Market Review: September 03, 2019

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Closing Recap

Tuesday, September 03, 2019

Index

Up/Down

%

Last

DJ Industrials

-285.26

1.08%

26,118

S&P 500

-20.12

0.69%

2,906

Nasdaq

-88.73

1.11%

7,874

Russell 2000

-22.53

1.51%

1,472


 

Equity Market Recap

·     U.S. stocks opened weak and remained under pressure the entire session, led by declines in energy, financials, tech and commodities, while defensive utilities, staples and REITs rose after a fresh round of U.S.-China tariffs were imposed over the weekend, coupled with renewed slowing global growth fears (after ISM data) weighed on sentiment. This weekend, tariffs on Chinese imports took effect on Sunday including China’s levy of 5% on U.S. crude while the U.S. began collecting 15% tariffs on more than $125 billion in Chinese imports, including several tech items and China started to impose additional tariffs on some of the U.S. goods on a $75-billion target list. Markets also continue to eye developments in the UK over Brexit, as well as the protests in Hong Kong, which pressured markets as well. Stocks took another leg lower following the weaker than expected monthly ISM-Manufacturing data, as it fell to its lowest levels since 2016. Crude oil prices fell nearly 2%, well off earlier session lows while Hurricane Dorian impact seen on travel, leisure, insurance, retail, etc. also a market concerns as it bears down on the Southeast. Defensive, safe-haven assets jumped again today led by gold (new 6-year highs), Treasury prices (yields to multi-year lows), the yen and in stocks utilities as markets remain concerned with Chinese and U.S. officials struggling to agree on the schedule for a planned meeting this month, political uncertainty in the U.K. over Brexit and violent confrontations in Hong Kong. Today’s market decline snapped a three-day win streak, but followed market declines in August.

Economic Data

·     U.S. Markit Aug. Manufacturing PMI 50.3 vs Flash Reading 49.9 (vs. yr ago 54.7) and lowest reading since Sept. 2009 while output rises to 50.8 vs 50.5 in July and new orders fall MoM

·     ISM Manufacturing for August fell to 49.1 (lowest since January 2016) vs. est. 51.3; while new orders plunge to 47.2 from 50.8 prior month and employment fell to 47.4 vs. 51.7 prior; prices paid rose to 46.0 vs 45.1 and backlog of orders rose to 46.3 vs 43.1

·     Construction Spending MoM for July rises 0.1% vs. est. 0.3% (while prior month revised to -0.7% from prior -1.3%)

 

Commodities

·     Energy prices were mixed as WTI crude dropped -$1.16 or 2.1% to settle at $53.94 per barrel, but was well off the intraday lows of $52.84 per barrel after tariffs were imposed this weekend by China (new set of tariffs on Chinese imports took effect on Sunday including China’s levy of 5% on U.S. crude), while natural gas prices rose 3.2% to $2.36 mln btu on Hurricane Dorian impact fears. Note the weekly API and EIA inventory data reports are each pushed out a day later.

·     Gold prices surged, as December gold gains $26.50 to 1.7% to settle at $1,555.90 an ounce, its best closing levels since April 2013, getting boost from safe-haven asset buying given a sharp decline in stocks. Fears of slowing global growth after a weak economic data point this morning in the US (as well as the UK and Japan yesterday), helped buoy prices, which rallied despite a spike in the dollar. Copper prices fell to its lowest price since mid-2017 amid mounting evidence of a global slowdown and fading prospects for a deal in the U.S.-China trade war/copper has sunk 16% since mid-April on a sharp downturn in factory production.

 

Currencies

·     The U.S. dollar traded to two-year highs, as the dollar index (DXY) traded to 99.37 before paring gains, rising most early against the British pound before reversing and sliding against the safe-haven yen. The Pound fell below the $1.20 level overnight (1.1959 low) before recovering back above the 1.21 level following weak UK economic data (UK manufacturing activity contracted in August for the fourth consecutive month and at the fastest pace since 2012) and amid a showdown between UK Prime Minister Johnson and Parliament over Brexit. Sterling rebounded after U.K. Prime Minister Boris Johnson loses his majority in the House of Commons after Phillip Lee announces that he’s leaving the Conservative Party to join the Liberal Democrats. Johnson faces a showdown with members of his Conservative Party that will determine the U.K.’s exit from the European Union and the length of his tenure as PM. The USD-JPY fell to lows of 105.73 following the sub-50 manufacturing ISM, coming from session highs of 106.31 after the open.

 

Bond Market

·     Treasury market’s advanced, sending yields lower across the board, but finished off their intraday day multi-year lows. Treasury yields plunged initially as weaker U.S. economic data (ISM report) reaffirmed concerns of a slowing global economy, thus boosting chances for additional rate cuts by the Fed this year. The 2-year slid to lows of 1.43% (lowest since Sept 2017), while the benchmark 10-year dropped to its lowest levels since 2016 (1.427%) and the 30-year dipped back near its record low yields of 1.90% after the ISM Manufacturing Index slipped to 49.1 in August from 51.2 previously while new orders dropped to 47.2 from 50.

 

 

Macro

Up/Down

Last

WTI Crude

-1.16

53.94

Brent

-0.40

58.26

Gold

26.50

1,555.90

EUR/USD

0.0003

1.0973

JPY/USD

-0.32

105.92

10-Year Note

-0.038

1.459%

 

 

Sector News Breakdown

Consumer

·     Retailers; TLRD rises after entering into a "multi-year" licensing agreement with the National Football League where sports fans will be able to customize their suits and sport coats with linings from many of their favorite NFL teams; Bernstein upgraded shares of UAA and PVH in the retail sector; CONN rises after earnings as beat on the top and bottom line while reports retail same-store sales fell 2.3% in Q2, in-line with the guidance range of -4% to -0%; footwear and apparel names fell early after a 15% U.S. duty hit Chinese consumer goods; AOBC, RGR shares slipped after WMT said it will stop selling ammo for assault style weapons and handguns per DJ; SIG, BBBY, MIK, SCVL, BOOT, HBI among a handful of retailers feeling the pain on tariffs that started on September 1st, effecting several consumer stocks

·     Consumer Staples; SAM was downgraded to Underperform rating from Hold at Jefferies on its view that the company faces stiffer competition in the alcoholic seltzer drink category, while cuts tgt to $332 from $360; tobacco stocks held up well in downdraft day for stocks, with PM, MO

·     Casino & Leisure movers; casino stocks slide (WYNN, MLCO, LVS) as gambling revenue in Macau was hit by tapering demand from high rollers due to slowing economic growth amid China’s trade war with the United States and protests in Hong Kong/gross gaming revenue in the region fell 8.6% y/y in August, according to recent data worse than the estimate 4% decline; cruise operators a focus given the potential impact from Hurricane Dorian in the islands, as Nomura noted after speaking with the cruise operators, they expect the impact of cancelled cruises beginning this weekend and lasting for several days this week will be in the neighborhood of 5c per share (CCL, RCL, NCLH); PLNT was downgraded at Berenberg warning of lack of catalysts

 

Energy

·     Energy stocks were among the biggest drags in the S&P on plunging oil, slowing global growth concerns (renewed by weak ISM data today in the US), as well as the implantation of tariffs on oil by China this weekend. Oil held losses as the U.S. and China’s inability to agree on a schedule for talk’s deepened concern that their ongoing trade clash will further erode fuel demand.

·     E&P sector; CXO agreed to sell its assets in the New Mexico shelf to an affiliate of Spur Energy Partners for $925 million which includes the sale of 100,000 gross acres; assets produce 25,000 barrels of oil equivalent per day and initiated a repurchase program of up to $1.5B of shares

·     Utilities & Solar; the utility complex one of the few bright spots, with the UTY index rising more than 1% to fresh all-time highs above the 800 level; the ongoing slide in Treasury yields making dividend paying sectors more attractive (1-yr yield fell below 1.44% today) – all 20-names in the UTY were higher late morning led by NEE, SO, ETR, AWK; analyst positive again on the space (Credit Suisse raised sector weighing, Wells raised tgts on several names)

 

Financials

·     Bank movers; as Treasury yields continue to plunge to fresh multi-year lows, fears renewed for banks and brokers as the narrowing of yields will likely weigh on upcoming earnings season when it comes to lending margins; insurance focus remains on reinsurers (RGA, RNR, RE) and P&C stocks (ALL, PGR, CB) given the potential damage from Hurricane Dorian

·     Consumer finance and lending; SQ was upgraded to buy at SunTrust saying they expect Square to invest in C20 to address complex retail and restaurants which should bolster capabilities for large, inventory-intensive retailers where we believe it currently competes poorly (also upgraded to buy at MoffettNathanson); TREE upgraded to buy from neutral at UBS and raised tgt to $395 from $355 to reflect revised outlook for improving revenues and EBITDA combined with the recent compression in the shares’ valuation; ADS upgraded to buy at UBS as view that the current valuation of ADS shares assigns almost zero equity value to the company’s LoyaltyOne unit or a deeply discounted valuation to its Card Services unit

 

Healthcare

·     Pharma movers; VRTX to acquire privately held Semma Therapeutics for $950M, while separately, Goldman Sachs upgraded to conviction buy list as believes investor attention should now shift to the company’s emerging pipeline; CDTX surges after announced a partnership with Mundipharma with a total potential value of $568 million to Cidara; AZN said Farxig, its type-2 diabetes drug, reduced the chances of cardiovascular death or worsening heart failure by 26% in a recent trial. Its cardiovascular drug Brilinta also reduced the risk of death and heart attack by 10%; KURA announced positive topline results from an investigator-sponsored Phase 2 trial of its lead drug candidate, tipifarnib, in patients with relapsed or refractory urothelial carcinomas that carry HRAS mutations; MNK tgt cut to $1 at Berenberg as sees rising litigation risk for the company in the national and state opioid lawsuits

·     Biotech movers; MDCO rises after presented late-breaker results from the Phase 3 ORION-11 trial of PCSK9 RNAi drug inclisiran at the European Society of Cardiology (ESC) meeting where analysts believe these results show inclisiran has good efficacy and safety, raising tgts (tgt to $55 at Citigroup, to $50 at Cowen and to $60 at Oppenheimer); ARDX rises after announcing positive results from a Phase 3 clinical trial, AMPLIFY, evaluating tenapanor, combined with phosphate binders, as the study met the primary and all key secondary endpoints; ARDS falls following an unsuccessful Phase 2 clinical trial evaluating candidate AR-105, a fully human IgG1 monoclonal antibody, for the treatment of ventilator-associated pneumonia caused by Gram-negative Pseudomonas aeruginosa.

·     Healthcare services and providers; in managed care (UNH, CI, HUM, ABC, MCK, CAH), Bernstein said they see the biggest drivers of the recent swoon in stock prices as being political outlook and concerns on medical costs following 2Q results. We see medical costs from the quarter as indicating commercial medical costs, which have come in below expectations for three of the past four years, and are now seemingly coming in at expected trend. This removes a tailwind for the commercial business, although we expect this to be neutral, not negative for the year. SmileDirectClub set terms of its proposed IPO to raise up to $1.2B as plans to offer 58.5 million class A shares in the IPO, which is expected to price at $19-$22 a share

 

Industrials & Materials

·     Industrial & Machinery; ETN, RXN and ATU downgraded to Neutral at Baird, shifting to a more conservative stance citing various individual reasons for each cut; CNHI said it is spinning off truck maker Iveco as a separate business as part of a five-year plan to double its profit margin; in aerospace, BA shares weigh on the Dow on tariff concerns and friction with regulators could keep the 737 Max plane out of service through December holidays

·     Transports; Truckers WERN and SNDR both upgraded to buy from neutral at Citigroup with WERN tgt to $40 from $32 and SNDR to $23 from $22 as becoming more constructive on the s full truckload sector saying fundamentals are bottoming after a disappointing year of volume and pricing declines; in airlines, With Hurricane Dorian (now a Category 3 Hurricane) looming off the East Coast of Southern Florida, there have been elevated flight cancelations around the Southeast Florida region as a result – Stephens noted SAVE, LUV and JBLU as having the most exposure to these markets and likely could see stock pressure associated with these elevated cancelation levels (SAVE was downgraded at Raymond James)

·     Metals & Materials; group sharply under pressure on implementation of tariffs this weekend between the US and China as well as a stronger US dollar; RIO was upgraded to outperform at BMO Capital following a near 20% pullback from its highs; Bernstein said to watch lithium producers’ stocks (ALB, SQM, LTHM) after global electric-car sales fell for the first time in modern history in July (fell 14% to about 128K plug-ins) after China scaled back purchase subsidies; MT named top pick among European steel names at Credit Suisse; iron ore stocks under pressure again (CLF, BHP, RIO) after suffering its biggest one-month fall since 2011/down 27% to $85.85 a metric ton by the end of August, the most since October 2011, according to S&P Global Platts. The drop deepened amid sluggishness among the Chinese mills responsible for producing more than half the world’s steel, and concerns over future demand.

·     Paper & Packaging; Stephens noted China’s move to double tariffs on pulp and linerboard (to 10%) from the U.S. will hurt demand for both, but will hurt pulp pricing more seriously. Recycled fiber tariffs rise to 30% from 25%. Firm said expect the pulp tariffs to be absorbed by U.S. sellers to China, while the linerboard tariffs get split between buyer and seller. UFS and IP have the biggest pulp export positions among U.S. sellers but smaller producers are now selling unbleached pulp, too

 

Technology, Media & Telecom

·     Internet; AMZN one of the few bright spots in Internet space, up 0.7% after the positive RBC comments this morning, raises PT to $2600 from $2250) saying the One-Day Prime Shipping will accelerate growth in a big way once it goes nationwide & worldwide; SNAP shares erased earlier gains after Evercore upgraded to outperform with a $20 tgt; GOOGL shares slipped after the Washington Post reported Attorneys generals from more than half of the U.S. states will announce their antitrust investigation into Google

·     Semiconductors; KLAC both upgraded to outperform from in-line in the semi-equipment space at Evercore/ISI citing sustained leading edge investments at TSM, Samsung spending in logic and ongoing catch-up by INTC as among the key drivers of upside, while upgraded WDC to in-line from underperform and raise tgt to $50 from $30 as sees near-term earnings upside being balanced by long-term structural concerns

·     Software movers; Cloudflare sets IPO at 35M shares, with a price range of $10-$12 per share as seeks to raise up to $420 million from its IPO, according to a regulatory filing; sector could be active this week given several earnings results (PANW, SMAR, WORK) as well as TMT conferences this week with Wells and Citigroup

·     Media & Telecom movers; Intelsat (I) shares fell after Eutelsat (ETL.PA) pulls out of their C-band alliance/SES SA, Eutelsat, and Intelsat had formed CBA in an aim to free up so-called C-band spectrum that could then be sold on to mobile operators for the rollout of 5G in U.S.; in media, CBS tgt cut to $35 and VIAB to $21 at Bernstein noting when they double-downgraded CBS three weeks ago, they described a range of potential target prices depending on mgmt’s plan. Having now listened to mgmt’s commentary and contemplated the consequences, they believe the low-end of the range (or worse) is most likely; AMT new 52-week hi’s after signing new multi-yr agreement earlier with AT&T, prompting the tower co to boost its guidance

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Content is provided by Hammerstone Inc., which has no affiliation with Regal Securities, Inc. (“Regal”) This commentary is provided for information purposes only, and is not a recommendation, offer or solicitation by Regal to buy or sell securities or to adopt any investment strategy. Regal has not participated in the creation of the Hammerstone content and does not directly or indirectly endorse the content. Any reliance on this material is at the sole discretion of the reader.

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