day, signaling it has “no intention” of using its status as a top producer as leverage in Khashoggi case. Commodity prices in general broadly lower
· Oil services; HAL narrowly beating Wall Street expectations for Q3 earnings and revenues, but demand for some of its key operations came in weaker than anticipated/said Q3 sales in its completion and production segment totaled $4.17B, up 15% Y/Y but flat Q/Q/guided Q4 EPS 37c-40c below est 49c; WFT will sell its laboratory services business to an affiliate of CSL Capital Management for $205M in cash.
· Other movers; OXY was upgraded to Strong Buy at Raymond James saying it provides a striking case study of the year-to-date disconnect between (spot) oil prices and oil-levered equities; RIG quarterly fleet status report shows that the company has added about $465M contract backlog since the last report/as of today, backlog is $11.5B; HCLP cuts its dividend; in utilities, SCG shares fell more than 15% late afternoon
· Refiners were defended at Wells Fargo saying they see no need to panic or change our views toward the refiners as the IMO 2020 implementation process is highly unlikely to be altered, in our view; reiterate OP on DK, MPC, PBF, PSX and VLO. Firm notes on 10/19 a story in the WSJ cited senior unnamed Trump administration officials searching for ways to alter and/or delay the IMO 2020 implementation; they do not see the IMO 2020 process as easily alterable given its treaty-based existence, authority, and structure.
· Bank movers; financials in general among top declining sectors on the day, led by regional banks; MTB upgraded to overweight by Piper after deposit base remains steady in Q3 and loan/deposit ratio fell; CFG was upgraded at both Macquarie and Bank America while also received a positive mention in Barron’s saying it has one of the hottest lending niches in the world and it is the exclusive financing partner for iPhones bought directly from Apple; few bank earnings today with BOH, CADE, CBU, OPB, ONB with results expected tonight from AMTD, SLM, ZION in the financial sector; regional banks move to 13-month lows following weak results from TCF earlier today – index remains pressured after early earnings disappointments for group (weaker NIM, higher provisions, pricing pressures)
· Pharma movers; MRK and AZN PARP-inhibitor, Lynparza, put the drug in the lead in ovarian cancer treatments; BMY shares fell after FDA delays approval deadline for cancer drug in trial called CheckMate-227, an ongoing phase 3 study testing its Opdivo plus a low dose of another Bristol-Myers drug, Yervoy/also downgraded at Citigroup as the potential for its CheckMate-9LA study to disrupt Merck’s first-line dominance in non-small cell lung cancer (NSCLC) has diminished; MRTX shares fell following disappointing updated Phase 2 data on tyrosine kinase inhibitor sitravatinib, combined with BMY’sOpdivo (nivolumab), in patients with non-small cell lung cancer; LOXO and BAYRY targeted cancer therapy, larotrectinib, beat Street expectations, as well as RHHBY’s entrectinib; Cannabis names slide as momentum wanes (CGC, TLRY, CRON); ABBV falls after SunTrust cut price target on the drugmaker to $135 from a Street-high $157 on lower estimates for top-seller Humira due to biosimilar discounts in Europe
· Biotech movers; DVAX rises as announced preliminary data from its ongoing Phase 1b/2 clinical trial evaluating SD-101 combined with MRK’s KEYTRUDA (pembrolizumab) in patients with advanced melanoma naïve to anti-PD-1/L1 therapy; TSRO tgt raised at Cantor as think that the 10/21 SOLO1 data are a positive read for Tesaro’s first-line study PRIMA (data expected 2H19); ADAP slumped after initial data from the first two cohorts of its ongoing studies evaluating its MAGE-A10 and MAGE-A4 SPEAR T-cells disappointed; INCY provided updated Fight-202 results in cholangiocarcinoma, which looked superior to the previously disclosed initial data according to Cantor (also upgraded to strong buy at Raymond James)
· Healthcare services and providers; AET announced its 2019 Medicare plans, featuring expanded plan options with low or $0 monthly plan premiums in many areas, enhanced benefits and a more personalized member experience; PHG falls after missing earnings expectations and warning trade wars and Brexit will weigh on its business
Industrials & Materials
· Industrial & Machinery; JEC has agreed to sell its energy, chemicals and resources business to WorleyParsons for $3.3 billion ; LII reported an increase in profit and raised its estimates for how much an Iowa tornado will affect its results; industrials yet to bounce, with names like CAT, DE, ITW, UTX moving to lows; earnings results tomorrow from CAT, MMM, HUBB, LMT, UTX
· Rail industry; rail car makers active after ARII agreed to merge with a wholly-owned subsidiary of ITE Rail Fund at a price of $70 per share in a transaction valued at about $1.75B, well above its Oct. 19 closing price of $46.29 (shares of GBX, TRN, GATX, WBC among names moving on news); KSU was upgraded at Seaport Global with $120 tgt saying while Q3 was a well-telegraphed disappointment, think KSU is a 2019 and beyond story
· Transports; Morgan Stanley turns cautious on freight stocks as sees downside risk to consensus in 2019 across virtually the entire group driven by slowing demand fundamentals/yet valuations remain elevated across most of the group. They downgrade industry view to Cautious and downgrading UNP and GWRto Underweight and ODFL to Equal-weight; in airlines; CPA was downgraded at Raymond James as they are becoming cautious on international LatAm trends, with our high fuel price outlook likely to push out the earnings recovery
· Metals & Materials; RS was downgraded to neutral at Longbow due to near-term risks associated with unfavorable nonferrous demand/price momentum; Industrial metals were up initially as Chinese authorities promised measures to support the economy with copper, nickel and aluminum outperforming and gold slipping – but group reversed lower
· Chemicals; SEED rises as new strategic investor Longhan Investment Management agrees to purchase nearly 1.4M shares for an aggregate purchase price of nearly $7.5M ; Linde AG and PX won FTC approval from the U.S. antitrust enforcers for their $46 billion merger on the condition that Linde and Praxair sell assets
Technology, Media & Telecom
· Internet; sector was mixed as technology outperformed in a volatile day of trading overall; EBAY downgraded to neutral at Bank America (stocks came into the day near 52-w2eek lows); NFLX said it intends to offer $2B in senior notes offering
· Semiconductors; SMCI said no malicious hardware chip implanted during manufacturing of motherboards in letter to customers/no motherboard containing any unauthorized hardware chip found by company or government agency; COHR guided Q4 revs $460M-$461M, below prior view $465M-$485M citing end of quarter execution challenges” in one German manufacturing site and softening demand in China; INTC was upgraded to buy and $50 tgt at Nomura; AMDshares outperformed in semi space, rising as much as 8% before paring gains
· Software mover; security stocks were active after The Information reported Sunday that FB is on the hunt for a big acquisition in the space to fix its reputation around data protection (several stocks were active on the report (PANW, FTNT, ZS, PFPT, FEYE)