Tuesday, October 10, 17
Equity Market Recap
· U.S. stocks post gains on Tuesday, erasing yesterday’s modest losses as the Dow Industrials, S&P 500, and Nasdaq Composite all trade to fresh intraday record highs, led by energy and financial sectors and as the IMF raised its outlook for global growth. The Dow Industrials remain about 200 points away from 23K, but if it manages to clear it within the next 14 trading sessions, it would notch its third fastest climb to 1,000-point milestone since mid-July. The Dow was led by gains in WMT after the company reaffirmed guidance and announced a sizeable stock buyback, while PG shares fell after winning a proxy fight against activist Nelson Peltz. The tech heavy Nasdaq Composite traded above 6,600 for the first time (high of 6,608), as semiconductors (SOX) top fresh 17-year highs, though tech underperformed late day. Transports jumped, approaching the 10K level again amid gains in airlines and truckers, while rails lag (note Delta reports tomorrow morning). Financials rally heading into earnings season (JPM, BLK, PNC, BAC, C report this week) as tax reform/deregulation/rising rates trump fears of slowing trading volumes. The dollar fell, helping boost commodity prices as gold and oil end higher. There remain several macro factors that have failed to dent investor optimism including the political turmoil in Spain (Catalan crisis) and UK (UK Prime Minister May) or the Turkey standoff, while North Korea fears have abated (for now). California Wildfires another story with 15 active fires, 11 dead, over 100 missing and over 119,000 acres burned according to reports earlier. Meanwhile parts of Texas, Florida, Louisiana, Mexico, Puerto Rico and the Caribbean are still trying to recover from recent natural disasters.
· European markets ended mixed amid lingering worries over the Catalan crisis, which dragged Spanish stocks lower ahead of a closely watched address by the Catalan separatist leader. Catalan President Puigdemont later said in his address before the regional parliament in Barcelona, he was “accepting the mandate” of the chaotic Oct. 1 referendum on Catalonia’s secession from Spain but would suspend the prospect of declaring independence in favor of dialogue with the central government in Madrid. In the Dow there were 52-week highs for eight components including AXP, BA, CAT, CVX, INTC, MSFT, PFE, WMT, while GE bounces off 52-week lows.
· Oil prices close higher, rising $1.34, or 2.7% to $50.92 per barrel (hi $51.06 and low $49.54), ending at 2-week highs in a strong showing for commodity prices in general, helped by a softening dollar. A pledge from Saudi Arabia to reduce monthly crude exports and talk of progress toward a balanced market from OPEC helped to set U.S. prices on track to notch a second straight gain according to various reports. WTI crude posted its first back-to-back gains since the period ended Sept. 25 after falling over 4.5% last week. OPEC’s Secretary-General Mohammed Barkindo on Tuesday called on U.S. shale producers to take responsibility and help curb the global supply glut in the oil market that has kept a lid on prices.
· Gold prices advanced on Tuesday, rising $8.80, or 0.7% to settle at $1,293.80 an ounce, its third straight day of gains (longest string of gains in about 5-weeks for gold) and marked its highest finish in 2-weeks as the dollar softened (hasn’t closed above $1,300 an ounce since September 26th). Gold has been pressured by expectations of rising interest rates.
· The U.S. dollar extended its recent weakness, falling amid a resurgence of geopolitical tensions, as well as advances by the British pound and euro. The dollar index (DXY) fell for a third straight session after hitting a 10-week high late last week as the September U.S. jobs report was seen as strengthening the case for the Federal Reserve to raise interest rates in December. The euro climbed to an intraday high of $1.1820 before pulling back, while the greenback slipped against the Japanese yen. Meanwhile the British pound topped the $1.32 level vs. $1.3141 Monday. The Turkish lira bounced after falling to a six-month low Monday after Turkey and the U.S. stopped issuing nonimmigrant visas to each other’s citizens.
· Bond markets reopened after being closed for Columbus Day holiday Monday, ending higher with yields dropping as the 10-yr slips about 2 bps to 2.34%, while the shorter term 2-yr yield bounced back over 1.5%. There were no major economic data today to move markets as investors await the Fed minutes from September’s policy meeting on Wednesday.
Other Interesting tidbits
· The International Monetary Fund (IMF) raised its 2017 and 2018 GDP growth forecast for the U.S., China, Euro area and Japan in its October World Economic Outlook. Global GDP to expand 3.6% in 2017 and 3.7% in 2018, up from July estimates for 3.5% this year and 3.6% next. U.S. to grow 2.2% this year, up from July est. of 2.1% U.S. to grow 2.3% in 2018, up from July est. of 2.1%
Sector News Breakdown
· Retailers; WMT (held investor meeting today) reaffirms FY2018 adj. EPS $4.30-$4.40, vs estimate $4.38 while the Dow component said it would buy back up to $20B in shares over two-year period to replace existing authorization/sees FY19 consolidated net sales growth at or above 3% (shares of TGT and COST rallied with WMT); luxury retailers (TIF, COH, RL) active after LVMH tops estimates with its Q3 report as organic sales were up 12% during the quarter to sail past the 9% growth expected by analysts; FBR Capital is incrementally negative on GPS short term given in-store promotional activity last week
· Consumer Staples & Restaurants; BWLD downgraded to negative at OTR Global; tobacco stocks (PM, MO) outperform early after Wells Fargo recommends buying ahead of Q3 results as expects strong iQOS performance, resilience in key combustible cigarette markets; DPZ rises as CEO said the company may buy back more shares in November; PG declared victory in proxy fight with Trian’s Nelson Peltz in board vote (not elected to board); CMG outperformed
· Energy stocks led gains early on rebound in oil prices. OPEC’s Secretary-General Mohammed Barkindo on Tuesday called on U.S. shale producers to take responsibility and help curb the global supply glut in the oil market that has kept a lid on prices, helping bolster optimism that more efforts would be taken to keep supplies in check
· E&P sector; APA reduced its Q3 and Q4 production guidance by 2.2% and 4.1%, respectively as now expects 3Q17 and 4Q17 production at 354 MBoe/d and 374 MBoe/d vs. previous guidance of 362 MBoe/d and 390 MBoe/d; in research, Jefferies initiated coverage on 10 E&Ps, assumed coverage of 12, with top picks: CXO, FANG, RSPP, CPE, CNX; they upgraded CXO, DVN to buy from hold and cut NBL, CRZO to hold from buy and CHK cut to underperform vs hold
· MLPs; Citigroup said they continue to be bullish on the midstream group because of the positive tailwinds of higher commodity prices, record export volumes and solid domestic production growth, but downgrade TRGP and AMID largely on valuation, while have a strong preference for Buy rated ETP, MPLX, EPD, WMB and WPZ;
· Refiners; Piper on ANDV, PSX, MPC, HFC & PBF, saying they expect this to be a generally strong quarter for the group for well-known reasons/refining fundamentals have improved, leaving them more optimistic on 2018 earnings
· Large Cap banks bounced off earlier lows ahead of busy week of earnings; earnings later this week from BLK on 10/11, C andJPM 10/12, BAC, PNC, WFC, FHN on 10/13; STI and RF downgraded at FBR Capital in regional bank sector saying they expect fairly muted results out of the large caps, and favor high-quality small cap banks such as BOFI, FFWM, PFBC, and SBCF; in insurance, FBR upgraded PRU to buy and cut MET to neutral ; tax reform, deregulation and a rising rate environment continue to buoy stocks ahead of an earnings season that is likely to see softer trading and investment banking revs
· Asset managers; BEN preliminary month-end assets under management of $753.2B at the end of September 30, vs. $747.4B MoM; PZN preliminary AUM $35.4B as of September 30, up from $34.1B as of August 31, and $27.4B as of September 30, 2016
· Mortgage finance and lending; RLGY downgraded to Market Perform at KBW citing valuation ahead of the Q3 reporting season, while the firm also cut PRAA and PMT ahead of Q3 results
· REITs; VNO upgraded to overweight at Morgan Stanley saying that e-commerce isn’t hurting New York street retail as much as some think, and its dramatic rent increases that have driven store vacancies.
· Large Cap Pharma; LLY said its Phase III JUNIPER on Verzenio didn’t meet its primary endpoint; was also downgraded to neutral at Credit Suisse; MNKD initiated buy and $7 tgt at HC Wainright citing the combination of Afrezza’s potential and its strong underlying technology platform; PFE said it is reviewing options for Consumer Healthcare business (unit has $3.4B in revs); KALVjumps after signs deal with MRK to lead diabetic macular edema (DME) candidate KVD001 and future oral DME compounds based on plasma kallikrein inhibition ($37M upfront and up to $715M in potential milestones)
· Biotech movers; ANAB surges following positive results from a Phase 2 clinical trial assessing lead candidate ANB020 for the treatment of adults with moderate-to-severe atopic dermatitis (AD); ONCE Luxturna (potentially the first U.S.-approved gene therapy for an inherited eye disease) briefing documents posted by FDA
· Healthcare services and suppliers; ESRX agreed to buy privately-held medical benefit management company eviCore healthcare for $3.6 billion https://goo.gl/B9WmsS; MDXG guided Q3 revenue $84.6M, above estimates of $79.3M (but received negative mention at Grant’s conference today; in medical devices, SNN shares jumped midday on Bloomberg report that Singer’s Elliott is said to build a stake in the company
· Drug distributors; Cowen upgraded ABC and MCK to outperform as favors the two drug distribution companies over peer CAHas the business model for the sector transitions toward pricing specialty drugs separately from branded drugs (group has been pressured of late fearing entrance by AMZN into the space)
Industrials & Materials
· Industrials & Machinery; HON issues prelim Q3 EPS and sales above consensus ($1.75/$10.1B) and raised the low-end of its FY17 EPS guidance by 5c while announcing to spin Homes and DI Global Distribution Business and Transportation Systems into two publicly traded companies by end of 2018; ICHR entered into an agreement to produced liquid delivery systems for a “key customer”; in research, CAT tgt raised to street high $158 at Goldman Sachs, while JP Morgan upgraded ITW to neutral saying organic growth is likely to be better than forecast in Q3, while the firm downgraded AGCO to underweight on limited visibility
· Transports; airlines higher on better monthly metrics as AAL sees Q3 TRASM up 0.5%-1.5%, from prior view unchanged-to up 1%; UAL said Sept. traffic fell (-1.6%) and now sees 3Q Prasm down (-3.5%-4.0%) – had seen Prasm down (-3%-5%); DAL reports earnings tomorrow morning
· In rails, UNP was downgraded to hold at Aegis based on valuation but lower estimates for rails following storm impact; KSU was upgraded to buy at Bank America on valuation as the shares have been impacted by a trend of negative news (Luminent shutting its largest coal plant on KSU’s network, ongoing NAFTA negotiations, and recent Hurricane impacts)
· In truckers, Bank America downgraded WERN and ODFL to Underperform from Neutral given view of their relatively higher valuations, while double upgraded CHRW to buy from underperform as they increase focus on spot market beneficiaries in the rapidly rising truck pricing market
· Chemicals sector; EMN downgraded to neutral from Buy at Nomura as stock nears their $91 target and said top picks in chemicals in the medium to long run are OLN, DWDP and HUN/in terms of chemical markets, they prefer exposure to chlor-alkali, titanium dioxide (TiO2) and MDI/also have buys on ALB, VNTR, WLK and PAH offer more upside but also more risk/seeFMC as a lower risk play on ag/lithium growth; AXTA was downgraded to sell at Citigroup
Technology, Media & Telecom
· Internet; general softness in Internet names today; JD launches a new online shopping platform connecting high-end global brands with Chinese customers; BABA shares rose for an 8th straight session (market cap overtook that of AMZN midday)
· Semiconductors; semiconductors (SOX) trades to fresh 17-year highs above 1,210 before sliding midday to turn negative and below the 1,200 level; NVDA rises as it introduced a new AI computer for fully autonomous vehicles and a new VR tool for those who design them
· Internet Security; CUDA reports earnings tonight after the close; Morgan Stanley with a few changes saying they continue to see vulnerability management as an attractive and increasingly strategic market, with QLYS as best positioned given its cloud-based mode (but downgraded QLYS after a 65% move in the stock YTD). Morgan also downgraded SYMC based on valuation (follows 35% YTD advance), while upgraded PANW to overweight as views it as one of the best positioned vendors to execute on an integrated security platform story
· Hardware and Software; TECD shares active after issuing FY18 EPS and revenue guidance that came in above consensus views ($8.75-$9.25 on revs $3B-$37B vs. est. $8.79/$36.1B); JBL was downgraded to sell at Goldman Sachs citing overly optimistic Street estimates; NTNX shares outperform on positive William Blair comments saying checks indicate a strong early read on October quarter for large orders.
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.