Closing Recap

Tuesday, April 05, 2022

Equity Market Recap

·     Stock markets opened higher but broke down quickly following more hawkish Fed commentary, this time from Governor Brainard that got the ball rolling to the downside. There was nothing earth shattering or significantly different than comments from her other Fed counterparts recently, but it was enough to pressure stocks as Treasury yield spiked to 3-year highs and the dollar 2-year highs. Transports, Homebuilders, Retailers were among the biggest decliners today (and last few days), as well as Banks (surprisingly) despite the jump in Treasury yields across the curve. On the flip side, defensive sectors Healthcare, Utilities, Consumer Staples help soften the weakness in the S&P 500 index. After closing at the highs most of the trading days over the last 2-weeks, major averages ended near the lows. The 30-year fixed mortgage rate above the 5% mark for the first time since 2013, which could begin to really impact the housing market which is still seeing competitive bidding wars and surging housing prices.

·      Fed’s Brainard said: “combined impact of rate hikes, balance sheet reduction will bring monetary policy to more neutral position later this year and that the Fed is prepared to take stronger action if inflation and inflation expectation indicators suggest need for such action. She said the Fed will tighten monetary policy "methodically" through series of rate hikes, starting to reduce balance sheet at rapid pace as soon as may meeting and expects the balance sheet to shrink considerably more rapidly than previous recovery. None of these comments are much different than what other Fed members have said in recent week, but it was enough to turn markets lower

Economic Data:

·     February International Trade in Goods and Services showed deficit -$89.2B vs. -$88.8B consensus, vs. January deficit of $89.23B; while international trade in goods deficit narrowed to $106.6B in February; U.S. Feb exports +1.8% vs Jan -1.7%, imports +1.3% vs Jan +1.1%; China Feb trade deficit $30.67 bln vs Jan deficit $36.37 bln

·     ISM report on U.S. Non-manufacturing sector shows PMI 58.3 in March vs 56.5 in February; the business activity index 55.5 in March vs 55.1 in February; prices paid index 83.8 in March vs 83.1 in February; new orders index 60.1 in March vs 56.1 in February; employment index 54.0 in March vs 48.5 in February

·     U.S. Markit Services PMI Final Actual 58 (Forecast 58.9, Previous 58.9) and US Markit Composite PMI Final Actual 57.7 (Forecast 58.5, Previous 58.5)

Commodities

·     Oil prices fall as WTI crude dips -$1.32 or 1.28% to settle at $101.96 per barrel (off highs $105.59, but not far off the lows of $101.67). Tight supply concerns have kept prices higher over the last month or so, but a spike in the dollar and rising fears of recession fears have weakened sentiment over the last week. Gold prices slip -$6.50 or 0.3% to settle at $1,927.50 an ounce, a modest decline despite treasury yields hitting highest levels since 2019 and as the dollar index (DXY) hits highest levels since May 2020. The precious metals held up well as there remains plenty of appetite for a haven and inflation hedge. Natural gas prices jump above $6.00 mln Btus.

Currencies & Treasuries

·     Treasury yields continued to push higher with the 10-yr now up 14 bps to 2.56%, 2-yr up about 10bps to 2.526% and 3-yr up 12 bps to 2.73% as yields were at their highest levels since 2019 following more hawkish Fed commentary on rates and focus on the Federal Reserve’s unwinding of its balance sheet. Longer-term yields moved faster and partly reversing some of the recent inversion moves in the U.S. curve. Comments from Fed Governor Lael Brainard lifted yields and the U.S. dollar (hitting highest level since May 2020) after saying she expects rapid reductions to the Fed’s balance sheet alongside methodical increases to the benchmark rate. The FOMC March meeting minutes are expected tomorrow which should provide fresh details on the pace and scope of the Fed’s plans to reduce its bond holdings.

Sector News Breakdown

Consumer

·     Retailers; RL, TJX, VFC downgraded to Equal Weight from Overweight at Wells Fargo and said top Picks include BBWI (added to Signature Picks), TPR, CPRI, UAA, and NKE. While they began the year with a more bullish view on the group, following a laundry list of growing headwinds, now take a more cautious stance in the near term; FTCH said it plans to invest up to $200 million for a minority stake in Neiman Marcus Group as part of a global partnership with the parent of the Neiman Marcus and Bergdorf Goodman luxury brands.

·     Auto sector; GM and Honda will codevelop affordable EVs targeting the world’s most popular vehicle segments; electric vehicle stocks little weaker early after outperformance yesterday (TSLA, NIO, NKLA); CHPT said Antara Capital LP to invest $300 mln through purchase of convertible senior notes due 2027 to support co’s growth; CVNA downgraded from Outperform to Sector Perform w/ $138 PT from $155 at RBC Capital saying they are no longer able to justify the risk/reward as asymmetrically positive for CVNA and thus, downgrade to Sector Perform.

·     Housing & Building Products; homebuilders fell as Treasury yields surged to highest levels since 2019, pushing mortgage rates higher and pressuring the industry (LEN ); OC downgraded to Hold at Truist as expect OC’s European & Asian industrial insulation & composite fiberglass businesses (30% of sales) to see pressure from slowing demand and higher cost and see price/cost in roofing shifting to modestly negative as 2022 progresses

·     Consumer Staples; defensive food stocks among early gainers in the S&P with HSY, KR, SJM, CHD, CAG all moving higher in rotation out of riskier assets; BRCC downgraded to Market Perform at Raymond James noting the shares have performed very well of late, having appreciated >50% in the past month (+29% on Monday alone) and so believe a neutral stance is justified

·     Restaurants; DPZ downgraded Outperform to Market Perform and lowering PT to $390 from $480 while lower 2022-24E EPS further below consensus, driven by a disappointing 2022 U.S. franchise opening projection in the FDD; SBUX downgraded to neutral from Buy and lower PT to $91 from $105 as suspension of share repurchases a surprise to us at Wedbush

·     Casinos, Gaming, Lodging & Leisure sector; cruise lines strong early after CCL said it had its busiest booking week in the company’s history, seeing a double-digit increase between March 28 and April 3 from the previous seven-day record, and is operating nearly at its pre-pandemic capacity as 22 of its 23 ships are back in operation (RCL, NCLH also active)

Energy

·     Energy stock movers; oil prices were all over the place this morning, while natural gas prices jumped; Russia expects to earn 798.4 billion rubles ($9.6 billion) in additional revenue from energy sales in April due to high oil prices, the finance ministry said, as Moscow needs cash to finance its obligations, Reuters reported; Citigroup lowered estimates for SLB, BKR, WHD, CHX and NEX, while we remain below consensus on NOV saying incremental cost pressure, supply chain constraints and FX were primary culprits, and likely linger into 2q

·     Utilities & Solar; coal stocks were strong early (HCC ) following reports that the European Union is planning to propose a mandatory phaseout on coal imports from Russia; in solar, FSLR downgraded to Underperform with $65.50 tgt at Bank America saying the stock has risen nearly 30% off a February low and "at the end of the day, expansion is not backed by fundamentals, leaving shares susceptible to significant derating; in renewables/clean energy, XYL upgraded to Market Perform at Raymond James and downgrading EVA (to MP), NEP (to UP) as part of a series of rating changes within an earnings update on the renewable energy and clean technology sector.

Financials

·     Bitcoin, FinTech & Payments; Wells Fargo initiates coverage with Overweight ratings in payments/FinTech on: ADYEN, BILL, FIS, FISV, FLT, FLYW, GPN, MQ, PAY, PYPL, SHOP, SQ, TOST and WEX – a bullish stance as see a $1.5T annual revenue opportunity for Fintech companies globally, and expect 6% annual growth over the ensuing decade; MARA produces a record 1,259 Bitcoin in Q1 2022, up 556% year-over-year from q1 2021 and up 15% sequentially from q4 2021; total Bitcoin Holdings Increase to 9,374 BTC; COIN tgt cut to $190 from $210 at Mizuho; MSTR said it bought about 4,167 bitcoins for ~$190.5 mln cash

·     Services, Consumer Finance; MKTX reported trading volume for March of $894.6 billion vs. $689.6 billion y/y; U.S. high-grade volume $134.13 trillion vs. $145.7 billion y/y; other credit volume $150.95 trillion vs. $146.87 billion y/y; TW reports record trading volume of $28.2 Trillion in March with 14.0% yoy increase in average daily volume; PYPL announced the introduction of the new PayPal Cashback credit card, issued by SYF, which gives customers even more cash back when they shop with PayPal

Healthcare

·     Pharma movers; TEVA upgraded to Overweight from Equal Weight at Barclay’s and raise tgt to $13 from $11 as 1) raising bHumira revenue estimates for AVT02 (bHumira) factoring $300M p.a. for TEVA (potential for ~$500M p.a. with high-conc. interchangeability being the key swing factor); 2) a global opioids settlement likelihood rising post recent settlements; 3) BD flexibility and pipeline rebuild; TBPH announces results from study 0170, a second phase 3 study of ampreloxetine, in patients with symptomatic neurogenic orthostatic hypotension; SAVA falls as patient enrollment lags for Alzheimer’s drug studies, said STAT News

·     Biotech movers; MRNA falls after Bloomberg reported the African Union and COVAX, the WHO-backed group, decided not to obtain more of its COVID vaccine as developing nations struggle to inoculate; RCUS said it is set to join the S&P SmallCap 600 before the market opens on Thursday; BNTX tgt cut to $300 from $450 at Canaccord saying they remain optimistic for BNTX’s prospects but lower tgt largely on reduced revenues due to its commitment to democratized novel medicine access; DNA files to sell 292M shares of common stock for holders; BLUE says it will reduce its workforce by ~30% as part of its restructuring efforts and sees about $160M in cost savings over next 2-years

·     Healthcare Services; in managed care (UNH, HUM, CNC), CMS released FY2023 MA rates late Monday that implement a favorable increase of 5.0%, which was a modest improvement on the already strong 4.48% in the proposed rule. The improvement is due to benefits from the effective growth rate of 4.88% (4.75% proposed) and a 0.39% benefit from re-basing/re-pricing; UNH and CHNG agreed to extend the closing date of their merger by another nine months to Dec. 31, the companies said. Under the latest extension terms, UnitedHealth’s Optum unit, will pay a $650 million fee to Change if the deal is not completed due to the court’s decision

Industrials & Materials

·     Aerospace & Defense; LMT, RTX picked by Australia to help build guided weapons in the country and said it would accelerate the deployment of new long-range missiles; RKLB said it will attempt first mid-air helicopter recovery of its Electron rocket in its next mission; BA slipped after the WSJ reported factory problems disrupted production of one of its new Air Force One planes earlier this year, adding to the manufacturer’s stumbles developing the U.S. presidential jets

·     Industrial & Machinery; AYI FY2Q22 results delivered clear upside to expectations for revenue, OM, and earnings; PCAR downgrade from Buy to Hold at Jefferies and cut tgt to $85 from $100 as now believe 2023 will likely be this cycle peak vs our previous expectation for an elongated cycle; GNRC upgraded to Buy from Neutral with $410 tgt at Goldman Sachs as see products that are in the early phases of the adoption curve, rising distribution "store count" footprint, and the broadest product portfolio within its top products; CX downgraded to Neutral from Buy at Goldman Sachs and cut tgt to $6

·     Transports; Dow Transports fall for 5th straight day of losses, down another 2% today, down 7% to start the month and down 9.5% over the 5-day decline on rising recession fears and impact on travel/costs – nearly all 20 components in index are down again today; UPS was downgraded to Peer perform from Outperform at Wolfe as believe freight demand is likely to slow from here, and pricing will likely follow, supply chain congestion is easing

Technology, Media & Telecom

·     Semiconductors; MU appoints Mark Murphy as executive vice president and chief financial officer; ADI held its investor day; chipmakers in general declined with all 30-SOX index members falling (index down 4.5%) after comments from U.S. Federal Reserve Governor Lael Brainard spooked markets already on edge over faster rate hikes and the prospect of fresh sanctions on Russia; big “risk-off” day for software, IT, semis and large cap.

·     Internet, Media & Telecom movers; TWTR said to appoint Elon Musk on board of directors; said for so long as Elon musk is serving on board and for 90 days thereafter, Musk will not become owner of over 14.9% of Co’s stock as added to company’s board to serve as a class II director; in Telecom Operators and Cable, Citigroup said they remain a Buyer of TMUS shares as our top-ranked pick and we continue to advocate a pair-trade for TMUS to outperform Neutral-rated CHTR; VOD was downgraded to Hold from Buy at Berenberg