Thursday, December 6, 2018
Global equities weaker across the board, selling off on renewed concerns over trade tensions between the U.S. and China following the arrest of Huawei’s CFO in Canada at the U.S. request for allegedly breaking Iran sanctions. China promptly reacted with outrage after the news broke, demanding that both countries move to free Meng. The news threatens to upend the recent Trump/ZI trade truce reached this past weekend at the G20 in Buenos Aires. The Dow drops over 550 points, bringing its 2-day losses to more than 1,300 points while major US averages fall back below key technical levels. Financials, Energy (as oil falls another 4%), Industrials and Materials and Tech (all on China trade fears) leading the declines. Other factors weighing on global markets include the flattening yield curve as Treasury yields plunge over the last month (10-yr yield down more than 40 bps off October highs above 3.25%) as the Fed gets more dovish and investors rotate into safe-haven assets. The UK Brexit vote is nearing, with European markets hammered as Germany’s DAX falls more than 20% from its 2018 highs (down over 3% today) and falling near bear market territory while the UK FTSE 100 index also fell over 2% ahead of Brexit vote and the uncertainty that surrounds it. Selling is broad based, as major US averages turn negative on the year, while the dollar slides and gold rises.
Treasuries, Currencies and Commodities
· In currency markets, the dollar index (DXY) moves to lows, down -0.5% around 96.50 (off overnight highs of 97.20) with the euro bouncing above the 1.14 level, the British Pound rises, and the Japanese yen gains vs. the greenback; currencies whose economy is leveraged to oil for their economy (Canada) falling vs. the dollar as oil tumbles further
· Precious metals moving higher, with gold prices nearing $1,250 an ounce, getting a boost from the weaker dollar and a flight to safe haven assets given the assault on risk assets this morning.
· WTI crude oil plummets 4% after Saudi oil minister says need at least 6 months to cut production while Brent trades below $60. Overall commentary from the OPEC meeting in Vienna today shows after OPEC members say they agreed to production cuts but must await Russia before making a final decision on the exact amount and the allocation. CNBC notes markets had been looking for a 1.4 M bpd output cut by OPEC and Russia, though Saudi has said 1.0 M bpd would be enough. No deal, or a watered down outcome likely to hurt prices further
· Treasury markets extend their recent rally as Treasury yields fall further with the 10-yr at 2.85% (down about 40 bps from October highs), the 2-yr 2.71% and the 30-yr 3.12%
· ADP Employment data showed private-sector employment stayed strong in November, as employers added 179,000 jobs but missed the 195K estimate ahead of tomorrow’s nonfarm payroll data; October’s gain was revised slightly to show 225,000 growth instead of a previously estimated 227,000. ADP’s report showed that small firms added 46,000 jobs in November, medium-size businesses added 119,000 to large companies added 13,000.
· ISM Non-Manufacturing for November rises to 60.7, above the 59.0 est. while the non-manufacturing index at 60.7 vs 60.3 prior month; component breakdown showed: business activity rose to 65.2 vs 62.5 prior month while new orders rose to 62.5 vs 61.5 and employment fell to 58.4 vs 59.7; prices paid rose to 64.3 vs 61.7 and backlog of orders rose to 55.5 vs 54
· U.S. nonfarm productivity growth in Q3 raised to 2.3% from 2.2% prior while the increase in output was unchanged at 4.1%, as was the increase in hours worked at 1.8%; Unit-labor costs rose a revised 0.9%, smaller than the initially reported 1.2% advance (est. 1%)
· Weekly Jobless Claims fell 4K to 231K, slightly above the 225K estimate while prior week claims revised up to 235K from 234K; continuing claims fell 74K to 1.631M in the week ending Nov. 24; the decline broke a string a three straight increases that pushed claims up to the highest level since the end of March; the 4-week moving average rose by 4,250 to 228.000 (8-month high)
· The U.S. trade deficit rose 1.7% in October to a 10-year high amid a record shortfall with China, keeping the U.S. on pace to record the largest annual gap in a decade. The deficit edged up to $55.5 billion from a revised $54.6 billion in September, Imports rose 0.2% to $266.5 billion in October, also a record while exports slipped 0.1% to $211 billion.
· Factory Goods Orders for Oct fall (-2.1%) vs. est. (-2.0%) as Factory orders for Sept. revised down to 0.2% gain; new orders ex-trans. for Oct. rise 0.3%; new orders ex-defense for Oct. fall 0.4% after falling 0.4% in Sept.; durables orders for Oct. fall 4.3% after unchanged in Sept.
· Challenger Job-Cut announcements rose 51.5% Y/y in Nov. as said there were 53,073 job cuts in Nov. (494,775 year to date); retail continues to lead all sectors in year-to-date job cut announcements with 96,504, report notes
· Markit Nov Composite PMI 54.7 vs. Flash Reading 54.4; index falls to 54.7 from 54.9 in Oct.; Year ago 54.5; employment falls to 53.3 vs 53.8 in Oct.; Lowest reading since June 2017; new orders fall vs prior month; lowest reading since Oct. 2017
Sector Movers Today
· Bank movers; financials were the biggest drag on markets Tuesday and again today with several negative catalysts; the flattening yield curve hurting banks as banks borrow at the short-end and lend at rates dictated by the long-end, so a flat curve would squeeze their profit; also hurting today, softer “trading” comments from big banks as Citigroup (C) CFO John Gerspach warned that Citi’s fixed-income trading revenue might fall Y/Y and volatility may hurt its ability to meet some 2018 targets while JPM CEO Dimon said Tuesday trading results are “roughly equivalent” to last year; WFC fell as the Federal Reserve rejected the banks plans to prevent further consumer abuses, and must draw-up a robust plan to improve its governance and risk management controls before the Fed will lift an asset cap imposed on the bank in Feb.
· Optical stocks pressured (NPTN, LITE, FNSR, IIVI, IPHI, MTSI) after Canada arrested the CFO of Huawei (also the daughter of the founder) and is extraditing her at the request of the US. The sector falls after Craig Hallum notes they get about 1/3 of sales from China and says it is too soon to know what response the Chinese government will have, but it could certainly make acquisitions in progress less likely to occur; LITE obtained clearance from China’s State Administration for Market Regulation for its OCLR acquisition
· Semiconductors; sector plunges as the Philly semi index (SOX) drops 100 points from Monday highs of 1,281.35 after the arrest of Huawei Technologies Co.’s chief financial officer; some Huawei suppliers include QCOM, SWKS, ADI, CY, QRVO, XLNX according to Bloomberg; LRCX shares slide after its CEO resigned Wednesday amid allegations of misconduct; MRVL OctQ estimates beat estimates but JanQ guidance fell below expectations, with headwinds in storage business from MPU constraints
· Retailers; PLCE shares fall after cutting year forecast and saying 4Q would be hurt by added fulfillment costs, as well as sales and margin impact of potentially significant liquidation events from competitors; COST reported total comparable sales for the November +9.2% above the estimate +5.4% while U.S. comps ex: fuel, currencies +10.1% vs. estimate +4.90%; LB reported an unexpected rise for the November Victoria’s Secret comp sales (2% vs. est. -1%) as overall comps rose 9% topping the 2.8% estimate; GIII, FIVE, DLTH, other retailers moving after quarterly results and guidance; jewelry names slide as SIGsaid is seeing a “more competitive environment as department stores continue to invest in the category and consumers are highly responsive to value” and as a result, will have additional promotional activity in 4Q to support holiday sales
· HPE +6%; among the top gainers in the S&P 500 after earnings results
· LB +2%; reported an unexpected rise for the November Victoria’s Secret comp sales (2% vs. est. -1%) as overall comps rose 9% topping the 2.8% estimate
· LEN +2%; homebuilders were a stand out to the upside on lower rates with LEN, PHM, MTH, TOL among those moving higher
· OKTA +6%; reported very strong FQ3’19 results with revenue 9% and billings 10% above estimates, a 12% beat on gross profit and better-than-expected operating losses/billings growth of 58% – representing an acceleration from 53% in FQ2
· TST +42%; as sells its institutional business units, The Deal and BoardEx (the “B2B Business”), for $87.3 million to Euromoney Institutional Investor PLC
· AKRX -19%; as the company argued in appeals court hearing in Delaware Wednesday that a trial judge improperly rewrote state law and used “guesswork” in allowing Fresenius to scrap the deal
· CNAT -53%; in response to its announcement that its Phase 2 clinical trial, ENCORE-PH, evaluating emricasan in patients with compensated NASH cirrhosis at high risk of decompensation failed to sufficiently separate from placebo
· EE -5%; after DealReporter said the company’s board has elected not to proceed with a formal sales process, with Bloomberg reporting news
· FB -2.8%; as company emails show the company threatened to cut off data to potential rivals added a new target for the regulatory armory that is being amassed by European regulators.
· GWRE -11%; as FQ1 beat, but FY19 revenue guidance meaningfully lowered due to some elongated sales cycles
· LRCX -4%; announced that CEO Martin Anstice has resigned, effective immediately, amid an ongoing investigation into allegations of misconduct in the workplace. LRCX noted that there was no financial misconduct, and it reaffirmed its prior financial guidance for the December quarter
· MDXG -52%; as announces management shake-up and cuts 24% of sales force
· NPTN -22%; as optical space falls after CFO of the U.S. company’s Chinese customer, Huawei Technologies Co. was arrested in Canada yesterday (downgraded at B Riley)
· PBYI -5% after RBC cuts tgt to $26 saying Roche’s Kadcyla data likely to add headwinds to PBYI’s Nerlynx as it proved more impressive than anticipated
· PLCE -9%; after cutting year forecast and saying 4Q would be hurt by added fulfillment costs, as well as sales and margin impact of potentially significant liquidation events from competitors.
· SUPN -12%; after Phase 3 data for SPN-812 posted weaker-than-expected efficacy, according to Mizuho
· TDOC -6%; with several analysts defending after a report from Southern Investigative Reporting Foundation (SIRF) negative on company CFO citing improprieties
· THO -12%; as Q1 EPS and sales missed consensus estimates by a wide margin along with weaker than expected gross margin of 11.8% (LCII, CWH shares weak in sympathy)
· TROX -21%; after the company said late Tuesday that the FTC staff has indicated it would likely not recommend the proposed remedy of selling two plants in Ashtabula, Ohio, to Ineos as part of the Cristal acquisition.
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.