Mid-Morning Look: October 11, 2019

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Mid-Morning Look

Friday, October 11, 2019

Index

Up/Down

%

Last

 

DJ Industrials

399.77

1.51%

26,896

S&P 500

46.67

1.59%

2,984

Nasdaq

143.25

1.80%

8,094

Russell 2000

32.57

2.19%

1,517

 

 

U.S. equities are rising as various reports (including those from President Trump) indicate that the talks that started yesterday in Washington between top trade negotiators from the U.S. and China are progressing well and going better than expected. Stocks extended overnight gains after President 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!” Reports also indicate a partial deal could be announced this afternoon, according to some close to the discussions who have spoken with. The euphoric mood (for the moment) has reversed weekly losses for major U.S. averages while defensive assets are sliding (gold, bonds, yen). Markets are hoping for some sort of positive resolution between the two power-house economies, but even if tariffs ease (or delay) with a few points reached (ag purchases, IP news, other sticking points that have caused trade tensions) markets could continue to hold their recent gains – with some hoping for no added tariffs, or possibly a delay of the Oct 15 increases were are set to take effect. Outside of trade, Brexit fears easing as the British Pound jumps nearly 2% this morning 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. The mood is positive early for major averages with a broad based rally underway, with trade sensitive sectors such as technology, autos, and commodities pacing gains along with financials which are benefitting from the recent spike in Treasury yields and into earnings next week.

 

Treasuries, Currencies and Commodities

·     In currency markets, the U.S. dollar down sharply vs. Euro currencies, falling the most vs. the British Pound which jumped 1.7% to 1.2656, highest 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)

·     Commodity prices are mixed as oil prices jump overnight on reports an Iran tanker sustained damages after being hit by missiles that were launched from the Saudi Arabian port of Jeddah, while gold prices following Treasury prices lower in rotation out of defensive assets

·     Treasury market’s under pressure as Treasury yields surging, with the 10-year yield rising another 5 bps to 1.73% (best levels since October 1st) as investors rotate out of defensive/safe-haven names and into risker stocks which turn higher on the week

 

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

 

 

Macro

Up/Down

Last

 

WTI Crude

0.59

54.15

Brent

1.00

60.10

Gold

-13.60

1,487.50

EUR/USD

0.0052

1.1057

JPY/USD

0.52

108.51

10-Year Note

0.081

1.748%

 

 

Sector Movers Today

·     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

·     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

·     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%)

·     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

 

Stock GAINERS

·     BWA +4%; amid rally in trade sensitive auto sector on improved China negotiations with US

·     DECK +5%; upgraded to buy at Stifel citing improved UGG go to market strategies, reduced dependence on Classics and F3Q, and the emergence of HOKA/Koolaburra as secondary drivers

·     FAST +15%; 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 (shares of comps GWW, MSM rise in sympathy)

·     ROKU +6%; after receiving its 2nd analyst upgraded of the week, with RBC upping to Outperform and $155 tgt (upped by Macquarie midweek)

·     SAM +4%; 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

·     SAP +8%; 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

 

Stock LAGGARDS

·     CRWD -5%; downgraded to sell at Goldman Sachs and lower tgt to $66 from $83 on valuation

·     JELD -9%; lowered its year 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

·     NEM -2%; as gold miners slide I sympathy with gold prices

·     WEC -1%; 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

·     XONE -12%; guides lower as sees Q3 revs $10M-$11M vs. est. $16.7M and said now expects 2019 revenue growth to be lower than its previous guidance

·     YNDX -15%; shares dropped 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.

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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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