Market Review: October 18, 2018

Terrie AmengualDaily Market Report

Closing Recap

Thursday, October 18, 2018

Equity Market Recap

· U.S. stocks fell, as investors dealt with another day of heavy selling pressure as a confluence of factors continue to weigh on market sentiment and push riskier assets further from their record highs reached in September. U.S. markets opened weak, only to extend losses as rising yields, China concerns and the prospect of a more hawkish Fed took sentiment lower. Additionally, several material and industrial stocks have offered sour profit outlooks over the last 2-weeks as they face higher input costs and shrinking margins due to inflation and tariffs. China slowdown story hitting markets with Shanghai index dropping to multi-year lows last night while a jump in borrowing costs (before pulling back) as 2-year yield topped decade highs earlier above 2.9% also factored in to today’s weakness. Markets also dealing with potential the potential backlash from the U.S. against OPEC heavyweight Saudi Arabia as they await details in the case of Jamal Khashoggi, the Washington-based journalist allegedly murdered two-weeks ago there.

· Technology was slammed with the Nasdaq Composite falling as much as 2.5% to 7,452, led by broad weakness in Internet, semiconductors, security and software names with nowhere to hide today (and fell back below its 200-day MA support 7,514). Meanwhile the Dow Industrials plunged as much as 470 points at its lows before rebounding and Dow Transports entered into correction territory. The benchmark S&P 500 index dropped below its 200-day moving average (been a battle at that level this week of 2,768) before moving back above it late afternoon.

· Sector movers; Investment advisors and asset managers extend yearly decline with several near 52-week lows such as STT (ahead of eps tomorrow), BLK (down nearly $200 off its 52-week high of $594 in January), BEN, JHG, and EV. Homebuilders no let-up in selling pressure with XHB falling for the 20th time in the last 22 days, while autos plunged as GM, F, BWA, and GT all posting fresh 52-week lows. Energy stocks sunk as oil brought its 2-day losing streak to 4.5%. Some of the industrial and materials companies were the biggest early decliners today, led by lower earnings and/or outlooks from TXT, SEE, CCK and URI. Defensive utilities, retail estate, and staples were among the best performing sectors while IT, communication services, transports, discretionary, financials and industrials were the biggest decliners.

· Markets took another leg down late morning after Treasury Secretary Steven Mnuchin said he won’t attend an upcoming investment conference in Saudi Arabia. The secretary’s announcement came shortly after Secretary of State Mike Pompeo said he told President Donald Trump the Saudis should be given more time to investigate the disappearance of journalist Jamal Khashoggi. Several executives have pulled out of the conference over Khashoggi’s suspected murder.

Economic Data

· Weekly Jobless Claims fell 5K to 210K compared to the 211K estimate; prior week claims revised to 215K from 214K; the 4-week moving average edged up by 2,000 to 211,750 in the latest week; continuing claims fell 13K to 1.640M in the week ending Oct. 6; overall, remained near a 49-year low in mid-October

· The Philadelphia Fed manufacturing index fell slightly to 22.2 in October from 22.9 in September, but was slightly above the 20.0 estimate by economists (note the factory index had jumped 11 points in September). New-orders index slipped to 2.1 points to 19.3, while the shipments index rose 4.9 points to 24.5. Inventories, had nearly no change near ze

Commodities

· Energy futures extends its recent decline as the pullback in broader assets (stocks), and continued signs of slowing demand (big weekly inventory builds again yesterday), overshadowing issues with Saudi Arabia and upcoming sanctions on Iran. WTI crude oil fell $1.10 or 1.6% to settle at $68.65 per barrel bringing its 2-day decline to 4.5%. A strong dollar alongside the recent EIA inventory data (said yesterday that domestic crude supplies rose by 6.5 million barrels, more than three times more than expected) weighed on oil prices.

· December gold futures rise $2.70, or 0.2%, to settle at $1,230.10 an ounce, posting only a modest advance today as a flight to safety given the sharp plunge in US stocks was offset by a surge in the US dollar (best levels in a week for the DXY). Gold finished just shy of its multi month highs hit earlier this week. Gold prices had slipped late yesterday following the hawkish minutes from the Federal Reserve’s September monetary policy meeting. Gold is up nearly 3% so far for October, trimming its year-to-date drop to close to just over 6%.

Currencies

· The euro tumbled midday after the European Union blasted Ital’s “unprecedented” budget deviation (fell to lows around 1.1460 – October lows were 1.1432 on 10/9). The Japanese yen advanced vs. most currencies as investors sought “safe-haven” trades given the pullback in broader stock averages (dollar fell below 112 vs. JPY). Bloomberg noted the Turkish lira is on the verge of a bull market, up over 19% from its record low. The dollar gained vs. the Canadian dollar as oil prices slide while Brexit issues remain, weighing on the Pound. Overall, the U.S. dollar extends yesterday gains on rising FOMC rate hike expectations (after Fed Minutes yesterday).

Bond Market

· For the first time this week, Treasury markets were very volatile, with bonds falling initially, sending yields higher, as the 2-yr yield topped 2.903%, its’ highest since 2008, while the 10-yr moved above 3.21% and the 30-yr 3.38%. The move extended the late day push Wednesday after the hawkish Fed Minutes from the September meeting. However, as U.S. stocks found their way lower again (on a very volatile week), bonds rallied, and taking yields well off their highs (2-year to 2.86%, 10-year to 3.165%). Treasury markets also dealt with a selloff in Italian debt that could be drawing investors into the perceived safety of U.S. government paper.

Sector News Breakdown

Consumer

· Retailers; NKE was upgraded to outperform at Oppenheimer saying it represents an already dominant, legacy global brand that is now aggressively embracing the power of digital to enhance most facets of its business; GPS was downgraded to underweight at JPMorgan based on our recent fieldwork, financial model deep-dive, and recent management access; VFC expected to report earnings tomorrow morning; WMT is building a high-speed grocery warehouse in Shafter, CA to solidify its position as the nation’s biggest grocer

· Consumer Staples; STZ said CEO Rob Sands company will step aside on March 1 after 11-years at the helm; UN revenue totaled 12.5 billion euros ($14.4 billion), down 4.8% on year following the sale of Unilever’s spreads business; NSRGY said sales in the nine months ended Sept. 30 were 66.4 billion Swiss francs ($66.9 billion) compared with CHF65.1 billion for the period last year; defensive tobacco rises as PM reported Q3 EPS and revenue beat while reaffirmed its outlook

· Restaurants; WING was downgraded at Morgan Stanley citing valuation; Goldman Sachs said top buys into earnings are MCD and PFGC and see most risks into earnings in Sell-rated CAKE; Wells Fargo said 3Q18 Street SSS estimates appear to be relatively balanced based upon historical relative performance vs. the already-reported casual dining SSS index

· Housing & Building Products; homebuilder NVR EPS missed by wide margin ($48.28 vs. $50.94) on better revs; Homebuilders TOL, PHM, NVR downgraded at Bank America as the firms US economics team lowered its 2018-2019 housing starts and new home sales forecasts and thus we slightly temper our macro housing assumptions; another name in space disappoints as SNA Q3 sales of $898M miss est. of $928M, sending shares lower

· Auto & Leisure movers; Studio City (MSC), a Macau-based casino spun out from MLCO, had its 28.75M share IPO priced at $12.50 (top end of the $10.50-$12.50 range); DAN downgraded to neutral at Bank America; auto parts maker GPC Q3 earnings met expectations while sales were slightly above; in tire sector, GT and CTB shares volatile after Michelin said given the significant decline in the Passenger car & light truck and Truck tire markets late in Q3 and the further weakness expected in Q4, the Group has revised its 2018 markets scenario, notably in China; 52-week lows today for GM, F, FT, BWA in the auto sector

Energy

· E&P sector; SRCI FY’18 total production guidance was tightened to ~50 MBOE/d from a range of 48-52 MBOE/d but the oil cut guidance was reduced to 45% from 47%/FY’18 capex guidance was raised by ~7% to $580M; ESTE agrees to acquire the asset base of Sabalo Holdings, including producing and non-producing oil and gas assets in the northern Midland Basin, for $950M in cash and stock; OIS falls after guiding Q3 revs low end of guidance

· Utilities & Solar; utilities once again among top performing sectors as defensive names lead; in news, SRE’s Oncor agreed to buy HIFR for $21 per share, while Sempra Energy, which owns ~80% stake in Oncor, plans to acquire 50% stake in Sharyland Utilities for ~$98M https://on.mktw.net/2AgoVZF

· MLPs; ENLK downgraded to neutral at Citigroup as units appear fairly valued given view of the partnerships growth / financial outlook near-term; GLNGupgraded to buy at Bank America as the potential power auction catalyst draws closer, and as LNG market fundamentals accelerate; KMI posted in-line Q3 adjusted Ebitda view

Financials

· Bank movers; large cap banks out earlier in week/last week, with regionals out this week; today, TCBI shares fall after quarterly earnings missed by a bout 5c and net interest margin also fell short of views driven by lower spread revenue, due to a combination of weaker balance sheet growth and a decline in the yield on mortgage warehouse loan balances; WBS posted EPS beat helped by higher fees and a lower provision; BBT Q3 EPS beat on lower provision and higher fee income and good guidance; KEY in-line EPS of 45c, falls on weaker NII and NIM results; EGBN shares jump as EPS beat helped as growth rebounds and margins hold; BXS falls as EPS, NIM of 3.67% misses; other movers on earnings: UBSH, SBNY, WTFC, UMPQ; trust bank BK posted EPS beat a day after NTRS disappointed the Street; UBS upgraded at Oppenheimer NTRS at Deutsche

· Insurance; Dow component TRV Q3 revenue of $7.72B topped estimates on better core earnings as better results from investments in private equity and fixed-income securities helped drive a 10% gain in net investment income

· Asset managers; IVZ agreed to buy rival asset manager OppenheimerFunds from MassMutual for roughly $5.7B, in a deal that will put the group among the very largest money managers; Vanguard Tax-Exempt Bond ETF (VTEB) sees another record outflow, with investors pulling $45.1M on Oct. 17, according to Bloomberg. VTEB’s outflow last week was $70.1M, the most of any other muni ETFs tracked by Bloomberg

Healthcare

· Large cap Pharma movers; NVS EPS beat cons on sales 1% below, driven by better Pharma and Sandoz margins while Alcon missed by 11% on a 1% sales miss; NVS also agreed to buy ECYT for $2.1B, paying $24 per share https://on.mktw.net/2RWQnCo; BMY falls after MRK said the Phase 3 KEYNOTE-426 trial investigating its Keytruda in combination with Pfizer’s Inlyta met both primary endpoints of overall survival & progression-free survival in first-line treatment of advanced or metastatic renal cell carcinoma; PGNX rises in sympathy after NVS acquired ECYT in $2.1B deal as it is developing a treatment for prostate cancer that targets the same protein

· Specialty pharma; PTI shares jumped on positive Phase 1 trial data for cystic fibrosis therapy; VRTX was defended at some firms after PTI reported some early proof of concept data in CF on a small number of patients, as Jefferies said it doesn’t impact their thesis for VRTX given numerous challenges; ACORsaid the FDA’s pre-approval inspections two facilities were completed with no further action required; PHAS 9.2M share IPO priced at $5.00

· Biotech movers; SELB shares slide as reports that the National Cancer Institute informed it of a patient death from pneumonitis in a Phase 1 clinical trial evaluating combination product SEL-403 in patients with solid tumors; OMED drops after CELG will not exercise its option to license rosmantuzumab and has terminated their collaboration agreement effective February 12, 2019

· Medical equipment and devices; dental stocks slipped after DHR Q3 results showed continued weak dental trends in North America (XRAY, HSIC, ALGNactive); Evercore said the results offer “a directionally negative read to the distributors given recent move in shares plus hope for a rebound in demand.” DHR did raise guidance for the year for profit outlook

· Healthcare services and providers; ACHC rises after Reuters reported the company is in talks with private equity firms about selling itself after attracting buyout interest, with KKR and TPG Global are among the private equity firms that have expressed interest https://reut.rs/2NNZkdY

Industrials & Materials

· Industrial & Machinery; TXT shares fall after Q3 EPS/revs missed by wide margin (15c miss) and narrows FY18 adjusted EPS view to $3.20-$3.30 from $3.15-$3.35/Aviation and Bell had lower than expected revenues, but operating margins were in line to better; FLR upgraded to buy and $59 tgt and added to conviction buy list at Goldman Sachs; GNRC upgraded to neutral and $59 tgt at Goldman Sachs as expects strong organic growth over the next 12 months; URI falls as posted strong results, with 3Q EBITDA beating street expectations by 4% and raising 2018 EBITDA guidance by 1% but rental rate disappointed, coming in at +2.1% vs. est. 2.5%; shares of LNN in machinery and IIIN both decline following quarterly results

· Containers & Packaging; SEE lowered year profit outlook to $2.40-$2.45 from $2.45-$2.55 and guides Q3 EPS lower saying experienced higher absorption costs due to lower global volumes in our utility business, which accounts for 30% of the division’s sales; CCK reported in-line 3Q adj. EBIT (the adj. EPS beat came from a below-the-line FX gain), with strength in its beverage can business offsetting weakness in its European food can business/guides Q4 lower

· Transports; Dow Transports weak initially (fell more than -230 points) after losing steam on positive bounce yesterday in airlines after UAL boosted guidance (and Deutsche raised ratings on several names); today Bank America downgraded NSC, UNP and CNI ratings in the rail space while truckers leading declines with LSTR falling

· Metals & Materials; Steel earnings from STLD as posted 3Q operating EPS/Adj. EBITDA of $1.69/$626 mostly in line with consensus of $1.64/$627, while NUE Q3 EPS beat by 8c and said sees 2018 Q4 earnings higher than a year ago on better sales; in the aluminum space, AA shares rise on profit surprise, first share buyback since split ($200M) and boosted its full-year global alumina forecast, though cuts FY global aluminum demand 3.75%-4.75% (had seen 4.25%-5.25%); KALU Q3 EPS missed by 12c though revs of $393M topped estimates; overall, metals slipped as the U.S. dollar holds onto its gains and concern over outlook for Chinese growth and demand.

Technology, Media & Telecom

· Semiconductors; TSM shares slumped as it forecast revenue below analysts’ estimates, as it is expecting sales of $9.35B-$9.45B missing the $9.55B average; markets prepare for busy earnings in chip space next week; Goldman Sachs with big changes in its semi space today to reflect weaker data points in the Industrial and Automotive (mostly in China) end-markets as well as potential share shifts in the client CPU market in favor of AMD (they downgraded ADIand MXIM to Sell, TER cut to neutral, while reiterate buy rating on NVDA and add the stock to the Conviction List; also upgraded NXPI to buy ad TXN to neutral while remain sell rated on INTC

· Software movers; SAP boosted year guidance but shares slipped after miss for Q3 operating profit; video game maker ATVI slid after announcing that its newest release, Call of Duty: Black Ops 4, has passed $500M in worldwide sales in its first three days of release/Jefferies said assuming a $60 price tag, the $500M figure would imply 8.3M units sold vs. its estimate of 10M copies sold launch weekend

· Hardware, Media & Telecom movers; ERIC rises s Q3 net profit exceeded estimates by a significant margin as quarterly net profit ballooned to 2.75 billion Swedish kronor ($307.7 million) from a loss of SEK3.56 billion as sales rose 8.9% to SEK53.81 billion; gross margin rose to 36.5% from 26.9%; in towers, CCI provided a softer-than-expected AFFO/share forecast for 2019 after Q4 beat; AAPL is holding its next product launch on October 30 in Brooklyn, where it is expected to unveil new iPads and MacBook

· Internet shares fall; NFLX give back much of its gains from the prior day after better earnings and sub guidance with broader market selloff and after NBC news reported executives have been bracing employees for a Wall Street Journal investigation that they are expecting to be similar to The New York Times’ critical 2015 look into AMZN’s corporate culture

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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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