Closing Recap

Friday, April 01, 2022

Equity Market Recap

·     Equity indices finished the day modestly higher following a late day rip after spending much of the day teetering between gains and losses as the March payroll report showed unemployment rate improvement to 3.6% from the prior 3.8%. The S&P outperformed the NASDAQ, but both softened as market expectations continue to favor a +50bps move by the Fed in May, with the implied probability holding at around 73%. Despite easing from an early spike, a gain in long yields after the payrolls data continued to pressure equities. The 2’s/10’s curve inverted again, generating more recession concerns and the first inversion in the 2’s/30’s curve since 2007 also incrementally weighed on risk appetites for equities. From a sector perspective, biotech, energy, and REITs were the biggest gainers, while transports, semis and regional banks paced the laggards. Russia/Ukraine news flow today was somewhat muted. China voice regret over the “Ukraine situation” and Putin announced further plans to make gas payments payable in Rubles, a move the Kremlin claimed is irreversible. Note April historically has been a good month for stocks, as the S&P hasn’t fallen in April since 2012.

·     Stock & Sector movers: CHRW, JBHT, ODFL among the S&P top decliners in transports as truckers decline with Dow transports down over 4%; one analyst downgraded WERN CVLG saying the dry-van Truckload market has peaked; semiconductors underperformed in technology with the SOX falling over 2% led by declines QCOM after being removed from an analyst focus list; AMD extends yesterday losses; autos GM F TM decline after monthly auto sales slumped in Q1, hit by industry-wide inventory disruptions to supply chains and chip shortages hit retail sales; auto suppliers LEA APTV slide; BABA BIDU NTES JD VIPS U.S. listed China stocks rise on reports Chinese authorities are preparing to give U.S. regulators full access to auditing reports; BB falls on quarterly revs miss, BLND, DCT decline on lower guidance; NCNO rises on earnings; GPS W URBN AEO retailers decline after Barclays downgraded the sector citing dollar inventory risk from cost inflation, unit inventory risks; DELL downgraded by Goldman Sachs, second analyst to downgrade name in as many days on PC related slowdown concerns; firm also downgraded COMM.

Economic Data:

·     March Nonfarm payrolls +431,000 below est. +490,000 while February upwardly revised to +750,000 from +678,000. Private sector jobs +426,000 below est. +480,000 and prior month upwardly revised to +739,000 from +654,000. March average hourly earnings all private workers +0.4% in-line with views and Feb upwardly revised. The unemployment rate fell to 3.6% from 3.8% prior and below est. 3.7%. Labor force participation rate 62.4% vs 62.3% in February.

·     ISM U.S. Manufacturing activity index 57.1 in March (lowest since Sept 2020) vs 58.6 in February; prices paid index 87.1 in March vs 75.6 in February; new orders index 53.8 (lowest since May 2020) in March vs 61.7 in February; employment index 56.3 in March vs 52.9 in February

·     IHS Markit March final manufacturing PMI at 58.8 (vs flash 58.5); Manufacturing sector final output index for March at 56.1 vs flash reading 56.5 and final February 52.5; final input prices index for March at 79.5 vs flash reading 79.7 and final February 79.2

·     Construction spending rises +0.5%, below consensus +1.0% to $1.704 trln, vs Jan +1.6%; Feb private construction spending +0.8%, public spending -0.4%

Commodities

·     Oil prices fell -$1.01 or about 1% to settle at $99.27 per barrel, its first settlement below $100 since the end of February and was down 14% this week, larges weekly loss since April 2020. The drop was an extension from yesterday’s 7% slide after President Biden confirmed the White House would release a record 180M barrels from its Strategic Petroleum Reserve (SPR), while OPEC+ stuck to its existing deal for May output. The first 90 million barrels of oil would be released between May and July, while another 90 million barrels will be released between August and October, the Energy Department said in a statement. There were no signs of peace in Ukraine, with fighting continuing with Russia, but prices dropped after oil posted a 33% advance in the first quarter. Gold prices fell -$30.30 or 1.6% to settle at $1,923.70 an ounce, a rough start to the month and quarter as the dollar rebounded and Treasury yields rose (though pare gains).

Currencies & Treasuries

·     The U.S. two-year treasury yield rose to 2.456%, its highest since March 2019, while the 10-year also hit highs of the day just above 2.45%, before both pared gains and settled lower. The yield curve inversion of 2s and 10s rises over 5 bps now with 2-yr yield above 2.44% while 10-yr below 2.39%. Stronger jobs data with declining unemployment helped push yields higher initially. The U.S. dollar rose on the jobs data as well as job growth continued at a brisk pace in March, with the unemployment rate falling to a two-year low and wages re-accelerated. All recent data continues to push in the direction that the Fed will get more aggressive on its interest rate hike outlook, with 6-7 expected in 2022, including a possible 50 bps rate increase at the next meeting.

Sector News Breakdown

Consumer

·     Retailers; GME rises after said it intends to implement stock split through dividend; retail downgrades at Barclays as Wayfair (W) downgraded to Underweight from Equal Weight with $103 tgt, Gap Stores (GPS) downgraded to Underweight and tgt cut to $13 from $17, American Eagle (AEO) downgraded to EW from OW and tgt to $19 from $24 and Urban Outfitters (URBN) downgraded to EW from OW and tgt to $29 from $34; LVLU rises as 4Q adj EPS ($0.03) vs est. (0.07) on revs $97Mm vs est. $92.75Mm; sees FY revs $480-490Mm above est. $472Mm; POSH downgraded to Hold from Buy and cut tgt to $15 from $19 at Stifel as the company faces numerous growth challenges that may limit share price appreciation relative to other eCommerce ideas despite its current low statistical valuation

·     Auto sector; several Chinese EV companies out with monthly delivery totals: LI reported March deliveries that more than doubled from a year ago saying deliveries of its Li ONEs rose 125.2% to 11,034 vehicles, a slight deceleration in growth from recent months as Q1 deliveries grew 152.1% to 31,716 vehicles; NIO delivered 9,985 vehicles in March, representing an increase of 37.6% y/y; delivered 25,768 vehicles in three months ended March 2022, increasing by 28.5% y/y; XPEV said deliveries rise 202% year-over-year to 15,414 EVs. Q1 deliveries rose 159% to 34,561; FSR passes 40,000 reservations for Fisker ocean SUV and will open pre-orders for limited-edition Fisker Ocean one on July 1, 2022; TM March U.S. New vehicle sales drop 23.5% to 194,178 and Toyota 1q U.S. New vehicle sales drop 14.7% to 514,592; GM sold 512,846 vehicles in the United States in the first quarter of 2022

·     Casinos, Gaming, Lodging & Leisure sector; Macau says March gambling revenue down 55.8% from a year earlier to 3.7 bln patacas; WYNN upgraded from Neutral to Buy with a reduced TP of $96.50 (previously $98) at Citigroup saying they like Wynn for its increasing dedication to Premium Mass in Macau

Energy

·     Oil prices again volatile with WTI crude breaking below $100 per barrel before rebounding later with all eyes on situation in Ukraine. Prices dropped Thursday after the U.S. released a record 180M barrels from the SPR to soften prices at the pump; TELL upgraded to Outperform from Neutral at Credit Suisse and lift tgt to $8/share from $5.50/share as believe TELL is close to sanctioning the Driftwood LNG project, are ascribing value to future project phases given the strong demand for US LNG and LNG prices remain high; NEXT downgraded to Neutral at Credit Suisse as shares are up over 100% YTD and see risk-reward as balanced; HLX announces Multi-Year Contract with SHEL; KOS announced the successful refinancing of its revolving credit facility and the completion of a semi-annual re-determination of its reserve-based lending facility

Financials

·     Bank movers; PNC lowered its 1Q22 Q/Q revenue guidance from down 3% to 5% to down 8% to 10%, and said fee income is expected to decline by 14% to 16% from down 4% to 6%; CMA upgraded to Overweight from Neutral, BKU downgraded to Neutral from Overweight at JPMorgan saying remain bullish on bank stocks but encourage investors to concentrate positions on the best positioned banks for top line growth (top 6 picks FRC, SIVB, SBNY, PNFP, SNVUBS lowering 2023 EPS estimates for the brokers and M&A boutiques (AMP, BPOP, EVR, GS, MS) by 6%, on average, with downward revisions directionally consistent across the group; BGCP said it now sees Q1 revenue at midpoint of previous view $490M-$540M (est. $518.4M); MN said it would go private and be acquired by Callodine Group LLC, as the purchase price of $12.85 a share is a 41% premium above the $9.11 closing price

·     Financial Services, Insurance; BLND shares slide Q4 EPS (-$0.32) vs. est. (-$0.19) and guides Q1 revs $63M-$66M vs. est. $75.8M, prompting downgraded at Wells Fargo and Canaccord; NCNO forecast FY23 revs $398M-$400M, above estimates for $368M which follows Q4 beat for revenue of $75M above $69.3M est.

Healthcare

·     Pharma movers; sector was a leader in the S&P today across pharma and biotech broadly; ABIO announced that its experimental COVID-19 therapy rNAPc2 failed to meet the primary endpoint with statistical significance in a Phase 2b trial; ALT enrolls first subject in a mid-stage trial evaluating the safety and efficacy of its drug candidate, pemvidutide1, in subjects with obesity

·     Biotech movers; SAGE said data from a Phase 2 study that showed SAGE-718 was generally well-tolerated and associated with improvement on multiple tests in patients with mild cognitive impairment and mild dementia due to Alzheimer’s disease

·     Healthcare Services & MedTech Equipment; ZBH downgraded to Neutral from Buy at Citigroup, adding EW to the Citi Focus list, assigning a High Risk label to SGHT, and updating estimates for COO, DXCM, JNJ, NVRO, SYK and ZBH adding concerns for 1) the impact of Chinese lock downs given COVID-19 and the BA.2 variant, 2) the geopolitical environment, including Russia/Ukraine; and 3) macroeconomic headwinds, including shifting FX, higher inflation, and rising interest rates; WBA extends losses after disappointing guidance yesterday, hitting 52-week lows; DXCM said the new Dexcom ONE continuous glucose monitoring (CGM) system will launch in U.K. in May

Industrials & Materials

·     Aerospace & Defense; AER said it will provide 10 new Airbus A320neo, two new A330neo jets to Italian state-owned carrier ITA Airways starting next year; SAIC downgraded to Hold at Truist following F4Q22 results and FY23 guidance and view the NT catalyst path as relatively light and think organic growth will need to accelerate into the mid-single-digits

·     Transports, Industrial & Machinery; Transports lagged broader market, led by declines in truckers/logistics as JBHT, ODFL, CHRW among top S&P decliners; Stephens today downgraded CVLG and WERN saying for the group its been a fun ride, but, to put it plainly, the dry-van Truckload market has peaked. While drivers and equipment remain a challenge to recruit and acquire, the driver bottleneck to capacity growth has begun to ease; CIR said in an 8-K filing Friday that it is actively exploring an exit of its loss-making pipeline engineering business and expects to complete the exit during Q2

Technology, Media & Telecom

·     Internet & Media movers: U.S. listed China stocks BIDU, BABA, JD, NTES, TCEHY, BILI, VIPS after Bloomberg reported overnight that Chinese authorities are preparing to give U.S. regulators full access to auditing reports of most of the 200-plus companies listed in New York; FSLY rises after Raymond James maintain Strong Buy rating saying proprietary tracking tool has correctly predicted Fastly’s near-term revenue growth would beat the guidance in each of the last two quarters. We believe this momentum is continuing into 2Q22

·     Semiconductors underperformed in technology with the SOX falling over 2% led by declines QCOM after being removed from an analyst focus list; AMD extends yesterday losses; the impact of industry-wide inventory disruptions to supply chains for several sectors are being impacted by chip shortages; group was broadly lower with new place to hide today

·     Software movers; DCT shares slide as Q2 results beat consensus estimates on the top and bottom line along with ARR growth of 28% Y/Y and SaaS net dollar retention of 115.5% healthy, but guided Q3 revs $71M-$73M below the $75.9M view; RBLX said AAPL’s App store offers privacy and safety benefits to its users, supporting the iPhone-maker’s bid to beat an appeal by Epic Games in a key U.S. antitrust case.

·     Hardware, Components & Services; BB reports mixed quarter as revs miss; Q4 EPS $0.01 vs. est. loss (-$0.03); Q4 revs $185M vs. est. $208M while Canaccord says F2023 guidance below their expectations; in research, AAPL, QCOM removed from JPM Focus List while adding CIEN and ANET saying they are starting to see early signs of a reversal of the Value vs. Growth momentum; DELL downgraded a second day as Goodman Sachs cuts to Neutral saying it remains inexpensive compared to its peers, but see increasing fundamental headwinds hindering this value unlock; Goldman Sachs also downgraded COMM to Neutral from Buy with $9 tgt as ongoing commodity cost inflation looks more likely to delay the company’s margin recovery