Mid-Morning Look: October 18, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Thursday, October 18, 2018

U.S. equities start the day lower, falling after minutes from the Federal Reserve showed the central bank may favor additional rate hikes next year, which has lifted short and long term yields (2-yr above 2.9%, highest in a decade) as concern rises amid increased borrowing costs. Not helping matters is President Trump lashing out at the Fed (almost daily) about the rise in rates and how it will impact and derail the economic progress the tax cuts have made. US economic data certainly continues to support the rate hike increases as jobless claims hold at 49-year lows, while Philly Business survey rises above estimates. Material and Industrial sectors leading markets lower on China demand concerns, as well as several companies falling on lower earnings and guidance (TXT, CCK, SEE) with many of them citing the same issues such as weaker foreign currency, tariffs, higher raw material and labor costs (note recent warnings form GWW, FAST, PPG as well that has weighed on sentiment). While stocks open lower on China fears, rising rates, weaker earnings outlooks, they have since pared losses, pushing well off morning lows and back above psychological and technical levels.

Treasuries, Currencies and Commodities

· In currency markets, the U.S. dollar spiking on rising FOMC rate hike expectations (following Fed Minutes yesterday), while Treasury yields also march higher; the dollar index tops 95.75 with gains vs. the euro, pound, Canadian dollar (as oil slumps again), while the yen rises

· Precious metals steady with gold at $1,227 an ounce, failing to move higher with other defensive, safe-haven assets as stocks fall; as the bounce in the dollar keeps gains in check (not far off recent 2-month highs above $1,230 an ounce)

· Energy futures extend 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 Iran, as WTI crude slips below $69 per barrel and Brent below $80

· Treasury market’s drop as yields back on the rise with the 2-yr yield at 2.903%, highest since 2008, while the 10-yr above 3.21% and the 30-yr 3.38% – not late day spike yesterday in yields has continued into today – move started after Fed Minutes from September meeting confirmed path of the Fed to raise once more this year and several times in 2019

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 zero

Sector Movers Today

· 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

· 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%

· 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

· 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

      Stock GAINERS

· AA +8%; profit surprise, first share buyback since split ($200M) and boosted its full-year global alumina forecast

· ACHC +8%; 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

· ECYT +50%; acquired by NVS for $2.1B, paying $24 per share https://on.mktw.net/2RWQnCo

· ERIC +4%; as 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%

· PGNX +6%; in sympathy after NVS acquired ECYT in $2.1B deal (Wedbush noted PGNX and Telix are peers and Progenics is developing a treatment for prostate cancer that targets the same protein as Endocyte’s experimental therapy.

· PM +5%; reported Q3 EPS and revenue beat while reaffirmed its outlook

· PTI +292%; on positive Phase 1 trial data for cystic fibrosis therapy; reported some early proof of concept data in CF on a small number of patients (was upgraded at RBC and tgt raised to $9)

Stock LAGGARDS

· ATVI –7%; 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

· CCK –1%; in-line 3Q adj. EBIT (the 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

· OMED -12%; after CELG will not exercise its option to license rosmantuzumab and has terminated their collaboration agreement effective February 12, 2019

· SEE -6%; 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

· TCBI -10%; 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

· TXT -7%; 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

· URI -7%; 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%

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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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