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Morning Quant Ride April 13, 2018

Apr 13, 2018

Traders’ Corner

US Market Preview

While Sino-American trade concerns appear to settle, anonymous Trump Administration officials reportedly disclosed that USTR Robert Lightizer will likely announce a 25% tariff on various Chinese goods, representing $100 billion in trade, in coming weeks. Though much of the focus has been on US-China trade tensions, China has reported a $4.98 billion trade deficit in March, the first deficit in over a year. This was unexpected, and in sharp contrast to China’s $33.7 billion trade surplus in February.

Strong earnings reports from prominent banks is setting the tone for today’s trading. JP Morgan Chase (JPM) posted record quarterly revenue and profits. Earnings for 1Q surged 35% Y/Y, with EPS coming in well above expectations ($2.37 vs $2.28 estimate). Stock trading revenue has been cited as a catalyst for strong results, rising 13% in 1Q. Wells Fargo (WFC) beat expectations as well, posting 1Q EPS of $1.12 vs $1.07 estimates. Revenue for the quarter also came in higher than expected ($21.9b vs $21.75b estimates). Citi Group (C) 1Q EPS also beat consensus estimates ($1.68 vs $1.61). Financials encompass 14.7% of the S&P 500, second only to technology, and encouraging earnings could send markets higher.

Following yesterday’s broadly positive trading, US futures ticked higher this morning. S&P 500 futures advanced 0.32%, while Dow Jones Industrial futures moved 0.31% higher. Nasdaq 100 futures are up 0.15%.

In response to US sanctions against Russia, Russian lawmakers are considering drafting legislation banning US exports of agricultural, technological, and medical products.

Economic data scheduled for release today includes Consumer Sentiment for April at 10:00 a.m EST.

US options, pre-market, are implying a drop in risk premiums with the VIX currently at 17.89 after closing at 18.49 yesterday.  April 13 OTM Calls and Puts on SPY, May 18 ATM Calls and Puts on HYG, and June 18 OTM Calls on XLF are the most actively traded options this morning

Asian & Australia Equities Recap

Japanese equity finished their trading session positive with the Nikkei 225 +0.55% and Topix +0.63%.  Energy, tech and financials stocks were the best performers while healthcare and consumer staples were the only negative sectors.  Notable movers included: Furukawa Electric +5.57%, SUMCO +4.27%, Ebara +3.90%, Mitsui OSK Lines +3.81%, Alps Electric +3.69% and Kawasaki Heavy Industry +3.64%.  Market breadth was positive with 168 stocks of the 225 stocks in the Nikkei 225 closing in the green.  S&P raised its outlook for Japanese economy to Positive from Stable.  Japan and the EU are expected to sign a free-trade deal this July.

Hong Kong and Chinese equities closed negative with the Hang Seng -0.07%, Hang Seng China Enterprise -0.22% and CSI 300 -0.71%.  Consumer discretionary, financials and telecom stocks were the only positive sectors in Hong Kong trading while consumer staples, tech, and energy stocks were the largest underperformers.  Notable movers included: WH Group -2.88%, BOC Hong Kong +1.48%, Wharf Real Estate +1.38%, China Resources -1.34%, CNOOC -1.28%, Sands China +1.26% and Tencent -1.26%.  Market breadth was negative with the Advance/Decline ratio closing at 0.58.  The China Trade Balance for March was -USD$4.98bn vs. Consensus of USD$27.0bn and USD$33.78bn in February.  Exports contracted 2.7% Y/Y vs. Consensus expectations for an expansion of 10.0% Y/Y and +44.5% Y/Y growth in February.

Indian equities finished in the green with the Sensex +0.27% and the Nifty 50 +0.21%.  Metals stocks were the best performing group while capital goods were the largest laggards.  Notable movers included: Adani Ports & Special Economic Zone +2.66%, Wipro +2.28%, Coal India +1.57%, Kotak Mahindra Bank +1.52%.

In the Land Down Under, Aussie stocks closed positive with the ASX 200 +0.23%.  Tech, healthcare, and consumer discretionary stocks were the best performing stocks while utilities, consumer staples and energy stocks were the largest laggards.  Notable movers included: Seven West Media +12.62%, Fletcher Building +8.47%, Primary Health Care, +7.67%, Infigen Energy +6.87%, and Iluka Resources +4.16%.  Market breadth was positive with 123 stocks of the 200 stocks in the ASX 200 advancing; 61 stocks declined.  Moody’s believes there is a chance that Australian mortgage delinquencies may rise on account of weaker housing prices.  The Reserve Bank of Australia’s (RBA) Financial Stability Reviews notes a decrease in the magnitude of risks to global capital markets.  The RBA continues to believe that international investors are too complacent and are underpricing risk in global financial markets.

1-month implied volatilities for major Asian index options finished under 1 standard deviation below their 1-year averages again.  Skew remains elevated for HSI index options, closing close to the 80th percentile.  May 11 OTM Calls and Puts on the Nikkei 225 were the most actively traded options in Tokyo.  OTM June 28 OTM Calls and Puts on the Hang Seng China Enterprise were the most actively traded options in Hong Kong.

European Equities Summary

European equities as positive across the board this morning with the Euro Stoxx 600 +0.41%.  Regional indices are in the green as well with the FTSE 100 +0.12%, DAX +0.70% and CAC 40 +0.40%.  Materials, industrials and financials stocks are the top performing stocks this AM while energy, consumer staples and tech stocks are the largest decliners.  Notable movers this AM include: Ahold -4.08%, Vinci +2.56%, BBVA +2.28%, Deutsche Bank +1.97%, and Banco Santander 1.93%.  Market breadth is positive with 35 stocks of the large-cap benchmark Euro Stock 50 index advancing.  Volume is light this morning with total volume turnover for the European Composite 18.29% below its 10-day average.

The February Trade Balance for the Eurozone was EUR€21.0bn vs Consensus of EUR€20.1bn and EUR€19.9 in January.  The European Central Bank (ECB) formally approves of the idea for a European Monetary Fund that increase the EU’s crisis fund.  German March CPI was +1.6% Y/Y vs. a preliminary reading of +1.6% Y/Y.

Spanish March CPI was +1.2% Y/Y, in line with the preliminary reading of +1.2% Y/Y.  Spanish equities are positive with the IBEX 35 +0.93%.  Italian President Sergio Mattarella believes there has been limited progress in forming a new Italian government.  Italian equities are up this morning, in spite of this news, with the IBEX 35 +0.90%.

Risk premiums in options markets are dropping this morning with the VSTOXX currently sitting at 15.1146 after closing at 15.8108.  If the VSTOXX were to close around this level, it would be its lowest finale reading in over 3 weeks.  Skew on 1-month Euro Stoxx v50 options is very cheap and currently sites at the 17th percentile for its 1-year average.  Such low skew levels suggest there is limited investor appetite for Euro Stoxx 50 Puts.  Options activity is very diverse with December 18 OTM Euro Stoxx 50 Banks, June 18 OTM Calls on E.ON, September OTM Puts on E.ON and April 20 OTM Calls on the Euro Stoxx 50 are the most actively traded options in Europe.

Latin American Equities

Latin American equities were moderately higher yesterday. Brazil’s Ibovespa was up 23bps, Argentina’s Merval was up 2bps and Mexico’s Mexbol was up 56bps. The US is said to allow a tariff-free quota for Brazilian steel which should keep the bilateral relationship healthy between the two countries. Brazil will release its services sector volume Y/Y data for February, and current President Temer will speak at the Summit of Americas. Peru kept its benchmark lending rate unchanged yesterday at 2.75% as expected by economists. Peru is hoping for inflation to gradually converge to 2% by the end of the year. The country is currently facing some headwinds; corruption scandals slowing infrastructure spending, unemployment rate at the highest level since 2012 with public investment dropping as well. Mexican trade negotiators are hoping to finish an updated free-trade agreement with the European Union ahead of President Pena Nieto’s trip to the region later this month. The agreement originated 17 years ago, and both regions have a strong interest in updating the agreement as the Eurozone is the biggest buyer of Mexican goods after the US & Canada.

Rates & Commodities

Bonds around the globe are trading slightly lower. The JGB 10-Year Yield is at 0.027% while the German 10-Year Yield is at 0.52% and the UK 10-Year Yield is at 1.456%, all at the higher end for the week. The US 10-Year yield is roughly unchanged at 2.838% from yesterday’s close of 2.840% and the US 30-Year Yield is at 3.042% slightly lower from yesterday’s close of 3.047% The USD$ extending gains on the week, approaching a 90.0 level again. Currently the USD$ is at at 89.87, higher by 12bps on the day. The USD$ is notably stronger against the JPY¥ by 42bps, currently at 107.71, its highest level since the end of February. The USD$ is notably weaker against the AUD$ by 57bps at 0.7801. Precious metals are reflecting caution in the markets as geopolitical tensions in the Middle East and trade discussions create uncertainty. Gold is up 22bps at USD$ 1337.82/ounce, silver is up 31bps at USD$16.52/ounce, palladium is up 116bps at USD$977.57 and platinum is up 21bps at USD$930.08. Notably, Aluminum is at USD$2325/contract, an increase of 13.8% this week due to concerns of supply restrictions stemming from sanctions on Russia. WTI Crude is mostly flat before the US equity open, down 10bps. WTI is trading at $67.00/barrel.

Cryptocurrencies

After the dramatic move in cryptocurrencies yesterday caused by short covering, major cryptocurrencies are posting one of their best week’s this year. The positive momentum from yesterday continues into the morning with the new top five are trading at; Bitcoin USD$8,072.3 +11.07%, Ethereum USD$514.58 +16.22%, Ripple USD$0.6438 +21.45%, Bitcoin Cash USD$762.16 +10.69% and EOS USD$7.13 +7.13%. SEC Chief, Jay Clayton, recently told reporters that most cryptocurrency tokens are security tokens and that they are traded like stocks. As a result, the cryptocurrency tokens fall under the SEC’s purview and will be allowed to be regulated. An announcement from the SEC regarding cryptocurrency regulation is expected by the end of the year. Interestingly, Ripple’s chief market strategist, Cory John, has said that XRP is not a security and that the cryptocurrency does not meet the standards for what a security is based on the history of court law. FPT Software and cryptocurrency Factom have announced a strategic partnership. The two organizations will work on offering a blockchain technology platform to deliver customer’s needs by allowing space for innovation through workshops. A Japanese subsidiary of Yahoo, is purchasing a 40% stake in BitARG exchange in Tokyo. Lastly, Ripple has built an app called “One Pay FX” with Santander bank which will be launched in Spain, the UK, Brazil and Poland.

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

Companies Trending in the News

London Stock Exchange Group PLC (LSE.LN) has hired former Goldman Sachs executive David Schwimmer as CEO, ending a ending a 6 month search for a replacement candidate.

Issues with engines built by Rolls-Royce (RR. LN), used in Boeing’s 787 aircraft, have forced aircraft carriers to switch to different aircraft as safety regulators impose strict limits on operations.

Mylan (MYL) is reported to be in advanced talks with Merck regarding the acquisition of Merck’s consumer health unit.

PNC Financial (PNC) posted 1Q EPS in-line with estimates ($2.43 vs $2.43 expected).

Sears Holding (SHLD) announced that it will close its last department store in Chicago in mid-July. Sears has operated in Chicago for over 100 years.

SeaWorld (SEAS) shares are lower after the company reportedly received a Wells notice from then SEC which recommended a civil action against SeaWorld, citing the mistreatment of killer whales.

The Morning Recap

Upcoming Earnings & Events

Company Name

 

Ticker

 

Earnings Date

 

Event Type

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

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