Mid-Morning Look: October 24, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Wednesday, October 24, 2018

Equities trade lower, as the S&P 500 index on track to extend its losing streak to 6-days as slowing China growth/tariffs (which has been noted in several profit warnings thus far in earnings season) along with the recent surge on borrowing costs (Treasury yields) remain the key drivers to the market. Macro factors including Brexit, Italy budget and Saudi tensions also playing a factor. President Trump continuing to attack the FOMC and urging them to halt rising rates also creating tension. Housing data very weak with new home sales well below views, while energy prices look to rebound off 2 month lows (though markets receive another round of bearish inventory data). There were disappointing readings from European purchasing managers indexes this morning amid mounting concern about global trade. The composite euro-area PMI from IHS Markit dropped to 52.7 in October from 54.1 in September, while Germany’s dropped to 52.7 from 55.0 last month. UK Cabinet ministers to hold a meeting Thursday morning at 11:00 AM on Brexit update. Also tomorrow, the European Central Bank policy meeting (7:45 AM EST) and Draghi press conference following (8:30 AM EST). The Bank of Canada raised its benchmark interest rate (as expected) to 1.75%. Also unsettling markets today, several reports about suspicious packages after Hillary Clinton and Barack Obama were targeted by potential explosive devices sent in the mail, the Secret Service said on Wednesday. Lots of factors weighing on the market again as stocks fail to hold early gains led by better earnings from Dow component Boeing.

Treasuries, Currencies and Commodities

· In currency markets, the euro falls against the dollar, sliding below $1.14 for the first time since mid-August following weaker-than-expected purchasing manager’s index readings in Europe. Preliminary EuroZone services, manufacturing and composite indices for October all came in below expectations. Concerns about the state of Italy’s economy and the ripple effect a downturn in the Eurozone’s third largest market also weighing on sentiment. The Canadian dollar bounced initially after the Bank of Canada raised its interest rates (as expected)

· Commodity prices mixed with oil prices looking to rebound after falling over 4% yesterday to fresh 2-month lows (despite bearish inventory data overnight), while gold prices pullback from 3-month highs above $1,236 an ounce yesterday as the dollar spikes

· Treasury market’s rise, with yields falling back near yesterday lows as investors rotate back into safe haven assets/defensive; 10-year yield falls back down to 3.12% (after weaker housing data and yet another call from President trump to the FOMC to halt raising interest rates); the 2-yr yield down at 2.86% and 30-yr 3.33%

Economic Data

· New home sales for Sept fell (-5.5%) to 553,000 annual rate, the lowest since Dec. 2016 and well below the 625K economist estimate; the previous three months’ new home sales data revised down by 55K; median new home price fell 3.5% y/y to $320,000; average selling price at $377,200; 14% of new homes sold in Sept. cost more than $500,000, down from 20% prior month

· The flash reading of IHS Markit’s manufacturing purchasing managers index rose to a five-month high of 55.9 in October from 55.6, while the flash services PMI rose to a two-month high of 54.7 from 53.5 in September.

Sector Movers Today

· Medical equipment and devices; Medical device stocks fell yesterday after DGX and WAT missed estimates and issued cautious outlooks, while overnight, EW shares dipped after Q3 sales missed views and guided next quarter profit below forecasts while posting another soft quarter for TAVR growth; BSX another weak name in space after guiding Q4 below views and lowered its full-year outlook for revs and profit; ILMN delivered a strong Q3, with revenue and EPS beating, but did not raise its FY’18 revenue guide (despite the beat); VAR mixed Q4 as EPS miss/sales beat

· Semiconductors with bad guidance overnight; semi bellwether TXN disappointed with a forecast that suggests its customers are bracing for weaker demand/Q3 rev growth decelerated to 3.5% Y/Y from 11.4% and 8.8% in the prior 2 Qs and the company guided to below consensus for 4Q; STM said gross margins are likely to remain flat, even though it forecast sales growth this quarter (STM an AAPL chip supplier – weighs on supply chain SWKS, AVGO, CRUS)

· Aerospace & Defense; Dow component BA helping lift the sector after surging cash flow and an improved outlook/said free cash flow jumped 37% to $4.1B in Q3 while also reported earnings that beat estimates, raised its profit forecast for this year and predicted that sales would reach a record $100 billion; LMTwas upgraded to buy at Goldman Sachs saying the company increasingly looks to have growth differentiators in defense – a favored end-market; NOC also raising its full-year profit view and reporting 3Q sales above estimates; GD Q3 revenue missed the lowest analyst estimate, even as EPS topped expectations, while boosted guidance

· Bank movers; European banks slide after DB posted its lowest Q3 revenue since 2010 as FIC and equities trading income dropped 15%/full-year revenue will take a bigger hit than it previously expected; BCS a bit better reporting FICC revenue up almost 10% and equities trading revenue soaring 35%; MS was upgraded to outperform at Wells Fargo; UBS upgraded shares of TCBI and OZK after recent pullbacks in both following weaker earnings results

· Retailers; LULU upgraded to buy at Canaccord and upped tgt to $160 as they recommend taking advantage of the stock’s 15% pullback over the last three weeks as we believe the risk/reward is now skewed to the upside citing LULU’s strategic initiatives; TUP Q1 EPS/sales both above consensus while profit guidance for year also above views; IRBT shares fall as tariff concerns overshadowed an impressive quarter for the robotic vacuum cleaner company after company raised its Q4 and 2018 estimates; VFC was added to JPMorgan focus list

        Stock GAINERS

· BA +2%; said free cash flow jumped 37% to $4.1B in Q3 while Q3 earnings beat estimates, raised its profit forecast for this year and predicted that sales would reach a record $100 billion

· CMTA +89%; plans to file the Palovarotene NDA for the episodic treatment of FOP in 2019 based on Phase 2 studies, which points to an NDA filing and potential approval of Palovarotene about 12 months earlier than estimated

· JNPR +4%; reported in-line 3Q revenues and EPS above estimate due to margin outperformance yet guided down 4Q18 as sees continued project delays from cloud customers

· NSC +3%; Q3 earnings and revenue topped estimates as rising demand drives record quarter

· TRVG +12%; boosted its profitability forecast for 2018 and said it’s improving the quality of traffic referred to advertisers

· VAR +10%; among top S&P gainers despite mixed quarterly results

Stock LAGGARDS

· DB -4%; posted its lowest Q3 revenue since 2010 as FIC and equities trading income dropped 15%/full-year revenue will take a bigger hit than it previously expected

· DXC -19%; as the head of DXC Americas has left, The Register reports, saying the reason for his exit is believed to be a double-digit drop in the region’s sales https://bit.ly/2RaXvtF

· GD –5%; Q3 revenue missed the lowest analyst estimate, even as EPS topped expectations, while boosted guidance

· IRBT -13%; shares fall as tariff concerns overshadowed an impressive quarter for the robotic vacuum cleaner company after company raised its Q4 and 2018 estimates

· NDLS –17%; after mostly in-line results and mixed guidance while also announced stock offering to sell 8.75M shares

· SIX -10%; as Q3 results came in softer than expected, driven by lower attendance levels and higher operating costs/raises fears for other them parks (SEAS)

· T -3%; Q3 EPS missing while reported a loss of 232,000 regular monthly wireless subscribers (vs. est. +89K) with big factor the loss of 420,000 tablet customers in the quarter

· TXN -4%; Q3 rev growth decelerated to 3.5% Y/Y from 11.4% and 8.8% in the prior 2 Qs and the company guided to below consensus for 4Q

· UPS -3%; after Q3 EPS in-line on slight rev beat but midpoint of year profit view missed estimates

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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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