Closing Recap

Tuesday, July 12, 2022

Equity Market Recap

·     Stocks moved sideways most of the day until losing steam the final hour, falling to new lows on jitters ahead of tomorrow’s June consumer price inflation reading. Estimates for headline CPI M/M is to rise +1.1% for June and Y/Y to rise +8.8%. For core reading (ex food & energy) est. to rise +0.6% M/M and +5.7% Y/Y. CPI will be followed by Producer Prices (PPI) Thursday. Earnings season unofficially kicks off the next day, but for the moment, inflation concerns all that seem to be weighing on investors’ minds. In a day that lacked market driving news, attention was on Treasury yields and energy markets as oil prices fell to 3-month lows below $96 per barrel on more slowing demand and recession concerns. The Dow Jones Industrial Average got a boost from Boeing (BA) which rose 7% on positive analyst commentary and delivery orders, but wasn’t enough to lift the broader average, falling -0.6% on the day. In sector news, Information technology dropped led by software weakness, while energy was the big loser along with financials and healthcare. Winners were sparse, but consumer discretionary rebounded led leisure names, while other winners were spread out.

Commodities

·     Oil prices tumbled to 3-month lows, down -$8.25 or 7.93% to settle at $95.84 per barrel, falling on demand fears after fresh COVID-19 curbs in top crude importer China this week and ongoing fears of a global economic slowdown. A stronger U.S. dollar has also impacted commodity prices over the last few months, rising to 20-year highs. NYMEX Natural Gas settles at $6.1630/MMBtu. Brent crude falls -$7.61 or 7.11% to settle at $99.49, first close below $100 in 3-months.

·     Gold prices fell -$6.90 or 0.4% to settle at $1,724.80 an ounce – remains at 9-month lows – down 13 of last 16-trading days and down more than $125 during that stretch as the dollar hits 20-year highs ahead of the CPI report tomorrow. Precious metals have tumbled amid the ongoing pressure from a strong dollar and rising interest rate hike bets. The dollar (DYX) index hovered near a 20-year peak after hitting near parity vs. the euro at 1.00.

·     In the ag space, corn futures declined snapping its 4-day win streak after the U.S. Department of Agriculture raised its domestic production estimate for the 2022/2023 marketing year by 45 million bushels to 14.505 billion bushels and lifted its forecast for U.S. corn beginning stocks by 25 million bushels to 1.510 billion bushels, according to WASDE report

Currencies & Treasuries

·     The U.S. 2-to 10-year yield curve inversion reaches above 10 basis points today, with the 10-year at 2.95% with the 2-yr yield at 3.05% (inverted curve remains a recessionary warning). The U.S. Treasury auctioned $33B in 10-year notes at a yield of 2.96% vs. 2.94% when issued prior, with the bid-to-cover at 2.34 vs. prior 2.41 and indirect bidders awarded 61.33% and directs 17.97%. Was the 5th consecutive tailing 10Y auction, and 8th of the past 9 auctions. Treasury yields advanced as stocks declined following the weak 10-year auction.

·     Anyone planning a trip to Europe? Things are likely to be more affordable for American tourists visiting Europe this summer as the euro falls near parity vs. the buck. The euro nearly hit parity with the greenback at $1.000 before bouncing back – the first time since 2002 (in the early years of the euro’s existence) that the rate hit 1:1. The dollar overall pared gains after a massive run.

Sector News Breakdown

Consumer

·     Retailers; GPS slides after CEO departs and sees Q2 net sales to decline in the ~high-single digit range; GME introduced an NFT marketplace that will enable gamers, creators, collectors, and other community members to buy, sell and trade NFTs; PTON said it plans to exit all owned-manufacturing operations, as the maker of connected fitness equipment works to simplify its supply chain and reduce its cost structure; DG said its CEO Todd Vasos will step down effective Nov. 1, and current Chief Operating Officer Jeffery Owen will take over as CEO; PSMT reported lighter than expected profits for its fiscal third quarter; AMZN 2-day “Prime Day” kicked off

·     Auto sector; GOEV surges after saying it has signed a purchase agreement with retailer WMT which will purchase 4,500 of its all-electric delivery vehicles, with the option to purchase up to 10,000 units; HYRE narrows Q2 net revenue forecast to between $10.4M-$10.6M from previous forecast of $10.2M-$10.7M, citing strong performance in the quarter; in US auto parts & equipment, Citigroup with opening a tactical Pair Trade of Overweight APTV, Underweight VC; RIDE said President Edward Hightower has been named CEO, while Daniel Ninivaggi is moving from CEO to executive chairman of the board.

·     Consumer Staples & Restaurants; PEP Q2 core EPS $1.86 vs. est. $1.74; Q2 revs rise 5.2% to $20.23B vs. est. $19.51B; raises 2022 organic revenue to rise 10%, up from previous forecast of an 8% increase, helped by sustained demand for sodas and snacks even in the face of rising prices; HLF upgraded to Buy at Jefferies as see an asymmetrical set-up; $17 downside / $36 upside PT and stock pricing in greater est. downside vs. what they see as likely

·     Casinos, Gaming, Lodging & Leisure sector; in another negative for the travel & leisure space (hotels, cruise, etc.) Heathrow Airport said it would cap the number of departing passengers from the international hub at 100,000 a day until September and has asked airlines to stop selling new tickets from the airport for the summer season, as it and other European airports struggle with staff shortages and surging travel demand; Loop Capital lowers UBER ests for share of US deliveries following Amazon’s partnership with GrubHub announced last week

Energy

·     Energy stock movers; HES, OXY among top decliners in the S&P and energy space overall with sharp drop in oil prices on demand fears after fresh COVID-19 curbs in top crude importer China this week and ongoing fears of a global economic slowdown. OPEC today in its monthly report forecasts world oil demand will grow by 2.7M bpd in 2023 while leaves 2022 world oil demand growth forecast unchanged at 3.36M bpd. Also forecasts non-OPEC oil supply will rise by 1.7M bpd in 2023, led by U.S. and OPEC sees global demand for its crude at 30.1 million bpd in 2023, up 900,000 bpd from 2022.

Financials

·     Bank movers; all eyes on sector at end of week, with earnings results due for JPM on Thursday then a slew of banks Friday (BK, BLK, C, PGR, PNC, STT, USB, and WFC; in research, Citigroup upgraded JPM to Buy and downgrading RF to Neutral, launched negative catalyst watches on KEY and PNC largely on our expectations of negative NII revisions – says a lot of uncertainty is priced into the bank stocks, but believe risk/reward is very attractive for the group; SEIC downgraded to UW from EW at Morgan Stanley with a $55 PT on a lack of positive catalysts, exposure to weaker capital markets, pretax margin compression, and valuation; in asset managers, JMP Securities reduced 2Q22 estimates across the majority of their coverage to reflect softness in the broader markets, but with the bar lowered materially, believe upside far outweighs the downside for most stocks in our coverage at this point

·     Insurance: Goldman Sachs assumes coverage of insurance brokers, as prefer exposure to P&C related business and brokerage stocks on tailwinds from inflation, better pricing, and rising interest rates – initiate at Buy: AJG, MMC, stay-Buy on RYAN and init AON, BRO, WTW neutral

·     Consumer Finance & Lending; AXP, COF both downgraded to Equal Weight from Overweight at Morgan Stanley and cutting estimates across U.S. banks and consumer finance coverage as recession risks rise and taking some consumer chips off the table; COF also downgraded at Oppenheimer saying TBV growth fairly stagnant and upside/downside valuation not exciting; LDI implemented a program to generate annualized savings of $375M-$400M by year end and expects to cut another 2K jobs after 2,800 job cuts already this year

·     REITs; NNN downgrade to EW and STOR to UW in Triple Net REITs at Morgan Stanley saying rising cost of capital a headwind to investment spreads and AFFO growth. They reduce 23e AFFO ests -1.6% and PTs -12%

Healthcare

·     Pharma & Biotech: ALDX said it achieves primary endpoints in dry eye disease chamber crossover clinical trial and no safety signals were observed in trial, and reproxalap was well tolerated; the White House announces strategy to manage BA.5 covid variant saying will continue to recommend vaccine booster shots and to make tests and masks widely available to combat ba.5 variant (MRNA, PFE, NVAX, BNTX); GLSI rises after the FDA removes clinical hold, permitting late-stage trial of co’s experimental breast cancer therapy GLSI-100 to proceed; FULC announces departure of Chief Medical Officer Christopher Morabito after 15 months in the pos; MRNA begins dosing of Nipah virus vaccine mRNA-1215 in early-stage study

·     MedTech Equipment; INMD raises FY rev guidance from $415M-$425M to $425M-$435M after guiding Q2 results above consensus; ANGO slides early following quarterly results; GKOS upgraded from Hold to Buy at Stifel and up tgt to $60 from $40, supported by our bullish near-term and long-term survey diligence of 50 ophthalmologists as checks point to strong U.S. Glaucoma growth in 2022, leading them to believe sales upside this year is likely

·     Healthcare Services: ONEM downgraded from Buy to Hold at Deutsche Bank noting shares are up 32% over the last several weeks (vs QQQ +4%) on reported news of the company receiving takeover bids and a follow-on competitor upgrade – firm says have a hard time justifying a share price above the $12-13 range, implying ~10% upside to the current share price.

Industrials & Materials

·     Industrial & Machinery; Bernstein noted China M1 money supply increased 5.8% and global growth was 15% synchronized for the first time since February. CAT, TRMB, URI revenues are most correlated to China M1 money supply growth (~61% on average), J and AGCO are the least (~22% on average); BA was among top gainers in the S&P early as delivered 51 airplanes in June to bring its first-half tally to 216 jets, up 38% from the same period last year

·     Transports: In trucking and logistics, Wolfe Research upgraded KNX from Underperform to Peer Perform, but downgraded UPS, EXPD and ODFL from Peer Perform to Underperform based on a mix of earnings and valuation risk. Also downgrading CHRW from Outperform to Peer Perform as we expect net revenue/load to peak in 2Q; in rails, UNP and NSC both downgraded to Neutral from Overweight at JPMorgan; KNX also upgraded to Outperform at Evercore/ISI saying the earnings downside potential in a slowing market backdrop is not nearly as great as some peers

·     Airlines: outperform after AAL update and tumbling oil prices; AAL said it expects 2q revenue to be up 12% vs 2q 2019, sees 2q cost of fuel of $4-$4.05 per gallon of jet fuel and said flew 66.2b available seat miles in 2q, down 8.5% from 2q 2019; Susquehanna upgraded LUV shares while downgraded JBLU saying they’ve yet to find any cracks in airline booking data, and believe that at some point consumers will have to contend with the economic reality of higher air fares, outsized general inflation, and potential layoffs

·     Metals & Materials; industrial and precious metal prices tumble on recession fears; names like FCX down roughly 50% from 52-week highs while GLD falls an 11^th time in 13-days to 9-month lows; NGD lowered full-year guidance for gold equivalent production to 325K-365K oz from 380K-440K oz previously, including gold production of 260K-290K oz and copper output of 25M-35M lbs from prior guidance of 295K-335K oz and 35M-45M lbs, respectively; HL said Q2 silver production increased 10% to 3.6 million ounces over the first quarter, while gold was also up 10% to 45,700 ounces. Zinc production was up 12%, and lead production increased 23%.

Technology, Media & Telecom

·     Internet; GOOGL countersued MTCH amid legal battle over Google Play policies; RBLX tgt trimmed from $61 to $57 at BTIG and maintain Buy, but lower estimates to reflect a tempered DAU outlook, per May metrics and tracking that shows slowing user growth but see potential for upside vs. both our and consensus forecasts; Axios reported DIS signed a major advertising deal with TTD

·     Semiconductors; NVDA ests lowered at Citigroup again and tgt to $285 from $315 on below seasonal PC demand and elevated retail inventory; COHU narrows Q2 revenue view to $216M-$218M from $205M-$221M (est. $213.5M) saying Q2 ending backlog is expected to be approximately $342 million, substantially shipping over the next three quarters; KeyBanc cuts sector ests for sector and lowers tgts for NVDA, AMD, SWKS, SYNA following Asia trip- quarterly supply chain findings are mixed, but mostly negative: supply was clearly disrupted in 2Q by the China lockdowns, while demand across all consumer end markets (PC, SP, IoT) weakened further; conversely, auto, industrial, and cloud demand remained robust; GFS and STM have signed a Memorandum of Understanding to build and jointly operate a new 300mm manufacturing plant in Crolles, France, next to STMicro’s existing facility

·     Software movers; Stifel noted NOW CEO appeared on CNBC Mad Money last night during which he mentioned "macro cross winds (are) blowing strong" given rising interest rates, ongoing strengthening of the US Dollar, war in Europe, increasing energy costs, and cyber-security threats, among other items – NOW shares tumbled on the commentary and weighed on other software stocks SNOW, U, MDB, CRM; FTNT and CHKP added to the Best Ideas List at Wedbush saying for Fortinet, are bullish on FTNT’s ability to execute on its long-term vision of continuing to capture market and for CHKP expect to see cyber spending positive trend to continue

·     Hardware, Components & Services; Citigroup noted IDC released preliminary 2Q22 worldwide PC industry unit estimates, indicating units declined -15% YoY (below Citi’s estimate -9%YoY) and a deterioration from the -6% decline in 1Q22. The 2Q22 decline of -15%YoY compares to +13% in 2Q21 and +15% in 2Q20. Consumer demand weakened on lapping of COVID PC purchasing coupled with recession concerns, while commercial demand continues in pockets

·     Cable & Telecom movers; Goldman Sachs previews sector as expects broadband net adds to decline materially for major cable operators (CMCSA, CHTR, ATUS), +72k net adds, down materially from +480k in 2Q19 (pre-covid). In the fixed wireless space, favors TMUS, as anticipates the company adding +400k subs vs. VZ’s +225k, driven by TAM expansion as TMUS’ services reach subs that previously had not been served by wireline incumbents