Morning Quant Ride April 6, 2018

Apr 06, 2018

Traders’ Corner

US Market Preview

After yesterday’s relatively sanguine trading, President Trump announced he has instructed US Trade Representative Robert Lighthizer to determine if $100 billion in additional trade tariffs against China complies with Section 301 of the Trade Act of 1974. The imposition of these new tariffs would triple the US’s initial proposed amount. Though further trade actions would escalate Sino-American trade tensions, President Trump noted that the US is “still prepared to have discussions in further support of [the] commitment to achieving free, fair, and reciprocal trade”. Chinese officials responded to President Trump’s proposed tariffs by saying that China would counter any trade actions “to the end, and at any cost”.

President Trump cited China’s violation of intellectual property laws and unfair retaliatory tariffs that “harm our farmers and manufacturers” as justification for US retaliation. He further stated that he would direct US Agricultural Secretary Sonny Perdue to form plans to protect farmers and the agricultural sector, though he provided no details.

Were China to match the new round of US tariffs, the $150 billion in proposed tariffs would exceed all of the US ‘s exports to China (the US exported $130.4 billion in goods to China in 2017). A $150 billion trade tariff imposed by the US, on the other hands, would only encompass 30% of Chinese exports to the US ($505.6 billion in Chinese exports to US in 2017).

The materially lower than expected new jobs (103k vs 185k expected) in this morning’s payroll report will further compound economic uncertainty related to the trade tensions. There were net downward revisions of 50,000 jobs in January and February combined. Further economic data scheduled for release includes the Baker-Hughes Rig Count at 1:30 p.m EST, Fed Chairman Jerome Powell’s report on U.S economic outlook at 1:30 p.m, and the US Consumer Credit report at 3:00 p.m EST.

US futures have been driven broadly lower following news of further potential trade action and the new jobs report. S&P 500 futures are down 0.60%, while Dow Jones Industrial futures have moved 0.78% lower. Nasdaq Composite futures are 0.24% off from yesterday’s close.

US options, pre-market, are implying a rise in risk premiums with the VIX currently at 20.65 after closing at 18.94 yesterday.  April 06 ATM Calls and Puts on SPY, April 20 OTM Calls on XOP, June 18 OTM Calls on SPY, April 06 OTM Calls on AAPL are the most actively traded options this morning.

Asian & Australia Equities Recap

Asian equity markets finished mixed amidst concerns about rising Sino-US tension surrounding trade.  Japanese equities finished negative with the Nikkei 225 -0.36% and Topix -0.31%.  Energy, consumer staples and telecom stocks were the top performers while real estate, materials and tech stocks were the biggest laggards.  Notable movers included: Takeda Pharmaceutical -5.03%, Daiichi Sankyo +4.74%, Unitika -4.01%, SUMCO -3.87% and Seven & I Holdings +3.37%.  Market Breadth was negative with the Advance/Decline ratio closing at 0.46.  News flow was relatively quiet with one of the biggest stories being that the Bank of Japan (BOJ) has become the largest purchases of Japanese stocks after buying ~JPY¥18tn in ETFS over the period March 2012 through March 2018.  Japan real wages grew -0.5% Y/Y in February vs -0.6% in January (revised from -0.9%).  Japanese household spending grew +0.1% in February vs. +0.3% Y/Y.

Hong Kong equity markets closed positive after being closed yesterday for the Qingming Festival.  The Hang Seng closed +1.11% while the Hang Seng China Enterprise +0.93%.  Mainland Chinese exchanges were closed again for the Qingming Festival.  Tech, energy and telecom stocks were the best performing sectors in Hong Kong while consumer staples was the only sector negative.  Notable movers included: Sunny Optical Technology +3.55%, WH Group -3.37%, China Unicom +3.09% and Hang Seng Bank +2.79%.  Market breadth was positive for stock in the benchmark Hang Seng with the Advance/Decline ratio closing at 4.56.

Indian equities finished relatively flat with the Sensex +0.09% and the Nifty 50 +0.06%.  E&P stocks were the best performers in the Sensex.  Notable movers included: Bharti Airtel -2.17%, Infosys +1.37%, Larsen & Toubro -1.31%, Bajaj Auto -0.98% and ICICI Bank +0.97%.  Market breadth was positive with the Advance/Decline ratio for the Nifty 50 finishing at 1.27.

Aussie equities closed flat with the ASX 200 closing in-line with yesterday’s close.  Energy, real estate and industrials stocks were the best performers while healthcare, utilities and financials were the worst performers.  Notable movers included: Orocobre +5.70%, Galaxy Resources +5.19%, APN Outdoor Group +5.17%, Blackmores +3.77% and Retail Food Group -3.76%.  Market breadth finished positive for stocks in the ASX 200 as the Advance/Decline ratio closed at 1.53.  BAML Head of Economic & Rates Strategy, Tony Morris, believes wage growth and rising inflation will force the Reserve Bank of Australia to begin to raise rates as early as 4Q2018.

Asian options markets were relatively quiet again with limited movement on 1-month implied volatilities for major Asian index options.  However, Skew moved back into the 90th percentile with demand for OTM Puts increasing dramatically..  April 13 OTM Calls and Puts were the most actively traded options in Tokyo.  April 13 OTM Calls and Puts on the Nikkei 225 were the most actively traded options in Tokyo.  OTM December 18 Puts, OTM April 27 Puts and OTM April 27 Calls on the Hang Seng China Enterprise were the most actively traded options in Tokyo.

European Equities Summary

European equities are down broadly across the board with the Euro Stoxx 600 -0.41% following comments from US President Donald Trump that he has instructed his advisors to explore an additional USD$100bn in imports from China that may be eligible for tariffs.  Regional indices are down with the FTSE 100 -0.23%, DAX -0.66% and CAC 40 -0.42%.  Utilities stocks are the only positive sector this morning while materials, consumer discretionary and tech stocks are the worst performers across European equity markets.  News flow is limited primarily to concerns about the potential for deteriorating Sino-American trade relations.  An article in the FT this AM highlights that German car manufacturers are concerned that the Sino-American trade spat will negatively impact them since a large portion of their supply chain is based in China.  The major Germany car manufacturers are down this morning with BMW -0.23%, Daimler -6.04% and Volkswagen -1.78%.

German February Industrial Production was -1.6% M/M vs. consensus of +0.3% and -0.1% in January.  The German March PMI was 47.0 vs. 52.7 in February.  Spanish February Industrial Production was +3.1% y/Y vs. Consensus of +5.1%.

Risk premiums are relatively flat this this morning with the VSTOXX currently at 17.3886 after closing at 16.9025 yesterday.  While the VSTOXX is ticking up this morning, Skew on 1-month Euro Stoxx 50 options remains fairly valued.  Notably, skew for DAX index options has jumped to the 75th percentile.  December ITM Calls on the Euro Stoxx 50, December OTM Puts on the Euro Stoxx 50, June 18 OTM Puts on the Euro Stoxx 50, September OTM Calls on Telecom Italia and  June 18 OTM Puts on the Euro Stoxx 50 Banks are the most actively traded options in Europe.

Latin American Equities

Latin American closed higher yesterday and are poised to post solid gains this week. Brazil’s Ibovespa was up 101bps, Argentina’s Merval was up 175bps and Mexico’s Mexbol was up 113bps. The Ibovespa was led higher by energy +2.66%, and materials +1.95%, while consumer staples was the lone decliner at -1.21%. All sectors were positive in the Merval with materials +3.98% and industrials +2.95% as the leading sectors. The Mexbol’s sectors were all positive as well and were led by consumer staples +!.46% and industrials +1.30%. Volatility in the region is heightened as 10D Vol for Brazil, Argentina and Mexico is at 16.20, 20.43 and 20.70 vs. 30D Vol of 14.03, 19.97 and 15.09 respectively. Deutsche bank is reportedly closing its LatAm research business as the bank is focusing on a restructuring. US Trade Representative, Robert Lighthizer, will be meeting with his Mexican and Canadian counterpart today, the first high-level trilateral negotiation session in over a month. Inflation in Colombia slowed to the lowest level since 2014, as consumer prices rose 3.14% in March Y/Y. Camilo Perez, an economist at the Bank of Bogota said this slowdown in inflation considerably raises the probability that the Colombian central bank will cut interest rates at the next meeting in April 27th; after the bank had said monetary easing was complete in January. Economic data is light in the LatAm region for today; Chile is releasing its inflation data this morning (1.9% Y/Y expected and 0.3% M/M expected) and Colombia is released its monetary policy meeting minutes.

Rates & Commodities

Global bonds are mixed before the US open today with US and Asia-Pacific bonds mostly higher and bonds in EMEA trading in opposite direction. Italian, Spanish, and Portuguese are selling off, while bonds in the UK, France, Germany, Netherlands and Greece are rallying. In the US, the 10-Year yield is at 2.825%, lower from yesterday’s close of 2.830%. The US 30-Year Yield is at 3.067% from yesterday’s close of 3.071% this morning. Uncertainty initially stemmed from President Trump’s statements instructing the USTR to consider a retaliatory response of $USD 100bn of additional tariffs (see above). China’s commerce ministry will be holding a briefing this AM to further discuss trade relations. The USD$ remains at its highest level in weeks at 90.45, flat on the day. In a risk-off sentiment from the trade conflict, the USD$ is surprisingly stronger against the JPY¥ by 22bps at 107.34, and stronger against the CHF by 12bps (0.9634). Precious metals are mostly moderately lower, with Palladium being the only precious metal positive before the open. Gold and silver are down 18bps at USD$ 1324.13/ounce, and down 88bps at USD$ 16.30 respectively. Platinum (USD$ 910.07) -0.27% and palladium (USD$ 908.19) +0.09%. round out the precious metals. Lastly, WTI Crude oil is lower following a stronger USD$. Currently WTI is trading at USD$ 63.20/barrel. WTI seems to have stabilized around USD$ 63/barrel over the past week and a half, after losing support at $65/barrel once trade war fears returned to the market. On the economic front, Fed Chair Powell will be speaking at 1:30PM EST.

Cryptocurrencies

Major cryptocurrencies are lower to end the week, posting losses again this week. Bitcoin is trading at USD$ 6,585.60 down 3.36%, Ethereum is following at USD$ 367.81, down 3.62% and Ripple is at USD$ 0.4691 down 5.43%, to round out the top three. EOS and Lisk are the only positive cryptocurrencies in the top 25 by market capitalization, up 4.93% and 0.48% respectively. This morning, a hard fork occurred on privacy-centric cryptocurrency Monero. Hard forks have occurred before on Monero, and this current upgrade introduces a new consensus algorithm intended to protect the network from the emergence of ASIC mining hardware. Mentioned in our end of day note yesterday, SEC chairman Jay Clayton spoke at Princeton University yesterday on “Cryptocurrency and initial coin offerings”. His comments were supportive for cryptocurrencies as he said, “distributed ledger technology has incredible promise for the financial industry”. Additionally, Chairman Clayton made it clear that he is focused on stopping fraudulent initial coin offerings. The Swiss National Bank said that a central bank digital currency would pose risks to financial stability while offering few tangible benefits. However, the bank said that distributed ledger technology has the potential to improve cross-border payments. Lastly, Spanish tax authorities have sent requests for information on cryptocurrency investors to over 60 companies.

*All returns are price returns**All returns in local currency

Companies Trending in the News

Yesterday, President Trump accused Amazon Inc (AMZN) of operating under unfair practices, as well as not paying sufficient sales tax. President Trump has spoken multiple times regarding capturing more taxes from Amazon.

Campbell Soup (CPB) has appointed Luca Mignini as the company’s new COO, following an extended period of sales declines.

Daimler AG (DAI.GR) has reported that March sales of its Mercedes-Benz rose 3.9% on a Y/Y basis.

Danske Bank A/S (DANSKE.DC) has announced broad changes to its management team and will be replacing the company’s CFO and head of wealth management.

Deutsche Bank AG (DBK.GR) shares have fallen after reports that company recruiters were identifying candidates to replace CEO John Cryan.

Incyte Corp (INCY) shares are 20% lower pre-market after an external review determined that the company’s Epascadostat drug did not meet its primary endpoint.

MGM Resorts (MGM) and Wynn Resorts (WYNN) have reportedly begun “back-channel” discussions regarding MGM’s potential acquisition of the embattled hospitality company.

Samsung (005930 KS) offices have reportedly been raided by officials seeking documents teeing Samsung to anti-union practices.

Southwest Airlines (LUV) reported traffic and capacity numbers for 1Q 2018 that were higher Y/Y. Traffic rose by 3.7% and capacity rose by 1.8% on a Y/Y basis.

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

Quantamize is the trade name of Quantalytics Research, LLC.

Disclaimer

Quantamize is not an investment adviser, brokerage firm, or investment company. Any data, information, or opinions presented by Quantamize or Quantalytics Research are for general information purposes only. Such data, information, or opinions are not an offer to sell or to buy, or a solicitation to buy or sell any securities. All investments and investment recommendations entail risks. Any forward looking estimates presented by Quantamize or Quantalytics Research may prove to be incorrect and not be realized. Any data, information, or opinions expressed in any form may change without notice. Any data, information, or opinions in Quantamize or Quantalytics Research in any form attributed to a third party represent Quantamize's or Quantalytics Research’s interpretation of the data, information, or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. The data, information and opinions presented have been obtained or derived from sources believed by Quantamize or Quantalytics Research to be reliable. Quantamize or Quantalytics Research, does not make any representations as to their accuracy or completeness. Nothing discussed or presented in Quantamize or Quantalytics Research constitutes a representation that any investment, investment strategy, or recommendation is suitable or appropriate to an investor's individual circumstances or otherwise constitutes a personal recommendation. Data, information, or opinions contained in Quantamize or Quantalytics Research in any form give no consideration to any particular individuals' investment needs or objectives, nor do they consider any individuals' financial condition. Consequently, any such data, information, or opinions do not in any way represent a personal recommendation to any individual investor or any entities, whatever the type. Quantamize and Quantalytics Research does not accept any liability for any losses or damages arising from the use of the data, information, or opinions included in Quantamize or Quantalytics Research in any form. All investments involve risks of loss and potential permanent impairment of capital. Investors should diversify risks and exercise prudence and their own judgement in making their investment decisions. Quantamize and Quantalytics Research and any information contained therein is not intended for distribution to or use by any person, or entity, who is a citizen or resident of or located in any locality, state, country, or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or cause Quantamize or Quantalytics Research, LLC to be required to register or be licensed within any such venues. All data, information, and opinions expressed in Quantamize or Quantalytics Research in any form are as of the date of publication and are subject to change. Quantalytics Research partners and employees may own or have positions in any investment(s) mentioned respectively therein or related thereto and may, from time to time add to, or dispose of, any such investment(s).