Market Review: October 10, 2019

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Closing Recap

Thursday, October 10, 2019

Index

Up/Down

%

Last

DJ Industrials

153.58

0.58%

26,499

S&P 500

18.95

0.65%

2,938

Nasdaq

47.04

0.60%

7,950

Russell 2000

6.01

0.41%

1,485


 

Equity Market Recap

·     It is all about trade hopes for the time being, with stocks jumping across the board alongside selling pressure in safe-haven/defensive assets (Treasuries, gold, the yen all slide) as markets await results from the crucial trade talks ongoing in Washington between high level trade reps for both the U.S. and China. Vice Premier Liu He and the rest of the high-level Chinese team met with US Trade Rep Lighthizer today, as the 13th round of trade talks got underway (and now into their 15th month of trade disputes). Markets got a boost after President Donald Trump said he would meet with Chinese Vice Premier Liu, who is leading Beijing’s negotiating team, at the White House on Friday. Note the Trump administration has slapped tariffs on more than $360 billion worth of Chinese imports and is planning to hit another $160 billion Dec. 15th. Among the top gainers on the day, financials, as Treasury yields jumped, while trade sensitive sectors such as semiconductors advanced on trade hopes. Energy companies benefited from a 1.6% increase in crude oil prices. Safe-play sectors like utilities and real estate lagged. In economic data, US consumer prices were unchanged in September, their weakest reading in eight months, giving the Federal Reserve room to lower rates (follows soft PPI data this week). Dallas Federal Reserve Bank President Robert Kaplan said today he was watching the U.S. yield curve carefully for signs the Fed may need to cut interest rates further, reiterating his view that waiting to do so until consumer spending weakens would be "a mistake."

Economic Data

·     Weekly Jobless Claims fell to 210K in latest week, below the 220K est. while prior week claims revised to 220K from 219K; continuing claims rose to 1.684Mfrom 1.655M prior and compared to the 1.653M estimate; the 4-week moving average rose to 213,750 from 212,750 prior week

·     Consumer Price Index (CPI) MoM for September were unchanged, below the 0.1% rise estimate (tame but not as sharp a miss as PPI was earlier this week), while CPI core (ex: food & energy MoM) for September rose 0.1% vs. est. 0.2%. CPI core YoY was in-line at 2.4%

 

Commodities

·     Oil prices with a late day jump, as WTI crude rose 96c, or 1.8% to settle at $53.55 per barrel, while natural gas prices slide for the 16th time in last 18 session, slipping 0.7% to $2.22 mln btu. Oil prices were volatile today ahead of U.S./China trade talks and after OPEC downgraded its 2019 oil-demand growth forecast for the fourth time in five months– pointing to trade-related economic uncertainties, Brexit and other factors–and Secretary General Mohammed Barkindo said the cartel would look at all options, including deeper cuts at its December meeting in Vienna. Gold prices fell -$11.90 or 0.8% to settle at $1,500.90 an ounce, its lowest finish since the beginning of the month following comments from Dallas Fed Bank President Kaplan.

 

Currencies

·     The U.S. dollar rose against the Japanese yen, rising as high as 107.97 and holding near those levels late day, but outside of that, the greenback was broadly lower vs. major currencies. The British Pound surged to highs of 1.2451 (up around 2% on the day) after UK PM Johnson, and Taoiseach Varadkar said they could see a "pathway" to a potential Brexit deal. The USD dollar faded to weekly lows of 1.3269, with selling picking up after breaking under its 200-day moving average at 1.3287, which had held through the week amid firming oil prices. The euro moved and held above the 1.10 level vs. the buck.

 

Bond Market

·     Treasury prices extended their recent slide, with the 10-year yield rising over 6 bps to around 1.65% (just above its 50-day MA – and well above the 1.42% Sept 3rd low), while the 2-year yield rose 5 bps to 1.51% (spread between the two widens to 14 bps), and the 3-month and 10-year yield basically flat now (3-month at 1.66%) – well off the 40-bps inversion over a month ago. The $16B 30-year auction came in at a record low yield of 2.170%, previous lowest ever was 2.172% in July 2016. Markets still awaiting specific details from the China/U.S. trade talks ongoing.

 

 

Macro

Up/Down

Last

WTI Crude

0.96

53.55

Brent

0.78

59.10

Gold

-11.90

1,500.90

EUR/USD

0.0037

1.1009

JPY/USD

0.48

107.96

10-Year Note

0.074

1.657%

 

 

Sector News Breakdown

Consumer

·     Retailers; BBBY shares jumped after announced its new CEO last night, former TGT Chief Merchant Mark Tritton, with prior experience as EVP/President of JWN as well; COST Sept US comp sales ex gas, FX up 5.7% vs. est. 5.2%; reported net sales of $14.41B for the retail month of September, the five weeks ended October 6, an increase of 5.6% from $13.64B last year; luxury retailers (TIF, TPR, RL) shares advanced in reaction follow through from better LVMUY earnings and guidance yesterday; CATO reported sales for September of $70.5 million, +1.6% YoY and September comparable sales +5%; Hugo Boss (HUGPF) shares slid after cutting its 2019 sales outlook to Ebit EU330M-Eu340M

·     Consumer Staples; grocer KR was downgraded to hold at Jefferies based on in-depth analysis of online grocery fulfillment and conversations with industry contacts, as believe KRs CFC partnership with OCDO is a poor L-T allocation misstep when compared to micro-fulfillment; in beauty, ELF 2H ests raised at Jefferies to reflect strong consumption patterns with Nielsen data indicating a sales acceleration to +16% in the T4WKs, incremental space gains at retailers; HRL narrows its FY EPS view to $1.76-$1.80 from prior $1.71-$1.85 outlook (est. $1.74)

 

Energy

·     Energy stocks were mixed as investor hang on to China/U.S. trade hopes. OPEC downgraded its 2019 oil-demand growth forecast for the fourth time in five months, pointing to economic uncertainties related to U.S.-China trade tensions as well as Brexit, among other factors. While OPEC’s cut was only 40,000 barrels a day, it represents the third straight month of reductions. OPEC also trimmed its supply-growth forecasts for 2019 and 2020 for non-OPEC nations. Iraq and Nigeria–which have repeatedly flouted their production quotas–both agreed to fresh cuts at the end the most recent OPEC+ meeting, but while Iraqi daily production fell by 30,000 barrels a day, Nigeria’s production climbed by 110,000 barrels a day in September.

·     E&P sector; PXD was upgraded to buy at Mizuho with a $191 price target saying the company has shifted its focus towards sustainable free cash flow growth and has made major progress this year on cost cuts, while downgraded CLR to neutral. Seaport Global downgraded a ton of names in the sector including AXAS, CDEV, CRK, DVN, ESTE, HPR, JAG, LLEX, LONE, ROSE, SM, SNDE, and WLL to neutral from buy

·     Energy movers on news; PUMP shares jumped after announced the substantial completion of its audit committee inquiry and several changes to management responsibilities/an investigation found “internal control deficiencies” but also showed financial results don’t need to be restated; Reuters reported BP, CVX, RDS are among the companies that will compete for exploration and production rights off the Brazilian coast on Thursday

·     Utilities & Solar; PCG shares plunge around 30% after losing exclusive control on bankruptcy reorganization plan as U.S. judge Dennis Montali, overseeing the bankruptcy of PG&E, ends co’s exclusive right to file a reorganization plan, allowing company noteholders to file their plans; EVRG shares were downgraded to neutral at Bank America following the Missouri PSC vote in favor of petitioners against the company in the ongoing Sibley Generating Station complaint

 

Financials

·     Bank movers; Into earnings, analysts ratcheting down estimates: 1) Piper lowered EPS estimates on 52% of coverage universe to incorporate a lower NIM outlook with the latest Fed rate cut & flatter curve – EWBC, FIBK, PACW and WAL are among favorites into 3Q results while we are more cautious on HAFC, LBC and OPB, 2) JPMorgan said expects a weak 3Q, led by steep fall in rates and slower loan growth but tempered by swift cuts in deposit rates and sharp growth in securities portfolios, especially Treasuries, 3) Wedbush says expecting a tough quarter for bank earnings, led by margin pressure…but expect a few banks are in position to report earnings that are "less bad" relative to peers, including KEY, TCBI, FRC and UMPQ while are concerned about CFR and SIVB (follows rating changes/position by other analysts this week as well)

·     Brokers; Fidelity cuts online trading commissions to zero, joining the free-trading party, aiming to lure assets by offering zero commissions – says the offer will apply to online buying and selling of U.S. stocks, ETFs and options, as well as provide higher yields for cash balances and better trade execution (follows moves by AMTD, ETFC and SCHW last week); TW said average daily volume rose 47% y/y to $872 billion in September, a new monthly record, fueled in part by a surge in rates derivatives activity, which jumped 102% y/y to $290.8 billion in average daily volume

·     Asset managers with monthly AUM data; AB said prelim assets under management increased to $592 billion during September 2019 from $587 billion at the end of August; IVZ prelim AUM of $1,184.4 billion, an increase of 0.8%; LAZ September AUM totaled ~$230.87B vs. $228.81B at August 31, 2019; TROW reported assets under management of $1.13 trillion, +4.6% YoY; LM prelim AUM of $781.8 billion as of Sept. 30, 2019; APAM reported that its assets under management as of September 30, 2019 totaled $112.5 billion

 

Healthcare

·     Pharma movers; cannabis stocks were pressured after HEXO guides Q4 revenue $14.5M-$16.5M, while withdraws FY20 outlook saying Q4 revenue is below our expectation and guidance, primarily due to lower than expected product sell through (shares of TLRY, APHA, CGC, CRON, ACB all fell sharply given the lower guidance)

·     Biotech movers; RARX to be acquired by UCB for $48 per share in cash, which represents a transaction value of approximately $2.1B, net of Ra Pharma cash https://on.mktw.net/33g42JJ ; MDCO downgraded to hold at Jefferies after survey saying while respondents suggest inclisiran will lead in market share for PCSK9i; the market is essentially split between inclisiran and Repatha and firm lowers ‘26E revs to $1.4B from $1.7B and consensus currently looks for $2.6B; PBYI shares fell after Bernie Sanders calls out 20% price hike of its breast cancer treatment Nerlynx; BNTX shares down in IPO debut, opening at $16.50, above the $15 pricing, but hit lows of $13.01 before paring losses

·     Medical equipment and devices; PHG shares fall on lower guidance, warning it will miss its 2019 profit margin target due to increasing headwinds from tariffs causing poor results at its connected care unit/for the year, expects margin improvement of 10-20 basis points, following three straight years of gains of at least 100 bps

·     Healthcare services and providers; UNH was downgraded to hold at Jefferies noting political risk has weighed on the MCOs since 12/18 and while there is a low probability of these political risks coming to fruition, we expect MCO valuations to remain depressed until the political env’t stabilizes/also notes ANTM has been growing in commercial and other data points to UNH having the most risk of membership loss to ANTM; MD said it entered into a definitive agreement with Frazier Healthcare Partners, where MD will receive cash consideration of ~$250M at closing, as well as economic consideration of up to $50M contingent upon short and long-term performance; SDC shares hit new record lows now – recent IPO priced $23 about a month ago – shares cut by more than half since

 

Industrials & Materials

·     Industrial & Machinery; IEA shares plunge as merger in doubt, saying discussing possible investment from Ares Management Corp, Oaktree Capital Management, not a merger or a go-private deal; DE shares slid after monthly ag report (WASDE) updated its latest forecast to show U.S. corn production at 13.779B bushels, down from 13.799B bushels projected last month.

·     Materials & Chemicals; KRA lowered guidance saying product sales hurt by deterioration in China, Asia demand; now expects full year 2019 Adjusted EBITDA to be 10-15% below the lower end of its previous guidance range of $370 to $390 million; MOS says it will temporarily curtail potash production at its Esterhazy mine in Saskatchewan, citing rising inventories due to a short-term slowdown in global potash markets

·     Transports; the Baltic Dry Index jumped 2.99% to 1,929 points to mark the fifth up day in a row for the shipping rates measure. Panamax rates were up 2.6% and Capesize rates rose 4.1% to easily offset a 0.5% dip with Handysize rates; airlines active on earnings as DAL EPS beats by 6c and reports unit revenue was up 2.5% in Q3 off healthy leisure and corporate demand, while operating cost per available seat mile fell off 2.1%/sees Q4 EPS of $1.20 to $1.50 vs. $1.51; JBLU September traffic rose 3.4% YoY on a capacity increase of 2.5%; Goldman Sachs lowered 3Q earnings estimates across the transport space amidst pressures from lower volumes

·     Metals & Materials; in steel sector, U.S. Steel (X) guided Q3 EPS loss (20c-26c), better than the expected loss est of (33c) and guides Adj Ebitda $134M-$144M vs. est. $109.1M; in copper, UBS upgraded shares of FCX to buy from hold and raise tgt to $13 after resetting their copper price and production expectations, saying shares oversold, while also upgraded GMBXF to buy; ATI upgraded to buy at Goldman Sachs as see an attractive entry-point following underperformance which was driven by idiosyncratic (supply chain issues) and external factors (such as 737 MAX)

 

Technology, Media & Telecom

·     Internet; NFLX tgt cut to $370 from $420 at UBS, the latest firm to express caution over the video-streaming company ahead of its third-quarter results/separately, Goldman Sachs cut its price target to $360 from $420

·     Semiconductors; SWKS and QRVO both outperform in semi space after Cowen upgraded both saying investor expectations are very low on the apple supply chain, but the 5G cycle next year should bring ~40% uplift in RF content and that Huawei revenues have been largely de-risked from sell-side numbers while networking infrastructure spend on 5G and consumer electronics incorporating WiFi 6 is finally happening in C2020 after 12 months of delay.

·     Software movers; FSCT shares plunge as lowers Q3 revenue in the range of $90.6M-$91.6M from $98.8M-$101.8M prior and below consensus of $100.52M and GAAP operating loss for the Q3 is expected to be in the range of $18.2-$17.8M; WORK tads to Wednesday weakness (had fallen -4.4%) after Jefferies cut tgt to $26 from $31 saying the co is seeing more competitive intensity from MSFT’s Teams app versus a year ago; USAT shares down after guiding to fiscal 2020 revenue of $165M-$175M, below estimate for $197.7M, and EBITDA of $10M-$11M last night and announces $50M financing commitment

·     Media movers; MTCH was upgraded to Outperform at Oppenheimer (2rd analyst upgrade in over a week) saying stock down over 25% from highs citing confusion surrounding a likely debt transfer as part of the spin-off from IAC and concerns over the FTC lawsuit; add stocks active after PUBGY cuts year rev growth view/confirms op margin and EPS forecasts with new organic growth forecasts at -2.5% for year (IPG, OMC, WPP shares move in sympathy)

·     Communication equipment and Telco; ADTN shares fell as guides Q3 adjusted EPS loss of (6c) on sales about $114M, below the 3c profit and $140.2M estimate as shipments to a Tier 1 customer in Latin America and the continued slowdown in the spending at an international Tier 1 customer

·     Hardware movers; AAPL upgraded to buy from neutral at Longbow as expects iPhone production to beat estimates on higher sales of iPhone 11, which comprises about 50% of new model production; Goldman Sachs with several rating changes as upgrade PSTG to buy but downgraded shares of CSCO, NTAP and HPQ as they turn cautious on enterprise Tech spending, particularly large enterprise exposed names as weaker business confidence fueled by ongoing US-China trade uncertainty is weighing on enterprise spending

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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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