Closing Recap

Wednesday, July 05, 2023

Index	Up/Down	%	Last
DJ Industrials	-129.04	0.37%	34,289
S&P 500	-8.77	0.20%	4,446
Nasdaq	-25.12	0.18%	13,791
Russell 2000	-23.61	1.24%	1,873

 

 

 

 

 

 

 

 

 

U.S. stocks were lower, in a tight range most of Wednesday in what feels like a weeklong holiday in the US ahead of earnings season kickoff late next week (markets 1/2-day Monday, closed yesterday and light volume today). Attention turns to jobs data tomorrow, with weekly jobless claims and monthly ADP private payroll data before the Nonfarm payroll report on Friday. Market expectations are for another 25-bps rate hike next month by the Fed after a pause in June, following the footsteps of at least 6 central banks in recent weeks that boosted rates. Higher expectations, climbing Treasury yields (4-month highs for 10-yr above 3.94% today) have failed to weigh on US stocks, as large cap tech has held up well (thought market breadth has not been as strong – today decliners 2:1 margin over advancers).

 

Minutes from the June 13-14 policy meeting showed many FOMC officials agreed to hold interest rates steady at the June meeting to buy time and assess whether further rate hikes would be needed, even as the vast bulk expected they would eventually need to tighten policy further. While "some participants" wanted to move ahead with a rate hike in June because progress in cooling inflation had been slow, "almost all participants judged it appropriate or acceptable to maintain" the federal funds rate at the existing 5% to 5.25%, the minutes said. "Most of those participants observed that leaving the target range unchanged at this meeting would allow them more time to assess the economy’s progress," toward returning inflation to 2% from its current level more than twice that. Almost all officials expected more rate increases in ’23. Those favoring an increase noted a very tight labor market, stronger-than-anticipated economic momentum, little evidence of inflation on a path to return to 2%.

 

Issues in China: US Treasury Secretary Janet Yellen visits China this week with the goal of finding areas of common economic ground and opening communication channels amid an increasingly turbulent relationship between the world’s two biggest economies. This weekend, China announced a decision to restrict exports of two metals – gallium, germanium – used in chips and EVs, while the WSJ reported the Biden administration plans to curb China’s access to cloud computing services provided by companies such as MSFT and AMZN. In data, China Caixin services PMI came in at a soft 53.9 vs 56.2 expected, and 57.1 prior, its lowest level in six-months, since January.

 

 

Economic Data

·     Factory orders for May rose +0.3% vs. consensus +0.8% and vs April +0.3% (prev +0.4%), while factory orders ex-transportation fell (-0.5%) vs April -0.6% (prev -0.2%) and factory orders ex-defense +0.8% vs April (-0.6%). U.S. May inventories/shipments ratio 1.49 months’ worth vs April 1.50 months.

 

Commodities, Currencies & Treasuries

·     Oil prices rebounded after falling Monday despite news that Saudi Arabia said it would extend its production cuts into August, and Russia announcing a 500,000 barrel-per-day cutback in its output next month. OPEC’s meeting kicks off Wednesday. U.S. crude oil futures settle at $71.79/bbl, up $2.00, 2.87% and Brent settle at $76.65/bbl, up 40 cents, 0.52%.

·     Gold prices for August slip -$2.40 to settle at $1,929.50 an ounce. The 10-year Treasury yield rose 7-basis points to 3.91%, as the benchmark yield is now at the highest since March 9. Treasury yields climbed all morning into early afternoon, with the benchmark 10-year hitting 4-month highs above 3.94% on rising expectations of a Fed rate hike later this month. The US dollar (DXY) bounced this afternoon, rising vs. yen and euro, among other currencies.

 

 

Macro	Up/Down	Last
WTI Crude	2.00	71.79
Brent	0.40	76.65
Gold	-2.40	1,927.10
EUR/USD	-0.0025	1.0852
JPY/USD	0.20	144.65
10-Year Note	0.083	3.941%

 

 

Sector News Breakdown

Consumer

Autos:

·     TSLA China output increased almost 20% in June, contributing to the company’s record quarterly sales; shipped a total of 93,680 cars from its factory in Shanghai last month.

·     GM reported a 19% rise in Q2 U.S. auto sales helped by easing supply chain pressures; said Q2 sales jumped to 691,978 vehicles from 582,401 vehicles a year earlier.

·     RIVN rises early as analysts note its entry to Europe via delivery vans made for Amazon is much earlier than expected; more than 300 vans will hit German roads in the coming weeks. Davidson upgraded from Underperform to Neutral with $18 tgt on news.

·     NKLA said it delivered 66 trucks through retail channels in the quarter compared with 33 in the previous quarter and delivered 45 through wholesale compared with 31 in the previous quarter.

 

Retailers, Consumer Staples & Restaurants:

·     In food: CAG downgrade from Buy to Hold at Jefferies and cut tgt to 38 from $46 saying U.S. tracked channel data for the quarter shows sales decelerated to ~+4% with volumes down ~6.5%, while trends worsened in June (+0.3% sales / (~8%) volume).

·     In Restaurants: Truist provides Q2 store opening ests and store opening model updates saying of the four names (WING, SHAK, TXRH, NDLS), SHAK’s development was in-line with consensus and the others missed. Said the potential miss at WING follows a miss in 1Q23, but Truist believes investors are much more focused on SSS, which look strong. Truist also expects TXRH to miss for the second quarter in a row, but 3Q development looks solid and said NDLS miss is disappointing, but development is accelerating, which is not reflected in valuation.

·     In mattress retail (TPX, SNBR, PRPL), Wedbush said initial Independence Day selling period mattress checks with retailers and industry contacts indicate a wide range of performance, and it estimate that industry-wide bricks-and-mortar sales declined LSD y/y. This is better than the MSD declines it estimate for the Memorial Day period but says the demand environment remains challenged that there has been limited underlying improvement, in their view.

 

Energy

·     CPE announced the closing of Delaware basin acquisition and eagle Ford divestiture as reduces outstanding debt by approximately $300 million.

·     REI announces $25 million debt reduction in Q2 and sale of non-core Delaware basin assets; net sales proceeds from transaction used to further pay down debt.

·     NE, VAL initiated Buy and Neutral on SDRL and RIG upgraded to Buy at Citigroup in offshore drillers noting the offshore rig markets have witnessed a Swift recovery with floater day-rates up 3x from the bottom. While Driller stock performance has been robust, this reflects the group becoming investable again post-bankruptcy but not the full strength and duration of this upcycle.

 

Financials

·     In Crypto: Piper downgraded COIN from Overweight to Neutral on valuation and a belief that the recent case brought forth by the SEC, as well as the continued lack of regulatory clarity in the US, has created too much uncertainty to prudently project revenues in future years.

·     In brokers (SCHW, HOOD): Piper said despite equity volatility metrics reaching the lowest quarterly levels since before the pandemic, expects all four of the US exchanges to report record second quarter revenues as trading volumes remained strong in the face of seasonal headwinds.

·     In lodging REITs: Oppenheimer said they are lowering estimates across coverage universe given weakening STR data and other data points suggesting slowing business fundamentals. Also said reducing price targets given a more conservative view on 2Q results and increased uncertainty on 2H23 performance (APLE, BHR, CLDT, HT, RLJ).

·     In Insurance: Brookfield Reinsurance (BNRE) to acquire all the outstanding shares of common stock of AEL it does not already own in a cash and stock transaction valued at about $4.3B. https://tinyurl.com/yzedtf9f

 

Healthcare

Biotech & Pharma:

·     AMRX shares fell after saying on Monday received FDA request for additional information regarding an ingredient in IPX203 in Parkinson’s.

·     BMRN was upgraded to Outperform on current valuation at BMO Capital saying they believe that its thesis of a slow Roctavian uptake is materializing, as reflected in Roctavian’s slow EU launch and FDA label restrictions…but -25% since the firms’ initiation, believes that Roctavian constitutes an upside opportunity as it’s largely not priced in.

·     CCCC said the FDA cleared its investigational new drug application CFT8919 to begin human study for a potential treatment for a type of non-small cell lung cancer.

·     INCY said the U.K.’s Medicines and Healthcare Products Regulatory Agency has approved the company’s Opzelura cream for patients 12 years of age and older with the chronic skin condition non-segmental vitiligo with facial involvement.

·     MRNA said it had signed a memorandum of understanding and a land collaboration agreement to work towards opportunities for it to research, develop and manufacture mRNA medicines in China.

·     TEVA is weighing options for its active pharmaceutical ingredients, or API, business, including a possible sale, Bloomberg reported late morning.

 

Industrials & Materials

Transports

·     In Package delivery: UPS said it hasn’t walked away from contract talks with the International Brotherhood of Teamsters (340K workers), and that it is encouraging the union to continue negotiations on a new labor deal that would avert a crippling strike.

·     In Trucking & Logistics: KNX warned Q2 results will be lower than previously expected, largely driven by the full truckload market, where persistently soft demand has caused volumes and pricing to be under greater pressure; JBHT was added to tactical idea list at Wells Fargo saying a cyclical bottom in intermodal volumes combined with a secular tailwind makes it attractive.

·     In travel: For airlines (AAL, DAL, UAL), Fourth of July holiday period broke records for travel, despite flight delays and cancelations. Close to 10.7 million people passed through U.S. airport checkpoints Thursday through Sunday, according to the TSA. A further 2.3 million passengers were screened Monday and just more than 2 million Tuesday. DAL 52-week highs.

·     In Industrials: WNC downgraded from Strong Buy to Market Perform at Raymond James saying sees an increasingly balanced risk/reward on the back of ongoing macro/truck market softness that in its view could negatively weigh on trailer demand into 2024; PNR tgt raised to $78 at Oppenheimer saying they believe Pentair’s resi demand is bottoming, commercial product/service lines continue to solidly outgrow a healthy market.

·     In Aerospace & Defense: Germany will buy 60 Chinook helicopters from BA in a package that will cost up to 8 billion euros ($8.72 billion), including necessary infrastructure for the aircraft – Reuters reported citing two members of the parliamentary budget committee.

 

Materials, Metals & Mining

·     In Metals & Materials: MP shares rise on China’s move to restrict exports of rare earth specialty materials germanium and gallium. Citigroup opened a 30-day downside catalyst watch for shares of SCCO saying results should be generally weak based on cost pressure as the Citi commodity team expects the copper price to fall ~10% during 3Q. Steel stocks NUE, X, STLD among worst performers in S&P Materials sector (XLB -2.4%) on China weakness.

·     In Chemicals: ECL price tgt raised to $208 from $195 at Wells Fargo on higher mkt multiples and add to its tactical idea list as firm sees ECL as a beneficiary of moderating and/or lower-trending costs for several important inputs, which should support margin/accelerating y/y EPS growth. Weakness in shares of DOW, LYB, DD other chemicals all day.

·     In lithium: ALB added to tactical idea list at Wells Fargo saying they expect strong Q and potential for FY guide increase based on improved index pricing.

 

Technology

Internet, Media & Telecom

·     META’s “Threads”, which has been referred to as a "Twitter killer," will be launched under the umbrella of social-media site Instagram.

·     Today Twitter said that only verified users will be able to access TweetDeck after 30 days.

 

Hardware & Software movers:

·     In the AI sector: Barron’s noted Traffic for OpenAI’s ChatGPT chatbot in June was -9.7% lower than in May, while the number of unique visitors dropped -5.7% according to research firm Similarweb. The amount of time visitors spent on the site declined by 8.5%.

·     PEGA was upgraded to Outperform from Neutral at Wedbush and raise tgt to $65 from $50 reflecting incrementally better field checks and an under the radar AI story that is now starting to form and saying legal issues overblown/believe has an attractive risk/reward at current levels.

 

Semiconductors:

·     The group was lower, with the SOX index falling over 2% after China overnight announced a decision to restrict exports of two metals – gallium, germanium – used in chips and EVs (ON, NXPI among EV chip makers).

·     AMD upgraded to Outperform from market Perform with $150 tgt at Northland saying they think AMD can reach a 20% market share in the AI GPU market over time. They expect a ramp in GPU revenue from the MI 300 and El Capitan supercomputer in 2H. AMD’s open-source software approach likely reduces NVDA software moat. Finally, AMD has IP for AI beyond GPUs.

·     AXTI shares fell after saying it would seek permits to keep exporting gallium and germanium substrate products from China, after Beijing abruptly imposed export controls on the metals key to chipmaking.

·     NVTS confirms continued supply of state-of-the-art gallium nitride power (ICs); the company does not expect export restrictions to impact customer shipments or adversely impact its business.

·     NXPI said it was examining whether new Chinese export curbs on certain gallium and germanium products will affect its business. NXP makes some chips for the auto and communications sectors using gallium or germanium.

·     WOLF shares jumped after signing 10-year silicon carbide wafer supply agreement with Renesas Electronics Corp (offsetting the China curb news for semis).

·     In Research: Barclay’s upgraded COHR to Equal Weight from Underweight with a price target of $45, up from $29 as the bear case has played out and downgraded LITE to Underweight from Equal Weight saying shares are "expensive" with no catalyst on the horizon and a telecom inventory overhang "looming."