Closing Recap

Friday, April 12, 2024

U.S. stocks turned sharply lower on Friday following a convergence of factors that raised caution into the weekend, pushing major averages lower again on the week. Major U.S. banks reported mixed results (JPM, C, WFC) in the first round of financial earnings, capping a week marked by market-moving inflation data, evolving expectations for U.S. Federal Reserve policy, and looming geopolitical tensions in the Middle East. The S&P 500, Nasdaq, Dow Jones Industrials, and the Russell 2000 all fell over 1% and posted weekly losses. So, what weighed on sentiment today?

1) Earnings were fine, but net interest income misses for JPM, WFC weighed on the banks; 2) economic data this week, particularly Wednesday’s hotter-than-expected CPI report, disappointed investors who were hoping for three rate cuts this year by the Fed, but the sticky inflation lowered those expectations. We got better PPI data yesterday, but the University of Michigan 1-yr and 5-yr inflation expectations jumped sending stocks lower; 3) oil prices jumped as tensions grow into the weekend as reported indicated Iran sent a message to the Biden administration through several Arab countries earlier this week: if the U.S. gets involved in the fighting between Israel and Iran, U.S. forces in the region will be attacked, three U.S. officials told Axios; 4) Treasury yields and the dollar have surged in recent days with the 10-yr hitting highs around 4.59% today before pulling back and the dollar index (DXY) at November highs.

Note the S&P 500 (SPX) held its key 50-day moving average support of 5,110 this afternoon, the Nasdaq gave back all its gains from Thursday, the Dow Jones Industrials Average fell over -500-points, falling for the 9th time in last 8 sessions led by weakness in component BA (which fell a 10^th straight day today), INTC down on China chip headlines (falling 7 of last 9 days), and UNH falling a 3^rd day ahead of earnings tomorrow (JPM shares also weighed on the index today post earnings). The Smallcap Russell 2000 declined over 3% this week amid rising Treasury yields/lower rate cut expectations, just holding above 2,000. Haven plays such as bonds/gold prices rise after the WSJ reported a U.S. official with knowledge of the matter said Thursday that American intelligence reports indicate an Iranian retaliatory strike within days. The CBOE Volatility index (VXI) was very volatile Friday, rising 16% to around 17.35 after hitting highs of 19.20 late afternoon (topping yesterday’s highs of 17.61), its highest levels since Oct 31, 2023 (19.86).

• University of Michigan surveys of consumers sentiment prelim April 77.9 (below consensus 79.0) and vs final March 79.4; current conditions index prelim April 79.3 vs. March final 82.5 and expectations index prelim April 77.0 vs. final March 77.4
• Inflation portion of UoM sentiment not what markets wanted to see as University of Michigan surveys of consumers 1-year inflation outlook prelim April 3.1% vs final March 2.9% and University of Michigan surveys of consumers 5-year inflation outlook prelim April 3.0% vs final March 2.8%.
• Overnight, China March exports slumped (-7.5%) year-on-year, marking the biggest fall since August last year and compared with a (-2.3%) decline forecast (they rose 7.1% in the January-February period); China Imports for March also declined (-1.9%) y/y from the 3.5% growth in the first two months, missing an expected 1.4% rise.
• China crude oil imports in March totaled 49.05 million metric tons, or about 11.55 million barrels per day (bpd), according to data from the General Administration of Customs, a 6.23% decrease from the relatively high 12.3 million bpd imported in March 2023.

• U.S. WTI crude oil futures settle at $85.66 per barrel, rising $0.64 or 0.75%, but finished well off its intraday highs of $87.67 per barrel. Meanwhile Brent moved back above $90 per barrel as Israel braced for a potential strike by Iran or its proxies, in response to an attack on its diplomatic compound in Syria last week. Overnight, the WSJ reported Israel is preparing for a direct attack from Iran on southern or northern Israel as soon as the next 24 to 48 hours. The benchmarks are down 1.4% for WTI crude and 0.8% for Brent for the week in which U.S. crude stocks rose sharply and inflation came in above-estimate.

• In Autos: Chinese electric vehicles were pressured (LI, NIO, XPEV) after Senator Sherrod Brown of Ohio said late yesterday” I’m calling for a complete ban on Chinese electric vehicles in America. We cannot allow China to bring its government-backed cheating to the American auto industry."

• In Homebuilders: Zelman Associates with several rating changes as they downgraded HOV to Underperform from Neutral and cut DHI to Neutral from Outperform while upgraded TMHC to Neutral from Underperform.

• In Energy: the sector was one of the few winners early before caving with the rest of the market and as oil prices pared gains after hitting best levels since November (XLE +14.5% YTD top performer) given rising tensions in the Middle East (Israel/Iran); XOM has made a final investment decision for its sixth oil development project in offshore Guyana after receiving the required government and regulatory approvals, the company said on as the production at the $12.7 billion project, the sixth on the Stabroek block, is expected to begin in 2027.
• In Industrials: JCI subsidiary agreed to a $750M settlement with some U.S. public water organizations that had detected "forever chemicals" allegedly associated with the use of certain products made by the company.

• 1) JPM Q1 EPS $4.44 tops consensus $4.17 (compared to $4.10 y/y) and revs rose 9% y/y to $41.9B vs. est. $41.64B; net interest income (NII) rose 11% to $23.2 billion while excluding the impact of First Republic, it was still 5% higher than last year; Q1 provisions for credit losses were $1.88B, below last year $2.28B; said Q1 trading revenue fell (-5%) to $8 billion, with revenue from fixed income, currency and commodities (FICC) dropping (-7%) and equities flat; Q1 investment banking revenue rose 27% to $2B on higher fees earned on debt and stock underwriting; said sees FY2024 firmwide net interest income of about $90b, market dependent; said looking ahead, we remain alert to a number of significant uncertain forces.
• 2) WFC net income declined to $1.20 EPS for Q1 from $1.23 y/y, but above ests $1.00 as Q1 revenue $20.86B tops est. $20.21B; said net interest income (NII), the difference between what it earns on loans and pays out for deposits, fell (-8%) to $12.23B vs. est. $12.32B; said sees 2024 net interest income down between 7%-to-9% vs Fy23, unchanged from prior guidance; said Q1 credit loss provision fell to $938M, which included a decrease in the allowance for credit losses (vs. est. $1.27B); Q1 Net interest margin (NIM) was 2.81% vs. est. 2.84%.
• 3) Citigroup (C) Q1 net income fell to $3.4B from $4.6B y/y, but overall EPS $1.58 topped consensus $1.11 on better revs which were down -2% y/y to $21.1B but above est. $18.78B and guided 2024 revs 1.8%-3% higher (or $80B-$81B) from $78.5B in ’23; said credit costs of $2.2B were driven by higher non-conforming loans of $1.9B; Q1 Trading revenue fell (-7%) to $5.4 billion, dragged lower by fixed income and currencies, while its Wealth management revenue shrank 4% to $1.7B and investment banking revenue was $903M above street.
• In Asset managers: BLK Q1 adj EPS $9.81 vs. est. $9.35; Q1 revs $4.73B vs. est. $4.68B; Q1 assets under management rose 15% y/y to $10.47 trillion (vs. $9.09 last year); Q1 Investment advisory and administration fees, typically a percentage of AUM and BlackRock’s chief source of revenue, jumped nearly 8.8% to $3.63B.
• In Insurance: GL shares partially rebound after falling -53% Thursday on a short call from Fuzzy Panda (stock was down a 10^th straight day), as the company refuting the allegations in the short call; PGR Q1 net premiums written $18.96B, vs. Bloomberg est. $17.6B and Q1 net premiums earned $16.15B, vs. est. $15.87B, while Q1 combined ratio reported 86.1%, vs. est. 88.1%.
• In Crypto: APLD Q3 revenue $43.3M below consensus est. $47.9M on wider than expected Q2 EPS loss (-$0.52); said encountered several challenges in quarter that impacted their financial performance due to facility power outages in our datacenter hosting business.
• In Lending: The White House announced another round of student loan cancellations for nearly 277K borrowers, cancelling $7.4B in debt as the Biden administration has now doled out $153B in student debt relief for 4.3M people through various actions. After the Supreme Court blocked the President’s signature student debt cancellation plan last year, the administration found workarounds to provide borrowers relief.

• NRIX priced upsized underwritten public offering of 10.2M shares of its common stock at $15.00 per share.
• NVO – a committee of the European Medicines Agency said Friday that a popular weight-loss drug doesn’t increase the risk of suicide. The EMA had been reviewing the so-called GLP-1 receptor agonists, including Ozempic and Wegovy from Novo Nordisk, since July 2023.
• ZTS shares slumped in pet services after the WSJ reported that the company’s arthritis drugs for dogs and cats (sold as Librela for dogs/Solensia for cats) have come under scrutiny over possible side effects  https://tinyurl.com/kav9cj6c

• In Chemicals: ECL was upgraded to Buy from Neutral and raised tgt to $260 from $216 at Mizuho saying they have gained more confidence that ECL appears to be back to its historical “beat-and-raise” visibility. CTVA was downgraded to Neutral from Overweight at JPMorgan saying 2024 is likely to begin slowly for Corteva as crop chemical de-stocking continues in South America and Europe.

• In Networking: ANET was double downgraded to Sell from Buy at Rosenblatt saying they view Ethernet as a long-term winning technology, but Arista may not benefit as much as would be needed to support the current stock price or higher. The stock trades at 40x 2025 EPS, on low-to-mid-teens growth forecasts, because most people believe Arista will be a large AI beneficiary. CSCO resumed coverage with Neutral at Citigroup and $52 tgt but opens positive catalyst watch while firm initiated CIEN with a Sell rating and $44 tgt saying the benefits from AI networking traffic are still years out.
• In Internet: NTES removed from top pick at Morgan Stanley owing to weaker growth vs peers TCOM, TME due to risks of legacy titles and tampered expectation of new titles; though remains OW on stronger 2H24 than 1H24; cut 2024 mobile game revenue growth to 11% (was 13%) and lift PC game revenue growth to -10% (was -13%).
• In Hardware/Telecom: AAPL shares held strong after its best day in 11-monhts on Thursday after a news report that the company plans a big AI-focused refresh of its Mac computer lineup; Citigroup opens positive watch catalyst on ASML (and add to European focus list in place of STM) and open negative catalyst watch on ERIC in European Telecom as foresees persistent headwinds for telecom equipment, which it thinks a near-term problem for ERIC more than NOK.
• In Software: DOCU was upgraded to Neutral from Sell at UBS and raise tgt to $62 from $48 saying while remains on the sidelines given high eSignature market penetration, competition from the likes of Adobe and mixed traction with CLM, it concludes the co has largely moved past the material post-COVID expansion headwinds. GTLB was upgraded at Raymond James to Outperform citing set up potential beat/ raise story with FY’25 30% y/y growth revenue.

• In Auto chip suppliers, Mizuho said they see elevated auto semiconductor inventories and pricing headwind weighing on analog names and sees challenges for Analog with anemic auto demand, but content per vehicle offsetting challenge for TXN and MCHP, with ON and ALGM benefit from powertrain agnostic solutions, while EV OEMs TSLA, RIVN, and NIO continue to see headwinds.
• MBLY was upgraded from Peer Perform to Outperform at Wolfe Research with $41 tgt noting shares are down 28% so far this year, compared to the S&P up 5%, Semi stocks up 30%, and Auto Suppliers down ~10%. Notes weakness driven by challenges in near-term (2024) earnings expectations, and medium-term (2026) earnings estimates, which appeared lofty as Supervision shipment forecasts needed to be reset.