Mid-Morning Look: December 19, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Wednesday, December 19, 2018

U.S. equities open higher ahead of the FOMC meeting later this afternoon (2:00 PM EST decision and 2:30 press conference from Fed Chairman Powell). US markets have generally opened to the upside the last few weeks, but have been unable to maintain those gains, sliding late day in volatile action. A few positive developments overnight on trade and in Europe helping sentiment ahead of the Fed rate decision later, while transports slump following a weaker outlook from Fed-Ex (FDX) has shares trading at fresh 52-week lows. Yesterday, Treasury Secretary Steven Mnuchin said the U.S. and China will meet in January to try to broker a cease-in the ongoing trade dispute, in an interview with Bloomberg on Tuesday. Also in Europe, Italian markets rallied after the government said it had reached a budget agreement with the EU. But the key to the day remains the Fed, where expectations are for the FOMC to hike interest rates by 25 bps (its 4th hike of the year) – but markets are hoping for a revised dot plot that may signal fewer hikes in 2019. Although a long shot, given the recent downturn in economic data, trade uncertainty, stock market downturn and several calls from others to halt rates (President Trump has been a very vocal critic of the Fed hikes), an unexpected pause can’t be ruled out. Commodity prices rise, led by gold (5 month highs) and oil (bounces off 15-month lows) as the dollar slides.

Treasuries, Currencies and Commodities

· In currency markets, the dollar falling ahead of the FOMC statement later this afternoon; the euro rises vs. the dollar up 0.6% at 1.143, while the dollar falls vs. the yen to 112.22 (-0.25%) and the Canadian dollar rebounds after recent losses given the oil rout; bitcoin prices extend its weekly gains, rising over 7% to above $3,800

· Commodity prices rebound with WTI crude rallying off 15-month lows yesterday as the dollar slumps into the Fed meeting this afternoon and as investors buy the beaten up commodity; inventory data was bearish on the week with larger oil builds; gold prices also benefitting from the decline in the dollar, with the precious metals rising to fresh 5-month highs around $1,260

· Treasury market’s remain steady after rallying this week on volatile stock markets (sending yields lower) and expectations the Fed likely issues a dovish statement in its dot plots later this afternoon, though is still expected to raise rates by 25 bps this afternoon; the 10-year yield holding around 2.81% and the 2-year around 2.63%

Economic Data

· Current account deficit for Q3 widened to (-$124.8B) from (-$101.2B) in the prior quarter, but was mostly in-line with expectations of (-$125.0B); the balance of goods and services deficit widened to $158.7B compared to $134.6B prior quarter; the balance on primary income narrowed to $59.43B compared to $62.35B prior quarter

· Existing-home sales for November rose an unexpected 1.9% to 5.32M, topping the est. of 5.2M, while Oct. was unrevised at 5.22M; there was 3.9 month’s supply in Nov. vs. 4.3 in Oct. and 4.0 month’ supply seasonally adjusted in Nov. vs. 4.1 in Oct. seasonally adjusted; said inventory fell 5.9% to 1.74M homes and the median home price rose 4.2% from last year to $257,700

Sector Movers Today

· Energy stocks have been crushed in recent weeks as oil prices slump but rebounding today; Credit Suisse cut its 2019-20 WTI/Brent oil price forecasts by $12-$13/bbl to $54/$63 and $57/$67, citing stronger-than-anticipated U.S. supply growth at end of 4Q, counter-seasonal inventory builds in 2H, and less severe impact to Iranian exports than initially feared (firm also made several rating changes in the E&P sector in conjunction with oil forecast changes downgrading CLB, CJ, PTEN, RDC, FTSI, SPN, HCLP, LPI, OAS and SLB – while upgraded BHGE)

· Pharma movers; PFE and GSK announce plan to combine their consumer health-care units, and eventually spin the joint venture off, creating a global giant in the business of selling drugstore staples; LLY issued a 2019 forecast ahead of analysts’ estimates and boosted its dividend 15% as hosted its investor day today; AGN suspended sales of textured breast implants and tissue expanders in European markets and is withdrawing any remaining supply following a compulsory recall request from French regulatory authority; LGND issued 2019 financial guidance last night and raised its 2018 outlook; ALKS downgraded to sell at Goldman Sachs

· Industrial movers; GE was upgraded to buy at Vertical Research with an $11 tgt, the analysts first buy on company since 2008; Stifel said they expect growth in the global industrial economy to continue in 2019, with strength in the U.S. offset by softness in China and uncertainty around European growth, though still positive in our forecasts/taking a more defensive approach to our stock recommendations in 2019 (in conjunction with the call, they upgraded CW and XYL while downgrading shares of CIR and DNOW

· Medical equipment and devices; MASI was upgraded to overweight at Piper as believe the long-term stability (with potential for upside) is a compelling story in a choppy market; JPMorgan upgraded MDT to overweight as believe Medtronic can grow at least in line with its end-markets at ~5% growth, plus we see a number of underappreciated data presentations and product launches; JPMorgan downgraded ZMH to neutral as see limited upside to current expectations

· Restaurants; BLMN was upgraded to Equal-weight from Underweight on valuation at Morgan Stanley as see a more balanced risk/reward at current levels and maintain our PT of $19; RRGB was downgraded to hold at Jefferies saying while a return to positive comp. sales is possible, visibility is unclear – while the firm upgraded SHAK to hold after pullback in shares; Maxim upgraded DRI to buy following the release of better-than-expected and upgraded CAKE to buy as well in light of the DRI beat (DRI was also raised at BTIG)

       Stock GAINERS

· ABM +16%; bounces off 52-week lows despite missing quarterly revenue and guidance midpoint for the year missing estimates as well

· ADRO +15%; following its licensing deal with LLY for its cGAS-STING Pathway Inhibitor program for the potential treatment of autoimmune and inflammatory disorders.

· CIVI +11%; after Centerbridge Partners L.P. signed a deal to buy the company for $1.4B, with holders getting $17.75 a share in cashhttps://on.mktw.net/2BsRylC

· GE +6%; was upgraded to buy at Vertical Research with an $11 tgt, the analysts first buy on company since 2008

· GIS +5%; reported Q2 results that beat EPS estimates but missed on revenue despite a 5% Y/Y growth driven by the Blue Buffalo acquisition/FY19 guidance reaffirmed

· HSY +2%; upgraded to buy from underperform at Bank America saying the company should generate improved organic sales and operating profit growth in FY19

· JBL +7%; Q1 results topped consensus estimates and a revenue forecast that beat at the midpoint, boosted by the company’s electronics manufacturing services unit

· LLY +3%; issued a 2019 forecast ahead of analysts’ estimates and boosted its dividend 15% as hosted its investor day today

· WGO +16%; after its 1Q results topped estimates across the board as the company CEO said “We are very pleased with the strong start to our Fiscal Year 2019”

Stock LAGGARDS

· ADI -1%; downgraded at Morgan Stanley as sees it hard to remain positive on the stock considering the ongoing risks to semis in 2019

· AGN -4%; suspended sales of textured breast implants and tissue expanders in European markets and is withdrawing any remaining supply following a compulsory recall request from French regulatory authority

· FDX -9%; after Q2 EPS/revs topped consensus but cut its year outlook to $15.50-$16.50 from $17.20-$17.80 (est. $17.33) citing European weakness and announced cost reduction actions that include a “voluntary buyout program for eligible employees, international network capacity reductions at FedEx Express”

· MU -2%; as reported Q1 sales that fell short of analysts’ estimates ($7.91B vs. est. $8.02B) and guides Q2 EPS $1.65-$1.85 on revs $5.7B-$6.3B well below the $2.39/$7.26B est./also lowering bit output for both DRAM and NAND

· SURF -33%; said it would significantly reduce its investment in the SRF231 program in part due to initial trial results

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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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