Equity Market Recap
Stock markets got blitzed today, falling broadly across the board as all 10-S&P sectors posted declines (ending at the lows). Stocks posted their worst daily decline since late June (Brexit), as the S&P posted its first move of 1% or more for the S&P since July 8th (and how, falling around 2%), on various factors. Fed rate expectations were boosted today (lifting the dollar), as the Fed's Rosengren said he sees further risk in delaying rate hike, while the Fed’s Daniel Tarullo said he is open to the possibility of a rate hike this year (but not a rush right now). The comments weighed heavily on stocks and bonds (yields touched higher in more than a month). Reports that North Korea successfully carried out a fifth nuclear test overnight also weighed on sentiment early.
Energy stocks gave back most of their gains from Thursday, as WTI crude tumbled 3.6% on the day (though ended up 3% for the week), capped off by a Baker Hughes report showing rigs were added for a 10th straight week. Interest rate sensitive sectors were among the biggest movers on rising rate expectations after more “hawkish” commentary by the Fed (utilities, homebuilders, miners falling), but it felt like a move in the making, as markets have held up very well despite disappointing economic data over the last week (jobs, service and manufacturing). Major averages also dropped below key technical levels as both the Dow and S&P 500 broke below their 50-day moving averages early. Tech weakness was paced by semiconductors, while AAPL posted its lowest close since late July and worst 2-day loss since April. European stocks log worst fall in 5 weeks on Fed, ECB worries. Rough way to end the week!
Commodities
Oil prices fall; energy futures gave back about half of yesterday’s bullish inventory induced gains, as WTI crude drops over $1.74 or 3.6% to $45.88 per barrel amid a jump in the dollar, a “risk-off” trade in place today, and a little skepticism about yesterday’s DOE and API inventory reports that should massive drawdowns – still, for the week, oil posted a 3.2% gain
Gold futures fell on Friday, settling at their lowest level in a week, but still managed to post a modest gain for the week. On the day, gold futures slipped -$7.10, or 0.5% to close at $1,334.50 an ounce amid a rebound in the dollar the last few days, but for the week, prices still gained 0.6%. Gold dropped a third day as the ECB stood pat on its benchmark rates and repeated a pledge to keep rates low for an extended period, while Fed commentary today leaned more to the “hawkish” sign for n-t rate hikes
Currencies
The U.S. dollar gained broadly against rival currencies, helped after Boston Federal Reserve President Eric Rosengren said a “reasonable case can be made” for raising interest rates and Fed Governor Daniel Tarullo said he is open to the possibility of a rate hike this year but said there is no need to raise interest rates “right now.” The commentary boosted the dollar, but caused selling in both bonds and stocks. The euro plunged to lows of around 1.120 before paring losses (after high of 1.1327 yesterday following the ECB comments), while the greenback jumped to highs against the yen around 103 level (also before paring gains). On Thursday, the ECB declined to extend its program of monthly bond purchases past March 2017. Furthermore, new ECB staff forecasts for growth and inflation over the next two years were downgraded only slightly.
Bond Market
Bond markets extended losses, falling for a second day as yields jumped on the week to their highest level since late June. The German 10-yr bund traded back to above 0% (first time positive since July 22nd), amid a sharp global bond selloff. The yield on the 10-yr benchmark rose to 1.67% (up about 6 bps), while the 30-yr trades around 2.35% and the 2-yr 0.79%. Bonds slipped as market’s interest-rate hike expectations rose following hawkish comments from Federal Reserve officials Rosengren and Tarullo. The comments added to selling pressures in the Treasury market, which started a day earlier after the European Central Bank passed on providing further monetary stimulus. ECB inaction caused Treasury yields to jump by the most in a month.
Economic Data
Wholesale Inventories unchanged in July, slightly below est. for 0.1% (wholesale inventories increased to $591.3B vs. $591B in prior month); wholesale sales fell 0.4% in July after rising 1.7% the prior month; inventory/Sales ratio at 1.34 in July after 1.33 in the prior month
Sector News Breakdown
Consumer
Retailers; ZUMZ Q2 EPS and revs slightly better, but comps little worse; appliance maker WHR fell 4.1% yesterday after WTO announced ruling that duties on imports of Korean residential washing machines violated international trade rules; in mattress’, TPX estimates raised at Longbow as outperforms solid industry performance over Labor Day; VNCE as Q2 revs missed consensus on comp sales down (-18.7%)
Consumer Staples; EL was downgraded to hold at Argus as believe that further market share gains will be difficult to achieve given challenging economic conditions; grocers get a third day of negative commentary in space, as KR lowers guidance (follows weak results/guidance from SFM and SVU the last two-days)
Restaurants; LOCO will replace ASEI in the S&P SmallCap 600 after the close of trading on Monday, September 12; BJRI downgraded to neutral at Wedbush as believe risk to current consensus EPS expectations exists (cut tgt to $40)
Housing & Building Products; Homebuilders broadly lower on the jump in rates (as mortgage rates increase), with shares of KBH, WLH, BZH, TOL, MTH all falling; RH shares bounce as company beat low Q2 expectations on a pull-forward of revenue from Q3, but GMs collapsed and SG&A delevered again according to Evercore; also weaker HOV revenue results
In auto’s; A Volkswagen AG (VLKAY) engineer was charged in an indictment for his alleged involvement in the German automaker’s diesel emissions scandal; KMX shares dropped after Buckingham Research downgraded to neutral on valuation; broad weakness in auto and suppliers; GM recalling 4M vehicles for worldwide software defect
Casino’s; a standout to the upside for the group, as LVS touches fresh 52-week highs earlier, gains in WYNN, and MPEL upgraded to buy at Deutsche Bank
Energy
Energy stocks give back some of yesterday’s gains, that saw broad strength amid a 4% rally in oil prices on inventory data (led by drillers to the upside – ESV, DO); today, group gives back some; midday, Baker Hughes (BHI) weekly rig count rose 11 to 508 (after rising 8 last week to 497), oil rigs rose 7 to 414 (was up 1 prior week at 407) and gas rigs rose 4 to 92 (after jumping 7 the week prior to 88); adding rigs for 10th week in row
Energy movers on news; PDCE 7.9M share Spot Secondary priced at $63.25; CHK upgraded to Buy at Wunderlich and raising our target from $6 to $10 as the company has improved its financial position in 2016, while maintaining strong operations, in refiners; CVI was upgraded to neutral but downgraded PBF downgraded to sell at Goldman Sachs
Alternative Energy/Solar; FCEL defended at FBR Capital as reiterate outperform – says despite uncertainty over the exact award timing, given the potential for multiple positive catalysts over the next few months; Axiom said SCTY/TSLA deal has 50% odds of closing as joint S-4 filing suggests TSLA failed to consider if other solar companies offered more favorable synergies
MLPs and pipelines; EPD pulls its recent bid for WMB; Wells Fargo said it’s been nearly 2 years since we moved to the sidelines for our entire Marine MLP coverage on the premise that a deteriorating macro/energy outlook and mounting counterparty risk would unhinge risk premiums (upgraded TGP & GLOP, but downgraded SDLP); separately, GLOP 2.4M share Block Trade priced at $19.50; FBR Capital initiated 16-MLPs saying current valuations reflect moderate risk aversion related to underlying cash flows and “very little confidence” in growth over the long term (Outperform rated on CAPL, EEP, ENLK, MMLP, SRLP, TLP, USAC, USDP, WLKP)
Financials
Large Cap/Regional banks (BAC, C, ZION) and insurance stocks (UNM, MET, PRU, LNC) outperformed other sectors on rising rate hike expectations (though lose steam with broad market sell-off); JPM shook off downgrade from Macquarie on valuation; WFC underperforms after fines yesterday (WFC agrees to pay record $100M fine to CFPB, $35M to OCC, $50M to Los Angeles city attorney, fires 5,300 employees over improper sales practices as CFPB said WFC opened >2m accounts consumers may not have known about (downgraded to sell by Bove at Rafferty saying news “very unsettling,’’ with ‘‘significant’’ damage to WFC business model, though fines aren’t ‘‘meaningful”)
REITs; group was among the worst S&P performers given the jump in rate expectations and higher bond yields (REITs tend to outperform in low rate environment) – shares of AMT, VTR, HCN, IRM slipped; SUI 3.25M share Spot Secondary priced at $76.50; Credit Suisse changing target prices for 13 of our mREITs, by an average of 10%, reflecting a better book value environment
JMP Securities keeps favorable view on non-bank commercial real estate (CRE) finance industry amid strong earnings conditions, “solid” dividend coverage, “generally positive alignment” to higher S-T rates, even as investors, regulators grow more concerned credit cycle is nearing “later innings (shares of STWD, ACRE, WD, AGNC weaker)
Healthcare
Large Cap Pharma; just another sector down in broad market decline, weighing on pharma, generics, specialty, hospitals and biotech (few specific stories below)
Biotech; LXRX shares rise after positive results in a 793-subject Phase 3 clinical trial, Tandem1, assessing orally-administered Sotagliflozin in type 1 diabetics (met primary endpoint); ACHN interim data in mid-stage study shows Achillion and Janssen's triple combination therapy achieves 100% cure rate in HCV-1 patients
Several companies raise cash, with various secondaries pricing overnight in healthcare/biotech; SAGE 4.4M share secondary priced at $39.75; CLCD 3.25M share Spot Secondary priced at $20.00; PTI 5M share Secondary priced at $13.00; EVH 7.5M share Secondary priced at $22.50; LNTH 5.2M share Spot Secondary priced at $8.00
Life science tools and equipment; group another weak sector, led by TMO after Cleveland research downgraded to Neutral following checks that indicate softer trends/concerns over the remainder of the year and the policy change in China (A, BRKR, MTD, ILMN, PKI lower)
Industrials & Materials
Industrial Machinery; NAV was upgraded to neutral at Goldman Sachs and $20 tgt saying following the capital injection from Volkswagen, they believe liquidity risk is meaningfully reduced; KeyBanc said they are incrementally cautious around non-residential construction exposure following analysis of proprietary data/channel work, which, coupled with tightening financing trends, suggests the U.S. is approaching a peak non-residential construction environment (the firm downgraded ETN and IR to sector weight from overweight)
Transports; has outperformed the last two days, led by airlines, but this group also down with broader market today; SWFT advanced on reaffirmed guidance
Metals & Mining; metals another sharp drop - led by steel producers, as US Steel (X) falls another 8% (down from 52-week high 27.64 on 7/29), along with weakness in other steel producers ATI, AKS, CMC, NUE, STLD; gold miners drop more than 2% across the board on dollar bounce
Chemicals; DOW and DD were asked by the European Commission to provide missing data about their proposed merger, according to Bloomberg. The European authority said it has suspended its January 11 deadline for an in-depth merger review http://goo.gl/BSMnFZ
Technology, Media & Telecom
Semiconductors; sector in general coming undone today, with the semi index (SOX) down around 3% at the lows to 775 range (group has been one of top leaders in tech, touching 16-year highs just one week ago of 811); leaders to the downside today include SWKS, CAVM, NXPI, QRVO, (many of the AAPL suppliers); AMD priced 100M shares at $6
Optical and equipment; FNSR joined the optical party this quarter with an impressive beat and meaningfully guided above consensus for the October quarter (upgraded at MKM and tgt raised by many analysts); FNSR beat and raise follows recent strong results in space from AAOI (shares of OCLR, LITE also compete in the optical space)
Hardware & Display panels; Bernstein downgraded shares of AUO and LPL to market perform citing valuation and a lack of supply/demand catalysts; VMEM slides on earnings; STX outperformed in the S&P 500 index as ValueAct takes larger stake
Software movers; video game data out overnight, as NPD said PS4|XB1 August software sales grew 22% YoY and 72% MoM, boosted by the Sony’s No Man’s Sky (ATVI, EA); XTLY Q2 results come in slightly above views and raised year rev mid-point view; ORCL highlights group next week as it reports earnings |
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