Closing Recap

Tuesday, July 06, 2021

Equity Market Recap

·     U.S. stock indexes end mostly lower on the first day back from a 3-day holiday weekend, as the tech heavy Nasdaq Composite outperformed behind record highs in several large cap giants (AMZN, GOOGL), and cyber security stocks advance (FEYE, CRWD, PANW) following this weekend’s cyber-attack affected over 1,000 companies. However, the S&P 500 (snaps 7-day win streak), Dow and Smallcap Russell 2000 underperformed, with the S&P pulling back from all-time highs as weakness in energy, financials and materials weighed. On Friday, the broad-based S&P 500 index closed at a record high for the seventh consecutive trading session, its longest record-setting streak since 1997.Trading volumes remain thin after the holiday and ahead of a quiet week of earnings, economic data, and IPOs. Inflation concerns have also eased, pushing Treasury yields to 4-month lows (10-year hit 1.35%) as major central banks have signaled that they will leave accommodative monetary policies in place for now. New data released Tuesday showed that growth in the U.S. services sector eased in June compared with the previous month. One factor possibly weighing on market sentiment today included the rise of the Delta variant of Covid-19, on fears it could lead to renewed mask mandates and slow the recovery. European markets slid as well as Britain’s FTSE 100 falls about 1% and German DAX down over 1% for their biggest one-day drop in over 2-weeks, while the Stoxx 600 drops 0.64%, breaks three-day winning run. Ransomware attacks on U.S. businesses, such as the latest one centered on Florida IT firm Kaseya, will be discussed at a meeting of senior U.S. and Russian officials next week, the White House said on Tuesday.

·     Sector/stock movers: Nasdaq touches ATHs, outperforms other indices led by big tech as the 10-year yield falls to 1.35%; AMZN tops $3,600 to touch all-time highs, while FB, GOOGL, MSFT also hit record highs before finishing mixed; DIDI plunges after Chinese regulators ordered its app to be removed from app stores in the country; YMM, BZ also plummet after Chinese regulators announce investigations into the companies, weighing other Chinese stocks BABA, BIDU, JD; banks and insurers JPM, BAC, WFC slide given the sharp decline in Treasury yields today – giving back much of last week gains post positive Fed stress test results; WTI Crude almost hits $77/barrel overnight for the first time since Nov 2014 after OPEC+ ended without a new output agreement, though goes red under $75 to pullback energy stocks – OXY, NOV, FANG, HAL fall.

Economic Data:

·     June ISM Non-Manufacturing Index weaker: reported at 60.1 below the 63.5 consensus and 64.0 prior; business activity 60.4 vs. 66.4 consensus and 66.2 prior; component breakdown showed: Employment 49.3 vs. 55.3 prior and new orders 62.1 vs. 63.9 prior.

·     Markit June final composite PMI at 63.7 (vs flash 63.9) and June final services PMI at 64.6 (vs flash 64.8)

Commodities

·     Oil prices finish lower, pulling back from near 6-year highs earlier, as WTI crude drops -$1.79 or 2.38% to settle at $73.37 per barrel (off earlier highs $76.98 – Brent crude touched highs of $77.84). Crude is coming off its sixth straight weekly advance last Friday after OPEC+ meeting negotiations ended without a deal, failing to reach a production deal, further squeezing an already tight oil market, and raising concerns over inflation.

·     August gold prices rise $10.90 or 0.6% to settle at $1,794.20 an ounce, well off its intraday highs of $1,815.70 an ounce (gold prices helped by falling treasury yield, but the dollar rises weighs late day) – as the precious metal ends the day near 3-week highs. Tuesday’s gain was sufficient to propel the precious metal toward a golden cross, which occurs when the 50-day moving average crosses above the 200-DMA, widely viewed as a dividing line between longer-term uptrends and downtrends according to Marketwatch.com (50-day moving average for gold stood at $1,832.39 an ounce, with the 200-day at $1,832.04, according to FactSet data).

Currencies & Treasuries

·     U.S. Treasury yields fell sharply, especially the long-end of the curve, as the benchmark 10-year note posts its longest streak of declines in 16-months (6-straight days) as the benchmark 10-year yield touched lows around 1.35% (falling as much as 8 bps) to lowest levels since late February. Investors continue to look for signals on the Fed’s policy path after data signaled the service sector slowed (ISM data). Attention now turns to Wednesday’s release of the Fed’s June 16-17 meeting, when officials opened debate on how to end crisis-era bond-buying and signaled interest rate increases were closer on the horizon than previously thought. The U.S. dollar managed to push higher (DXY up 0.35% at 92.60), with the buck bouncing vs. commodity related currencies as the Canadian dollar hits a 2-month low as oil prices retreat.

Sector News Breakdown

Consumer

·     Auto sector; DIDI shares fall as much as 25% before paring losses just a few days after its market debut following a regulatory order that its app be removed from app stores in China – Sunday’s takedown order from the Cyberspace Administration of China (CAC) comes just two days after the regulator announced an investigation into Didi; TSLA shares drop below key technical levels on the day (100-day moving average was just below $665); Volkswagen is to sell a stake in its electric vehicle charging unit Electrify America, Reuters reported, as the carmaker looks for outside funds to build infrastructure for battery-powered cars.

·     Consumer Staples & Restaurants; TSN voluntarily recalling ~8.5m pounds of frozen, fully cooked chicken out of an abundance of caution due to possible exposure to a harmful bacteria; DPZ was downgraded to Neutral at Citi after DPZ’s 22% increase YTD. DPZ’s consensus forward P/E ratio of 34x is 17% above historical and its premium over the restaurant sector median widened to 24%, like levels at the onset of the pandemic.

·     Casinos, Gaming, Lodging & Leisure sector; the reopen trade saw weakness today, with questions about the UK Covid variant as theme parks (SIX), casinos (WYNN) saw weakness; CCL launched a ship on Saturday with passengers for the first time in >15 months; AMC said it decided not to seek stockholder approval for a proposal to increase the total number of Class A shares the company has the authority to issue.

Energy

·     Energy stock movers; after WTI crude oil prices climbed toward fresh, three-year high (just shy of $77 per barrel) following the failure by OPEC and other top producers to agree on further production increases – prices saw a sharp reversal in a bout of profit taking. The pullback in energy prices weighed heavily on energy stocks, which made up the top decliners in the S&P 500 as investors rotated back into large cap tech and out of commodity names.

·     E&P and Majors; PTEN agrees to acquire Pioneer Energy Services for ~$295M in cash and stock, which includes the retirement of all of Pioneer’s debt; says it will issue as many as 26.3M common shares and pay $30M of cash; TALO said it is "very disappointed" with the government’s decision to award the rights to run the potentially lucrative shared Zama oil find to state-owned oil company Pemex, the company said in a statement on Monday.

Financials

·     Insurance; PFG was upgraded to Outperform from Neutral at Credit Suisse due to continued mix shift to capital light and fee-based businesses and strong guidance at its investor day last week; Citi sees favorable risk/reward in AON and WLTW despite uncertainty due to the ongoing review of their merger, and they see upside in both in every scenario they considered (AON 2-35% upside, 3-50% upside in WLTW); Atlantic Equities initiated AJG at OW with a $175 price target

·     Bitcoin, FinTech & Payments; MQ was initiated at Outperform by William Blair, JPMorgan ($33 pt), KeyBanc ($35 pt), and Citi ($36 pt) and at Neutral by Goldman ($27 pt) and Wolfe ($33 pt); MARA ate Friday, had provided mining update – said had Produced 265.6 new minted bitcoins during June 2021, increasing total bitcoin holdings to approximately 5,784 with a fair market value of approximately $201.6 million

·     Consumer Finance; AXP was upgraded to Buy from Neutral and raise tgt to $225 from $185 at Goldman Sachs as it should benefit from a big pick-up in consumer spending in goods & services and travel & entertainment; BMO downgraded SC to Market Perform as they are disappointed in the $39/share offer since they believe it is worth $46, though they see the deal as a harbinger of strong industry trends and move ALLY to their top pick among credit-sensitive FIG coverage; KBW downgraded NAVI to Market Perform with a $20 target; COOP sold its Reverse servicing portfolio, operating under the Champion Mortgage brand, to Mortgage Assets Management

·     REITs; AHT shares tumble after issuing Q2 RevPAR results, saying they expect to report RevPAR for all hotels in the portfolio increased approximately 372% for the second quarter of 2021 compared to the second quarter of 2020, and decreased approximately 46% compared to the second quarter of 2019; BMO upgraded CONE to OP from MP with an $81 tgt as they view the sell-off in the shares post the investor day as an overreaction and the risk/reward now skewing more positive; Bank of America downgraded MPW to Neutral

Healthcare

·     Pharma movers; PFE’s vaccine is still highly-effective at preventing severe illness but is less good at halting the delta spread, data from Israel showed this weekend; AZN’s acquisition of ALXN cleared in Europe; LLY and Boehringer Ingelheim GmbH said they achieved the first and only successful trial for heart failure with preserved ejection fraction, with a late stage trial of Jardiance meeting its primary endpoint; MRKR continues to enroll patients in main portion of phase 2 trial with topline data from active disease group expected in q1 2022

·     Biotech movers; UBX rises as announced promising early-stage data for UBX1325 in patients with diabetic macular edema (DME) or wet age-related macular degeneration (wet AMD); CCXI announces filing of amendment to NDA submission and extension of the PDUFA review period for avacopan in the treatment of anca-associated vasculitis; TRIL announces dosing of first patient in phase 1b/2 study of tti-622 in combination with azacitidine and venetoclax in tp53-wild type acute myeloid leukemia; PRVB slides after receives Complete Response Letter (CRL) to BLA for Teplizumab for the delay of clinical type 1 diabetes (t1d) in at-risk individuals (did not cite any clinical deficiencies related to the efficacy and safety); MNOV said its lead experimental drug, MN-166, in development for treatment of neurodegenerative diseases, gets a new patent from the U.S. Patent and Trademark office for treatment of eye disease; AXLA rises after being initiated with a buy rating and a share price target of $14 at HC Wainwright

·     MedTech Equipment; WAT upgraded to Outperform from in-line and raise tgt to $400 at Evercore/ISI and HOLX raised to Outperform as well with raised tgt of $78 saying its recent tuck-in M&A strategy is smart, funded with profits from its COVID-19 tests and plays to its strengths; NVRO was downgraded to Neutral at Baird saying been looking to "see over our wall of worry" to where the promise of the PDN and NSRBP opportunities lie, but is now taking a break

Industrials & Materials

·     Aerospace & Defense; GD mentioned positively in Barron’s saying the stock looks set to rise, noting commercial air travel gets all the attention-but investors should start paying attention to private jets. While commercial air travel is slowly returning to life, May business-jet departures, at 275,000, were just 1% below their October 2019 high of 278,000; military shipbuilding firm HII it plans to buy Alion Science and Technology for $1.65 billion in cash from Veritas Capital to boost its security solutions portfolio; SPCE downgraded to Neutral at UBS on valuation after recent advance in the shares of the space vehicle company.

·     Industrial & Machinery; WBT received a revised unsolicited proposal from Ali Holding S.r.l. to acquire all of its outstanding shares of common stock for $24 per share in cash, an increase from the previously disclosed $23 per share cash proposal made by Ali Group on May 25, 2021 https://bit.ly/3jPp3GK ; Goldman upgraded IR to Buy with $59 pt as they believe the company is well poised to compound value over time after management’s recent strides in transforming the company and is almost in a net cash position after divesting its SCT and HPS assets; Credit Suisse downgraded MMM to Neutral in assumption of coverage as they continue to see fundamental potential upside with EPS that could approach $11+ in 2022, but they do not expect to see significant; ACT June preliminary Class 8 net orders of 25,700 units (CMI, PCAR leveraged to data)

·     Transports; travel space active (UAL, BKNG, EXPE, DAL) on several headlines – Germany eased travel restrictions on individuals from a few counties; the Financial Times reports corporate travel is beginning to rebound; the TSA screened 2.15M people on Thurs which is up 3% from Jul 1, 2019 as per CNBC; WSJ reports the UK to lift most Covid restrictions later this month despite surge in Delta cases; KNX acquired 100% of AAA Cooper Transportation and an affiliated entity for an enterprise value of $1.35B; in rails (UNP, CSX), Cowen adjusting rail models to reflect carloads, mix, fuel, FX, and cost implications as the supply chain remains tight. Acknowledging that 2Q offers the easiest comps, overall carload trends still came in above their expectations

·     Metals & Materials; AU names Alberto Calderon as its new CEO/he will start in his new role from Sept. 1; gold miners (AEM, GOLD, AUY, NEM) in general get a boost behind a lift in gold prices; material names have pulled back after strength the prior month as investors rotate back into mage cap tech and out of materials; KRA shares jumped mid-session after Reuters reported the company is exploring options that include a potential sale of the company

Technology, Media & Telecom

·     Internet; FB, GOOGL, AMZN new 52-week highs today as large cap growth surges; WB shares rose as much as 30% initially after Reuters reported Weibo chairman, state firm plan to take China’s Twitter private https://bit.ly/3xpdEkL – shares pared gains after the company denied the “going private” report saying it was “not true”; shares of China ADRs (BIDU, BABA, ZME, FUTU) slide as China said it will step up supervision of domestic firms listed offshore, its cabinet said, aiming to improve regulation of cross-border data flows and security; FB, GOOGL, TWTR have privately warned the Hong Kong government that they could stop offering their services in the city if authorities proceed with planned changes to data-protection laws, the WSJ reported

·     Hardware & Software movers; FEYE, CRWD, PANW surge early as Internet security rise after the latest broad cyber-attack – note The Hill reported the Russia-linked ransomware gang known as REvil has reportedly lowered the amount of money it is willing to accept in exchange for data belonging to hundreds of companies worldwide that it is holding hostage to $50M from $70M initially); PFSW shares jump after divesture of LiveArea to Merkle for $250M; SNX said while it provides many services as part of its overall IT distribution business, including supporting Microsoft cloud applications, it is not an MSP in the context mentioned in recent media in relation to recent cyber-attacks; MSFT slipped as the U.S. Defense Department cancelled its $10 billion JEDI cloud-computing project on Tuesday and will rebid a multiple vendor contract, saying in a statement that tech giants MSFT and AMZN are the only providers "capable of meeting the department’s requirements."