Closing Recap

Monday, August 29, 2022

Equity Market Recap

·     Friday’s equity market action was ugly, no doubt. A few observers noted 3%+ down moves on Fridays have historically been followed by an average -1.5% move in the next session but, with the implied probability of a +75bps move by the Fed climbing to over 70%, equities more or less shrugged off Friday’s move and today’s rise in 10-year US Treasury yields to finish only modestly lower (about 0.5%). A different view of the Friday action came from economist Robin Brooks, “Are we overheating or is the COVID recovery just super noisy? Lots of evidence to support the latter. We’ve had many BIG data surprises, including on payrolls and inflation. Truth is we’ve never had a COVID recovery before & our forecasts suck. A reason why the Fed SHOULD pivot!” Perhaps we remain rangebound while the market waits for more data.

·     Sector-wise, Energy (XLE) was the big winner today as oil rebounded back above $95/bbl and pulled equities with it. Utilities (XLU), Consumer Staples (XLP) and Industrials (XLI) also outperformed among S&P sector groups. Technology (XLK) and Healthcare (XLV) lagged. While a note out of Goldman indicated mutual funds and hedge funds are rotating from value into growth, today’s action skewed the other way with the Russell 1000 Value modestly outperforming its Growth counterpart.

Commodities, Currencies & Treasuries

·     WTI crude oil rallied $3.95, or +4.24%, to settle at $97.01/barrel. The move pushed oil to the highest settlement price since July 29, and generally marked supply risks. Concerns over increasing potential for a civil war threatening output from Libya and speculation OPEC+ is positioning for production cuts were at the forefront of today’s gains. Brent crude also finished solidly higher, settling +$4.10, or +4.06%, to $105.09/barrel.

·     Treasury yields rose as the U.S. two-year treasury yield hit its highest in 15 years above 3.48% as investors repositioned for an extended period of aggressive interest rate hikes by the Federal Reserve following chair Jerome Powell’s hawkish speech on Friday. The Fed will continue to raise rates in a bid to curtail inflation even as those rate increases cause pain for households and businesses, Powell said on Friday, in his bluntest language yet on the hiking-cycle. The 10-year yield rose over 7 bps to above 3.11%.

·     Gold futures slipped -$0.10 to $1,749.70 an ounce after hitting earlier highs of $1,757.90 during the session, pressured by a rise in U.S. Treasury yields, but with some weakness in the U.S. dollar limiting losses for the precious metal. Monthly U.S. jobs data due at the end of the week may provide clues on gold’s next direction.

Sector News Breakdown

Consumer

·     Retailers; Earnings this week from: Tuesday BBY, BIG, CONN, KIRK, CHWY, PVH; Wednesday BNED, CHS, DBI, EXPR, VRA, FIVE, and Thursday BBW, LE, OLLI, OXM, SPWH, TLYS; WMT has launched a 6.4 billion rand ($377.6 million) offer for the remaining 47% of South African retailer Massmart MSMJ.J it does not already own, valuing it at a premium of over 50%.

Energy, Industrials and Materials

·     Transports, Industrial & Machinery; MMM maintain underperform and $120 tgt at RBC Capital, and Wolfe maintained underperform and $120 tgt as well after the company was denied a stay in the combat arms process; 3M is now squarely back in the multidistrict litigation process where the company "faces a significant uptick in cases and legal costs," said one of the analysts; RBA sells $54M+ of equipment in August Houston auction; NVEE announces $100M share repurchase program; in airlines (AAL, DAL, LUV, JBLU), Bank America said booking were down -23.6% vs. the level seen in 2019 for the week ending August 21 compared to the prior week’s level of -9.3%. System volume was down 23.5% vs. 2019 and pricing edged 0.1% lower vs. pre-pandemic level.

·     Metals & Materials; in chemicals, KeyBanc downgraded DOW, LYB and WLK from Sector Weight to Underweight as see short-term risk/reward for names with meaningful commodity and European exposure skewed to the downside – expect 4Q22 margins and earnings to approach "trough" or "recession" levels, while we move to sub-normalized 2023 estimates; in metals, AA mentioned positively in Barron’s saying the company is developing a technology that could rid the aluminum-smelting process of carbon emissions. That’s a potential “game changer”; CLF and the United Steelworkers union reached a tentative labor agreement that will provide improved wages and other benefits to 12,000 workers in six states

Financials

·     Banks & Insurance; SLQT Q4 revenue fell ~25% to $139.4M below the estimates of $199.2M and guided 2023 revs $850M-$950M vs. est. $906M; note financials (XLF) coming int today have seen 14-straight weeks of fund outflows, according to industry data; in REIT research, Wells Fargo upgraded HST, PK to Overweight and APLE to equal-weight and downgraded CHH to underweight, PEB, DRH and HT to equal-weight to EW, DRH to EW and HT to EW @ WELLS – Should a near-term recession resemble 1990/91 in duration/magnitude, as is deemed likely by our Economics Team, taking into account relatively high inflation, rising interest rates, unemployment, and varying levels of remaining pent-up demand for leisure/business transient/group, we would expect 1) RevPAR headwinds to be relatively light but present over the near term (modeling Q4 2022-Q2 2023), 2) companies with less leisure/more group exposure and limited near-term maturities to outperform from a share price perspective, and 3) the likelihood of M&A to be relatively low. Overlaying 35 years of market/chain scale data over today’s portfolios to recreate the 4 prior recessions—the largest data deep dive we have embarked on to date—we found the domestic RevPAR in 1990/91 of the lodging C-Corps would have declined 3-5%/REITs declined 1-6% on a TTM basis, declines we used as starting off points to adj. estimates before accounting for likely tailwinds.

Healthcare

·     Biotech & Pharma movers; BMY slides after saying its drug candidate for preventing ischemia strokes missed main goal of dose response in a mid-stage trial, but met secondary goal of showing relative risk reduction among patients; IDYA announces achievement of first milestone in ongoing collaboration with GSK for potential first-in-class pol theta helicase inhibitor development candidate; MRNA Gets Switzerland approval for omicron booster; AZN upgraded from Hold to Buy at Argus with $75 tgt noting the company has received a range of new product approvals in recent months, including for multiple oncology drugs and a treatment for myasthenia gravis; separately, Japan’s health ministry said its panel of experts had agreed to approve manufacturing and sales of AZN’s COVID-19 preventive treatment Evusheld; ACOR announced a license agreement with Chinese biotech Asieris Pharmaceuticals for the preclinical candidate, Nepicasta; CTLT slips after fiscal Q4 results as outlook disappoints (FY revs $4.975B-$5.225B vs. est. $5.28B); TEVA that the European Commission authorized Ranivisio (ranibizumab), a biosimilar to Roche’s blockbuster eye therapy Lucentis.

·     Healthcare Services; CAH price tgt raised to $78 from $61 at UBS saying while they wait for a rebound in Medical, they believe CAH’s Pharma segment and potential for meaningful capital deployment will provide support for the stock; COO was downgraded from Overweight to Sector Weight at KeyBanc as are less confident in the sustainability of recent growth trends for CooperVision (CVI) into FY23, and incrementally, consensus estimates are likely moving lower on FX and interest rates.

Technology, Media & Telecom

·     Media, Internet; PDD reported quarterly revenue above Street’s estimates as total revenue stood at 31.44 billion yuan ($4.55 billion) in the quarter ended June 30, compared with Street’s estimate of 23.68 billion yuan; BIDU set to report earnings tomorrow morning; following 2Q22 advertising earning reports that were impacted by tough comps, inflation, and business confidence headwinds, JMP Securities lower their 2022 U.S. and global advertising growth estimates by 110bps and 60bps to +11.0% Y/Y and +10.1% Y/Y, respectively

·     Semi’s, Software & Hardware movers: NTAP and VMW strengthen global partnership to help customers modernize with multi-cloud; Bloomberg reported ZEN investor Light Street seeks to nix takeover, oust CEO saying current $9.5 billion takeover offer is too low; JNPR mentioned positively in Barron’s saying shares looks ready to break out — and they probably should; EU antitrust regulators will not appeal a court ruling scrapping its 997-million-euro ($991 million) fine against QCOM Reuters reported citing people familiar with the matter said