Mid-Morning Look: October 22, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Monday, October 22, 2018

U.S. equities initially rally on the back of gains in Europe and a surge in Asian stocks after Chinese officials pledged to support the economy as Chinese President Xi Jinping emphasized China’s support for the private sector, while Beijing also released new details on proposed personal income tax cuts (news lifted China’s Shanghai index by over 4%, its biggest one-day gain in over 3-years). However, stocks have since turned lower, as major averages try to hold their key technical levels (200-day MA), the same levels they have been battling to hold the last 2-weeks. Tech shares leading gains early while energy and financial stocks down the most to start. The dollar strengthened, while the pound slumped and Italian bonds gave back most of their gains, and energy prices resume their downward slide. Macro concerns remain 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). Several biotech and pharma names active today after results from European Society for Medical Oncology’s meeting revealed over the weekend (details below).

Treasuries, Currencies and Commodities

· In currency markets, the U.S. dollar was mostly higher, rising vs. the British pound as markets watch for Brexit updates with Prime Minister Theresa May is due to make a statement to the House of Commons on Monday. The euro influenced by positioning ahead of EC meeting this Thursday, while Italian bonds stabilize after a ratings downgrade Friday

· Commodity prices mostly lower as the dollar rises as energy complex biggest drag in space, led by more than 2% drop in natural gas and as WTI crude drops back below $69 per barrel; gold prices also sliding given the dollar strength. In oil, 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.

· Treasury markets edging slightly higher as yields fall, with rotation out of US equities to start the day; 10-year yield under 3.19%, though the 2-year yield holds steady above 2.90%

Sector Movers Today

· 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

· 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

· 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

· Bank movers; financials in general among top declining sectors to start; 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, CBU, ONB

        Stock GAINERS

· ARII +50%; 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 https://on.wsj.com/2yUHwbP

· CFG +1%; was upgraded at both Macquarie and Bank America while also received a positive mention in Barron’s

· DVAX +22%; 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

· JEC +6%; agreed to sell its energy, chemicals and resources business to WorleyParsons for $3.3 billion https://reut.rs/2AkVyFB

· SEED +20%; as new strategic investor Longhan Investment Management agrees to purchase nearly 1.4M shares for an aggregate purchase price of nearly $7.5M https://bit.ly/2J9nNd2

· SMCI +5%; said no malicious hardware chip implanted during manufacturing of motherboards in letter to customers

Stock LAGGARDS

· ADAP -22%; after initial data from the first two cohorts of its ongoing studies evaluating its MAGE-A10 and MAGE-A4 SPEAR T-cells disappointed

· BMY -5%; 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 (shares were downgraded to neutral at Citi based on news)

· COHR -2%; as 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

· HAL -2%; narrowly beating Wall Street expectations for Q3 earnings and revenues but guided Q4 EPS 37c-40c below est 49c

· HAS -6%; 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

· KMB -3%; 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

· MRTX -25%; following disappointing updated Phase 2 data on tyrosine kinase inhibitor sitravatinib, combined with BMY’s Opdivo (nivolumab), in patients with non-small cell lung cancer

· PHG -8%; after missing earnings expectations and warning trade wars and Brexit will weigh on its business

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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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