Closing Recap

Friday, July 12, 2024

Stock market strength/resilience remains astounding! One day of stock market weakness for the S&P 500 and Nasdaq was all the Bears get, as Friday was another rip-roaring session, as both averages climb for the 8^th time in 9-trading days, erasing much or all of yesterday’s rotation related pullback in another massive Friday rally. The Russell 2000 Smallcap index, the beneficiary to the selloff in tech stocks on Thursday (rising 3.5%), added to its gains bringing its weekly total to +5% on the week (all gains last 2-days), but the S&P and Nasdaq saw sustained strength throughout today’s session as investors took advantage of the one-day decline in large cap tech. Even the Dow Jones Industrial Average got in on the action, taking out its prior May all-time intraday high of 40,077, topping 40,200. Most S&P sectors were higher with more than 1% gains for Technology, Discretionary, Utilities, REITs, and Materials. European shares advanced and logged their second consecutive weekly gains on upbeat earnings and global investor optimism about a September interest rate cut by the Federal Reserve. France’s CAC 40 advanced 1.3% after a volatile week of elections. Global stock market euphoria continues as any dip, small or large, is immediately bought as major averages back near all-time highs. There is no fear, none in stock markets right now, with Smallcaps joining the S&P 500 and Nasdaq rally as yields tumble on expected rate cuts by the Fed as inflation prices decelerate (not falling), following the CPI report yesterday (though PPI today showed a jump). Next week we get earnings from BAC, GS, AXP, BLK, MS, STT, ALLY, SCHW, CMA, TRV in financials, NFLX in technology, UNH, ELV, JNJ, ABT in Healthcare and HAL, SLB in Energy. Stocks were strong all day, surging in the first two weeks of July, but saw some selling pressure late day into the weekend.

• University of Michigan surveys of consumers sentiment prelim July 66.0 (consensus 68.5) vs final June 68.2; current conditions index prelim July 64.1 (consensus 66.3) vs final June 65.9; expectations index prelim July 67.2 (consensus 69.8) vs final June 69.6; 1-year inflation outlook prelim July 2.9% vs final June 3.0% and surveys of consumers 5-year inflation outlook prelim July 2.9% vs final June 3.0%.

• The U.S. dollar was down on day/week as the Japanese yen hit an almost four-week high against the U.S. dollar on Friday, raising speculation that Japanese authorities may have intervened for a second day to prop up the currency. After hitting 38-year lows against the dollar, Bank of Japan data suggested the Ministry of Finance appears to have spent around 3.37-3.57 trillion yen intervening in the market to support the Japanese currency. Japan May have spent up to 3.57 trillion yen ($22.43B) on Thursday in its most recent intervention in the for-ex market to bounce the yen.
• U.S. WTI crude oil futures slipped -$0.41 or 0.5% to settle at $82.21 per barrel in late day slide (down -1.14% for week), snapping the small 2-day win streak while Brent Crude futures settle at $85.03/bbl, down $0.37, or 0.43%. Natural gas with late week bounce finished +0.43% on week to $2.329. Aug. gold prices slip -$1.20 to settle at $2,420.70 an ounce posting its third straight weekly gain, as investors grew confident that the U.S. Fed was on track to lower interest rates soon.; prices rose 1% for the week so far. The move came as the dollar slid and treasury yields stumbled (10-yr near week lows 4.19%) after cooler CPI inflation data on Thursday raised expectations of a Fed rate cut in September.
• In other commodities: The USDA forecast the 2023/24 corn crop end stocks to be 1.877 billion bushels, down from June and below expectations of 2.049 billion bushels. The USDA forecasted corn production at 15.1 billion bushels, above the average analyst expectation of 15.063 billion bushels. The USDA raises its estimate of 2024-25 U.S. cotton production to 17 million bales in its July WASDE report, from June’s 16 million bales forecast. Ending stocks projection is raised to 5.3 million bales from 4.1 million bales. The global 2024-25 output forecast increases to 120.19 million bales from 119.14 million bales, with ending stocks of 82.63 million bales, down from 83.49 million bales estimated last month.

• In Consumer Staples: Unilever (UL) plans to cut as many as 3,200 roles in Europe by the end of 2025, according to details of a company-wide call shared with the Financial Times. In Spirits, Diageo (DEO was downgraded from Neutral to Sell at Goldman Sachs expecting relative underperformance as earnings risks remain high and forecast -1% sales growth in FY25 and 1% in FY26 in North America vs the 2% and 4%, respectively. In beauty, EL confirmed reports of CFO Tracey Travis leaving the company.

• In Online travel/Hotels: BKNG was upgraded to Buy from Hold at Benchmark with a $4,700 price target saying while the firm acknowledges its "timing may not be optimal given the rash of ongoing economic worries," as well as some signs of anecdotal trading down in key European markets and how crowded the name is, it adds that its prior rating was inconsistent with its long-term view.

• In Energy: COP said on Friday it received a second request from the U.S. Federal Trade Commission for information on its proposed acquisition of rival MRO; ConocoPhillips said both companies received the requests on July 11 and are working with the FTC to review the merger. RRC said June-qtr total non-cash fair value loss $111.2M and qtrly non-cash fair value loss on natural gas derivatives $113.1M. FANG said Q2 Avg total realized oil price/barrel $79.51, Avg total natural gas price/Mcf $0.10, and avg total realized NGLs price/barrel $17.97. APA curtailed about 78 mmcfe/d of U.S. natural gas production in Q2 in response to weak or negative Waha hub prices and curtailed an estimated 7,600 barrels per day of natural gas liquids. In refiners, Wells Fargo is the latest of many firms to lower estimates in group (DINO, VLO, MPC) on weaker refining margins, primarily due to tighter crude diffs, as well as trim its marketing expectations.
• In Chemicals: Citigroup provided a chemicals preview saying they see a challenging lithium market ahead with the most weakness in lithium for Q2 and the balance of the year, with continued spot/index price declines and few signs of supply cuts. ALB ests cut at Citi, revised -12% downward, and it takes a negative short-term view on the quarter, while maintains constructive end-market view on electronics and flavors & fragrances – DD and IFF are its #2 and #3 picks. RBC Capital lowered Q2, FY24, FY25 estimates for DOW, LYB, OLN, WLK, CE and EMN saying expectations of a steeper recovery in 2H24 have become somewhat muted due to a generally sluggish macro. IPAR was upgraded to buy from Hold at Jefferies saying shares are oversold after dropping 17% year-to-date.
• In Metals & Mining: TECK shares rose after Sky News reported that RIO is studying a refreshed list of takeover targets including Teck after the collapse of rival BHP’s bid for Anglo American (NGLOY). Sky said Rio had drawn up detailed proposals for a potential bid for Teck, which included approaching banks for financing a deal. BHP entered into an agreement with VALE in relation to group action proceedings in United Kingdom in respect of Fundao dam failure in Brazil. BHP said it does not consider that it is liable to claimants in English proceedings. BHP, BHP Brasil and Vale entered into an agreement for BHP and Vale to each pay 50% of any amounts potentially payable to claimants.
• In Transports/Industrials: FAST reported in-line Q2 EPS $0.51/sales rose 1.8% y/y to $1.92B, while Q2 operating profit margins came in at 20.2%, down from 21% a year ago. In construction materials (MLM, SUM, CX), Barclays said Cement import prices declined 3% y/y in May, -6% T6M basis. 2) Compared to April, May monthly trends less cautious (up m/m and less neg. y/y). 3) Volumes are down 2% y/y in May. T6M declines each month in 2024. 4) Import price in SUM markets -9% y/y T6M and -1% m/m. Airlines stall a second day, adding to weakness after DAL miss/lower guide.
• In Aerospace & Defense: Aerospace supplier HWM tgt raised to $85 from $53 ahead of earnings at Benchmark saying the co does not have the same defense exposure as CRS-buy and ATIbuy but they still expect strong aftermarket support. For LMT, deliveries of F-35 jets to the U.S. military are set to resume shortly without the complete TR-3 software upgrade, the head of the F-35 Joint Program Office (JPO) said on Thursday.

• Citigroup (C) reported a 10% rise in Q2 profit with revenue growing at all its businesses; posted Q2 EPS $1.52 vs. est. $1.39 as net income of $3.2B, compared with $2.9B a year earlier while revs rose 4% y/y to $20.1B vs. est. $20.07B. Q2 CET1 ratio now stands at 13.6% and they raise their dividend by 6%. Citigroup’s investment banking revenue was up 60% from a year ago to $853 million, though it slipped 8% from the first quarter of this year. Citi’s trading revenue was up 6% overall to just over $5 billion, led by a 37% increase in equities trading from a year ago. Citigroup said sees 2024 expenses at higher end of $53.5b-$53.8b guidance ex-FDIC special assessment, civil money penalties; reaffirmed every 2024 and 2025-2026 guide.
• JPM profit rose in Q2 as EPS $4.40/$50.2B revs vs. est. $4.28/$50.2B, helped by rising investment banking fees and an $8 billion accounting gain from a share exchange deal with Visa. Q2 investment banking revs $2.5B, rising 46% y/y and up from $2 billion last quarter; booked $7.8 billion of trading revenue in Q2, up 10% from a year earlier as equity market revenue grew 21%, and fixed-income market revenue was up 5%. Said Q2 client investment assets were up 14% to $1 T, and we also had a record number of first-time investors; card loans were up 12%; charge-offs rise $820 million in 2Q to $2.2 billion, as more credit cards were opened, and credit conditions continued to normalize.
• WFC Q2 EPS $1.33 tops est. $1.29 on revs $20.69B vs. est. $20.28B; Q2 net interest income fell -9% to $11.92B, below est. $12.12B due to the impact of higher interest rates on funding costs; said commercial banking revenue $3.12B vs. est. $3.15B; Q2 net interest margin 2.75% vs. est. 2.77%; Return on equity 11.5%, common equity Tier 1 ratio 11%; Q2 provision for credit losses $1.24B, vs. est. $1.28B; Q2 Non-interest income increased 19%, driven primarily by higher trading revenue in our Markets business; credit card volume solid +12% y/y & debit spend +3% y/y, though both down modestly vs Q1. 30/90-day delinquencies down sequentially; said expects FY net interest income decline to be in upper half of the forecast range; booked a 41% increase in equity trading revenue and 8% increase for fixed income, currencies and commodities. Total trading revenue hit just under $1.8 billion, up 17%.
• In Trust banks: BK Q2 adj EPS $1.51 vs. est. $1.43; Q2 net interest margin 1.15%, Q2 adj revs $4.60B vs. est. $4.52B; said other total fee and other revenue $3.57B; Q2 Return on equity 12.7% (STT, NTRS rise in reaction ahead of results next week).
• In Fintech/Payments: SQ tgt was raised to $98 at Deutsche Bank saying despite weak stock performance by payment peers, they believe SQ continues to shine fundamentally with one of the few beat/raise stories in the sector. For 2Q results on Aug. 1st, we are forecasting gross profit growth of ~17% Y/Y and adj. EBITDA of ~$690m (~32% margins).

• European Software: Heading into Q2 earnings, Citigroup said is turning more cautious on Europe exposure across its software coverage. While summer seasonality is always a factor, they see more risk of elevated political/macro uncertainty pressuring decision making following recent elections, cautious pre-announcements from Dassault, and its recent CIO Survey which featured a considerable downtick in EMEA IT budgets. Under its coverage says PTC, ADSK, CXM have the highest EMEA exposure, while NOW are highest among “large deal” Co’s.
• In Semis: Good bounce back early for the Philly semi-index (SOX) after tumbling on Thursday, hitting highs above 5,860 this morning as investors used the one-day sell-off to reengage on of the hottest sectors in 2024 (SOX +36% YTD); INTC push into software is going well and the company could have cumulative software revenue of $1 billion by the end of 2027, Chief Technology Officer Greg Lavender told Reuters. In HDD sector: Citigroup added an upside 90-day short-term view on WDC on increased confidence in robust NAND pricing and under shipment to demand and reiterates its Buy ratings on both STX and WDC shares on its view of a storage market cyclical recovery. Citigroup said it expects storage media industry dynamics to continue improving on return of pent-up storage demand led by hyperscalers.