Market Review: October 02, 2019

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Closing Recap

Wednesday, October 02, 2019

Index

Up/Down

%

Last

DJ Industrials

-492.76

1.85%

26,080

S&P 500

-52.28

1.78%

2,887

Nasdaq

-123.44

1.56%

7,785

Russell 2000

-13.70

0.92%

1,479


 

Equity Market Recap

·     U.S. stocks were pummeled for a second consecutive session, with the picture in Europe actually worse as the FTSE 100 Index fell -3.2%, posting its biggest one-day decline since January 16 after weak manufacturing data and ongoing Brexit fears, while Germany declined 2.75%, falling below the 50 and 100 day moving averages. Key technical levels were breached today in the U.S. as well as today marked the first time in the S&P 500’s history since 1928 that Q4 (or October) started with back-to-back 1%+ drops…the 4th worst start to Q4 if looking at 2-day change (-2.75%), according to Bespoke. The U.S. equity meltdown took the S&P cash (SPX) below its 100-day MA of 2,925 (dropped below 2,900, while the 200-day MA is lower at 2,835), while the NASDAQ fell as much as 2% before paring losses. The crux of the recent weakness is renewed slowing global growth fears (recession concerns) after a round of softer manufacturing data points in the U.S., UK, and EuroZone the last few days. The UK IHS Markit construction purchasing managers index fell to 43.3 in September from 45 in August—the second-worst reading in more than a decade. That followed a decade low reading for U.S. ISM manufacturing data yesterday which started the market pullback. Also in Europe, Germany’s leading economics research institutes (DIW, Ifo, IWH and RWI) jointly lowered their economic forecasts.

·     Transports plunged, energy remains weak, and financials were pressured by plunging Treasury yields and even defensive names slid today. Note the S&P closed up last quarter with a 21% YTD gain, its best 9-month rally to start a year since 1997. So adding political fears in Washington, Brexit fears in the UK, China trade wars and collapsing oil prices we get stocks at their lowest levels in over a month. Stocks extended losses late morning after Democratic Presidential nominee hopeful Bernie Sanders campaign announced that he would be cancelling some events and appearances until further notice due to health issues/reportedly undergoes surgery for artery blockage. The news was seen as a negative for stock markets as it boosted chances for perceived market unfriendly Elizabeth Warren to get the Democr5atci bid (she has been outspoken against financials, big tech such as FB/GOOGL/AMZN as well as the healthcare sector).

Treasuries

·     Treasury prices gained (slowly) throughout the day with yields inching lower across the board as investors move back into the safety of bonds. The 10-year dropped below 1.59% (down over 4bps but well off the 1.9% Sept peak on 9/13), and stays above the 2-yr yield by more than 10 bps (around 1.47%) while the 30-yr was around 2.07% late day. The recent weakness in global PMI data has once again renewed recession fears, with markets anticipating the Fed may step up the rate of interest rate cuts to head off slowing growth and stimulating the economy.

 

Commodities

·     Oil prices sink once again, with WTI crude falling 98c to settle at $52.64, lowest levels since early August following the larger than expected weekly build in crude stockpiles as reported by the EIA (3.1M barrels vs. est. 2M), along with the usual trade concerns with China and reduced demand fears given the ongoing flow of weaker than expected economic data globally. Natural gas prices decline for a 12th consecutive session (Dow says longest streak on record), down 1.6% to $2.25 mln btu amid hotter temperatures along the East Coast.

·     Gold prices jumped $18.90 or 1.3% to settle at $1,507.90 an ounce (follows a 1.1% increase yesterday), to move back above the $1,500 an ounce level for the first time in three days as weaker-than-expected U.S. economic data pressured U.S. benchmark stock indexes, with investors rotating into more defensive assets.

 

Currencies

·     The U.S. dollar index (DXY) pulls back from overnight highs (99.41) trading slightly lower late day around the 99 level given the recent pullback off YTD highs. The British Pound remains volatile ahead of Brexit fears, while the yen is little changed and the euro up slightly; the Colombian peso fell to record low against the US dollar (3.50). Macro-economic data has been the key driver for currencies over the last few days.

 

Economic Data

·     Monthly private payroll ADP data showed U.S. firms added 135K Jobs in September, mostly in-line with the 140K est. while August was downwardly revised by -38K to 157K. Small firms added 30k jobs in Sept, medium firms added 39k jobs and large firms over 500 employees added 67k.

 

 

Macro

Up/Down

Last

WTI Crude

-0.98

52.64

Brent

-1.20

57.69

Gold

18.90

1,507.90

EUR/USD

0.0025

1.0958

JPY/USD

-0.58

107.17

10-Year Note

-0.0043

1.592%

 

 

Sector News Breakdown

Consumer

·     Retailers; SFIX shares rolled following Q4 results, which were generally better on EPS but Q1/FY20 guidance was meaningfully below the Street on a like-for-like basis (guides Q1 revenue $438M-$442M (vs. est. $451.2M) and sees Q1 adjusted Ebitda loss ($6M-$9M); retailers led declines in the S&P 500 early (CPRI, KSS, M, BBY, LB); WMT said it is suspending the sale of all over the counter ranitidine products in stores, clubs and online, including Zantac, Equate and Member’s Mark brands; CAL set new financial targets which include low single-digit CAGR revenue growth through 2022, double-digit EPS growth through 2022 and return on invested capital of greater than 15% through 2022; WW extends declines after news yesterday that NVO partners with Noom around digital health solutions

·     Consumer Staples; lower guidance from household products maker CLX (guided year EPS $6.05-$6.25 from prior view $6.30-$6.50 vs. est. $6.37 and sees sales down this year low-single digits to flat and margins down slightly in FY20) pressured the sector; UNFI shares plunge after Q4 profit, and its forecast disappoint driven by lower gross margins (Q4 gross margin 12.83% vs. 14.5% a year ago) due to a more competitive landscape and guided year EPS $1.22-$1.76 vs. est. $1.67 on weaker sales; GO shares fall after the co launches first stock offering since its Jun IPO; said certain shareholders, including private equity sponsor Hellman & Friedman, offering 13M shares; MNST downgraded to neutral at Guggenheim and cut tgt to $60 from $74 given view that the stock will be range bound for at least the next 6 to 9 months

·     Housing & Building Products; LEN a bright spot in homebuilders after Q3 EPS of $1.59 beat estimate of $1.32 as deliveries rose 7% to 13,522 homes and new orders increased 9% to 13,369 homes during the quarter – shares edged lower late morning after its conference call as guidance and margins came in below views, before moving higher again

·     Casino & Leisure movers; FUN quick spike after Reuters reported SIX made a bid to acquire the theme park operator https://yhoo.it/2nIu4X3 ; SGMS Chairman Ronald O Perelman purchased 50,000 shares ($1.02M in shares) on 9/30/19 at a price of $20.42 according to a filing; BX said its Blackstone Real Estate Partners IX fund and units of Centerbridge Partners L.P. are acquiring a 65% controlling stake in Great World Resorts Inc.

·     Auto sector; slowing global growth fears take a bite out of this industry as well, despite some better monthly auto sales today; FCAU said U.S. auto sales fell -0.1% vs. est. -1.6%; Ford (F) was mixed as shares dropped, reports total Q3 U.S. sales down 4.9%, with truck sales up 8.8%, Q3 SUV sales fell 10.5%, and car sales fell 29.5% YoY; GM said Q3 total deliveries rose 6.3% vs. est. 7.1% as end of Sept inventory was 759,633 units

 

Energy

·     Inventory data mixed; the EIA weekly energy inventory showed: Crude weekly inventories rose 3.1M barrels vs. est. for build of 2.0M barrels; Gasoline stockpiles fell -228K barrels vs. est. for build of 600K barrels and distillate stockpiles fell -2.41M barrels vs. est. for draw of -2.0M barrels – (oil rolls on bearish data). Overnight, API reported U.S. crude supplies fell by -5.9M barrels for the week ended Sept. 27, showed a stockpile increase of +2.1M barrels for gasoline, while distillate inventories fell by -1.7M barrels

·     In OPEC+ news, Russia was still exceeding its OPEC+ target in September even after producers made deeper cuts from a month earlier. Russia’s Putin tells OPEC sec gen Barkindo oil prices returned to current levels following attacks on Saudi Arabia as there are no fundamental grounds for sharp volatility on the market Ecuador is to leave OPEC in January.

·     E&P sector; XOM said it expects weaker crude prices to hit its Q3 earnings by $400M-$700M; CVE reduces its capital spending guidance forecast for the year and plans to raise its Q4 dividend, saying it seeks to return more money to shareholders/now sees its 2019 capital budget at C$1.1B-C$1.2B, a C$150M reduction from the midpoint of its previous guidance, and says it will raise its dividend by 25% to C$0.0625/share; ANDE said that it and MPC have merged four ethanol entities with and into the new legal entity The Andersons Marathon Holdings LLC

·     Utilities & Solar; PCG shares down a 9th straight session after wildfire victims, creditors, labor unions and the state’s consumer advocate for utility customers said they support ending PG&E’s exclusive right to offer a plan of reorganization.

 

Financials

·     Brokers; after massive declines in shares of ETFC, AMTD and SCHW yesterday after Schwab eliminated commissions for stocks, ETFs and options listed on U.S. or Canadian exchanges – AMTD followed suit last night as they too will eliminate commissions for its online exchange-listed stock, ETF, and option trades, moving from $6.95 to $0, effective Thursday Oct. 3, 2019 (firm also noted they expect this decision to have a revenue impact of approximately $220M-$240M per quarter, or approximately 15%-16% of net revenues) – analysts negative on the news with Barclay’s downgrading all three brokers to underweight on the commission declines

 

Healthcare

·     Large cap-pharma movers; JNJ shares rose after agreeing to pay $20.4M, including damages and legal costs, to Cuyahoga and Summit counties in Ohio, but admitted no culpability in opioid crisis; MRK said China’s National Medical Products Administration approved the company’s cancer drug Keytruda as monotherapy for the first-line treatment in certain patients with non-small cell lung cancer

·     Specialty pharma; AIMT rises after Piper positive saying recent survey of 45 allergists, capturing over 21,000 peanut allergy patients, indicates massive upside to the estimates for Aimmune Therapeutics’ Palforzia; AXSM rebounds from yesterday slide after saying it is on track for 4Q readout of topline results GEMINI Phase 3 of AXS-05, STRIDE-1 Phase 3 of AXS-05, MOMENTUM Phase 3 of AXS-07, CONCERT Phase 2 of AXS-12; PGNX shares slipped despite agreeing to be acquired by LNTH in an all-stock deal, given the sharp selloff in Lantheus shares (PGNX holders to get 0.2502 Shares of LNTH stock); HRTX announced topline results of Phase 3b study of HTX-011 together with a scheduled postoperative regimen of generic, oral analgesics in patients undergoing total knee arthroplasty surgery

·     Biotech movers; SRPT shares were under pressure early as a competitor files with FDA for Duchenne drug as Japanese drugmaker NS Pharma said paperwork required to seek approval for a new drug to treat DMD was submitted to the U.S. FDA; SVRA said it received a negative response from a Type C meeting with the U.S. FDA regarding the Molgradex development program for autoimmune pulmonary alveolar proteinosis, or aPAP

 

Industrials & Materials

·     Metals, Industrial & Machinery; AYI shares dropped after Q4 top/bottom line miss and softer outlook as said expect market demand for lighting products to remain sluggish until there is more clarity regarding these global trade issues; industrial metal stocks continue to be punished (X, CLF, AKS, NUE, CENX, FCX) given the ongoing trade war between the U.S. and China as well as the weaker economic data which dampens sentiment/demand for the sector; watch heavy duty truckers as Well Fargo estimates monthly Class 8 truck data expected to show between 10K-13K in orders, the Midpoint 11,500 implies 73% drop yr/yr but up about 3% from August’s 11,119 – shares of PCAR, CMI and NAV are leveraged to the data

·     Chemicals; RPM shares dip on mixed Q1 results as EPS beat (95c vs. 91c) but sales fell short of consensus ($1.47B vs. $1.49B), while guides Q2 sales to the low end of 2.5%-4% view; MEOH was upgraded at RBC saying the bearish investor sentiment on the stock is nearing a bottom, and the shares offer good upside; OLN and WLK cautious mention at Nomura saying caustic soda domestic contract index declined $10/ton m/m in Sept., vs. their est flat to down $5/ton

·     Transports; The Dow Transport Index falls below the 10,000 level for the first time in over a month (fell as much as 3%), led by declining airlines after DAL guidance and rising fears of slowing global growth; DAL monthly metrics out saying Sept capacity rose 4.7%, traffic up 6.8% and load factor 85.3%/said prelim CASM-ex up about 2.5% vs. prior guide of 1%-2%; FDX fresh 52-week lows as breaks below the $140 level along with broader mkt weakness

·     Aerospace & Defense; FAA said today that aircraft operators must inspect 165 U.S. registered Boeing (BA) 737 NG airplanes for structural cracks within seven days; EADSY shares fell after Washington won approval to impose tariffs on $7.5 billion worth of European goods, opening a new front in the global trade war.

 

Technology, Media & Telecom

·     Semiconductors; IDCC guided Q3 revs $71M-$74M below the $76.6M est; CREE shares fell, falling in sympathy with AYI after the company missed earnings and said expect market demand for lighting products to remain sluggish; overall semiconductor space down on the day with broader decline in technology on trade and growth concerns

·     Software movers; ORCL signed an agreement to acquire CrowdTwist, the leading cloud-native customer loyalty solution to empower brands to offer personalized customer experiences; CRM said it forecasts "sustained and solid" U.S. online revenue growth this holiday season at 13%, with total sales reaching a record $136B in the U.S. and $768B globally, despite a shorter selling season; ATVI downgraded to underperform at Bernstein saying the market was paying too much for the hope surrounding a mobile version of Call of Duty and World of Warcraft Classic; DOCU tgt raised to $80 at RBC following bullish NDR with the CFO & IR in NYC yesterday, as firm now has increased conviction around the opportunity for upside to numbers both short/longer term

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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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