Market Review: December 03, 2019

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Closing Recap

Tuesday, December 03, 2019

Index

Up/Down

%

Last

DJ Industrials

-278.95

1.00%

27,504

S&P 500

-20.58

0.66%

3,093

Nasdaq

-47.34

0.55%

8,520

Russell 2000

-4.94

0.31%

1,602


 

Equity Market Recap

·     U.S. stocks ended broadly lower (but well off the worst levels of the day), with trade sensitive sectors among the biggest decliners to the downside (tech, autos, industrials and materials) while interest rate sensitive sectors such as utilities, REITs and telecom outperformed given the biggest daily decline in Treasury yields in over a month as the 10-year sunk below 1.7%. U.S. stocks fell a third straight session (the Dow fell more than 400 points earlier) after President Trump suggested a trade war with China could continue well into next year and threatened new tariffs on several more countries. Trump said to reporters this morning that he has "no deadline" for reaching a trade accord with China. "In some ways, I like the idea of waiting until after the election for the China deal," the president said. The U.S. will go ahead with its plan to tariff China more on Dec. 15 if nothing changes in the next two weeks, Commerce Secretary Wilbur Ross says on CNBC (while markets were currently banking on tariffs to be delayed as a Phase I trade deal remains in the works with China). In other trade/tariff news, the White House also proposed overnight tariffs against $2.4 billion of French imports in response to the European nation’s new digital-services tax, which it said unfairly targets U.S. tech companies such as Apple and Alphabet’s Google. The threat to impose levies on French products came a day after the U.S. said they would revive tariffs on steel and aluminum imports from Brazil and Argentina.

·     With all the negative tariff and trade talk this morning, the S&P 500 index dropped below the 3,100 level for the first time since November 22nd while defensive/safe haven assets rally with gold, Treasury prices all rising. Small caps sliding as the Russell 2000 falls over 1%, back below 1,600 level and the NASDAQ dropped to the 8,500 level. Transports underperform down over 200 points testing key support levels led by declines in airline (DAL) and package delivery (FDX). Bank stocks/financials dropped as the 10-year yield posted its largest daily decline since Aug. 8 after President Donald Trump’s ‘no deadline’ trade comment (yield fell below 1.7%). Technology rebounded in the afternoon as the Nasdaq Comp rallied back above the 8,500 level (off earlier lows 8,435) into earnings tonight from WDAY, CRM, ZS and MRVL in software and semi space, only to lose steam. European markets were mostly lower again as Britain’s FTSE 100 fell 1.62%, logging its worst day in two months and down for a 4th consecutive session, while France’s CAC 40 at one-month low, down 1.03%, though Germany’s DAX inched higher after three straight losing sessions.

·     U.S. House Democrats leading the impeachment inquiry into Donald Trump on Tuesday released a report detailing their case against the Republican president, saying he used "the powers of his office to solicit foreign interference on his behalf in the 2020 election." The report was prepared for the House Judiciary Committee, which is scheduled to kick off hearings on Wednesday as it begins to consider drafting articles of impeachment to be laid before the full House.

 

Commodities

·     Mixed bag for commodity prices, getting a boost from the recent continued slump in the U.S. dollar, but increased trade concerns with China took a toll on industrial metals and oil prices initially. Gold prices jumped for its best daily gain in a few weeks as investors rotated into defensive assets, with gold rising $15.20 or 1% to settle at $1,484.40 an ounce, its highest settlement in nearly a month (Nov 6th). Oil prices rebounded off earlier losses (lows of $55.35 per barrel) heading into weekly inventory data tonight (API) and tomorrow (EIA) as well as OPEC meeting this Thursday and OPEC+ meeting details on Friday. WTI crude ended the day up about 14c to $56.10 per barrel.

 

Currencies & Treasuries

·     Treasury prices jumped amid safe-haven rotation as the 10-year yield fell over 11 bps to move below the 1.7% level, lowest in over a month as investors rotated out of riskier assets with stocks falling for a third straight day. Treasury prices had slipped yesterday following a weaker ISM manufacturing report and broad based market asset selling to start the month. The U.S. dollar extended recent declines vs. major rival currencies (down again vs. safe haven yen), falling yesterday on weaker ISM report, though no major economic data today to move the buck.

 

 

Macro

Up/Down

Last

WTI Crude

0.14

56.10

Brent

-0.10

60.82

Gold

15.20

1,484.40

EUR/USD

0.0005

1.1084

JPY/USD

-0.46

108.52

10-Year Note

-0.118

1.70%

 

 

Sector News Breakdown

Consumer

·     Retailers; LE shares jumped after the company raised its fiscal 2019 profit outlook and posted higher third-quarter earnings while narrowed its full-year revenue guidance; GES issued long-term financial targets saying for 2025, said it expects sales to increase about $250 million compared with 2020 and sees gross margin increasing 4% points in 2025 compared with 2020; Adobe Analystics said U.S. shoppers spent $9.4 billion online by the end of Cyber Monday, an increase of 19.7% YoY, making it the largest online shopping day of all time in the U.S.; the NRF said shoppers spent an average $361.90 on holiday items over the five-day period, up 16% from $313.29 during the same period last year

·     Auto sector; sector slammed (ADNT, TEN, DLPH, AXL) on the prospect that the U.S.-China trade battle won’t be resolved shortly, and perhaps not until after the 2020 election, with tariff fears rising; monthly auto sales for November release today for some with TM reports November sales up 9.2% to 207,857 units on a volume basis and up 5% on a daily selling rate basis versus November 2018; Mazda reported total November sales of 24,374 vehicles, an increase of 18% YoY; HMC Nov US auto sales up 11% vs. down -9.5% YoY; NSANY Nov US auto sales down -15.9% vs. -18.7% YoY; in Transportation technology/auto; APTV was upgraded to overweight at Piper saying growth profile has inarguably sheltered the company from weakening auto production; Piper raised its tgt on TSLA to $423 in conjunction with broader effort to focus more directly on disrupters in the transportation sector while prefers LYFT (overweight) to UBER (neutral rated)

·     Consumer Staples; ELF shares fell as priced 3.4M share secondary at $15.90 while Marathon Partners urged the company to consider all of its strategic options, including a possible sale of the company (Marathon owns a 7.8% stake) and said in a letter to the board that it believes the company is worth about $22-$27 a share to strategic buyers; ABEV downgraded to underweight at Barclay’s as they see several challenges for ABEV, particularly in its core business (Beer Brazil) that they believe are likely to get worse before they can get better; SAM upgraded to buy and $440 tgt at UBS on continuing +DD topline and earnings growth in F20/21E, upside to 2020 shipment and depletion guidance, enduring outlook for the Hard Seltzer category; PM said for current fiscal year, said it now expects to report earnings of at least $4.55 a share, up from its previous guidance of $4.53 a share (had lowered guidance in November from at least $4.73); BYND slides after another lukewarm analyst recommendation (Oppenheimer)

·     Restaurants; WING was upgraded to buy from neutral at BTIG saying given recent declines from its August high, strong concept fundamentals and anticipation for some eventful developments at next month’s inaugural investor day; CBRL was downgraded to hold by Argus as expect margins and earnings to face pressure as comp sales slow and the company adds fewer new stores (which follows recent miss for the quarter and lower guidance)

 

Energy

·     Energy stocks mixed to mostly lower as the trade commentary from President Trump weighed on the commodity space, though names leveraged to natural gas bounced as prices rose given the drop in temperatures along the Northeast

·     Equipment and E&P sector; Credit Suisse downgraded RES and PTEN to Underperform from Neutral, cut NBR and NINE to Neutral from Outperform while upgraded RNGR to Outperform from Neutral and initiated NEX with a$6 target price and Neutral rating following CJ’s merger with FRAC down another 5% (fell -12.3% yesterday) after light details on latest well update in Suriname; shares of APA, COG, OXY hit 52-week lows today

·     Utilities & Solar; PCG volatile as reports show the company failed to adequately inspect and maintain its transmission lines for years before a faulty line started the deadliest fire in California history, a state investigation has found

 

Financials

·     Bank movers; banking stocks among top decliners given the sharp pullback in Treasury yields with the 10-yr back below 1.7% as shares of C, GS, JPM, GS, WFC and several regional banks down over 2% on the day; Baird downgraded regional banks ASB to neutral and ZION to underperform saying expectations are now higher, but risk/reward is weakening calling 4Q trends mixed, with slower loan growth and more deposit re-pricing and sees continuing NIM compression in quarter; quiet in insurance and payments space while REITs were among top beneficiaries (high dividend payers) due to decline in Treasury yields; CBL shares fell over 30% after saying it is suspending all future dividends on its common stock; sees decline in net operating income in 2020; shares of REITs CCI, EXR, SLG, WELL, PSA, ARE among top S&P gainers.

 

Healthcare

·     Pharma movers; AXSM shares rose after reporting that its AXS-12 Phase II trial met the primary endpoint and significantly reduced the number of cataplexy attacks as compared to placebo in patients with narcolepsy; ALDX reverses early gains, falling after reporting mixed results from its late-stage “Renew” study in patients with dry eye disease (study hit its primary endpoint of improving ocular dryness, but co-primary endpoint did not reach statistical significance); MACK shares gained after announced a $6.7M special dividend to holders

·     Biotech movers; gene therapy sector active given M&A deal in space as BOLD agrees to be acquired by Astellas Pharma for $60 per share in cash, representing a total equity value of ~$3B in gene therapy sector https://reut.rs/2Lg8qSm (shares of BLUE, NTLA, EDIT, CRSP among movers in gene therapy on news); QURE was initiated buy and $98 tgt at Goldman Sachs as positive on lead program Ph3 AMT-061 in hemophilia B based on Ph2b 36-week proof-of-concept data; separately, Cowen initiated at outperform saying feedback suggests EntranaDez looks like both first and best in class gene therapy for Hemophilia B that alone could support the current value; ASLN fell after priced its public offering of 5,124,527 American Depositary Shares (ADSs) at $2.50 per ADS, for expected gross proceeds of ~$12.8M; CARA plunges after mixed data as unveiled data from the Phase II trial of oral Korsuva in chronic kidney disease patients with moderate-to-severe pruritus saying trial met its primary endpoint but in secondary endpoint didn’t achieve statistical significance; GILD slides after President Trump and Sec Azar are launching a new program to provide an HIV prevention drug for free to people who need the protection but have no insurance to pay for it

·     Medical equipment and devices; VRAY shares jumped after announced that it has entered into strategic collaborations with both Elekta (EKTAF) and MDT as part of a planned equity financing to advance the knowledge and use of MR-guided radiation therapy/Elekta committed to invest capital for up to a 9.9% minority interest

·     Healthcare services and providers; DRIO shares surge as launches its digital diabetes management system through WMT’s online distribution channel; UNH said it sees 2020 adjusted EPS $16.25-$16.55 vs. estimate $16.47 and sees 2020 revenue $260B-$262B vs. est. $260.97B; sees 2020 cash flows from operations $19.0 billion to $19.5 billion

 

Industrials & Materials

·     Transports; CNI rolls 8-day labor strike impact into outlook as sees adjusted EPS growth in the low to mid-single-digit range vs. prior guidance for adjusted EPS growth in the high single-digit range and $5.97 consensus (+8.5% Y/Y); DAL reported +4% Nov capacity and 84% load factor, down from 85.8% a year ago, led by a fall in domestic numbers (weighed on airline stocks); ODFL will replace SunTrust Banks (STI) in the S&P 500; FDX shares slumped after KeyBanc cut est for the qtr and the year well below the street ahead of report in two weeks saying cost cutting initiatives have been slow to start and weakening macro is a headwind to growth

·     Metals & Materials; CLF agreed to acquire AKS in an all-stock deal valued at ~$1.1B where AKS shareholders will receive 0.40 shares of CLF common stock for each outstanding AKS share valuing AKS at $3.36 per share https://on.mktw.net/2Ll1gMO ; GLNCY slides after forecasts modest decline in copper production over the 2019-2022 period and also sees largely flat production profile over the next three years; VALE lowered its Q1 2020 production outlook for iron ore to 68M-73M metric tons from prior guidance 70M-75M mt; industrial metals pressured early, paring recent gains on the Trump comment about trade; gold miners (AEM, NEM, GOLD, AU among others) outperformed given the early bounce in gold prices

·     Aerospace & Defense; GD was awarded a $22.21B fixed-price-incentive, multi-year modification to a previously-awarded contract for construction of nine Virginia-class submarines, eight with Virginia payload module, or VPM, from FY19 to FY23; AER 4M share secondary priced at $60 per share as Abu Dhabi’s Waha Capital departs

 

Technology, Media & Telecom

·     Internet; NFLX was downgraded to neutral from buy (in transfer of coverage) at Citigroup and cut tgt to $325 from $410 saying current consensus analyst estimates don’t reflect the long-term relationship between cash outlays on content and net subscriber additions; Citigroup said FB will “likely” face three potential antitrust actions from the U.S. government, and together, these may pose a headwind to the social-media company’s share price by $55-$60 risk

·     Semiconductors; chip stocks plunged (INTC, AMD, NVDA, QCOM, SWKS, AVGO) after U.S. President Donald Trump says a trade deal with China might have to wait until after the U.S. presidential election in November 2020; NXPI and MRVL announce receiving all necessary regulatory approvals for the acquisition of Marvell’s wireless connectivity portfolio; in earnings, MRVL expected to report after the close tonight

·     Software movers; COUP shares declined despite solid results as disappointed on expectations as guide fell back to the old 2%-3% beat and raise vs expectations of 8% they posted last Q (also follows good run in shares)/revs and billings still growing 50% + against tough comps this is nothing but an expectations miss; tonight earnings from CRM, WDAY and ZS in software sector

·     Hardware & Component news; Reuters reported the Trump administration considered banning China’s Huawei from the U.S. financial system earlier this year as part of a host of policy options to thwart the blacklisted telecoms equipment giant; COMM downgraded to hold at Jefferies and cut tgt to $14.50 saying it has a heightened need to deleverage the business, but there’s a long road to deleveraging the balance sheet.

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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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