Closing Recap

Wednesday, July 06, 2022

Equity Market Recap

·     Stocks rise after treading water earlier, bouncing after the FOMC June policy meeting minutes didn’t reveal any major surprises, but markets pared gains in the final minutes with a late day slide. An odd pair led markets higher as technology and defensive utilities were the best performing sectors, while energy was biggest decliner as oil settled below $100 per barrel, touching 12-week lows. Big tech led as the Nasdaq 100 rises a 3^rd day in a row – has been up 4-days in a row only twice since March. Investors continue to juggle concerns over inflation versus a recession, after Federal Reserve minutes showed officials rallied around a large rate hike at its June meeting. Commodity related stocks lagged, though did perk up late day with the broad market buying. Economic data was mixed as job openings had fallen less than expected in May, suggesting the labor market remained tight, while the Institute for Supply Management’s Non-Manufacturing Purchasing Managers Index, a key gauge of services activity, came in at 55.3 for June, dipping from the May reading of 55.9 and the lowest reading since May 2020. The dollar index surged above 107, while the euro dropped below $1.02 since 2002. Treasury yields jumped after tumbling Tuesday. General market news was quiet ahead of the earnings season kick-off late next week. Energy sector was down again as oil prices slide, now down -26% from June high.

·     Fed minutes from the June policy meeting showed: participants at June meeting ‘concurred’ that inflation outlook had deteriorated, warranting huge 0.75-percentage-point rate increase and the participants judged rate increase of 50 or 75 bps would likely be appropriate at July policy meeting. Many participants judged there was a ‘significant risk’ higher inflation could become entrenched if public questions Fed’s resolve and ‘concurred’ high inflation warranted ‘restrictive’ interest rates, with possibility of ‘more restrictive stance’ if inflation persists. They saw ‘little evidence to date’ that supply constraints were easing enough to help control inflation.

Economic Data:

·     ISM report on U.S. Non-manufacturing sector shows PMI 55.3 in June vs 55.9 in May (lowest since May 2020); non-manufacturing business activity index 56.1 in June vs 54.5 in May; prices paid index 80.1 in June vs 82.1 in May, new orders index 55.6 in June vs 57.6 in May; employment index 47.4 in June vs 50.2 in May (lowest since July 2020)

·     S&P Global June final composite PMI at 52.3 (vs flash 51.2); S&P global June final services PMI at 52.7 (vs flash 51.6); and S&P Composite PMI Final Actual 52.3 (Forecast 51.2, Previous 51.2)

Commodities

·     Oil prices finish lower as WTI crude drops -$0.97 or 0.97% to settle at $98.53 per barrel, but off its lowest levels in 12-weeks earlier ($95.10) and settled below the $100 per barrel market for a 2^nd day (did so yesterday for the first time in about two months). Growing fears of demand destruction from a global recession has outweighed supply concerns in recent weeks. Brent Crude Futures settle at $100.69/bbl, down $2.08, 2.02%. Oil prices were also knocked down by a soaring U.S. dollar, which rose to a near 20-year high against a basket of other currencies.

·     Gold prices slide -$27.40 or 1.6% to settle at $1,736.50 an ounce, falling a 7^th straight session and to its lowest levels sine September 2021 (and longest losing streak since March 2019) amid monetary tightening policy fears and weak demand for commodity prices on recession fears. Note the GLD ETD fell for a 9^th straight day.

·     After hitting record highs this year on supply-chain disruptions stemming from the Russia-Ukraine conflict, continuous corn and soybean futures trading on the CBOT are now down year-to-date–with corn currently trading at $5.69 per bushel, off 4% from where it started the year. Soybeans are currently trading at $13.07 per bushel, 2.4% lower from the start of 2022.

Currencies & Treasuries

·     After rallying all Tuesday, Treasury prices sunk as the script flipped a day later (sending yields tumbling), as yields were up across the board with the benchmark 10-year more than 18-bps above morning lows of 2.74%. The yield curve inverted further (recession indicator) as the U.S. 2-yr yield traded above the 10-year by 4-bps, rising to 2.96% late day while benchmark 10-year yields were last at 2.923% (and have fallen from 3.498% on June 14, the highest since April 2011). The U.S. dollar has had an incredible run the last few weeks, with the dollar index (DXY) hitting highs around 107.25 today, its highest since, its highest since 2002 as the euro tumbles further near parity (hit 1.0163 lows).

Sector News Breakdown

Consumer

·     Retailers; general weakness in retail most of the day in specialty and department stores (M, DDS, JWN, KSS); for mattress retailers, Wedbush lowered price tgts for TPX from $34 to $27, SNBR moves from $50 to $33 and PRPL remains at $3.60 saying even though buy-side expectations are low and valuations appear attractive, they do not see a sustained move higher for these stocks until there is evidence that demand trends have bottomed; VSTO acquired Fox Racing, a global icon in performance motocross, mountain bike and lifestyle gear for $540M; OSTK ests lowered at Guggenheim to reflect weaker trends observed in Q2 based on supplier checks and our various data trackers; Wells Fargo said CPRI, TPR, and BBWI remain Top Picks as they remain selective in retail, while also acknowledging that our outlook for off-price is beginning to improve as well

·     Auto sector: TSLA sold around 78,000 China-made vehicles in June, preliminary estimates published by the China Passenger Car Association (CPCA) showed; this was up 142% from May, when Tesla sold 32,165 China-made vehicles, and up 135% from a year ago; RIVN said that Q2 production levels were in line with expectations and the company expects to deliver on its forecast of producing 25,000 electric vehicles this year.

·     Consumer Staples; in tobacco, for MO, the U.S. FDA has temporarily stayed an order that banned e-cigarette maker Juul from selling its products while the order is appealed as has determined that there are scientific issues unique to the JUUL application that warrant additional review; MKC was downgraded from Buy to Hold at Argus to reflect the company’s high input costs and modest earnings prospects over the next year, as well as the stock’s high valuation; GO was downgraded to Neutral from Buy at Davidson

·     Restaurants: for MCD Loop Capital said their latest McDonald’s U.S. franchisee checks indicate same-store sales growth came in above expectations in 2Q, growing 5.0-6.0% during the last five weeks of 2Q and were up approximately 4.0% for the full quarter

·     Casinos, Gaming, Lodging & Leisure sector; NCLH announced it will no longer require guests to complete pre-cruise COVID-19 testing unless required by local regulations, according to a press release; DASH falls along with weakness in UBER (parent of Uber Eats) after AMZN agreed to take a 2% stake in Just Eat Takeaway.com’s U.S. food delivery business GrubHub and will offer its Prime members access to the service for one year

Energy

·     Energy stock movers: momentum to downside continues as the strongest S&P sector for the first half of 2022 has been crushed over the last week on recession fears/profit taking; DVN all dropping below their 200-day MA supports today with roll in oil prices; UBS raised its 2022 Brent forecast to $104/bbl from $95/bbl; 2023 to $95 from $85; 2024 to $85 from $80; and 2025 to $80 from $75. Our 2026 and long-term Brent forecasts are unchanged at $75/bbl. Near-term, we see Brent staying at >$100/bbl until 2Q23.

·     E&P and Majors; RBC Capital upgraded CDEV to Outperform, while downgraded CLR, EOG, ESTE to Sector Perform saying they believe a strong fundamental underpinning for oil prices provides investors a backdrop for an attractive entry point. Valuations look attractive and many energy companies are positioned and ready to lean into stock buybacks.

·     Refiners: Wells Fargo raises Q2’22 and FY 2022 EPS estimates for refiners PBF, PSX and VLO as revisions lift expectations into record territory. The event feels anti-climactic with recession risks/fears undermining both the energy sector and the broader market, in our view

·     Utilities & Solar; in utilities, SRE was upgraded to Buy at Goldman Sachs given a more attractive valuation on a sum of the parts, after shares lagged peers in the past 2 months, and exposure given multiple potential growth projects to the major theme of LNG development; JKS announces $200M share buyback

Financials

·     Bank movers: ahead of earnings season for banks/brokers, UBS lowered 2023 EPS estimates for the brokers and M&A boutiques by -8%, on average, with downward revisions directionally consistent across the group. Said updates to 2Q forecasts reflect the continued slowing of IB activity and tightening credit conditions; MC was downgraded to Neutral from Buy at UBS as the public M&A pipeline continues to deteriorate, showing little replenishment, and setting the company up for difficult comps over the next few prints

·     FinTech & Payments; RBC Capital lowered ests for payment services GPN, FIS, and FISV saying while the overall consumer backdrop remains healthy, they believe a combination of greater FX headwinds, higher interest costs and inflationary pressures will result in "reported" numbers being below expectations and estimates for the full year having to come down

·     Consumer Finance: for credit cards (AXP, COF, DFS, MA, V), Citigroup said card spending for the four weeks ending 7/2/22 declined – 2.6% Y/Y, modestly decelerating from -2.3% in the prior period. Spending declines have moderated at -LSD Y/Y against admittedly difficult June ’21 comps, and spending appears more favorable on 2-year (+4.7%) and 3-year (+32.6%) stacks; RKT was upgraded to Overweight from Equal Weight at Wells Fargo saying while the residential mortgage market remains extremely challenging, they see RKT as a beneficiary of the dislocation, and interest rate expectations seem to have less upside tail risk

·     Bitcoin news: Cryptocurrency broker Voyager Digital Ltd. said it has filed for Chapter 11 bankruptcy protection, days after it suspended withdrawals and trading on its platform amid growing turmoil in digital-currency markets; RIOT said in June produced 421 Bitcoin, an increase of about 73%, as compared to June 2021 production of 243 and at end of month held about 6,654 Bitcoin, all produced by company’s self-mining operations; CLSK said it sold more than 300 bitcoin during June at an average price that was 21.4% below sales made the month before. The bitcoin mining company said it fully funded its growth and operations through the sale 328 bitcoin (BTC) in June at an average price of $25,644 per BTC

·     Financial Services: MKTX reported US high-grade volume for June of $121.99B vs. $117.42B Y/Y, U.S. high-grade volume $121.99B, +3.9% Y/Y and other credit volume $142.57B, +17% Y/Y; TW reports trading volume of $26.1 trillion in June with 18.0% yoy increase in average daily volume and Q2 record average daily volume up 20.4% Y/Y; DNB was upgraded to Neutral from Underperform at Bank America as expect sales momentum and improving margin and cash conversion trends to support valuation (notes shares -35% from the June 2020 IPO price)

·     REITs: Jefferies said they believe a ban on ‘cooperative compensation’ will largely eliminate use of buyer agents in the real estate market and cause listing agents to rely more on online listing portals to attract buyers, allowing ZG to charge more for lead generation

Healthcare

·     Pharma movers; AMTI tumbles after the company said its lead candidate AMT-101 failed to outperform in combination with ABBV’s blockbuster drug Humira in a Phase 2 trial for ulcerative colitis; MRK upgraded from Hold to Outperform at Daiwa and up tgt to $102; KZIA rises after the company said regulators designated its treatment for childhood brain cancer as an orphan drug; HEXO announced that the company’s shareholders voted in favor of its previously disclosed transaction of convertible notes with its domestic rival TLRY

·     Biotech movers; Biotech bounce continues as trades to highest levels since April 21st and up more than 30% from June lows (XBI); BIIB/Eisai announced last night that the US FDA has accepted its BLA for lecanemab under the accelerated pathway, with the application receiving a January 6th, 2023 PDUFA; SRPT said its investigational gene therapy SRP-9001 for Duchenne Muscular Dystrophy demonstrates significant functional improvements across multiple studies; VERU announces New England Journal of Medicine Evidence publication of phase 3 clinical trial results demonstrating that sabizabulin treatment significantly reduced deaths in high-risk hospitalized covid-19 patients

·     Healthcare Services; hospital providers HCA and UHS both downgrade to Underperform at BMO Capital (HCA tgt to $160 from $233 and UHS to $90 from $133) citing simultaneous pressures on the top and bottom lines that combine to reduce earnings growth this year, and likely next, and to a greater degree than currently implied in stock prices for the downgrade; in virtual health space, TDOC receives positive comments by Bank America saying near-term fundamentals continue to improve as BetterHelp MAUs in June grew an impressive 38% y/y and 2% m/m

Industrials & Materials

·     Aerospace & Defense; RADA said it’s withdrawing its full-year 2022 revenue guidance in light of its pending merger with Leonardo DRS/guides Q2 revenue to about $22.5M below the $36M estimate; RKLB said its next 2 launches will be responsive space missions for the U.S. National Reconnaissance Office

·     Industrial & Machinery; AGCO among Industrials and Metals hitting 52-week lows today; KRNT tumbles as guides Q3 revs $56.4M-$59.4M vs. est. $91.4M; says entered period where some customers are working through excess capacity built through 2-yr pandemic, expect to continue for near-term; in building products/cement, Jefferies said TX cement shipments increased by 33% in May and are +14% YoY QTD as MLM outperformed the industry, with its reported shipments increasing by 47% YoY in May and its 2Q shipments now tracking +25% YoY QTD, well ahead of our 2Q forecast (+10% YoY)

·     Transports: in rails, NSC tgt to $235 from $260, UNP tgt to $220 from $235, and CSX tgt to $31 from $35 at Citigroup saying freight volume in the second quarter was below expectations. Expects freight volume to be under incremental pressure which could continue into 2023 caused by a decelerating macro environment and service constraints; in Brazilian airlines, AZUL and GOL both downgraded at Barclay’s on the back of higher jet fuel prices, unfavorable competitive dynamics, and higher risk aversion; Susquehanna downgraded UNP while remain positive on CSX saying the rails made incremental progress on hiring this quarter, but the reality is the start of 3Q just doesn’t feel like the breakthrough and simply put, lagging rail service levels and upstream/downstream supply chain disruptions continue to limit volumes

·     Metals & Materials; in the lithium space (ALB, LAC, LTHM, SQM), Deutsche Bank revised spot and contracted pricing forecasts as expect both pricings to average >$50kg over the next 6 months and market deficit to deepen on the medium-term structurally further in numbers driven by EV and BESS Demand despite increasing efforts on the Supply side to boost project development; CRS said it will increase base prices by an average of twelve percent (12%) to fifteen percent (15%) on new, non-contract orders across the majority of its premium products; Copper prices slid to their lowest in almost 20 months amid persistent worries that a recession would dampen metals demand hit a market with thin summer volumes.

·     In paper sector, MERC upgraded to Outperform at Credit Suisse as believe Mercer faces many positives that range from commodity prices (pulp, lumber, and power), generally favorable FX rates (EUR/USD and USD/CAD) along with a rather attractive valuation; Canadian paper and packaging company Paper Excellence said it will buy RFP in a deal valued at about $2.7 bln, through its U.S. unit Domtar, paying $20.50 per share

Technology, Media & Telecom

·     Software movers; SAP downgraded to Equal Weight from Overweight at Barclays saying unfortunately, the SAP investment case remains challenging with, as we see it, four key issues to navigate over the coming quarters; RNG was downgraded from Buy to Hold at Needham saying recent field work gives them concern that enterprise growth could continue to slow to the point where 2023 estimates now appear higher risk than we previously believed

·     Hardware, Components & Services; for AAPL Loop Capital said they believe AAPL updated its iPhone builds this weekend and while AAPL is altering build mix between iPhone 13 & iPhone 14 and reducing builds they don’t believe this materially impacts shipments June/Dec qtrs.