Morning Quant Ride Mar 23, 2018

Mar 23, 2018

Traders’ Corner

US Market Preview

Global markets are down across the board over fears of an escalating trade war between the United States and China. Friday morning in Asia, China announced retaliation against US aluminum and steel tariffs by imposing tariffs on US imports representing $3 billion. A tariff of 15 percent will be placed on 120 agricultural and metal products including wine and steel pipes, worth a total of $977 million. In addition, tariffs of 25% will be levied on 8 categories of products including pork and recycled aluminum representing $2 billion in trade. Chinese officials have stated that “China doesn’t want a trade war”, but that they are prepared to fully protect Chinese interests.Following these development, sharp declines in US equities continued to the pre-open with S&P 500 futures trading 0.25% lower; however, they reversed on stronger than expected durable goods order growth (3.1%  vs 1.6% estimated) and the futures have moved into positive territory to +0.21%. US Trade Representative Robert Lightizer has informed the Senate Finance Committee that the EU will be granted a temporary exemption from US steel and aluminum tariffs while negotiations continue. Remaining on the US economic calendar today is the release of new home sales for February at 10 a.m EST.

US options markets, pre-market, are continuing yesterday’s risk-off trade with the VIX now at 23.52 after closing at 23.34 yesterday. As a point of reference, the VIX closed at 15.80 last Friday.  SPY April 20 and March 23 OTM Puts are the most actively traded options this morning. 

Asian & Australian Equities Recap

In reaction to Chinese retaliation against the United States and fears over an escalation of the current Sino-American trade conflict, all major Asian equity markets finished the trading session negative.  Japanese equities closed down significantly with the Nikkei 225 -4.51% and the Topix -3.62%.  Utilities, consumer staples and real estate stocks were the largest relative outperformers while consumer discretionary, tech and materials stocks were the largest underperformers.  Notable movers included: Ebara Corp -8.05%, Showa Denko KK -7.92%, Yamaha Motor -7.85% and Dowa Holdings -7.37%.  Volume traded in Tokyo  was 38.4% above its 10-day average.  Japan February Core CPI was +1.0% Y/Y vs. consensus of 1.0%; the CPI rose at it fastest pace since March 2015.  Sector and corporate news was overshadowed by worries about a global trade war.

Chinese and Hong Kong equities closed negative with then Hang Seng -2.45%, Hang Seng China Enterprise index -2.41% and the CSI 300 -2.87%.  Utilities, industrials and telecom stocks were the best performing sectors in the Hang Seng while consumer staples, consumer discretionary and tech stocks were the worst performing.  Notable movers included: AAC Technologies -6.79%, Sunny Optical -5.48%, Country Garden Holdings -5.36% and China Overseas Land & Investment -4.98%.  Volume traded in Hong Kong was 10.0% above its 10-day average while volume traded in Shanghai was 65.9% above its 10-day average.  CCP officials announced USD$3bn in retaliatory tariffs against the US following the announcement by the US government that it would institute up to USD$60bn on imports from China.  China state-backed funds are allegedly purchasing large-cap stocks with the CCP intervening in equity markets to help stabilize volatility.

Indian equities were negative with the Sensex -1.24% and Nifty 50 -1.15%.  Real estate and metals stocks were the worst performing stocks in Mumbai.

In the Land Down Under, Aussie equities finished down in sympathy with Japanese and Hong Kong equity markets.  The ASX 200 was down 1.96% with utilities, real estate and energy stocks the best performing sectors; consumer discretionary, financials and materials were the worst performing sectors.  Unlike Japan, Hong Kong and Shanghai, volume traded in Sydney did not spike was 9.6% below its 10-day average.  A trade war between the US and China would materially impact the Australian economy:  ~1/3 of Aussie exports  go to China.

1-month implied volatility on Japanese and Hong index options spiked overnight are now well over 2 standard deviations above their 1-year average.  As expected, Skew is now near the 99th percentile with demand growing for OTM Puts.  March 28 strangles on the Hang Seng China Enterprise Index and December 18 OTM Puts on the Hang Seng China Enterprise Index were the most heavily traded options/options spreads in Hong Kong.  Nikkei 225 April 13 strangles and Nikkei 225 OTM Puts were the most heavily traded options/options spreads in Tokyo.

European Equities Recap

European equity markets likewise are trading down this morning in reaction to the Sino-American trade conflict with the Euro Stoxx 600 -1.14%.  Regional indices are down with the FTSE 100 -0.64%, DAX -1.69%, and the CAC 40 -1.54%.  Telecom, real estate and utilities stocks are the best performing stocks while materials, auto & parts and chemicals are the worst performing.  Volume traded in Europe is relatively muted ahead of the NY Open with total volume traded for the European Composite 2.87% below its 10-day average.

Implied volatility for European index options is elevated, though not like what was seen in Asian markets.  Currently, broadly speaking, 1-month implied volatility for European index options is 1 to 2 standard deviations above the 1-year average.  Skew is elevated with demand for OTM Puts driving Skew into the 90%+ percentiles.  The VSTOXX is currently at 20.97, up from yesterday’s close of 18.55.  The V-VSTOXX is currently trading at 114.69.  The most heavily traded options in Europe are Euro Stoxx 50 June 18 OTM Puts, Euro Stoxx 50 Banks June 18 OTM Calls and Euro Stoxx 50 OTM April 20 Calls.

Latin American Equities

Latin American equities generally followed yesterday’s global equity sell-off. Brazil's Ibovespa (84,767) was down 25bps with 31 of its 64 constituents rising on the day. Mexico’s Mexbol (2,812), was down 27bps with 8 of its 23 constituents advancing on the day. Lastly, Argentina’s Merval (31,908), lagged much more than Brazil and Mexico, with a decline of 143bps with 12 of its 31 constituents advancing on the day. News was light out of Latin America yesterday, however, Brazil’s highest court granted an injunction suspending former President Lula’s prison sentence for corruption and money-laundering. This ruling will go to the appeals court for another decision on Monday, and Lulu will not be detained until the country’s top judges meet again to discuss his habeas corpus request on April 4. Brazilian investors will be following this case closely as Lula is still in the running for Brazil’s Presidential election which will take place in October. In Argentina, the central bank is boosting support for its country’s peso as the monetary authority has sold more than 1.6 Billion USD$ in the foreign exchange markets this month to help slow down the depreciation of the peso. Currently the Argentinian Peso is stabilizing around 20.2, which is down 8% against the USD$ year to date. Argentina has very high interest rates at 27.25% due to stubbornly high inflation in the country.

Rates & Commodities

Global bonds are mixed as of this morning; the US 10-Year is higher at 2.830% in comparison to 2.824% from yesterday’s close and the 30-Year is at 3.084% from 3.063% at yesterday’s close. The rest of the US yield curve shows US bond yields slightly lower. EMEA is following the US’ 10-Year and 30-Year as bond yields are moderately higher across the region. In Asia-Pacific, investors are buying bonds of all maturities, most notably Australian and Chinese bonds as investors flock to safety. Additionally, Japan’s 10-Year fell to .025%, lower by 1.4bps which is the lowest level since November 2017. In the FX markets, the USD$ is lower by 22bps at 89.62 measured by the U.S. Dollar Currency Index (DXY). The USD$/JPY¥ (105.03) broke below 105 overnight, a level not seen since election night in 2016. To reduce pressure from the US proposed tariffs on Chinese goods, China has announced they may devalue the yuan to protect exports. Currently, the USD$/CNY¥ is trading at 6.320 vs. yesterday’s close at 6.332.With USD$ weakness, and Iran hardliner John Bolton replacing General McMaster, WTI Crude oil is higher at $64.54/barrel, up 37bps. Saudi Energy Minister Al-Falih has stated that there is still time to go before OPEC’s cuts will return oil inventories to “normal levels” and that there will be a need for further coordination extending into 2019. Precious metals are higher on the day as gold is at 1,341 USD$/ounce, up 95bps, silver following at 16.54 USD$/ounce, up 91bps and platinum at 956 USD$/ounce, up 78bps. Overnight Chinese steel futures fell more than 6%, hitting their lowest level in more than 8 months, and Dalian iron over also fell over 6% hitting levels not seen since June 2017.

Cryptocurrencies

Major cryptocurrencies are all lower this morning as Japan’s top financial regulator has issued a warning to the Binance exchange.  The firm is based in Hong Kong, and roughly 9% of its traffic comes from Japan. Binance’s CEO has confirmed receipt of the warning letter and is working with Japanese regulators to secure a license. Outside of the Binance news, most other news in the cryptocurrency world was positive overnight. Coinbase is currently in talks to buy bitcoin startup Earn.com for more than $30mm. Google revealed that it has been working on two separate Blockchain projects; a tamper-proof auditing system and a cloud operations platform. Additionally, the US Postal Service is looking at backing up its data with blockchain as part of a system for establishing digital trust. Surprisingly, JP Morgan has announced that it is reportedly thinking about spinning out its Quorum blockchain project as an independent company. Lastly, Chinese smartphone compony, Huawei, is reportedly seeking a license to introduce a blockchain-based smartphone. This smartphone will be able to support decentralized applications (DApp). This technology will be backed by Swiss blockchain-oriented company, SIRIN Lab.

After yesterday's market pullback, we are watching the following A-rated laggards:

QuantShot: AbbVie Inc. - 22.06% off its 52wkH, reports earnings on 04/25/2018

AmerisourceBergen Corporation - 20.02% off its 52wkH, reports earnings on 05/07/2018

Eaton Vance Corp. - 9.65% off its 52wkH, reports earnings on 05/23/2018

Huntsman Corporation - 18.04% off its 52wkH, reports earnings on 04/26/2018

Lear Corporation - 7.30% off its 52wkH, reports earnings on 04/24/2018

Louisiana-Pacific Corporation - 9.56% off its 52wkH, reports earnings on 05/04/2018*All returns are price returns

Companies Trending in the News

BOEING (BA) will not appeal the US trade commission’s decision allowing Bombardier (BDRAF) to sell its jets to US airlines with a 300% duty on sales.

An investor lawsuit against CHIPOTLE MEXICAN GRILL(CMG) has been dismissed. The lawsuit accused the company of hiding food sanitation risks related to the out breaks of food borne illness at their restaurants.

DEUTSCHE BANK's (DB.GR) assets management division, DWS Group, began trading on the Frankfurt exchange today with a price of $32.55 per share.

DROPBOX (DBX) has priced its IPO at $21 per share, which is higher than the expected range of $18 to $20.

GLAXOSMITHKLINE(GSK.LN) is trading 3.58% higher after announcing that it will no longer pursue the acquisition of PFIZER INC.’s (PFE) consumer health unit. This marks the second major bidder to withdraw from contention after RECKITT BENCKISER GROUP (RB.LN) did so earlier this week.

AT HOME GROUP (HOME) announced a forecasted adjusted range for its FY2018 EPS of $1.18 to $1.24, which is higher than consensus estimates of $1.15 in per share earnings.

BANCO SANTANDER SA (SAN.SM) plans to announce a dividend of 0.23 for 2018, as well as 2 further dividend payments for 2019.

Large-Cap Conviction Buy Movers

Winners   Ticker   Sector   Industry   1 Day Return   5 Day Return   YTD
Post Holdings, Inc.   POST   Consumer Staples   Packaged Foods and Meats  

0.25%

 

-6.51%

 

-9.37%

Atmos Energy Corporation   ATO   Utilities   Gas Utilities  

-0.26%

 

-2.04%

 

-5.50%

Black Hills Corporation   BKH   Utilities   Multi-Utilities  

-0.36%

 

-0.36%

 

-11.78%

CenterPoint Energy, Inc.   CNP   Utilities   Multi-Utilities  

-0.41%

 

-1.55%

 

-5.75%

Domino's Pizza, Inc.   DPZ   Consumer Discretionary   Restaurants  

-0.81%

 

-1.48%

 

19.81%

Losers   Ticker   Sector   Industry   1 Day Return   5 Day Return   YTD
AbbVie Inc.   ABBV   Healthcare   Biotechnology  

-12.76%

 

-13.73%

 

-15.31%

Darden Restaurants, Inc.   DRI   Consumer Discretionary   Restaurants  

-7.90%

 

-9.11%

 

-6.78%

Caterpillar Inc.   CAT   Industrials   Construction Machinery and Heavy Trucks  

-5.19%

 

-5.55%

 

-4.54%

Raymond James Financial, Inc.   RJF   Financials   Investment Banking and Brokerage  

-5.42%

 

-6.12%

 

-1.20%

AmerisourceBergen Corporation   ABC   Healthcare   Healthcare Distributors  

-5.03%

 

-12.02%

 

-10.68%

Source: S&P Capital IQ                        

Large-Cap Conviction Short Movers

Winners   Ticker   Sector   Industry   1 Day Return   5 Day Return   YTD
Esperion Therapeutics, Inc.   ESPR   Healthcare   Biotechnology  

-6.57%

 

-8.05%

 

-12.49%

Superior Energy Services, Inc.   SPN   Energy   Oil and Gas Equipment and Services  

-6.46%

 

-4.02%

 

11.70%

Loxo Oncology, Inc.   LOXO   Healthcare   Biotechnology  

-6.31%

 

-7.67%

 

4.46%

Exact Sciences Corporation   EXAS   Healthcare   Biotechnology  

-6.26%

 

-12.52%

 

3.09%

Arconic Inc.   ARNC   Industrials   Aerospace and Defense  

-6.13%

 

-7.65%

 

-7.01%

Losers   Ticker   Sector   Industry   1 Day Return   5 Day Return   YTD
Longfin Corp.   LFIN   Financials   Financial Exchanges and Data  

12.23%

 

27.72%

 

14.56%

Pandora Media, Inc.   P   Information Technology   Internet Software and Services  

7.76%

 

2.72%

 

9.54%

Menlo Therapeutics Inc.   MNLO   Healthcare   Pharmaceuticals  

7.40%

 

8.62%

 

0.00%

Rite Aid Corporation   RAD   Consumer Staples   Drug Retail  

1.32%

 

-4.35%

 

-21.83%

Vistra Energy Corp.   VST   Utilities   Independent Power Producers and Energy Traders

0.99%

 

-0.39%

 

11.08%

Source: S&P Capital IQ                        

Upcoming Earnings & Events

Company Name

 

Ticker

 

Earnings Date

 

Event Type

MSC Industrial Direct Co., Inc.  

MSM

 

4/9/2018

 

Estimated Earnings Release Date

Celanese Corporation

 

CE

 

4/15/2018

 

Estimated Earnings Release Date

J.B. Hunt Transport Services, Inc.  

JBHT

 

4/15/2018

 

Estimated Earnings Release Date

UnitedHealth Group Incorporated

 

UNH

 

4/15/2018

 

Estimated Earnings Release Date

Comerica Incorporated  

CMA

 

4/17/2018

 

Earnings Release Date

M&T Bank Corporation

 

MTB

 

4/17/2018

 

Estimated Earnings Release Date

Quest Diagnostics Incorporated  

DGX

 

4/18/2018

 

Estimated Earnings Release Date

BB&T Corporation

 

BBT

 

4/19/2018

 

Earnings Release Date

AT&T Inc.  

T

 

4/19/2018

 

Estimated Earnings Release Date

Caterpillar Inc.

 

CAT

 

4/19/2018

 

Estimated Earnings Release Date

Gentex Corporation  

GNTX

 

4/19/2018

 

Estimated Earnings Release Date

IDEX Corporation

 

IEX

 

4/19/2018

 

Estimated Earnings Release Date

Kansas City Southern  

KSU

 

4/19/2018

 

Estimated Earnings Release Date

Lockheed Martin Corporation

 

LMT

 

4/19/2018

 

Estimated Earnings Release Date

Norfolk Southern Corporation

 

NSC

 

4/19/2018

 

Estimated Earnings Release Date

Line for QuantShots

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