Market Review: October 08, 2019

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Closing Recap

Tuesday, October 08, 2019

Index

Up/Down

%

Last

DJ Industrials

-314.59

1.19%

26,163

S&P 500

-45.89

1.56%

2,892

Nasdaq

-132.52

1.67%

7,823

Russell 2000

-24.98

1.67%

1,472


 

Equity Market Recap

·     U.S. stocks finished lower, sliding to the lows into the close ahead of high level trade talks later this week (10-11th) between China and the U.S. that were upended after a report the White House was moving ahead with efforts to limit capital flows to China as well as the inclusion of some top Chinese startups to a blacklist (several tech companies). All 11 major S&P 500 sectors traded lower, despite dovish commentary from Fed Chairman Powell late afternoon in a speech where he announced additional easing measures – but said several times it’s not QE! Powell said the Federal Reserve will resume purchases of Treasuries to expand its balance sheet in hopes of preventing a repeat of the recent disruption in short-term lending and said will soon announce measures to add to the supply of reserves over time. Brexit fears also high, with reports UK PM Boris Johnson spoke to Leo Varadkar today and the pair agreed to meet in Dublin on Thursday or Friday. This will effectively be the final chance to salvage any Brexit deal before Oct 31. Economic data was weak as monthly Producer Prices fell the most since 2015 MoM, down (-0.3%) vs. an expected rise of 0.1%, while core PPI also fell (-0.3%).

·     U.S. equities tumbled earlier ahead of the expected implementation of tariffs on $250 billion worth of Chinese goods to 30% from 25% set to take effect Oct. 15th. Reports last night that the U.S. was blacklisting several Chinese tech companies (including Hikvision, Sense Time, Megvii and iFlytek) that develop facial recognition and other artificial intelligence technology that the U.S. says is being used to repress China’s Muslim minority groups also sank sentiment. Lastly, reports that the Trump administration is looks at limiting Chinese stocks in government pension funds/potential restrictions on capital flows also tipped markets lower.

·     Federal Reserve Chairman Jerome Powell said at a speech on Tuesday the central bank will soon announce plans to increase the amount of short-term Treasury securities it purchases over time in order to avoid a repeat of last month’s unexpected strains in wholesale funding markets. Powell says Fed contemplating purchases of T-bills, won’t be QE — Fed to act as appropriate – Fed to soon announce steps to add to reserves over time, while leaving a rate cut open this month.

Economic Data

·     Producer Price Index (PPI) MoM for September fell an unexpected (-0.3%) – biggest drop since 2015, vs. vs. est. up 0.1%, while core PPI (ex Food & Energy MoM for September also drops (-0.3%) vs. est. up 0.2%. PPI YoY for September well below views at 1.4% vs. est. 1.8% and PPI Ex: Food & Energy YoY for September 2.0% vs. est. 2.3%

 

Commodities

·     Oil prices drop again, dipping 12c to $52.63 per barrel ahead of weekly inventory data tonight (API) and tomorrow (EIA) and ahead of key trade talks with China this week (but was ell off earlier lows of $51.81 per barrel). Prices more bearish news earlier after the EIA cut its forecast for 2020 world oil demand growth by 100,000 bpd, now sees 1.30 mln bpd yr-on-yr increase. Natural gas prices fall -0.7% to $2.29 mln btus. Gold prices settle little changed, down 50c to $1,503.90 an ounce – erasing earlier gains and well off highs of $1,514.30 an ounce as the dollar rebounded off lows.

 

Bond Market & Currencies

·     Treasury prices gained on weak PPI data, raising expectations the Fed will cut rates again at the end of the month given low inflation concerns, sending yields lower across the curve. Treasuries pared gains following a weak auction as the U.S. Treasury sold $38B in 3-year notes at a yield of 1.413% vs. 1.409% when issued ahead of the auction, with a bid-to-cover (demand) at 2.43 vs. 2.42 prior auction and indirect bidders awarded 45.8% and 16.9% to direct. The 10-year yield ended around 1.54%, the 2-yr at 1.46% and the 30-yr at 2.03%. The U.S. dollar bounced off morning lows despite weaker PPI data, gaining vs. the euro and Pound.

 

 

Macro

Up/Down

Last

WTI Crude

-0.12

52.63

Brent

-0.11

58.24

Gold

-0.50

1,503.90

EUR/USD

-0.0015

1.0956

JPY/USD

-0.10

107.15

10-Year Note

-0.023

1.534%

 

 

Sector News Breakdown

Consumer

·     Retailers; GME shares slip after SNE says the PlayStation 5 will launch during the 2020 holiday season/some may have been expecting an earlier debut for the next-gen console; JMIA shares pressured as IPO lockup of about 13M shares becomes available for sale tomorrow; LEVI expected to report earnings tonight after the close; CROX outperformed after Piper called it the most impressive move in our Fall 2019 Teen Survey/tied for the No.7 spot–all-time survey high vs. No. 13 last year and No. 27 in Fall 2017

·     Restaurants; DPZ shares fell initially as Q3 profit came in below consensus and posted its fifth straight qtr of revenue miss ($820.8M vs. $823M) while Q3 U.S. same-store sales rise 2.4%, slowest in at least 15 quarters, and below analysts’ estimate of 2.8% (shares rebounded)

·     Autos; NIO reports 35.1% growth in Q3 deliveries of 4,799 vehicle, consisting of 4,196 ES6s and 603 ES8s/deliveries exceeded the middle point of the Company’s guidance range significantly by 499 vehicles, or 11.6%; the strike against GM by the United Auto Workers enters its fourth week with suppliers to shippers to restaurants, feeling the impact of the work stoppage

·     Casinos, Leisure; WYNN ests trimmed at Nomura and lowers its tgt to $117 from $126 as estimates below consensus marks to account for the protests in Hong Kong and pressure from Beijing on junkets; separately, VIP action in Macau slow during Golden Week as the Macau sector is on watch after gross gaming revenue (GGR) is estimated to have dropped 1% in Macau compared to a year ago for the first seven days of Golden Week; education stocks remain weak (LOPE, CECO, STRA, LAUR) have underperformed dramatically in recent weeks amid concerns for Elizabeth Warren doing well, who has a track record against for-profit postsecondary operators.

 

Energy

·     Energy news; more weakness for energy prices, with the EIA cutting its forecast for 2020 world oil demand growth by 100,000 bpd, now sees 1.30 mln bpd yr-on-yr increase; EIA cuts forecast for 2019 world oil demand growth by 50,000 bpd, now sees 0.84 mln bpd yr-on-yr increase

·     Energy movers; XOM awards contract for $30B African project to JGC, TechnipFMC, Fluor saying it will invest more than $500M in the initial construction phase of its $30B liquefied natural gas project in Mozambique; in research, Bank America/Merrill downgraded PTEN, NINE, FTSI to underperform and HP downgraded to neutral in oil sector saying capital discipline and service efficiency gains from U.S. E&P companies is leading to intensifying weakness across the Oil Field Services sector, driving activity that has been even worse than already more cautious view; CLR shares active after Bloomberg reported it plans to weigh water unit stake sale/sale of non-controlling stake in water-infrastructure business could value unit at $1B or more

 

Financials

·     Bank movers; Jefferies upgraded STI, BBT to buy as see less downside to EPS estimates vs. peers and a faster EPS growth rate , upgraded RF to buy as trades at 9.4x ’20, a full P/E turn discount to the large cap regional peer average, downgraded ZION to hold saying loan growth is slowing, making it harder to outgrow NII pressure better than peers and cut MTB to hold; Citigroup upgraded MTB to neutral from sell while downgraded CFG, RF and USB to sell; Raymond James downgraded CADE and EWBC saying broadly speaking, declining NIMs and a competitive and challenging loan growth environment leaves the firm expecting generally disappointing 3Q

·     Services; EZPW was downgraded at Jefferies based on corporate governance actions which, in their minds, represents misalignment with non-voting shareholders; Hong Kong Exchanges & Clearing Ltd. said that it will drop its $37 billion bid to buy the London Stock Exchange Group PLC

·     REITs; JPMorgan made a handful of REIT rating changes, upgraded HCP, SRC and downgraded OFC, TCO as they believe the sector is set up well in this environment/ said earnings growth should remain stable into 2020, driven by commercial real estate fundamentals that are moderating a little but lower capital costs afford companies the ability to drive growth; AVB was downgraded at KeyBanc noting the stock surpassed its target and view valuation as fair

 

Healthcare

·     Pharma movers; NVS announced it had received US FDA approval for its Beovu injection for the treatment of wet age-related macular degeneration (AMD) – watch REGN as it relates to competitive risks to its Eylea; JAZZ announced that its CFO Matthew Young would be resigning from the company to join a private company

·     Biotech movers; Goldman Sachs downgraded PBYI to sell and cut tgt to $8 from $24 seeing various company-specific challenges including potentially smaller end markets, increasing competitive risk and underdeveloped pipeline; NKTR cut to sell at Goldman Sachs and slashed tgt to $16 from $54 as believe near-term catalysts are unlikely to re-rate the stock in the face of quality issues and a narrower focus for bempegaldesleukin; GILD submits NDA for filgotinib, an investigational, oral, selective JAK1 inhibitor for the treatment of adults with rheumatoid arthritis (RA) to the Japanese Ministry of Health, Labor and Welfare.

·     Medical equipment and devices; sector slammed early (TMO, WAT, PKI, MTD, BSX) after QGEN sales warnings that pointed to weakness in China; QGEN shares tumbled amid long-standing CEO Peer Schatz resigning, 3Q EPS results below expectations (and says sales results for Q3 don’t meet views), and a decision to partner with ILMN on NGS kits (initially oncology), which leads to ending development of their GeneReader system; ICUI announced a voluntary recall on 29 July 2019 of certain lots of Plum and Sapphire Microbore Infusion Sets with inline filters due to the potential for small amounts of fluid leaking out of the air vents; recent IPO SDC plunges further, falling below the $12 level (recent IPO on 9/11 priced at $23)

 

Industrials & Materials

·     Aerospace & Defense; BA shares pressured after the WSJ reported friction between U.S. and European regulators that could delay 737 MAX’s return to service/EU aviation safety agency is not satisfied with the U.S. FAA and Boeing officials’ safety demonstration of the reconfigured MAX flight-control computers (parts suppliers SPR, ATI remain active as well)

·     Materials and Chemicals; CE shares active after Bloomberg reported overnight that the company is undertaking a strategic review that could include a breakup (has 3 main businesses); AXTA shares fell after DealReporter said potential buyers for the company need more time for due diligence and mid-October timeline for final bids is likely to be pushed back

·     Industrial & Machinery; URI shares fall after being cut to neutral at UBS as they find increasing evidence of downward momentum in URI’s underlying markets and indicators, which we expect to lead to a negative inflection in EBITDA; AZZ shares fell as postponed its quarterly earnings release to give the company more time to complete a review of its Form 10-Q quarterly report

·     Transports; NAT upgraded to buy at BTIG with $4 tgt saying crude tanker spot rates have finally shown tangible signs of a recovery – says since the start of 2017 through the first half of 2019, Suezmax rates averaged just $16k/d, well below the long term (30 year) average of $30k/d; airlines helped support the sector with rebounds in AAL, DAL; JBHT shares were downgraded to neutral at Susquehanna ahead of earnings next week; HA shares rose on better guidance

 

Technology, Media & Telecom

·     Internet; U.S. listed shares of China-based companies fell (BABA, BIDU, HUYA, JD) on news the Trump administration was said to be moving ahead with possible restrictions on capital flows into China, with a particular focus on investments made by U.S. government pension funds; general weakness in large cap names GOOGL, AMZN, FB and smaller SNAP, GRUB, PINS

·     Semiconductors; group falls on the day; Samsung preliminary earnings report better, but the Trump administration placed eight Chinese technology giants on a U.S. blacklist overshadow (topped estimates but profit was much lower than a year ago due to depressed memory prices which were offset by handsets); AMBA falls sharply following the White House move to blacklist Chinese technology companies that develop facial recognition and artificial intelligence technology (which includes Hikvision and Dahua), which Stifel estimates represent about 15% of Ambarella’s total revenue, or about 25% of its security camera revenue; overall semi space pressured (SMH) with the Blacklist announcement and potential for retaliation from China as well as negotiations that are likely to produce a stalemate; CREE shares fell as Canaccord cut its tgt to $64 from $72 saying its previous expectations had been too optimistic

·     Software movers; software space down with broader tech weakness, while Jefferies upgraded MSFT to buy in sector call while downgraded ORCL, CARB, and CHKP to hold – said prefer MSFT over ORCL given MSFT’s DD rev growth at scale and view that ORCL is likely to lose ground in the infrastructure business while CARB cut on continued execution risk and take CHKP as well, as see a lack of catalysts that are likely to reinvigorate product growth and accelerate total rev growth; ASUR rises after saying it has signed an agreement to sell its workspace management business to facility management software provider FM: Systems for $120M

·     Media & Telecom movers; Chinese broadcaster CCTV says it will halt NBA broadcasts in the nation as the backlash over a tweet by an executive of the Houston Rockets in support of the Hong Kong protestors intensifies. China is one of the top international markets for the NBA and a region where Nike sees strong growth from the sales of products tied to NBA stars

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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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