Tuesday, October 23, 2018
Equities in sell-mode as U.S. stock declines following the rout in Asian markets overnight with trade concerns, impact of tariffs becoming more pronounced after quarterly earnings and lower outlook from various industrial giants this morning (CAT, MMM) weighing on markets and sentiment. The Dow Industrials fall more than 500 points, dropping below the 25,000 level, while the Nasdaq Comp drops more than 2.5% to below 7,300 (6-month lows) and the S&P 500 index on track for its 5th straight day of declines (also down 12 out of the last 14-sessions) falling below its October low of 2,710 and now below the 2,700 level. More fears of backlash from U.S. to OPEC giant Saudi Arabia after death of journalist few weeks ago with Vice President Pence saying this morning “brutal murder will not go without a response.” Smallcaps decline as the Russell 2000 erased its gains for 2018. Weak data today adding to pressures as the Richmond Fed’s Oct. mfg. survey reported at 15 vs 29 last month as shipments fell to 7 after 33 the prior month and new order volume slowed to 20 after 34 the prior month. The CBOE Volatility index (VIX) surges with market downturn, rising over 20%. The Shanghai Composite dropped 2.3% overnight after a two-day rebound fueled by verbal intervention by Beijing following last week’s equity weakness. More trouble in Europe as well as the Financial Times reported Brussels formally rejects Italy’s budget, an unprecedented step for Eurozone fiscal authorities that will force Rome’s populist government to rein in its spending plans or face fines from Brussels.
Treasuries, Currencies and Commodities
· In currency markets, the dollar is mixed as the Pound pushed higher amid promising Brexit headlines/the pound perked up to a session high of $1.3044 but has since moved back below the 1.30 level; the US dollar gained vs. the Canadian dollar as oil prices continue to drop after posting 4 ½ year highs last month (CAD/USD trades up to 1.312); the dollar falls back to the 112 level vs. the yen, while rising against the euro
· Commodity prices mixed; Precious metals leading the way as investors rotate into defensive and safe have assets as gold rises over 1% to $1,237 an ounce while palladium rises to record highs according to Bloomberg; energy futures sink, with WTI crude the biggest drag down nearly 3% to around $67.50 per barrel ahead of weekly inventory data tonight and tomorrow (data has been overly bearish the last 2-weeks, dragging prices lower)
· Treasury markets jumped as stocks dropped, pulling yields lower in an apparent flight to safety as a renewed Chinese stock market rout and weaker than expected outlooks from top industrial companies (CAT, MMM) citing rising costs/impact of tariffs sparked global equity weakness. The yield on the 10-year Treasury note fell 7 bps to 3.118%, while the 2-year Treasury note yield dipped about 3 bps to 2.866% and the 30-year yield fell 4.6 bps to 3.335%.
Sector Movers Today
· Aerospace & Defense; ARNC is said to have received an $11B acquisition offer from Apollo Global on Friday, Reuters reports, citing people familiar with the matter. The offer of $23-$24 per share is only a slight premium to the company’s last close – Reuters https://reut.rs/2O0qPkv ; in defense, LMT Q3 earnings topped estimates and said it expects sales to grow as much as 6% next year, topping the expected 5% revenue growth view; HXL reported mixed quarter (EPS beat/sales miss) while narrowing its year outlook for profit and raised rev view
· Machinery stocks; Dow component CAT Q3 EPS beat by a penny and reaffirmed its view but shares sunk after the company said material costs are rising because of tariffs (common theme that has weighed on industrial and material stocks amid trade dispute between US/China); CAT said it sees full-year impact of the tariffs at the low-end of $100M-$200M range; PCAR posted quarterly revenue miss though net income came in at a record $545M for the quarter, up 35% from a year ago
· Industrial stocks were weak as a handful of large cap earnings and lower outlooks sunk the sector; Dow component MMM falls after cutting its adjusted EPS view for the year/ lowers FY18 adjusted EPS view $9.90-$10.00 from $10.20-$10.45 and as Q3 EPS missed by 12c (shares of DE, ITW, CFX, DOV, EMR, MTW, OSK, TEX, ASTE, WCC, TSCO active); Goldman said CAT slowing construction industry orders do not bode well for TEX and MTW; CR Q3 EPS/sales beat and raised guidance for the year; Dow component UTX raised its full-year earnings guidance for the third time as it reported higher than expected Q3 earnings on strong aircraft and equipment demand
· Semiconductors; group down with broader market as investors prepare for earnings this week as the Philly semi index (SOX) fell as much as 3%, dropping under the 1,200 level – 52-week lows; in research, ASML, AMAT, LRCX cut to neutral from positive at Susquehanna after recent checks signaled incremental weakness for Cloud and Enterprise spending expectations in the first half of 2019 (tgts cut as well AMAT to $38 from $60, ASML to $200 from $240 and LRCX to $165 from $225); Barclays upgraded AMD and NXPI after the group’s continued underperformance this month, as sector fundamentals are not falling off as fast as stock prices
· Hardware & Component news; EDA sector strong after CDNS reported a beat and raise highlighted by higher Verification and IP revenue, 32% operating margins and a raise to the full year guide; also in sector, JPMorgan upgraded both SNPS and CDNS to neutral from underweight noting both have underperformed coverage by 20% and 35% year to date, respectively. But now the valuations are more palatable and we believe each stock has catalysts; Enterprise hardware and memory/storage sector views downgraded at Susquehanna as cut NTAP (PT to $85 from $105), MU (PT to $45 from $75) and SK Hynix to neutral from positive while STX was cut to negative from neutral (PT to $32 from $53)
· Cannabis sector extends declines as the ETFMG Alternative Harvest ETF (MJ) falls again after tumbling 20% over the past 5 sessions (cannabis sector) – TLRY, ACB, CRON, CGC remain weak since the start of legal recreational cannabis use in Canada on October 17. Last night, TLRY issued an additional $25M aggregate principal amount of its 5.00% convertible senior notes due 2023
· ABG +10%; handily topped Q3 eps and revs
· BIIB +1%; posted stronger-than-expected Q3 earnings and sales, as sales grew 12% YoY led by strong sales of Spinraza
· CDNS +7%; reported a beat and raise highlighted by higher Verification and IP revenue, 32% operating margins and a raise to the full year guide
· MCD +2%; reported better quarterly results on the top and bottom line, while also warning that for the full-year 2018, costs for the total goods are expected to increase about 2% in the U.S.
· PHM +5%; reported a small beat for Q2 earnings and revs while net new orders rose a meager 1% to 5,350 homes in Q3
· SENS +8%; after AET announced coverage of Eversense for its ~22M lives/size and timing of the decision are ahead of expectations
· UTX +1%; raised its full-year earnings guidance for the third time as it reported higher than expected Q3 earnings on strong aircraft and equipment demand
· VZ +2%; reported Q3 EPS and revs ($1.22/$32.61B) above estimates while lowered its capex outlook to $16.6-17.0B from $17.0-17.8B
· ATI -8%; after 2c EPS miss, while sales beat and company warned of 4Q headwinds for its Flat Rolled Products (FRP) Segment
· BAYRY -10%; after the company failed to persuade a California state judge to set aside a jury’s verdict in the first trial over allegations that its Roundup weed killer causes cancer; though the judge on Monday said damages should be slashed to $78.6M from $289M
· CAT -9%; Q3 EPS beat by a penny and reaffirmed its view but shares sunk after the company said material costs are rising because of tariffs
· DGX -5%; after in-line Q3 EPS but lower revs of $1.89B and guided both year profit and revenue below consensus views
· DISH -6%; downgraded to underperform at Macquarie citing an unfavorable backdrop for the stock near-term and more spectrum going to market
· GPK -8%; posted Q3 EPS and Ebitda that missed estimates citing commodity input cost inflation, specifically, increased freight, chemicals, wood, purchased external paper, and pulp substitute recycled fiber costs, along with labor and benefits
· INGR -9%; cuts FY18 EPS view to $6.80-$7.05 from $7.50-$7.80 (est. $7.48) after reporting large Q3 EPS miss ($1.70 vs. est. $1.96)
· MMM -7%; after cutting its adjusted EPS view for the year/ lowers FY18 adjusted EPS view $9.90-$10.00 from $10.20-$10.45 and as Q3 EPS missed by 12c
· SLCA -13%; reported lower than expected revenue, EBITDA and EPS as revenues came in at $423M, below consensus of $461M, as Oil & Gas segment saw greater decline in price per ton than est. (leads frac sand names HCLP, EMES< SND lower)
· WAT -6%; after Q3 revenue growth missed expectations and Q4 guidance came in well below expectations
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.