Mid-Morning Look: December 14, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Friday, December 14, 2018

U.S. stocks falling on slowing global growth concerns following a round of weaker-than-expected manufacturing data in China, Europe and the U.S. The economic news that weighed on risk appetite included the German and EuroZone-wide purchasing manager’s indexes for December. The EuroZone composite index slipped to 51.3 versus 52.8 expected, with a slowdown in both the manufacturing and the services component (France also showed a contractions). Meanwhile, Chinese economic activity mostly slowed in November, driven by weakness in both industrial production and retails sales. China value-added industrial output rose 5.4% in November from a year earlier, slowing from a 5.9% on-year increase in October. Also, Retail sales in China rose 8.1% in November from a year earlier, slowing from an 8.6% on-year gain in October. The headlines pushed European and Asian markets lower overnight, which carried to early U.S. trading as well (which also showed slowing PMI data).

Regarding trade, China officially paused its imposition of increased tariffs on U.S.-made cars and car parts, another sign of improvement between the two countries. Dollar strength may also be hitting the market as the dollar index (DXY) trades to new 2018 highs. In Brexit news, the European Commission President Jean-Claude Juncker said the Irish backstop was not subject to renegotiation. And earlier report that the U.K. Parliament must wait till 2019 to vote on Brexit deal Theresa May struck with EU. The weaker start puts the S&P on track for a 0.1% weekly decline, while the Dow is set for a 0.3% weekly fall (though markets in the U.S. attempting a rebound). In early action retailers are recovering, while beaten up banks getting a boost as well as transports (airlines) and defensive utilities. Technology, healthcare and energy are among the biggest decliners.

Treasuries, Currencies and Commodities

· In currency markets, new 2018 highs for the U.S. dollar (best levels since June 2017), with the dollar index trading up over 0.5% at 97.71 highs as risk appetite weakened following softer-than-expected economic data from the EuroZone and China. The euro drops back below the 1.13 level vs. the dollar while the Pound slips to 1.255 vs. the buck though the perceived safe-haven Japanese yen holding steady vs. the dollar. Commodity prices are widely lower given the surge in the U.S. dollar, with both gold and oil prices falling. Treasury markets however fairly steady, with the 10-year holding around the 2.90% level while 2-yr yield down at 2.74%.

Economic Data

· Retail Sales in November rose 0.2% topping the 0.1% estimate while retail sales less autos rose 0.2% in November, in-line with estimates; the increase in sales in October was raised to 1.1% from 0.8%; E-tailers recorded a robust 2.3% increase in sales last month while department store sales rose a smaller 0.4%; auto dealer y/y sales rose $1.3B in Nov. to $96.0B

· Industrial production rose 0.6% in November, the strongest gain in three months and topped the 0.3% estimate on strong mining and utility output. Manufacturing output was flat and there was a large downward revision in the prior month – to a fall of 0.1% from a gain of 0.3%. Capacity utilization rose 0.4 percentage point in November to 78.5% vs. the 78.6% estimate

· Flash U.S. services PMI slips to 53.4 in December vs. 54.7, an 11-month low while the flash U.S. manufacturing PMI slips to 53.9 in December vs. 55.3, a 13-month low

Sector Movers Today

· Utilities & Solar; UBS upgraded CNP ahead of management plans to update forecasts with its VVC deal due to close in the first quarter of 2019, which may offer a positive catalyst while the firm also downgraded ATO to neutral as its growth profile is likely priced-in and cut UGI to neutral after YTD outperformance; 52-week highs for AEP, CMS, CNP, DUK, ES, ETR and XEL; LNT 7.23M share Spot Secondary priced at $44.85

· Auto sector; Deutsche Bank initiates auto sector with cautious view which reflects cyclical and macro risks for the industry across the globe, as well as secular pressure from the shift towards electrified vehicles and autonomous shared mobility (buy rated on APTV, BWA, DAN, F, GM, LEA…sell rated ALV and VNE); EU new car registrations, a reflection of sales, fell 8.0% in the EU compared with a year earlier to 1.12 million vehicles; TSLA initiated outperform and $440 tgt at Wedbush saying has evolved into one of the most dynamic technology innovators last 30 years

· In hospitals; JPM November survey suggests weakness across most geos – total inpatient admissions/commercial admissions/outpatient procedures/ ER visits declined by approximately -3/-2/-1/-3% YoY (THC, CYH); UHS was downgraded to sell at Goldman Sachs saying a healthy macro env’t helps acute hospitals’ commercial mix, but behavioral health providers like UHS over-index to Medicaid and Medicare, leaving them less exposed to the supportive backdrop

· Consumer finance and lending; AGNC and NLY were both upgraded to overweight at Barclays, turning constructive on mortgage real estate investment trusts saying if a recession occurs, these stocks could be big outperformers as a flight to yield and quality pushes book values and multiples higher, potentially generating 20%-plus total returns

        Stock GAINERS

· ALK +3%; airlines rising while the airline said revenue passenger miles increased 1.0% to 4.440B in November/load factor fell 10 bps to 84.1% during the month

· AMD +2%; as Mizuho said NVDA and AMD GPU trends highlighting the first pricing stabilization and rebound since the peak of the crypto bubble earlier this year

· BEL +39%; as luxury goods maker LVMH has agreed to buy BEL the owner of hotels including Venice’s landmark Cipriani, for $3.2B w/debt https://reut.rs/2ElAsJm

· NUE +2%; despite issuing below-consensus guidance for Q4 EPS of $1.90-$1.95 vs. $1.99 analyst consensus estimate; EPS was $2.13 in Q3 and $1.20 in the year-ago quarter

· SEE +6%; upgraded to buy at Bank America after the company unveiled a new restructuring plan which aims for total annualized savings by the end of 2021 of $215 million to $235 million

· XPO +5%; announced a stock buyback plan up to $1 billion of its stock (shares fell yesterday after a negative short report sunk shares)


· ADBE -6%; reported a generally in line quarter and provided a healthy outlook for FY19 but analysts noted Marketo acquisition delays margin improvement and creates a noisy quarter

· COG -3%; amid broad weakness in the energy/oil complex as prices slide following a strong bounce in the U.S. dollar/weighing on commodity prices

· COST -3%; Q1 EPS were hurt by greater-than-expected gross margin pressure amid increasing competition and rising costs/adj. gross margin declined 37 bps

· JNJ -4%; after Reuters reports that J&J knew for decades that asbestos had been found in its talc products, that from at least 1971 to the early 2000s, and some of the 11,700 plaintiffs claimed the talc caused their cancers https://reut.rs/2rAz2TO

· SBUX -3%; after lowering its adjusted EPS growth view to at least 10% per year over the longer term, below the company’s previous forecast of 12% growth on this basis, while also said same-store sales growth in China could be as low as 1% over the long-term

· UHS -4%; downgraded to sell at Goldman Sachs, while JPM says November survey suggests weakness across most geos



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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