Monday, October 29, 2018
Equity Market Recap
· U.S. stock markets could not hold the strong gains it started with, as every bounce was met with more selling pressure, fading to lowest levels since early July and pushing the Dow and S&P 500 index back into negative territory for the year. The Nasdaq Composite fell as much as -370 off its highs (7,295.61) breaking below the 7,000 level (6,922 lows), while the Dow Industrials fell more than -915 off its best levels of 25,040. The S&P 500 index fared slightly better than both as strength in financials, autos and retailers helped offset the weakness in other sectors, but still pulled back late afternoon back into correction territory. Not helping markets (ahead of a busy week of earnings) Bloomberg reported the U.S. is preparing to announce by early December tariffs on all remaining Chinese imports if talks next month between presidents Donald Trump and Xi Jinping fail to ease the trade war. That just added to the already somber market outlook, clouded by trade, tariffs, rising borrowing costs, European issues, lower profit outlooks and a tech tumble. Markets posted a strong spike in the final 15 minutes to pare the day losses!
· Tech stocks extended last week declines (the NASDAQ was down 3.8% last week while for the month of October so far, had lost 11% – coming into today), after UK Chancellor Philip Hammond introduced a widely-anticipated new tax on technology companies as part of his Autumn Budget speech. That added to already weak moves in Internet giants such as GOOGL, AMZN, NFLX and FB (which reports tomorrow night). Software stocks were strong following a $34B deal as IBM acquires RHT. Top sector gainers included financials, retailers (UAA, M, KSS) and real estate sector, while the auto sector jumped (GM, F, FCAU, BWA) after Bloomberg reported that China was considering cutting a tax on auto purchases saying regulators are planning to halve the tax on car purchases to 5% to help support the world’s largest automotive market. Transports in general were strong, along with defensive utilities, while energy and defense stocks (LMT) fell. With the late day pullback, the S&P 500, the Dow, Dow Transports, Russell 2000 and NASDAQ all down more than 10% from all-time highs. Boeing the top decliner in the Dow falling over 8%.
· Macro news overnight: Brazil markets rise as Jair Bolsonaro won Brazil’s presidency with 56% of the vote, beating Worker’s Party candidate Fernando Haddad. Brazil’s next president pledged to trim the deficit, pay down debt and reduce the size of government. In Germany, Angela Merkel will quit as head of her Christian Democratic party and won’t run for another term as chancellor.
· On a positive note, Bloomberg reported that discretionary corporate buybacks, whose absence due to an earnings-related blackout coincided with this month’s S&P 500’s sell-off, is expected to resume again as blackout periods come to an end. Bloomberg noted about $110 billion of planned buybacks will be freed up this week, more than twice last week’s $50 billion, and that total will rise to $145 billion next week, Deutsche Bank AG estimated.
· Personal Income for Sept rose 0.2% vs. est. up 0.4% while personal spending rose 0.4%, matching economist estimates; real personal spending rose 0.3% (in-line) while PCE core inflation MoM rose 0.2% vs. est. up 0.1% and up 2.0% YoY (in-line with est.); PCE prices rose 0.1% (in-line) and rose 2.0% YoY; savings rate at 6.2% in Sept. vs 6.4% last month
· WTI crude oil slips 55c or 0.8% to settle at $67.04 per barrel, off highs $67.95, pressured as losses in the Chinese stock market fed concerns over a potential slowdown in energy demand. Oil prices have fallen over the last few weeks, pulling crude off 4 year highs just 3-weeks ago, even as U.S. sanctions on Iranian oil in November were expected to tighten global supplies.
· Gold prices drop -$8.20 or 0.7% to settle at $1,227.60 an ounce, pulling back after settling higher for a 4th straight week last Friday and pulling back from its highest settlement in about 3-months reached last week and closing at 1-week lows. Despite the volatility in stocks, with major averages falling well off their intraday highs, investors took profits in gold as the dollar gained. Still, for October, gold is so far up 3.3% on the heels of six consecutive monthly declines.
Currencies & Bonds
· The U.S. dollar advanced, rising as high as 96.70 up over 0.25% before ending slightly below those levels, as the euro falls back below the 114 level, the dollar rises vs. the Japanese yen and the Pound dropped below the 1.28 level (Friday low was 1.2777). The Mexican peso weakened as the dollar rose as much as 2% (3-month highs) around 19.70 as almost 70% of 1.07 million participants voted against completing the Mexico City airport, a big infrastructure project. Bitcoin prices drop out of recent tight trading range, falling over 2% to below $6,300. Brazilian Real rises after election outcome. Treasury markets edge lower as stocks rise, lifting yields with the yield on the 10-year bounces off multi-week lows; the 10-year yield fell 11 bps last week to 3.08%.
Sector News Breakdown
· Autos outperform (FCAU, GM, F) after Bloomberg reported China’s top economic planning body is proposing cutting the tax levied on car purchases by half. The National Development and Reform Commission submitted a plan to a group of key policy makers to cut the purchase tax to 5%-10% for passenger vehicles with engines no bigger than 1.6 liters; Ford (F) was upgraded to buy from hold at Goldman Sachs and raised tgt to $12 from $9; DAN Q3 earnings and sales topped consensus views while affirmed its year outlook; CTB mixed quarter as EPS beat on lighter than expected res, but rallies with broader auto sector bounce
· Consumer Staples; CL was downgraded by two analysts (JPM, SunTrust) as the challenges to the top line and margins will likely linger, leading to low single digit EPS growth in 2019; in grocer space, KR lowers identical sales guidance, excluding fuel, for 2018, citing space optimization and store remodeling work; BUD was upgraded to outperform at RBC Capital after pullback in shares; APRN tapped WMT’s Jet to be the first e-retailer to offer an assortment of its meal kits for purchase on Jet’s online and mobile platforms; in restaurants, BLMN Q3 comps of 2.9% top the 2.7% estimate and boosted its year EPS view
· Housing & Building Products; sector has been among the worst underperformers in recent months on rising rates, impact of rising material costs and weaker outlooks in both the housing and products sector thus far in earnings season; homebuilders were mixed today after recent bounce off multi-year lows
· Energy stocks mostly lower though were mentioned positively in Barron’s saying they look attractive in the face of U.S. sanctions on Iran that will take effect Nov. 4. Traders are probably underestimating the amount of oil that will be pulled from the market when they hit, says the senior energy policy analyst at Hedgeye Risk Management (said BP, RDSA, TOT likely to benefit from rising oil prices); utility stocks once again stayed strong as investors rotate into defensive assets as stocks fall from highs
· E&P and services sector; DNR to acquire Penn Virginia Corporation (PVAC) in a transaction valued at approximately $1.7B in cash and stock and included debt ; WFT posted a smaller than expected Q3 loss but a slight Y/Y decline in revenues to $1.44B; CLB was upgraded to buy at Stifel, HP upgraded to market perform at BMO Capital; NOV upgraded to outperform at Evercore/ISI; COP upgraded to buy at Bank America; OIS Q3 miss on the top and bottom line
· Bank movers; financials and banks were among the day’s top gainers after trailing broader sectors over the last few weeks; shares of JPM, GS were among the best in the Dow Industrials on the day; in consumer finance and lending; FDC fell more than 10% as Q2 top/bottom line results missed estimates (35c/$2.16B vs. 37c/$2.21B) and forecast year below estimates ($1.38-$1.40 vs. est. $1.45) – busy week of earnings for sector this week; REITs outperformed with financials in general; in research, KeyBanc upgraded BRX to overweight from sector weight as sees the stock as attractive following recent underperformance, while the firm downgraded RPT as sees risk to 2019 consensus FFO in the near term
· Pharma & Biotech movers; ESPR announces positive results from its final Phase 3 clinical trial evaluating LDL-cholesterol-lowering med bempedoic acid; DRNA rises as LLY is spending $100M for a stake in the co as part of a licensing deal, companies expect to collaborate on developing more than 10 experimental drugs to treat pain, neuro-degenerative diseases and cardio-metabolic disorders; cannabis stocks take another weekly hit as the recent craze that sent shares soaring have come back to earth (TLRY, CGC, ACB, CRON all fell as much as 10%)
Industrials & Materials
· Transports, Industrial & Machinery; broad weakness in the defense sector to start the day (HRS, LLL, LMT, NOC) on reports the White House was signaling that the remarkable surge in defense spending may be over (NOC shares down 8-straight days); Dow component BA fell over 6%, leading markets lower on China trade/tariff fears and after its 737 Max jet, operated by Indonesia’s Lion Air, crashed in the Java Sea with 189 people on board, making it the model’s first accident; nice bounce for transports early, rising to highs of 10,165, but dropped late day to lows around 9,900 as stocks came for sale
Technology, Media & Telecom
· Software sector active after RHT agreed to be acquired by IBM for $190 per share in cash, representing a total enterprise value of approximately $34B, more than a 50% premium from Friday close (the deal helped spur more speculation in the sector today); PFPT was upgraded by KeyBanc and Goldman after last week’s earnings related pullback; EA was downgraded at KeyBanc as visibility remains low, expect negative estimate revisions, and have diminished confidence in the pipeline
· Internet sector; group extended last week’s declines following the earnings disappointments in both GOOGL and AMZN last Thursday as shares of each fell again ahead of FB earnings tomorrow night; The European Commission has proposed that a 3% levy will be imposed on the revenue that tech companies make from “the placing on a digital interface of targeted advertising, the making available to users of a multi-sided digital interface,” and the “sale of user data (the news also provided a hit to tech)
· Semiconductors; ON reported Q3 EPS and revs above consensus while Q4 revenue $1.48B-$1.53B topped the est. $1.47B; TSEM falls as reports Q3 EPS 34c/$323M below the est. 40c/$335.04M; sees Q4 revs about $340M vs. est. $364.6M; NXPI to replace CA in the NASDAQ-100 index starting Nov 5th
· Hardware & Component news; AAPL cautious mention at Bank America as the firm expects results to come in above consensus…but lower their iPhone estimates for the Dec quarter and for F19 to account for a slowdown in China (double digit unit decline although ASP drives rev growth) and for broader FX headwinds/data points suggest some near-term weakness