Closing Recap

Thursday, July 07, 2022

Equity Market Recap

·     Stocks climb, finishing just off the highs as the S&P 500 posts its first 4-day win streak since the end of March (3/24-3/29) heading into tomorrow’s July jobs report where +268K jobs are expected to be added for nonfarm payrolls, +240K private jobs and +15K manufacturing payrolls. The S&P has not seen a 5-day win streak in 2022, will tomorrow break the string? Nasdaq also posts a 4-day win streak as software, Internet, and semiconductors bounce after being the top S&P sector decliners in the 1H. The CBOE Volatility index (VIX) hit its lowest levels in about a month at 25.75, as investors show more optimism/less fear in recent days ahead of earnings season (1^st 2-weeks of July also historically one of the stronger periods). Fed commentary in the afternoon from Bullard and Waller showed confidence in the economy, giving stocks an added boost. Recession fears have weighed more distinctly on investor mindset of late, but over the last few days, market momentum has been to the upside with the S&P back above 3,900.

·     Fed speakers didn’t derail the market rally as the Fed’s Bullard reiterates central bank must ratify market rate-rise expectations saying expectations of tighter monetary policy already affecting economy. Fed’s Bullard said 75 bps rate hike in July would ‘make a lot of sense’ and continue to advocate getting to 3.5% fed funds rate this year. Fed’s Waller said inflation is too high, doesn’t seem to be coming down and we need to move to a much more restrictive setting, and quickly. Waller said “we need to frontload rate hikes; large increases early” as supports a 75-bs hike in July said is “probably” in favor of 50 bps rise at the September meeting.

·     U.S. stocks started strong out of the gate and just kept going led by strength in technology, metals and mining, and energy, on upbeat China stimulus headlines, coupled with Samsung posting better Y/Y quarterly results (but shy of estimates), helping boost semiconductors. Defensive sectors such as staples, utilities and REITs lagged the broader market. The dollar took a break after soaring the last week, Treasury yields rebound, oil prices higher and gold was flat. Bitcoin catching a little momentum, moving back above the $21,000 level.

Economic Data:

·     Challenger Gray job cuts spiked 58.8% y/y in June vs. -15.8% in prior month; largest jump since December 2020 … auto sector announced most cuts at 10,198 (+155% y/y)

·     Mortgage rates recorded their largest decline this year as investors raise their bets that the economy is headed for a downturn. The average rate on a 30-year fixed-rate mortgage fell to 5.30%, mortgage-finance giant Freddie Mac said Thursday. That is down from 5.70% last week but far above 3.22% at the beginning of the year.

·     Weekly Jobless Claims rose to 235,000 from 231,000 last week and vs. est. 230,000; the 4-week moving average rose to 232,500 from 231,750 prior week; continued claims rose to 1.375M from 1.324M prior week; the U.S. insured unemployment rate rose to 1.0% from 0.9%

·     The U.S. Trade Deficit for May (-$85.55B) vs. est. (-$84.7B); Exports up 1.2% to $255.9B and Imports up 0.6% to $341.4B (seasonally adjusted); May capital goods imports $71.46 bln vs April imports $71.71 bln; U.S.-China may trade deficit $31.54 bln vs April deficit $30.57 bln

Commodities

·     Oil prices rebound, with WTI crude rising $4.20, or 4.26% to settle at $102.73 per barrel (off earlier highs of $104.48 but also well off the $96.57 lows) despite bearish weekly inventory data. The EIA data was very bearish, as crude weekly stockpiles rose +8.2M barrels vs. -1.043M consensus and -2.762M last week, while Gasoline stockpiles fell -2.5M vs. -0.480M consensus and Distillates fell -1.3M vs. +1.133M consensus. Natural gas data was bullish with smaller-than-expected build of +60 bcf vs. +74 bcf consensus, +82 bcf last week, sending prices higher 13%.

·     Gold prices end with a modest gain, rising $3.20 or 0.2% to settle at $1,739.70 an ounce, but was enough to snap its 7-day losing streak. Gold prices have tumbled in recent weeks amid a surging U.S. dollar and volatile swings in the Treasury markets. The U.S. dollar edged higher after a brief pause in the morning, back to 20-year highs above the 107 level for the dollar index (DXY). The euro held below 1.02 making new YTD lows while the British Pound rose following a shake-up in the UK as Boris Johnson resigned as Prime Minister. Treasury yields higher across the board with roughly 10-bps moves to the upside for the 2, 3, 5, 7 and 10-yr and 2s-10s remain inverted.

Sector News Breakdown

Consumer

·     Retailers; recent datapoints from other retailers (KSS, BBBY, RH) indicate that demand is worsening at all price points, especially for stay-at-home categories and have pressured the retail sector lately; GME announced that its Board of Directors has approved and declared a four-for-one split of the company’s Class A common stock; HELE Q1 adj EPS $2.41 beats est. $2.00 on better revs $508.1M vs est. $474.2M but guides year lower to $9.85-10.35 vs. prior guidance $12.73-13.03 and revs $2.15B-2.20B vs prior guidance $2.38B-2.42B (est. $2.37B); KSS was downgraded at Bank America; BBBY rises on filing that CEO bought 50,000 shares

·     Housing & Building Products; homebuilder SKY upgraded to Outperform at Wedbush saying year to date through May, manufactured housing industry shipments are 14% higher versus the same time last year and anticipate this should be a positive read for Skyline; Truist lowered ests on building product names FBHS, MHK, JELD on weakening end demand trends for R&R business and expectations of distribution channel inventory corrections in 2H22

·     Consumer Staples: RBC Capital with earnings preview for space, saying they expect solid results across the CPG space in Q2 with top ideas into prints KO and cautious on CLX as topline and margin trends see the benefit from higher sequential pricing realized in the quarter vs. Q1 results, with still limited elasticity impacts on volumes. SAM downgraded to SP from OP at RBC as well and lowers tgt to $331 from $488 given expected depletions miss and guidance cut; USNA slides as guides prelim Q2 EPS $1.05 below consensus $1.26 and sees Q2 revs roughly $265M below consensus $272.77M and prior year figure of $337M; sees year EPS $3.85-$4.45 vs. est. $5.27 and sales $1.015B-$1.065B vs. est. $1.13B; BG upgraded to Overweight at JPMorgan as think near-term positive catalysts could come from 2Q22 earnings; Kellogg (K) downgrade to Neutral from buy at UBS on concern the company is going to experience a significant amount of inflation over the NTM and will likely have difficulty passing through as much price going forward; NAPA 5M share Spot Secondary priced at $19.50

·     Casinos, Gaming, Lodging & Leisure sector; FUN said that YTD revenue through July 4 was a record $704 million, up 20% from the comparable period in pre-pandemic 2019 that went through July 8. The increase in revenue was fueled by new highs for in-park per capita spending of $59.52 and growth in out-of-park revenue, such as resort properties, to $88 million; decent bounce in discretionary and leisure names in theme park, casinos, lodging and travel.

Energy

·     Energy stock movers: oil prices rebounded after a recent downdraft, staying higher despite bearish weekly inventory data as the EIA showed a large weekly build of 8M barrels vs. an expected drawdown of about -1M barrels. The average gasoline price in U.S. has been declining for past 22 days … most recent daily drop was largest since March 2020

·     Inventory data showed: The American Petroleum Institute reports a weekly build in crude oil of 3.825 mln barrels vs expectations of a draw of 1.1mln barrels. The EIA data was very bearish, as crude weekly stockpiles rose +8.2M barrels vs. -1.043M consensus and -2.762M last week, while Gasoline stockpiles fell -2.5M vs. -0.480M consensus and Distillates fell -1.3M vs. +1.133M consensus. Natural gas data was bullish with smaller-than-expected build of +60 bcf vs. +74 bcf consensus, +82 bcf last week.

·     E&P and Majors; SHEL said it expects strong Q2 profit from higher fuel-refining margins that could add more than $1 billion to earnings, while forecasts for sustained high energy prices boosted the value of its oil and gas holdings; natural gas producers AR, EQT, RRC, SWN seeing the biggest jump in energy complex as natural gas prices surged in the solar space, massive gains for JKS, ARRY, DQ, ENPH, FSLR, SPWR; The United States has agreed to lift tariffs on Canadian solar products after a trade dispute settlement panel sided with Ottawa earlier this year, Canadian Trade Minister said

Financials

·     Bank movers: NTB upgraded to Overweight from EW at Wells Fargo as believe the conservative balance sheet and nearly 6% dividend yield provide investors solace in what is likely to remain a volatile environment for bank stocks, while downgraded OZK to Equal Weight, Lower tgt to $42 from $58 as broader backdrop of accelerating rate hikes and recessionary fears will likely keep shares range bound; Raymond James also with a handful f rating changes in banks ahead of earnings season: upgraded RF but downgraded GNTY

·     Finance & Financial services: Goldman Sachs cut estimates for the ratings agencies (MCO ) and lower their revenue forecasts to be down 22% at SPGI and down 27% at MCO following a 40% y/t decline in debt issuance in 2Q22; Bank America reported total card spending was up 11% year over year in June, compared to 13% and 9% in April and May. Credit card spending rose by 16% year over year, while debit card spending increased by 6% year over year (AXP, DFS, COF

·     Insurance: few previews ahead of earnings as UBS said sees potential headwinds for U.S. life insurers in Q2 from weakness in equity markets and economic uncertainty as lowers tgts for AFL, EQH, MET, RGA and VOYA; Goldman Sachs said fundamentals for P&C are better than for Life Insurers (hurt by declining stock and bond prices), but the stocks have also pre-trade this dynamic. For P&C, focus on potential margin pressures as the cost of claims rise as favor: Buy-rated CB, WRB, HIG while inflation can pressure Sell-rated TRV For Life, focus on margin pressures in asset management and variable annuity businesses. Favor UNM, VOYA, RGA, BHF while we see pressure for LNC, JXN, PFG

Healthcare

·     Pharma movers; MRK is aiming to finalize a deal for SGEN this month that would be one of the year’s largest at ~$40B or more, WSJ reported last night saying the companies are discussing a price for Seagen above $200 a share https://on.wsj.com/3P4qAF4; CTMX slides after saying while the phase II study of its praluzatamab ravtansine drug candidate met its primary endpoint of objective response rate in HR+/HER2-non-amplified breast cancer, a separate study arm didn’t pass the protocol-defined futility boundary in triple-negative breast cancer; ABBV disclosed that 2Q results would see a $269M pre-tax or $0.14 EPS impact from the result of acquired IPR&D, with FY22 guidance now $13.78 to $13.98 (vs. $13.92 to $14.12 prior), with the company noting its prior guidance did not forecast IPR&D expense beyond 1Q22.

·     Biotech movers: DMAC announced that U.S. FDA has placed a clinical hold on company’s phase 2/3 remedy2 trial; BHVN enrolls first patient in phase 3 trial of taldefgrobep alfa in spinal muscle atrophy and expects to enroll approximately 180 patients in this randomized, double-blind, placebo-controlled global trial; ICPT announced topline results from a new interim analysis of its Phase III REGNERATE trial of obeticholic acid in patients with liver fibrosis due to nonalcoholic steatohepatitis (NASH), with this 2nd analysis meeting its primary endpoint for the intent-to-treat population; ANVS slips after saying the FDA has allowed it to proceed with the late-stage study of its experimental therapy, buntanetap, in early Parkinson’s patients; VIVO to be acquired by SD Biosensor and SJL Partners in $1.53 billion all-cash transaction, $34 per share; NVAX hitting 3-month highs after the EMA approved its South Korean partner SK Bioscience as a supplier of Co’s Nuvaxovid COVID-19 vaccine

Industrials & Materials

·     Aerospace & Defense; SPCE shares rise after announced it was teaming up with Aurora Flight Sciences, a BA subsidiary, to help design Galactic’s next-generation motherships; BA CEO Dave Calhoun told Aviation Week in an interview that the plane maker could be forced to cancel the 737 Max 10 over potential regulatory issues.

·     Industrial & Machinery; several analyst previews ahead of earnings season as Cowen lowers tgts on CAT $225 from $255, CMI to $267 from $281, DE to $342 from $396, PCAR to $92 from $100 saying in the near term ahead of earnings, favor GATX and CAT; we’re cautious on GBX and RAIL; and neutral on DE, WAB, CMI, PCAR, and TRN downgrade from Overweight to Neutral at JPMorgan as see potential for continued tailwinds as an independent entity; DE upgraded was upgraded to Buy from Neutral at Citigroup while downgraded OSK to Neutral

·     Transports; in airlines, Argus downgraded UAL to Hold from Buy and lowers EPS estimates to reflect flight cancellations, pilot shortages and higher fuel prices; Bank America cut tgts and estimates in space as well ahead of earnings: DAL ($40 from $50), AAL ($8 from $9), UAL ($39 from $47), ALK ($60 from $72), HA ($14 from $16) and ALGT ($140 from $170); in railcars, Wells Fargo said they believe rail supply concerns around improved rail service and recession likely overdone – WAB continues to be top idea; further, heading into Q2, we would be OW the names with the greater leasing exposure, notably GATX, TRN, and GBX in order of preference

·     Metals & Materials; nice rebound in materials and metals names after recent downturn on recession fears; shares of copper, aluminum, iron ore, etc. getting a boost after upbeat China stimulus headlines overnight as FCX, AA, CLF, others bounce; in research, FCX downgraded to Peer Perform at Wolfe Research on lower Copper prices and limited growth, now assuming buybacks slip 50% from H1 levels in H2E and, also cut SCCO to Underperform; in coatings space ahead of earnings, RBC Capital lowers FY22/23 EPS/EBITDA estimates by ~2-4% for our covered coating names AXTA , resulting in price Target cuts of ~10%

Technology, Media & Telecom

·     Internet & Media movers: just broad general strength in the media, internet space with stocks surging; in advertising, Citigroup upgraded LAMR and EDR from Neutral to Buy saying the market has pressured firms with lower contractual revenue (topline fears) as much as they have punished firms with low EBIT margins (inflation fears)…and think this is incorrect; TWTR said the number of spam bots is well under 5% estimate; GOOGL adds over 8% this week, along with gains in rest of space META, SNAP, SHOP, PINS

·     Semiconductors: the biggest jump in tech coming from semi’s broad based strength after a rough start to the year (down -36YTD), helped after Samsung Electronics (SSNLF) posted an operating profit of 14 trillion won ($10.7 billion) for Q2, up 11% from 12.57 trillion won a year earlier, just shy of a 14.45 trillion won estimate; Q2 revs rose 21% to 77 trillion won, in line with market estimates – shares of chip makers jump following the report in relief rally AMD