Tuesday, November 13, 2018
Equity Market Recap
· U.S. stocks were volatile on Tuesday, as the Dow Industrial Average slumped as much as 150 points led by declines in Boeing and Home Depot (as well as financials and energy), as the index now falls more than 1,000 points from last Thursday’s high of 26,277.82. Tech stocks got a mild boost early after underperformance Monday amid positive signs of trade progress with China (more below), but succumbed to selling pressure late day (Nasdaq Comp fell more than 115 points off its highs). The dollar dipped from 18-month highs, while Treasuries rally, pushing yields lower. Energy grabbed headlines again given the steepest one-day plunge in over 3 years.
· Energy prices plunge again as December WTI crude oil dropped $4.24, or 7.1%, to settle at $55.69 per barrel to mark its lowest settlement in nearly a year (and down a 12th straight day). Energy stocks encountered wide selling Tuesday, with oil’s unprecedented decline deepening as investors fled a market hammered by swelling excess supplies, a darkening demand outlook and U.S. President Donald Trump’s Twitter critique of the world’s biggest crude exporter.
· Regarding trade with China: Overnight, Bloomberg reported Treasury Secretary Steven Mnuchin and China’s Vice Premier Liu He resumed talks before a meeting between Presidents Trump and Xi at the G-20 this month. This morning, two of President Donald Trump’s top economic-policy lieutenants were publicly arguing over the striking of a trade deal with China, with one saying the other “misspoke” when he talked about it last week. Appearing on CNBC on Tuesday, National Economic Council Director Larry Kudlow took issue with words by Peter Navarro, Trump’s trade adviser. ‘I think Peter very badly misspoke. He was freelancing.’ On Friday, Navarro said any new China trade deal would be on Trump’s terms, not Wall Street’s, and said “globalist billionaires” are ratcheting up pressure on the White House.
· European stocks rallied late in the session following a report that U.K. and EU negotiators have agreed on a text to manage the Irish border after Brexit, though any wording would still require approval by Prime Minister Theresa May’s cabinet. Earlier news that May must reveal legal advice to the government on Brexit stoked concerns this could give rise to a fresh bout of fractiousness in parliament. Europe’s Stoxx 600 rose 0.7%, with gains in all but a few sub-sectors
· Energy futures pummeled again, closing near the lows, with WTI crude falling over 7.1% at $55.69 per barrel in its biggest one-day drop since Sept 2015. WTI crude closed lower for a record 12th straight day and at its worst levels in over a year (after hitting 4 ½ year highs just a month ago). The additional push lower stared midday yesterday after a tweet by President Donald Trump added to oil’s woes, as he voiced disapproval over a potential production cut by Saudi Arabia and OPEC, and said prices “should be much lower based on supply!” Reports of lower oil demand forecasts from OPEC and of oversupply in 2019 this morning also added.
· Gold prices slipped another $2.00, settling at $1,201.40 an ounce, extending its recent decline to more than one-month lows (and off recent 7-month highs), falling a 4th straight session and seventh out of last eight. The recent spike in the dollar, coupled with rising rate hike expectations from the Fed has dulled investor interest in precious metals. Strong jobs data and rising inflation data points have lifted the dollar. Silver prices lost 3.4 cents, or 0.2%, to $13.977 an ounce, the lowest settlement for a most-active contract since January 2016.
Currencies & Treasuries
· The U.S. dollar pulled back from 18-month highs, paring some of its recent gains, but bounced off intraday lows for the dollar index (DXY). The British Pound touched highs of 1.3047 (up over 1.25%) midday, getting a boost as U.K. and European Union officials found an agreement to avoid a so-called hard border between Northern Ireland and the Republic of Ireland, according to Ireland’s national radio and television broadcaster RTE. The report said negotiations regarding the border had concluded. Earlier, Bloomberg reported that a deal on the so-called backstop could be reached within the day. However, the Pound slipped back to around 1.295 late day. The dollar held small gains vs. the Japanese yen while the euro climbed off 17-month lows. Treasury prices gainedafter being closed Monday for Veteran’s Day holiday, with the yield on the 10-year sliding over 3 bps to around 3.15%, while the 2-yr slipped under 2.9%, well off prior market highs.
Sector News Breakdown
· Autos; auto retailers get a boost after AAP rises following beat on quarterly EPS, revs and comp sales/Q3 comp sales rose 4.6% vs. est. 2.2%; broader auto sector got a boost today (GM, F, FCAU) before President Trump met with senior members of his trade team to discuss potential tariffs on automobile imports to protect national security. According to a Bloomberg report, the White House is circulating a draft report over Section 232 tariffs on automobile imports under the guise of national security, according to RBC.
· Retailers; WMT said the CEO of Flipkart Group, the Indian ecommerce company that Walmart took a majority stake in for $16B in May, has stepped down following an allegation of serious personal misconduct; BBY was downgraded to neutral at Bank America saying slowing comp growth and continued margin pressure to likely limit earnings
· Consumer Staples; protein stocks slip as TSN reported a decline in sales in the latest quarter, ($9.99B vs. $10.3B estimate) as the average price for its products fell 4.1% during the quarter; Kellogg (K) said it is exploring the sale of its cookies and fruit snacks businesses as part of its five-year Project K program; IPAR shares fell after guides 2019 EPS/sales below consensus; E-cigarette startup Juul Labs Inc. said it is shutting down its Facebook and Instagram accounts and curbing its use of other social media in the U.S., part of the company’s response to the FDA call for changes to curb underage e-cigarette use
· Housing & Building Products; home improvement retail and Dow component HD posted beat and raise quarterly results, but shares slipped off earlier highs, turning negative as sees Q4 comp sales lower than Q3 due to hurricane impact; BZH gave a boost to homebuilders after Q4 earnings and sales topped consensus/dollar value of homes in backlog as of September 30 decreased 5.7% to $628.0M (MTH, LEN, DHI, TOL higher)
· Energy stocks crippled early on as oil prices plunge as much as 5%, dropping below the $57 per barrel mark and falling for a record 12th straight day; weakness early in drillers, equipment, services and integrated names; nat gas related stocks (COG, EQT, CHK, SWN) however did benefit from a spike in natural gas prices to above $4.00 mln btu amid colder weather forecasts
· Equipment, refiner news; HFC agreed to acquire Sonneborn, a manufacturer and supplier of high-purity specialty hydrocarbons and vegetable-based emollients, for $655M; TDW falls after quarterly earnings and revenue miss
· E&P sector; SND was downgraded to neutral at Piper to reflect the challenged environment for Northern White; in natural gas, SWN was upgraded to neutral at Bank America while natural gas prices rise to its highest level since 2014 in New York, topping the $4 per mln btu level
· Utilities & Solar; PCG, EIX and SRE shares back under pressure; California’s largest utility owner (PCG) issued a report last week suggesting its equipment may have started the Camp Fire northeast of San Francisco that’s consumed 125,000 acres and killed 42 people. Firefighters are also battling blazes near Los Angeles
· Bank movers; after falling to 52-week lows yesterday in biggest daily decline in several years, GS shares were little changed in the Dow; banks have failed to rally meaningfully during this recent rate hike cycle; weaker trading volumes, slowing M&A of late (though still on track for strong year of new issues) keeping prices under wraps; in regional banks Nomura downgraded CMA, HBAN and KEY to neutral from outperform as disagrees with view YTD pullback is overdone; sees evidence of P/E multiple compression as cost of equity rises; notes market-implied cost of equity inflected higher as Fed increased rates in 2017 and 2018
· Banks haven’t changed their lending policies so far in response to the flattening of the yield curve but would if it inverted, a new Federal Reserve survey finds. The Fed’s questions — an addition to the senior loan officer survey it conducts each quarter — found that banks would tighten standards or price terms across every major loan category if the yield curve were to invert, a scenario that they interpreted as a signal of a deterioration in economic conditions. Concern about a flattening yield curve — when the yield difference between longer- and shorter-dated bonds narrows — has been a talk of financial markets this year, particularly in the summer when the curve was the flattest it’s been since the boom years of 2016.
· Insurance; the California wild fires, which have taken over 30 lives according to latest reports and destroyed thousands of acres, home and structures, likely to impact top carriers in the state including ALL, MCY, BRKA, State Farm, Liberty and Farmers; EVER shares plunge after reported a wider-than-expected loss and provided a downbeat outlook, citing margin compression (downgraded at Bank America); VOYA rebounded after updating financial targets
· Asset managers: AB preliminary assets under management decreased to $530 billion during October 2018 from $550 billion at the end of September. The 3.6% decline was due to market depreciation, partially offset by total firm wide net inflows; IVZ preliminary month-end assets under management (AUM) of $926.1 billion, a decrease of 5.6%.
· Pharma movers; AZN sold U.S. rights for respiratory drug Synagis to Swedish Orphan Biovitrum for $1.5 billion and agreed to share profits and losses on a potential new medicine it’s developing with SNY; SLDB rises following its Q3 report that included an update on DMD gene therapy candidate SGT-001/dosing has resumed in the Phase 1/2 IGNITE DMD study after being suspended earlier this year over safety concerns; EYEG soars after results from a 45-patient study show that its Ocular Bandage Gel (OBG) helped heal epithelial corneal wounds following photorefractive keratectomy surgery.
· Biotech movers; Leerink initiated on the Neuroscience sector saying it is experiencing a “renaissance” – outperform rated on ACIU, ADMS, AGN, BHVN, GWPH, ITCI, ZGNX, and an underperform rating on one stock SAGE; CBAY slides after Phase II results for its experimental liver treatment, seladelpar, presented at AASLD raised some concerns; VKTX rises as a phase 2 study of VK2809 met its primary endpoint, showing statistically significant low-density lipoprotein cholesterol reductions; gene editing names rally after 1.6M share block of shares for NTLA traded at $18.00 per share
· Healthcare services and providers; MGLN was downgraded at Leerink saying FL Seriously Mentally Ill (SMI), the flagship contract, has been lost with associated pressures on the Pharmacy business and its scale, despite a protest and retaining two regions; ACHC shares plunged midday, falling as much as 20% as Credit Suisse said it sees antitrust issues with any UHS interest
Industrials & Materials
· Industrial & Machinery; GE agreed a deal to raise up to about $4B from selling part of its stake in oilfield services group BHGE, accelerating the break-up plan it set out in June; JCI to sell power business for $13.2B in cash to Brookfield Business Partners; expects $11.4B in net proceeds from power business sale ; BA shares drag Dow lower as Boeing’s 737 Oct. net orders 43 vs 61 in Sept./also reports Boeing held back information on 737 that crashed in Indonesia, according to safety experts; CAT reported October retail sales growth that continued to decelerate as total retail sales of machines for the 3-month rolling period rose 18% from a year ago, compared with 21% growth in September and a 23% increase in August.
· Transports; sector was among the top beneficiaries of plunging oil prices, with a boost to shares of airlines (DAL, UAL, AAL) as well as truckers with oil falling to its lowest level this year; GWR said its total traffic in October 2018 was 286,180 carloads, up 3.9%
· Metals & Materials; CSL was upgraded to buy at Longbow as the recent move down in raw material prices should drive 1H19 margin upside as CSL will benefit from the carryover from 2018 price increases plus potential cost offsets; metals got an early boost from reports of resumption of high-level talks between U.S. and China on trade; Chile rejected ALB’s initial request for $584m lithium plant; BAYRY shares fell after Q3 profit fell 26% Y/Y to €2.89B ($3.26 billion) from €3.88B a year earlier and disclosing another jump in the number of lawsuits alleging the company’s recently acquired weed killers cause cancer.
Technology, Media & Telecom
· Semiconductors; after falling over 4.4% yesterday, the Philly semi index (SOX) rose back around the 1,200 level getting a boost from some key components; NVDA and XLNX both upgraded to positive at Susquehanna as expects the companies to benefit from the market for Artificial Intelligence inferencing as think market will grow to $6.5 billion by 2025; Raymond James adjusting estimates across the iPhone RF supply chain to reflect updated mix and unit shipment assumptions, with sales and earnings for AVGO and QRVO lower
· Software movers; SAIL upgraded to buy at Goldman Sachs as believe SailPoint is one of the higher quality assets we cover because of its product differentiation and pricing power; EB shares fell in its first quarterly report as a publicly traded company
· Media & Telecom movers; in the tower space, Guggenheim said updates model with notable takeaways include (1) CCI’s preliminary 2019 outlook (inline), (2) the impact of the Tata settlement on AMT, and (3) our increased estimates for SBAC driven by a strong YE18 exit rate and ongoing share buybacks; VODquarter came in largely to analysts’ expectations, and new CEO Nick Read set up a path forward, with a dividend freeze to help address heavy debt