Closing Recap

Wednesday, April 13, 2022

Equity Market Recap

·     After declining three consecutive days on rising inflation fears (aggressive Fed rate hikes), surging Treasury yields (hitting 3-yr highs this week) and concerns into earnings, stocks rebounded sharply led by broad gains outside of defensive sectors. Ironically, the all-day market surge came despite those same issues after we saw another hawkish inflation report (PPI record highs), weaker earnings in the financial sector (JPM earnings miss), and surging energy costs as oil gains nearly 10% in 2-days. Investors haven’t passed up too many 3-day market pullbacks over the last year, and today was no different with stocks rising from the open and trending higher throughout to settle near the highs as fear took a back seat. Strength in consumer discretionary and travel helped buoy the S&P and Nasdaq after better quarterly results and outlook comments from airline Delta (DAL). With today’s rally, the S&P 500 bounced off its 50% retracement of March rally (roughly 4,385), reclaiming its 50-day moving average resistance (about 4,416), with the 200-day MA resistance higher (around 4,488). It was a market “melt-up” into the close heading into the final day of trading tomorrow (markets closed for Good Friday).

·     Stock & Sector movers: JPM leads financials lower after EPS miss, weak investment banking revs, higher credit provision costs ahead of bank earnings from Citi, WFC GS MS PNC USB tomorrow morning; DAL leads airlines higher after better qtrly revs, smaller EPS loss and better month travel metrics; boosts other airless AAL UAL LUV; also strength in the leisure/travel space CCL MAR BKNG LVS as numbers help boost sentiment for travel/return to normalcy post pandemic; PYPL slides as CFO leaves; ABBV tumbles on news vice Chairman to exit; ATRS rises on M&A headlines with HALO; SRRA surges on M&A headlines with GSK; MRNA BNTX NVAX vaccine makers outperform as biotech space outperforms; metals/materials rise on further supply disruption fears as Ukraine/Russia was ongoing UEC AA CLF NUE.

Economic Data:

·     Producer Price Index (PPI) for March rises +1.4% m/m vs 0.8% previous and est. +1.1%, while headline PPI on a y/y basis surges +11.2% vs 10.0% previous and est. +10.6%; the core PPI (ex Food & Energy) rises +1.0% m/m/ for March vs 0.2% previous and +0.5% estimate and y/y rises +9.2% vs. 8.4% previous and above est. +8.4%

Commodities, Currencies & Treasuries

·     Oil prices closed out a good day near the highs, rising $3.65 or 3.63% to $104.25 (highs $104.43), bringing its 2-day gain to nearly 10% after Russia President Putin said yesterday that peace talks with Ukraine had hit a dead end, fueling supply worries, while extended lockdowns in China amid an attempt to contain Covid virus outbreaks also boosted prices. Natural gas prices topped $7.00 mln btus – highest since late 2008 (also up more than 50% since the end of February). Earlier today, the IEA said cut its forecast for global oil demand this year after China reimposed lockdowns. AAA data shows U.S. average price at $4.08/gal on Wed versus w/ $4.33 a month ago & $2.86 y/y.

·     Gold prices edge higher for a 5^th straight day, up $8.60 or 0.4% to settle at $1,984.70 an ounce, its highest level in a little over a month. Prices have risen amid surging inflation data points this week from CPI yesterday, PPI today and a spike in UK inflation as well. Gold prices have rallied recently despite a 9-day win streak for the U.S. dollar that was snapped today. Rising interest rate expectations has boosted the buck and Treasury yields over the last few weeks.

·     Treasury yields slide, pulling back from 3-year highs as the benchmark 10-year falls to lows around 2.65%, down from overnight highs around 2.79%. Yields fell despite another “hawkish” inflation report as the PPI posted its highest jump on record. The 2-yr yield dropped about 6 bps to 2.33% after hitting highs above 2.6% just last week. The spread between the 2 and 10-yr around 35 bps after the curve inverted to begin the month.

Sector News Breakdown

Consumer

·     Retailers; BBBY posted an expected quarterly loss as well as a shortfall on sales saying comp sales were down -12% impacted by supply chain disruptions and inventory challenges (est. for -8.5% decline), while sees Q1 current trend negative adj. EBITDA; BBBY CEO said industry trends have worsened since February as macro market volatility and overall consumer uncertainty has surged (stock down big early before paring losses); PTON shareholder Blackwells Capital reiterates its call for Peloton’s Board to sell the company noting that first 60 days under new CEO has cost shareholders nearly $2 billion in lost market value; PVH reaffirms guidance, and announces stock buyback; GPS shares outperformed the broader retail index; warehouse stocks COST, BJ, WMT outperformed in retail; AMZN said to charge merchants 5% surcharge for fulfillment services as fuel costs rise.

·     Housing & Building Products; The average interest rate on the 3-year home loan rose to more than 5% last week, the highest level since November 2018, and homebuyers hurried to make purchases before costs rise further, the Mortgage Bankers Association (MBA) showed. The average contract rate on a 30-year fixed-rate mortgage increased to 5.13% in the week ended April 8 from 4.90% a week earlier. It is up more than 1.5 percentage points since the start of the year which has crushed homebuilders TOL, LEN, PHM, etc. and XHB down 28% YTD

·     Consumer Staples & Restaurants: defensive names such as HSY, KO, recently hitting all-time highs but the defensive group mixed today as investors rotate back into tech; in research, REYN downgraded to Hold at Stifel and reduce estimates mainly due to greater anticipated gross margin pressure from higher input costs, while continue to recommend IFF shares despite reducing 2022-2023 EBITDA estimates for input cost and FX pressures

·     Casinos, Gaming, Lodging & Leisure sector; strength in travel and leisure names after better DAL numbers help boost sentiment for travel and return to normalcy post pandemic (CCL, NCLH, MAR, RCL, BKNG, LVS higher among top gainers in the S&P early)

Energy

·     Energy stock movers: not much in way of stock news as the macro picture continues to dominate the price of oil. Today the IEA cut its forecast for global oil demand this year after China reimposed lockdowns to contain the spread of a resurgent coronavirus. Lowered projections for world fuel consumption this year by 260,000 barrels a day, with a particularly steep reduction of 925,000 a day for China in April.

·     Inventory data: The American Petroleum Institute (API) reported crude inventories rose 7.8M barrels in the latest week while inventories at Cushing rose 400K barrels on the week; gasoline inventories fell -5.1M barrels and distillates fell -5.0M barrels. The EIA said U.S. crude oil inventories actual showed 9.38M barrel build vs 2.4M prior and more than est. of 1.0M barrel build; Cushing crude oil inventories actual 450K build vs 1.6M build prior; gasoline inventories fell 3.6M barrels vs. prior draw -600K

Financials

·     Bank movers; another rough day for major U.S. banks, adding to the recent weakness after JPM posted a 42% decline in Q1 profit as deal making slowed (posted 28% drop in Q1 investment banking) and started building loan loss reserves (provision for credit losses surges to $1.46B) amid high inflation and the Ukraine crisis; SCHW elevated to Top Pick at Morgan Stanley as see a compelling entry point given that shares are down -5% YTD (vs peer LPLA up +26% YTD and S&P500 down -8%)

·     Asset managers and Brokers: BLK Q1 adjusted EPS $9.52 vs. est. $8.84; Q1 revenue $4.7B vs. est. $4.73B; Q1 adj operating margin 44.2% and assets under management $9.67 trillion; MN has reported prelim AUM of $20.6B for March, compared with Feb AUM of $20.8B and Jan AUM of $21.4B; VCTR preliminary assets under management of $178.1B as of March 31, 2022, increased from $176.0B as of Feb. 28, the company said Tuesday; APO upgraded to Outperform with a $64 price Target at Oppenheimer on attractive valuation and a strong outlook noting private equity–based "Alt" sponsors’ stocks are down 18% YTD, and the group’s relative multiple has pulled back from 124% of the S&P to 103%, with APO, CG and KKR all trading well below that level.

·     Bitcoin, FinTech & Payments; PYPL announces departure of CFO John Rainey (going to WMT); Gabrielle Rabinovitch will serve as interim chief financial officer upon Rainey’s departure. Also, a media report said PayPal has laid off its team responsible for quantum computing, cryptography, and distributed ledger technology; TPTX shares jumped as lead drug shows strong response rate among patients with advanced non-small cell lung cancer in early-to-mid stage trial

·     Consumer Finance; credit card names (AXP, COF) not impacted too much from JPM results as one analyst noted JPM metrics on US consumer cards remain very healthy. Card spends +29% y/y, led by travel & dining. 90day+ delinquencies ticked up very modestly vs Q4 to still very low 0.54% & down sharply from 0.8% last year. No sign of stress in 30day+ either

Healthcare

·     Pharma movers; GSK to acquire SRRA in a $1.9B cash deal to bolster its cancer drug portfolio as outstanding shares of Sierra will be cancelled and converted into the right to receive $55 per share in cash https://bit.ly/378r9h3 ; ATRS to be acquired by HALO in a cash deal valued at $960M with ATRS holders to receive $5.60 for each share held https://bit.ly/3KIVXmU ; BCTX rises as the FDA granted Fast Track status to BriaCell’s lead candidate, Bria-IMT, for the treatment of metastatic breast cancer; CRNX 5.63M share Secondary priced at $22.22; ABBV falls as Vice Chairman Michael Severino is leaving the company, effective May 31, to join bioplatform innovation firm Flagship Pioneering as chief executive-partner

·     Biotech movers; vaccine names strong all day with MRNA rising; NVAX said its protein-based COVID-19 shot receives conditional marketing authorization in Switzerland; AFMD 22.5M share Spot Secondary priced at $4.00; LQDA 9.804M share Spot Secondary priced at $5.10

·     MedTech Equipment; NSTG shares tumble as cuts Q1 revenue view to $31M from $34M-$38M (est. $35.8M) impacted primarily as uneven sales execution resulted in an imbalance between capturing Q4 revenue and developing our Q1 2022 funnel of opportunities

·     Healthcare Services; HUM upgraded from Neutral to Buy at UBS and up tgt to $520 from $486 predicated on belief that HUM can return to above industry growth levels for individual MA and show margin expansion. Said channel checks pointed to increased compliance requirements being the root cause of the membership decline during AEP…but issues appear addressable

Industrials & Materials

·     Aerospace & Defense; in research, CACI was downgraded to Neutral from Buy as continues to view CACI as a unique margin expansion story with accelerating growth, but prefers BAH (which is upgraded to Buy with $102 tgt) and LDOS where sees greater visibility and near/medium term growth drivers; BA among Dow leaders, helping boost industrial stocks

·     Materials, Industrial & Machinery; FAST Q1 revenue jumps 20.3% to $1.70B, slightly above ests saying growth is due to improved unit sales across most products to its traditional manufacturing and construction customers, while EPS also beat while March sales up 19.1% to $632.63M; MTZ tgt to $96.50 from $117 at Stifel as continue to like MasTec’s exposure to what they believe will be robust spending trends over the next 5 years. But see several risk factors to drive uncertainty; for CARR, WSO, KeyBanc says despite headline macro concerns, Resi HVAC demand remains strong with lingering supply chain issues despite an improving inventory picture, per channel checks; big gains in metals with AA, CLF TECK (52-week highs) surging

·     Transports; Dow Transports solid rebound, with airlines outperform following earnings results from DAL as posted smaller Q1 adj EPS loss ($1.23) vs. est. loss ($1.27) and revs $9.35B vs. est. $8.92B, sees June quarter 2022 capacity up about 84% vs June quarter 2019 and March month adjusted TRASM inflected to positive versus 2019 (AAL, JBLU, UAL higher); in truckers, JBHT upgraded to Buy from Hold at Deutsche Bank it appears we are mostly through this period of significant near-term volatility

·     Chemicals: ASH guided Q2 adj EPS $1.50c above consensus $1.14 and sees Q2 rev $604M well above consensus $575.31M saying it saw continued strong end-market demand; Disciplined pricing and product mix actions more than offset additional inflation in raw-material; BASFY, COVTY both downgraded to Hold from Buy at Stifel warning macro developments will hit the European chemicals sector as Russia’s invasion of Ukraine adds to rising energy costs and supply concerns; also cuts BASF’s Target price by a fourth to EUR 63 to reflect lower estimates, saying 2023 EBIT could fall by 15% year-on-year due to the macro slowdown; in fertilizers, KPLUY raised its 2022 core profit outlook, as it expects rising average prices in the agriculture customer segment to outweigh energy, logistics and materials cost increases as now sees Ebitda for year 2.3-2.6B euros above the consensus of 2.16B euros (shares of MOS, NTR, CF active in reaction)

Technology, Media & Telecom

·     Semiconductors; group bounces after falling 5 of the last 6 trading days with solid gains across the board early; in semi equipment Deutsche Bank lowered tgts on AMAT tgt to $145 from $180, KLAC to $425 from $475, ENTG to $145 from $160, LRCX to $560 from $650, MKSI to $170 from $200 as expect stock volatility to remain elevated as we go through the 1Q earnings season, with a tug of war between those who are worried about a cyclical peak and those who believe in structural improvements in the industry. Fundamentally, we believe companies will continue to sound bullish on demand despite ongoing supply constraints; SNPS slides after receives subpoena from commerce dept on China transactions

·     Media & Telecom movers; Deutsche Telekom said it has bought additional shares in TMUS from Softbank for $2.4 billion as part of a deal agreed in 2020; the purchase of the 21.2M shares via a call option raises Deutsche Telekom’s stake in T-Mobile US to 48.4% from below 47%, as planned; GOOGL unveiled its plan to invest about $9.5B across its U.S. offices and data centers in 2022, up from $7B in 2021; SQSP slides early as CFO Marcela Martin announced her intention to resign as chief financial officer effective July 31, 2022