Closing Recap

Friday, August 26, 2022

Equity Market Recap

·     Stocks finish on the lows, with the S&P dropping to its 100-day moving average technical level (roughly 4,075), and the Dow down over 1,000 points, with markets better for sale most of the trading day, as it appears investors came in positioned for a somewhat “dovish” or mixed speech from Fed Chairman Powell – but that’s not what they got! Stocks had surged late Thursday to close at highs well over 1% ahead of today’s meeting, but those gains were erased. Fed Chairman Powell reiterated his prior view that the Fed will continue to raise rates to fight inflation – but with a more resolute tone saying the U.S. economy will need tight monetary policy "for some time" before inflation is under control, a fact that means slower growth, a weaker job market and "some pain" for households and businesses, he said in prepared remarks for a speech to the Jackson Hole central banking conference in Wyoming. People should not expect the Fed to dial back quickly until the inflation problem is fixed, the central bank chair added. These comments are in stark contrast to what Wall Street pundits and media have been portraying with some forecasting rate cuts in 2023 after the aggressive rate hike cycle this year! The Nasdaq 100 falls 3% in the biggest intraday drop since late June as growth stocks were hit especially hard (semiconductors fell 4%) while economic sensitive banking stocks slide as well. All 11-S&P sectors finished in the “red.” The U.S. two-year Treasury briefly popped to their highest levels since October 2007 before stabilizing near two-month highs. Traders are still divided between a 75-bps or 50-bps hike by the Fed in September, while economists see the central bank lifting rates by 50 bps at its meeting next month.

Fed Speakers:

·     Fed chairman Powell said in his comments at the Jackson Hole symposium this morning that the Fed must continue raising interest rates and hold them at a higher level until it is confident inflation is under control, a process that is likely to weaken the job market and cause some pain for households and businesses. Powell was “hawkish,” and markets are now reacting to that. While the central bank’s steps to slow the rate of investment, spending, and hiring "will bring down inflation, they will also bring some pain to households and businesses," Mr. Powell said. His commentary overshadowed comments from other Fed speakers today and yesterday.

Economic Data

·     July Personal Income rose +0.2% M/M vs. +0.6% expected and +0.7% prior while July Personal Spending rose +0.1% M/M vs. +0.4% expected and +1.0% prior (weaker on both counts). July personal saving rate 5.0% vs June 5.0%

·     July PCE Price Index: -0.1% M/M vs. +0.1% expected and +1.0% prior while on a Y/Y basis, rose +6.3% vs. +6.3% expected and +6.8% prior (so in-line).

·     July Core PCE Price Index rises +0.1% M/M vs. +0.3% expected and +0.6% prior, while on a Y/Y basis rise +4.6% Y/Y vs. +4.7% expected and +4.8% prior (slightly better)

·     Advance July goods trade balance a deficit -$89.06 B dollars, better than the expected deficit around -$98B (in March of this year was -$125B the all-time highs); U.S. Advance July wholesale inventories +0.8% and U.S. Advance July retail inventories excluding autos +0.4%

·     University of Michigan surveys of consumers sentiment final Aug 58.2 vs. est. 55.2, preliminary aug 55.1 and final July 51.5; current conditions index final aug 58.6 vs prelim aug 55.5 and final July 58.1; expectations index final aug 58.0 vs prelim aug 54.9 and final July 47.3

·     University of Michigan surveys of consumers 1-year inflation outlook final August 4.8% vs prelim 5.0% and final July 5.2% (improvement) and the 5-year inflation outlook final August 2.9% vs prelim 3.0% and final July 2.9% (also better)

Commodities, Currencies & Treasuries

·     Oil prices manage to close higher, as WTI crude rises $0.54 or 0.58% to settle at $93.06 per barrel, rising nearly 3% on the week, while Brent crude futures settle at $100.99/bbl, up $1.65, 1.66%. Natural gas prices pull back but remain at historic highs, falling 0.6% to $9.316/MMBtu

·     The U.S. dollar jumped on more hawkish outlook for interest rates, with the euro falling below parity vs. the US dollar for the 5^th time since occurring. 

·     Gold prices slip -$21.60 or 1.2% to settle at $1,749.80 an ounce, falling -0.7% for the week as comments from Fed Chair Powell indicated more aggressive hikes soon.

·     Treasury yields all over the place, with the benchmark 10-yr hitting highs around 3.09% briefly after Fed Chairman made his comments at Jackson Hole at 10:00 AM but hit session lows below 3.01% nearly 2-hours later as markets remain confused as to the trajectory of yields given mixed messages about the economy and rates.

·     Cryptocurrency prices retreated, following stocks lower as hawkish comments from Federal Reserve Chairman Jerome Powell spurred a broad-based selloff in risk assets. Bitcoin was down 4.7% to $20,600 in recent trade, while Ethereum’s Ether token was down 9% at $1,550. Other popular cryptocurrencies including Cardano and Solana also saw prices decline.

Sector News Breakdown

Consumer

·     Retailers: GPS shares rose overnight after surprise Q2 profit and beat Q2 revenue expectations, but an inventory glut and weak sales of outdated clothes prompted it to withdraw annual forecasts; FTCH posted a Q2 rev and EBITDA beat, FY guide lowered slightly due to FX, but break-even EBITDA this year intact; consumer retail had a rough week with several misses/lower guides weighing on confidence, not helped by tough talk on rates by Fed Chair Powell today – lower results this week from likes of DG, DLTR, JWN, ANF, BURL, PTON, CTRN, WOOF

·     Consumer Staples: ULTA posted a strong quarterly beat, and raised guidance as sees FY op margin 14.6%-14.8%, vs. prior 14.1%-14.4% and raises FY comp view to +9.5% to +10.5% from +6% to +8% while Q2 comps rose a strong +14.4%; food and beverage companies are racing to keep operations running during a nationwide shortage of carbon dioxide, the WSJ reported. Companies including TSN and KHC have been searching for carbon dioxide as supply disruptions this summer exacerbated existing shortages, threatening production of goods from cold cuts to beer

·     Casinos, Gaming, Lodging & Leisure sector; in casinos sector (MLCO, WYNN, LVS), Macau’s economy contracted by 39.3% in the second quarter from the same period a year earlier, statistics data showed on Friday. Tourist arrivals fell 27.5% on year in the quarter as the city was impacted by COVID-19 pandemic; SIX shares fell after another accident (out last night) as a roller coaster malfunction at NJ’s Six Flags Great Adventure Leaves 14 Hurt; casinos (WYNN, MGM) and cruise lines (CCL, RCL, NCLH) saw weakness after Fed Chairman Powell said the economy will need tight monetary policy "for some time" before inflation is under control, a fact that means slower growth, a weaker job market and "some pain" for households and businesses.

Energy, Industrials, and materials

·     E&P and Majors; COP was strong early, rising an 8^th straight day, while rest of energy space was mixed; in solar, JKS shares rallied initially after earnings results; FSLR upgraded to Buy from Neutral at Bank America; the Baker Hughes (BKR) rig count showed total rig count +3 to 765, oil rigs rise 4 to 605 and gas rigs down 1 to 158

·     Transports, Industrial & Machinery; MMM shares hit lows late day, down over 8% after Reuters reported a U.S. bankruptcy judge refused to block more than 230,000 lawsuits accusing 3M Co of selling allegedly defective earplugs to the U.S. military from moving forward, saying the bankruptcy of the subsidiary that made them did not necessarily protect the parent company. Hawkish comments from Fed Chair Powell sunk industrials, HVAC, multi-industry on concerns of impact to consumers and companies; U.S. DOT said that passenger air travel service complaints jumped 35% in June over may and are up 270% over pre-pandemic levels (UAL, DAL, LUV, JBLU); UNP was downgraded to Neutral at Daiwa to reflect limited earnings upside potential beyond our estimates, especially in a slowing environment

·     Metals & Materials; shares of FCX, SCCO, active in copper, Codelco adjusts 2022 production forecast to the lowest level in 14 years, saying it has announced that it cannot achieve its 2022 copper target of 1.608mt and has cut this to 1.489-1.509mt, i.e. ~100kt lower as per article in Diario FInanciero) https://bit.ly/3cokhhS ; CF, MOS outperform as fertilizer names stay strong – recall this week soaring gas prices are forcing producers to curb operations (Yara was one and Grupa Azoty trimmed ammonia output on record gas prices Monday)

Financials

·     Bank movers: both US and European banking stocks trade lower following a hawkish speech by U.S. Federal Reserve Chairman Jerome Powell. Powell said in a widely anticipated speech that the Fed must press on with interest-rate hikes to control inflation; shares of C, CS, DB, GS, JPM, WFC among the big banks pressured

·     FinTech & Payments; AFRM slides as results showed a beat on revenues, driven by GMV growth as well as higher interest income and greater servicing income, but op expense rose $53M Q/Q to $461M, the driver for the comprehensive loss of $201M said Jefferies – co sees Q1 revs $345M-$365M below est. $386M and lower year revs as well; the guidance weighed heavily on the FinTech sector – PYPL, SQ, UPST, GPN, more

·     Financial Services: FDS upgraded to Buy from Hold and raise tgt to $507 saying they have been warming up to the FactSet story since initiation as come to learn more about the company at its April investor day and meetings, we hosted with new CFO Linda Huber in June.

Healthcare

·     Biotech movers: SGEN shares slipped after Bloomberg reported MRK’s talks to buy the company have stalled for now, having failed to agree on a price; MRNA said it is suing PFE and BNTX for patent infringement in development of COVID-19 saying they copied MRNA technology that Moderna had developed years before the pandemic; ETNB said its experimental drug pegozafermin met its main goal in a mid-stage trial

·     Healthcare Services: in managed care, California announced the long-awaited Medi-Cal intent to award contracts, with MOH, CNC and ELV securing contracts, though MOH the largest net winner, adding 1.36M members, while CNC would lose the most at 1.23M (takes effect Jan 1 2024). Other plans, including CVS, UNH and Blue Shield of California, were not selected but have minimal legacy share. Elevance is expected to lose ~109k, CVS/Aetna is expected to lose 46k, and UNH is expected to lose ~30k. (according to Credit Suisse and Opco)

Technology, Media & Telecom

·     Media, Internet; META CEO Mark Zuckerberg reveals Co’s new virtual reality headset will be launched in October; the highly anticipated headset, code-named Project Cambria, is centerpiece of Co’s plans for metaverse; BABA, BIDU, PDD, JD and other US listed China stocks rise early after the US and China reach prelim agreement on audit inspections (which was source of strength yesterday). Chinese regulator said the next step is for both sides to conduct inspections and investigations of relevant accounting firms, and make objective assessment (shares slipped with broader market declines)

·     Software news: EA +5%; shares had been higher by over 15% pre mkt after reports by USA Today’s "For the Win" portal, citing GLHF sources that AMZN was expected to make a bid; shares pared gains after CNBC’s David Faber said AMZN is not expected to make a bid for EA https://bit.ly/3RetCHS ; EVBG +14%; after Bloomberg reported the Co is exploring strategic options including a sale; said potential buyers could include industrial companies and private equity firms, though Co could choose to stay independent, https://bloom.bg/3RdXeFg

·     Software earnings: WDAY delivered a strong F2Q23 print that beat top-line expectations with better-than-expected profitability as the company closed two of the largest 1Q slipped deals; ESTC said it doubled its loss in latest quarter, widening to $69.6M from $34.5M y/y but adj was better than estimates and revs rose to $250.1M topping the $246M estimate; SUMO 2Q adj EPS ($0.10) vs est. ($0.14) on revs $74.1Mm vs est. $71.5Mm; sees 3Q adj EPS ($0.15) vs est. ($0.16) and revs $73.5-74.5Mm vs est. $73Mm; DOMO reported disappointing F2Q23 results, with non-GAAP EPS of ($0.26) (est. ($0.33)) on total revenue of $75.5M (est. $76.4M), up 20% y/y, down from 24% last quarter, billings of $72.3M, (est. $71.9M), up 21% down from 25% last quarter

·     Hardware, Components & Services; DELL posted its slowest revenue growth in six quarters, hurt by a rising dollar/impact in China, on in-line revs as consumer revenue fell 9%, but commercial revenue rose by 15% to $12.1B; net income from continuing operations fell to $506M from $629M y/y; OTEX said late Thursday it would acquire British software firm Micro Focus International Plc in a $6-billion deal, including debt; Panasonic Holdings Corp, a supplier to electric-car maker TSLA is in talks to build an additional electric vehicle (EV) battery plant in the United States at a cost of around $4 billion, the Wall Street Journal reported; AAPL shares weak late day after reports the DOJ in beginning stage of drafting an antitrust complaint against Apple, and could sue as early as this year. A case could include both App Store stuff and other issues around hardware access, ie. the complaint

·     Telecom movers: TMUS will use Elon Musk-owned SpaceX’s Starlink satellites to provide mobile users with network access in parts of the United States, the companies announced on Thursday, outlining plans to connect users’ mobile phones directly to satellites in orbit

·     Semiconductors: MRVL Q2 results in-line while sees Q3 revenue of $1.56B plus/minus 3% vs. est. $1.58B and EPS 59c plus/minus 3c vs. est. 61c; overall growth sector slammed with broader tech as semi index fell over 4.5% on day, dragged down by players including NVDA