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US Market Morning Briefing August 14th 2019

Stock market inverting as 10-2 spread inverts

U.S. equity futures have backtracked from yesterday’s relief rally, as weakening global data continues to pressure equities and further invert the U.S. Treasury yield curve. The S&P 500 futures are down 32 points and trade 1.1% below fair value.

Chinese stocks started the day broadly higher after the U.S. decided to delay tariffs on some consumer goods but spent the bulk of their trading session retracing those gains after Beijing reported weaker than expected growth figures for July. For instance, industrial production grew at its slowest pace (+4.8%) in 17 years. 

Similarly, disappointing GDP data out of Germany has contributed to a risk-off session in Europe, including a 1.6% decline in Germany’s DAX. Specifically, Germany’s Q2 GDP contracted 0.1% qtr/qtr for the first time since the third quarter of last year. 

The data has reinforced the flight-to-safety trade into U.S. Treasuries, which has caused the 10-2 spread to invert for the first time since 2007. Currently, the 2-yr yield is down seven basis points to 1.60%, and the 10-yr yield is down nine basis points to 1.59%. The U.S. Dollar Index is down 0.1% to 97.73. WTI crude is down 2.6% to $55.61/bbl. 

In the five recessions since 1980, the time between the first inversion and the start of the recession has averaged just over 18 months, with a range that spans ten months to two years.

On the data front, investors will receive Import and Export Prices for July at 8:30 a.m. ET. The weekly MBA Mortgage Applications Index spiked 21.7% following a 5.3% increase in the prior week.  

In U.S. Corporate news:

  • Bank of America (BAC 26.92, -0.80): -2.9% amid the further compression in Treasury yields. 
  • Myriad Genetics (MYGN 33.00, -11.55): -25.9% after missing top and bottom-line estimates and providing disappointing guidance. 
  • We Company (WE, private): the company has officially filed its S-1 prospective, eyeing a $1 billion IPO. 

Reviewing overnight news:

  • Equity indices in the Asia-Pacific region ended the midweek session on a higher note, though markets in China and Hong Kong spent the day in a retreat from their opening highs. Japan’s Nikkei +1.0%, Hong Kong’s Hang Seng +0.1%, China’s Shanghai Composite +0.4%, India’s Sensex +1.0%, South Korea’s Kospi +0.7%, Australia’s ASX All Ordinaries +0.4%.
    • In economic data:
      • China’s July Industrial Production +4.8% yr/yr (expected 6.0%; last 6.3%), July Fixed Asset Investment +5.7% yr/yr (expected 5.9%; last 6.3%), July Retail Sales +7.6% yr/yr (expected 8.6%; last 9.8%), and July Unemployment Rate 5.3% (last 5.1%).
      • Japan’s June Core Machinery Orders +13.9% m/m (expected -1.0%; last -7.8%); +12.5% yr/yr (expected -0.6%; last -3.7%)
      • South Korea’s July Import Price Index -1.3% yr/yr (expected -4.1%; last -0.6%), July Export Price Index -5.3% yr/yr (expected -2.8%; last -2.7%), and July Unemployment Rate 4.0% (expected 4.1%; last 4.0%)
      • Australia’s Q2 Wage Price Index +0.6% qtr/qtr (expected 0.5%; last 0.5%); +2.3% yr/yr, as expected (last 2.3%)
      • India’s July WPI Inflation +1.08% yr/yr (expected 1.93%; last 2.02%)
    • In news:
      • The early gains were fueled by the partial delay of the next round of U.S. tariffs on imports from China while the pullback developed after China reported weaker than expected growth figures for July, which included the weakest industrial production growth in 17 years.
      • The People’s Bank of China fixed the yuan at a slightly higher level for the first time in ten days.
      • Passenger auto sales in China decreased 3.9% yr/yr, marking the 13th consecutive decline.
  • Major European indices trade in negative territory with bank stocks among the laggards. STOXX Europe 600 -1.1%, Germany’s DAX -1.6%, U.K.’s FTSE 100 -1.0%, France’s CAC 40 -1.4%, Italy’s FTSE MIB -2.0%, Spain’s IBEX 35 -1.4%.
    • In economic data:
      • Eurozone’s Q2 flash GDP +0.2% qtr/qtr, as expected (last 0.2%); +1.1% yr/yr, as expected (last 1.1%). Q2 Employment Change +0.2% qtr/qtr (expected 0.3%; last 0.3%) and June Industrial Production -1.6% m/m (expected -1.4%; last 0.8%); -2.6% yr/yr (expected -1.2%; last -0.8%)
      • Germany’s Q2 flash GDP -0.1%, as expected (last 0.4%); 0.0% yr/yr (expected -0.3%; last 0.6%)
      • U.K.’s July CPI 0.0% m/m (expected -0.1%; last 0.3%); +2.1% yr/yr (expected 1.9%; last 2.0%). July Core CPI +0.1% m/m (expected -0.1%; last 0.0%); +1.9% yr/yr (expected 1.8%; last 1.8%). July Input PPI +0.9% m/m (expected 0.6%; last -0.8%) and Output PPI +0.4% m/m (expected 0.1%; last 0.1%). July House Price Index +0.9% yr/yr (expected 1.0%; last 0.9%)
      • France’s July CPI -0.2% m/m, as expected (last 0.2%); +1.1% yr/yr, as expected (last 1.2%). Q2 Unemployment Rate 8.5% (expected 8.7%; last 8.7%)
    • In news:
      • Germany reported a qtr/qtr contraction in Q2 GDP, marking the first negative reading since Q3 of 2018.
      • The Italian Senate will debate a no-confidence motion against Prime Minister Giuseppe Conte on August 20.
      • Inflation figures from the U.K. showed that CPI was above the Bank of England’s target for the fourth month in a row.

U.S. equity futures:

  • S&P 500 Futures -39 @ 2893
  • DJIA Futures -372 @ 25942
  • Nasdaq Futures -111 @ 7637

Overseas: 

  • Europe: DAX -1.6%, FTSE -1.0%, CAC -1.4%
  • Asia: Nikkei +1.0%, Hang Seng +0.1%, Shanghai +0.4%

Commodities: 

  • Crude Oil -1.36 @ 55.74
  • Nat Gas +0.041 @ 2.188
  • Gold +9.20 @ 1523.50
  • Silver +0.14 @ 17.13
  • Copper -0.04 @ 2.59

U.S. Summary:

  • Earnings/Guidance:
    • Applied Industrial (AIT) misses by $0.15, misses on revs; guides FY20 EPS below consensus, revs below consensus
    • Canada Goose (GOOS) beats by CAD 0.03, beats on revs; reaffirms FY20 EPS guidance, revs guidance
    • Contura Energy (CTRA) misses by $0.33, beats on revs; lowers FY19 coal shipment guidance
    • Embraer SA (ERJ) misses by $0.06, beats on revs
    • Grocery Outlet (GO) beats by $0.07, beats on revs; initiates FY19 guidance with upside EPS, revs in-line
    • Luckin Coffee (LK) misses by $0.03, misses on revs
    • Myriad Genetics (MYGN) misses by $0.07, misses on revs; guides Q1 EPS and revenue below consensus; guides FY20 EPS and rev below consensus
    • Performance Food Group (PFGC) beats by $0.05, beats on revs; guides FY20 EPS in-line
    • The RealReal (REAL) beats by $0.03, beats on revs
    • Tilray (TLRY) misses by $0.05, beats on revs
    • YY (YY) misses by $0.32, beats on revs; sees Q3 revs growth of 60.2-65.1%; authorizes share repurchase plan
  • General News:
    • Senior White House official tells CNBC that tariff delay on some products is “not at all an indication of thaw in US/China relations”
    • China will still hold trade talks with US in September despite new tariffs, but China is not optimistic about progress, according to Bloomberg
    • 10-yr Treasury note yield briefly falls below 2-yr note yield for first time since 2007
    • July China industrial output increased 4.8% yr/yr which was lowest since 2002
    • Germany’s Q2 GDP fell 0.1%
    • FTC Chairman is prepared to break up large technology companies if necessary by reversing prior mergers, according to Bloomberg
    • Carl Icahn increases active stake in Cloudera (CLDR) to 19.98% (from 18.36%)
    • PG&E (PCG) wants to be in charge of its own bankruptcy despite push back from creditors, according to The Wall Street Journal
    • Qualcomm (QCOM) appoints Mark McLaughlin as Chairman of the Board, effective August 13
    • SunTrust Banks (STI) increases quarterly cash dividend to $0.56/share from $0.50/share
    • The We Company (WeWork) (WE) officially files for $1 bln IPO
  • M&A:
    • Applied Industrial (AIT) to acquire Olympus Controls; terms not disclosed
    • NexPoint Residential (NXRT) entered into an agreement to purchase a 1,520-unit multifamily property located in Pembroke Pines, Florida, a suburb of Miami, from an unaffiliated third party for approximately $322.0 million, subject to prorations and other adjustments. 
    • Presidio (PSDO) to be acquired by BC Partners for $16.00/share in cash, or approximately $2.1 bln
    • Sterling Construction (STRL) to acquire Plateau Excavation for $400 mln
  • Syndicate:
    • ACM Research (ACMR) announces intended public offering of $30 mln shares of Class A common stock
    • Akamai Tech (AKAM) prices private offering of $1 bln in aggregate principal amount of its convertible senior notes due 2027
    • CIM Commercial Trust (CMCT) files for $1 bln mixed securities shelf offering and 7,405,170 share common stock offering by selling stockholders
    • Crinetics Pharmaceuticals (CRNX) files for $300 mln mixed securities shelf offering
    • Deciphera Pharmaceuticals (DCPH) commences public offering of $200 mln in shares of common stock
    • Endologix (ELGX) entered into $25 mln equity distribution agreement through an “at the market offering” program
    • Genpact (G) announces secondary public offering of 12.5 mln common shares by selling stockholders
    • Invesco Mortgage Capital (IVR) prices public offering of 14 mln shares of its common stock at $15.86 per share
    • Portola Pharma (PTLA) prices offering of 8,035,715 shares of common stock at $28.00 per share
    • Wayfair (W) announces intention to offer $750 mln in convertible senior notes due 2026
    • Workiva (WK) prices offering of $300 mln principal amount of its 1.125% Convertible Senior Notes due 2026, separately prices secondary offering of 1,287,038 shares of Class A common stock at $56.25/share
  • IPOs:
    • Expected This Week
      • 9F (NYSE: JFU): Leading digital financial account platform integrating and personalizing financial services in China [Planning to offer 8.9 mln ADS between $7.50-9.50]
      • CrossFirst Bankshares (Nasdaq: CFB): Kansas corporation and registered bank holding company with total assets of $4.5 bln [Planning to offer 7.11 mln shares between $15.00-17.00]
      • WiMi Hologram Cloud (Nasdaq: WIMI): Provider of augmented reality-based holographic services and products [Planning to offer 4 mln shares between $7.50-9.50]

Gapping Up/Down

  • Gapping up:  GO +13%, REAL +12.4%, AXU +11.1%, CHNG +10.2%, GOOS +4.6%, OCN +3.3%, DCPH +1.3%, CTRA +1.3%, CLDR +1.3%, AIT +0.9%, AAXN +0.7%
  • Gapping down:  MYGN -25.9%, CPLG -19.7%, ADPT -10.1%, TLRY -8.8%, CDK -8.7%, PSNL -7.2%, RKDA -6.4%, LK -5.5%, IVR -3.5%, ERJ -3.2%, ACMR -2.8%, W -2%, CGC -1.8%, APHA-1.7%, G -1.6%, QCOM -1.6%, BIDU -1.4%, ACB -1.1%

Analyst Research:

  • Upgrades:
    • Bristol-Myers (BMY) upgraded to Overweight from Neutral at Atlantic Equities; tgt $63
    • Care.com (CRCM) upgraded to Buy from Neutral at BTIG Research; tgt $13
    • CBS (CBS) upgraded to Buy from Neutral at BofA/Merrill Lynch; tgt raised to $63
    • Viacom (VIAB) upgraded to Buy from Neutral at Guggenheim; tgt raised to $35
  • Downgrades:
    • Advance Auto (AAP) downgraded to Neutral from Buy at Guggenheim
    • CBS (CBS) downgraded to Underperform from Market Perform at Bernstein
    • Granite Point Mortgage (GPMT) downgraded to Outperform from Strong Buy at Raymond James; tgt lowered to $20.50
    • Myriad Genetics (MYGN) downgraded to Neutral from Overweight at Piper Jaffray; tgt lowered to $40
  • Others:
    • Fastly (FSLY) initiated with an Overweight at Piper Jaffray; tgt $21
    • Tenet Healthcare (THC) resumed with a Neutral at Goldman Sachs; tgt $28
    • World Wrestling (WWE) initiated with Buy and $85 tgt at Rosenblatt

Upcoming Events:

  • Econ Data:
    • 07:00 ET: MBA Mortgage Applications for week ending Aug. 10 (Prior 5.3%)
    • 08:30 ET: Export Price Index for July (Prior -0.7%)
    • 08:30 ET: Import Price Index for July (Prior -0.9%)
    • 10:30 ET: EIA Crude Oil Inventories for the week ending Aug. 10 (Prior +2.4M)
  • Earnings:
    • Monday (August 12)
      • After-Hours: BE, TME, VFF
    • Tuesday (August 13)
      • Pre-Market: AAP, AVYA, BEST, CVET, EAT, ELAN, GDS, IIVI, JD, PSN, RUBY
      • After-Hours: ADPT, BILI, CDK, GO, HUYA, MYGN, PSNL, TLRY, YY
    • Wednesday (August 14)
      • Pre-Market: AIT, CAE, ERJ, GOOS, LK, M, PFGC
      • After-Hours: A, CACI, CGC, CSCO, HOLI, NTAP, PRSP, SPTN, VIPS
    • Thursday (August 15)
      • Pre-Market: BABA, BGG, CSIQ, JCP, TPR, WMT
      • After-Hours: AMAT, CRMT, GLOB, NVDA, PAGS, VIAV, ZTO
    • Friday (August 16)
      • Pre-Market: DE, QD
      • After-Hours: None of note

Asia & Europe detail:

Asia: Nikkei +1.0%, Hang Seng +0.1%, Shanghai +0.4%

Equity indices in the Asia-Pacific region ended the midweek session on a higher note, though markets in China and Hong Kong spent the day in a retreat from their opening highs. The early gains were fueled by the partial delay of the next round of U.S. tariffs on imports from China while the pullback developed after China reported weaker than expected growth figures for July, which included the weakest industrial production growth in 17 years. The People’s Bank of China fixed the yuan at a slightly higher level for the first time in ten days. Passenger auto sales in China decreased 3.9% yr/yr in July, marking the 13th consecutive decline.

  • In economic data:
    • China’s July Industrial Production +4.8% yr/yr (expected 6.0%; last 6.3%), July Fixed Asset Investment +5.7% yr/yr (expected 5.9%; last 6.3%), July Retail Sales +7.6% yr/yr (expected 8.6%; last 9.8%), and July Unemployment Rate 5.3% (last 5.1%).
    • Japan’s June Core Machinery Orders +13.9% m/m (expected -1.0%; last -7.8%); +12.5% yr/yr (expected -0.6%; last -3.7%)
    • South Korea’s July Import Price Index -1.3% yr/yr (expected -4.1%; last -0.6%), July Export Price Index -5.3% yr/yr (expected -2.8%; last -2.7%), and July Unemployment Rate 4.0% (expected 4.1%; last 4.0%)
    • Australia’s Q2 Wage Price Index +0.6% qtr/qtr (expected 0.5%; last 0.5%); +2.3% yr/yr, as expected (last 2.3%)
    • India’s July WPI Inflation +1.08% yr/yr (expected 1.93%; last 2.02%)

—Equity Markets—

  • Japan’s Nikkei: +1.0%
  • Hong Kong’s Hang Seng: +0.1%
  • China’s Shanghai Composite: +0.4%
  • India’s Sensex: +1.0%
  • South Korea’s Kospi: +0.7%
  • Australia’s ASX All Ordinaries: +0.4%

—FX—

  • USD/JPY: -0.5% to 106.19
  • USD/CNH: +0.4% to 7.0340
  • USD/INR: -0.1% to 71.32

Europe: DAX -1.6%, FTSE -1.0%, CAC -1.4%

Major European indices trade in negative territory with bank stocks among the laggards. Germany reported a qtr/qtr contraction in Q2 GDP, marking the first negative reading since Q3 of 2018. The Italian Senate will debate a no-confidence motion against Prime Minister Giuseppe Conte on August 20. Inflation figures from the U.K. showed that CPI was above the Bank of England’s target for the fourth month in a row.

  • In economic data:
    • Eurozone’s Q2 flash GDP +0.2% qtr/qtr, as expected (last 0.2%); +1.1% yr/yr, as expected (last 1.1%). Q2 Employment Change +0.2% qtr/qtr (expected 0.3%; last 0.3%) and June Industrial Production -1.6% m/m (expected -1.4%; last 0.8%); -2.6% yr/yr (expected -1.2%; last -0.8%)
    • Germany’s Q2 flash GDP -0.1%, as expected (last 0.4%); 0.0% yr/yr (expected -0.3%; last 0.6%)
    • U.K.’s July CPI 0.0% m/m (expected -0.1%; last 0.3%); +2.1% yr/yr (expected 1.9%; last 2.0%). July Core CPI +0.1% m/m (expected -0.1%; last 0.0%); +1.9% yr/yr (expected 1.8%; last 1.8%). July Input PPI +0.9% m/m (expected 0.6%; last -0.8%) and Output PPI +0.4% m/m (expected 0.1%; last 0.1%). July House Price Index +0.9% yr/yr (expected 1.0%; last 0.9%)
    • France’s July CPI -0.2% m/m, as expected (last 0.2%); +1.1% yr/yr, as expected (last 1.2%). Q2 Unemployment Rate 8.5% (expected 8.7%; last 8.7%)

—Equity Markets—

  • STOXX Europe 600: -1.1%
  • Germany’s DAX: -1.6%
  • U.K.’s FTSE 100: -1.0%
  • France’s CAC 40: -1.4%
  • Italy’s FTSE MIB: -2.0%
  • Spain’s IBEX 35: -1.4%

—FX—

  • EUR/USD: UNCH at 1.1168
  • GBP/USD: +0.2% to 1.2081
  • USD/CHF: -0.3% to 0.9730
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