Market Review: October 11, 2019

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Closing Recap

Friday, October 11, 2019

Index

Up/Down

%

Last

DJ Industrials

319.04

1.20%

26,815

S&P 500

32.06

1.08%

2,969

Nasdaq

106.27

1.34%

8,057

Russell 2000

26.54

1.79%

1,511


 

Equity Market Recap

·     U.S. stocks were on cruise control all day, (though pulled back in the final 10 minutes of trading on several headlines out of the China meeting), finishing off their best levels with broad based gains from tech, materials and autos (trade sensitive sector) as well as outperformance in small caps (Russell 2000 surged) amid constant positive news flow from the two-day trade talks between China and the U.S. Expectations were low heading into the meeting, but headline after headline the last 2-days has provided indications that’s some progress was made for the first time after a year and half stalemate that has resulted in high tariffs on both countries. Reports that the U.S. and China reached a partial trade agreement lays the groundwork for a broader deal that Presidents Trump and China leader Xi Jinping could sign later this year, pushed stocks even higher. As part of the deal, China would agree to some agricultural concessions and the U.S. would provide some tariff relief, said the reports though noted the pact is tentative and subject to change. Stocks opened higher after Trump tweeted (not long after the stock market open) “Good things are happening at China Trade Talk Meeting. Warmer feelings than in recent past, more like the Old Days. I will be meeting with the Vice Premier today. All would like to see something significant happen!” For the week, the Dow is poised to rise 1.4%, while the S&P 500 and Nasdaq are on pace to post 1.2% and 1.5% increases, respectively – this heading into the start of earnings season Tuesday with big banks kicking it off (JPM, GS, C, WFC).

·     Outside of trade, Brexit fears easing as the British Pound jumps nearly 2% as a fresh burst of optimism swept through markets after EU council President Donald Tusk said he saw “promising signals” over a Brexit deal. The pound jumped by the most in seven months after the meeting between U.K. Prime Minister Boris Johnson and Irish Premier Leo Varadkar. Also today, the Fed announced it will initially buy $60B of Treasury bills (started 10/15) “at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.” Fed to “conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation.”

Economic Data

·     Import Prices for September rose 0.2% MoM, above the estimate to hold unchanged and after falling (-0.2%) in the prior month; import prices ex-fuels fell (-0.1%) MoM after no change in Aug; export prices fell (-0.2%) MoM after falling (-0.6%) in August

·     University of Michigan Sentiment reported at 96.0 vs. est. 92.0 (prior reading 93.2); Current economic conditions index rose to 113.4 vs. 108.5 last month while the expectations index rose to 84.8 vs. 83.4 last month

 

Commodities

·     Gold futures dropped on Friday, falling -$12.20 or 0.8% to settle at $1,488.70 an ounce as safe-haven assets declined amid growing optimism on China/American trade talks and progress on Brexit. Price dropped 1.6% for the week, the biggest weekly percentage drop for the contract in over seven months while silver prices lost 5.8c, or 0.3%, to end at $17.544 an ounce. Reports that the U.S. and China reached a tentative partial agreement that may lead to a truce in the trade war was enough to further fuel the risk on market mentality

·     Oil priced jumped on Friday, with WTI crude rising $1.15, or 2.2%, to settle at $54.70 a barrel on the NYMEX, posting its highest closing level since Sept. 27 and tallying a weekly advance of 3.6%. Price gained as expectations grew that progress in U.S.-China trade negotiations improved, boosting expectations of increased demand. Oil had jumped overnight following reports of an explosion that damaged an Iranian oil tanker off the Saudi port city of Jeddah. Intensifying already increased tensions in the region.

 

Currencies & Treasuries

·     The U.S. dollar fell sharply on Friday against European based currencies, falling the most vs. the British Pound which jumped 1.7% to 1.27 highs before paring gains, its best levels since early July and nearing its 200-day MA vs. the dollar which stands at 1.2714 as optimism swept through markets after EU council President Donald Tusk said he saw “promising signals” over a Brexit deal. The euro also seeing broad gains while the buck rises vs. the safe haven Japanese yen as defensive assets sell off (dollar rises to best levels since Aug 1 vs. yen above 108.50).

·     Treasury markets were under pressure all day yields surged, with the 10-year yield rising another 8 bps to 1.75% (best levels since October 1st) as investors rotate out of defensive/safe-haven names and into risker stocks which turn higher on the week. On the week, the 10-year yield rose about 25 bps and the 2-yr rose around 23 bps to 1.62%.

 

 

Macro

Up/Down

Last

WTI Crude

1.15

54.70

Brent

1.41

60.51

Gold

-12.20

1,488.70

EUR/USD

0.0035

1.104

JPY/USD

0.49

108.48

10-Year Note

0.087

1.755%

 

 

Sector News Breakdown

Consumer

·     Staples and retailers; DECK was upgraded to buy and $170 tgt at Stifel saying improved UGG go to market strategies, reduced dependence on Classics and F3Q, and the emergence of HOKA and Koolaburra as secondary drivers give the new looking Deckers better protection from weather related volatility; NKE said it will shut down its Oregon Project after the head coach of the US sportswear’s training program and the doctor who worked with the athletes received bans for doping violations; SAM received its third upgrade to buy in recent weeks with Citigroup the latest and boosting tgt to $448 from $394 citing the terrific growth of its hard seltzer brand, Truly

·     Housing & Building Products; in building products, JELD lowers year rev outlook to down about -2% from prior view of flat and says 2019 adj Ebitda margin neg impact 60 bps citing reduced demand in residential new construction channels, and the impact of continued erratic order patterns in North America windows retail channel

·     Auto’s; GM latest offer to the United Auto Workers union included $8.3 billion of investment in U.S. plants, over $1 billion more than the carmaker proposed nearly a month ago, according to reports earlier this morning as the strike enters its 26th day; CSFB said today they expect many suppliers to cut ’19 guidance due to the GM strike, with estimates below the low end of the guide for AXL, APTV, LEA, DLPH, and DAN exposure for suppliers varies 5-18% (AXL at 40%)

 

Energy

·     Energy stocks were higher as “risk-on” market mentality carried over to energy stocks, helped by a bounce in oil prices on reports an Iran tanker sustained damages after being hit by missiles that were launched from the Saudi Arabian port of Jeddah. In other macro news, the IEA said it expects global demand of 1 million barrels a day in 2019 and 1.2 million barrels a day, in the following year. IEA attributed the downgrades of about 100,000-a-barrel-a-day from previous estimates for demand that has shaped up to be the weakest since 2016

·     Oil movers, E&P sector; BP said it plans on selling some $10 billion in assets by the end of 2019, a year earlier than it had expected. BP said it has been selling oil assets in Alaska at a faster clip than had been anticipated, with those divestitures expected to result in a non-cash after-tax charge of $2-3B; industry buoyed by intensifying tensions in the Mideast

·     Utility stocks fall; declines in WEC, NEE, LNT, XEL, CMS under pressure amid broad weakness in utility stocks as Treasury yields rise and investors rotate out of defensive YTD winners into riskier bets/beaten up names on trade talk hopes

 

Financials

·     Bank movers; BCS shares outperform in the banking sector given positive headlines out of UK, Brexit this morning (higher yields helping banks in general again today); earnings season right around the corner, with big banks kicking things off next week with JPM, BLK, C, GS, WFC all expected next Tuesday followed by ALLY, BAC, BK, CBSH, CMA, PNC and USB on Wednesday; in services, SQ was upgraded to positive at Susquehanna while Nomura initiated with a reduce

 

Healthcare

·     Pharma movers; JNJ was upgraded to outperform with a price target of $155 at Bernstein saying shares are historically cheap at a 17% discount to its SOTP and a 13% discount to the S&P, nearly 2 standard deviations below long-term averages and believe JNJ will resolve legal liability for $10B-$12B (vs. ~$50B priced into stock); cannabis stocks have had a rough go this week with lowered guidance from HEXO and several analysts getting cautious. Today, Jefferies lowered tgts on a handful of cannabis stocks, saying next 12 months price performance should see strong divergence between companies which can move to profit and those that can’t – they downgraded WEED to underperform, while cuts tgt on CRON, TLRY, APHA and HEXO

 

Industrials & Materials

·     Industrial & Machinery; AME downgraded to neutral on valuation at Bank America and cutting ‘20 estimates below consensus on macro headwinds, and above-average valuation leaves little room for error while see less potential M&A upside given $1.1B in announced deals YTD; Danish engineering group FLSmidth (FLIDY) lowered its FY EBITA margin to around 8%, down from 9-10% expected previously – said sees good momentum in the service business, but parts of our Mining capital business are not delivering the planned margin (shares of peers Sandvik and Metso fell); FAST shares outperform after Q3 profit beats expectations while net sales and profit each rise ~8% in Q3, helped in part by strength in industrial vending – though warned it continued to see a slowdown in economic activity in Q3, which spilled over from the prior quarter; TEX was downgraded to underweight at Barclay’s expects the rental equipment market to move from equilibrium to oversupplied by 2020

·     Transports; airlines look to rebound after slipping yesterday post DAL earnings, as Argus downgraded shares today to hold while saying it prefers UAL; in truckers, UBS upgraded SNDR and KNX to buy saying key forward looking truckload market metrics are likely to continue to improve – notes SNDR has significant leverage to the truckload cycle, and it faces the easiest comparisons of the trucking names in 2020; tankers FRO, TNK, DSX rising after Iran tanker news;

·     Metals & Materials; trade hopes boosting the metals sector, with broad gains for beaten up steel, aluminum, copper and iron ore names; RIO was upgraded to buy at Jefferies saying analysis suggests RIO’s FCF strength through the cycle should lead to a supportive dividend, even in the case of a weak cycle; in chemicals, outperformance today from MOS, DOW, EMN

 

Technology, Media & Telecom

·     Software movers; SAP pre-announced and reiterated full year guidance as well as announced the fact that the company’s CEO Bill McDermott was stepping down as CEO. SAP’s preliminary results beat consensus expectations on revenue (€6.79B vs consensus estimates of €6.68B) and EPS (€1.30 vs consensus of €1.19) and delivered improving YoY gross and operating margins; WORK said it had more than 12 million people "actively using Slack every day" in September, up about 37% YoY/also reported more than 6 million paid seats and said it had nearly 600,000 daily active registered developers; TTD upgraded to outperform from sector perform at RBC Capital; Piper downgraded NTCT and FSLY after recent survey results as NTCT cut on weak Enterprise demand trends, a pause in Service Provider spending related to the 4G->5G cycle, FSLY on valuation; CRWD downgraded to sell at Goldman Sachs and lower tgt to $66 from $83 on valuation while upgraded shares of WDAY to buy

·     Media & Telecom movers; MTCH shares active (has received three analyst upgrades over the last two weeks) after IAC proposed the full separation of Match from the remaining businesses of IAC and eliminating the dual-class common stock structure at the new independent Match; WWE was upgraded to outperform at FBN Securities with $100 tgt

·     Internet; strength in the sector with broader markets, seeing big gains across the board, including gains in China ADRs on apparent trade progress (BIDU, BABA, JD); YNDX shares slump after reports the Kremlin is backing a draft law to restrict foreign ownership of Russia’s largest internet company, Yandex NV, and other tech firms on national security grounds, despite warnings from providers that it will harm their businesses

·     Hardware & Component news; AAPL trades to another record level given stock market bounce; according to Gartner’s and IDC’s preliminary data, PC units grew between 1% and 3% YoY in Q3 19, and Q2 to Q3 growth was largely in-line with historical seasonality and our expectations. PCs were notably strong in Japan, likely reflecting elevated purchase levels in advance of a tax hike, offset by weakness in China; in 3D sector, XONE shares tumble as sees Q3 revs $10M-$11M vs. est. $16.7M and said now expects 2019 revenue growth to be lower than its previous guidance (SSYS, DDD are comps); ROKU was upgraded to outperform from sector perform at RBC Capital and raise tgt to $155 from $107

·     Networking and Comm equipment; Piper lowered forward estimates for ANET, CSCO and JNPR given recent channel survey and other industry inputs – effectively, we are lowering our forward estimates given what we are seeing in the industry/price target for JNPR moves lower to $25 (prior $27) on lower estimates

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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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