Closing Recap

Tuesday, July 13, 2021

Equity Market Recap

·     The S&P 500 and the Nasdaq topped new peaks intraday, helped by a rise in mega-cap tech stocks, but a mixed start to earnings season, a jump in inflation data, and an awful 30-year Treasury auction (pushing yields higher) weighed on sentiment as markets finished near their worst levels of the day (Smallcaps again underperform). Truth be told, major averages were holding near their best levels of the day around 1:00 PM ET (prior to the weak Treasury auction) despite the CPI inflation spike and mixed earnings. Stocks and bonds sold off after the U.S. Treasury sold $24B in 30-year notes at a yield of 2.00%, well above the 1.976% when issued prior, but the bid-to-cover (demand) was still weak at 2.19, dragging large cap mega tech stocks off their best levels (names like AMZN, AAPL, GOOGL had been driving markets higher prior despite decisively weaker Nasdaq breadth all day). By day’s end, stock markets finished lower ahead of earnings tomorrow in the bank sector (BAC, Citi, Wells) and as Fed Chairman Powell is expected to give his semiannual monetary policy report before the U.S. House and Senate on Wednesday and Thursday. Investors remain concerned over an overheating economy amid a faster reopening could force the Fed to pare back its ultra-loose monetary policies sooner than expected. Following the CPI data this morning, futures on the federal funds rate showed a roughly 90% chance of a rate hike by December 2022, fully pricing that scenario in January 2023.

·     Stock/sector movers: bank earnings mixed as JPM posted an earnings beat on slightly weaker revs while GS posted a big EPS beat though trading revs were down sharply YoY; CAG weighs on food stocks after cuts year EPS view to reflect increased inflation since the fiscal third quarter; also lowered year margin guidance, while PEP leads beverages higher on its beat and raise quarter; BA a drag on the Dow after company slows Dreamliner production after new manufacturing issue/expects new defect to take at least three weeks to address; cannabis stocks outperform on reports Senate Majority Leader Chuck Schumer, Finance Chairman Ron Wyden and Senator Cory Booker will release a discussion draft of their marijuana legalization bill at a press conference Wednesday; shares of Chinese firms listed in the U.S. bounce after $TCEHY received official approval for its purchase of search engine developer.

Economic Data:

·     Inflation data comes in hotter than expected as all CPI readings all above estimates: Consumer Price Index (CPI) MoM for June rose 0.9% above est. 0.5%; CPI YoY rose 5.4% vs. est. 4.9%; on a core basis (ex food & energy) CPI rose 0.9% vs. est. 0.4% and on a YoY basis rose 4.5% topping the 4% level – all coming in well above consensus. The June headline is the largest surge since the 1.0% jump in June 2008, while core MoM reading ties April for biggest gain since late 1981. Driving inflation: Car rental 87.7% (y/y change), Used cars 45.2%, Gas 45.1%, Laundry machines 29.4%, Airfare 24.6%, Moving 17.3%, Hotels 16.9% and Furniture 8.6%.

·     Small Business Optimism Index hit an eight-month high of 102.5 – included in the survey was a record high 39% of owners increasing wages, while 46% say they can’t fill positions which is running at a 2x clip vs the historical avg, and 47% of owners reported higher selling prices which is the highest on record since 1981.

·     The U.S. government posted a June deficit of $174 billion, down from the $864 bln deficit in June, as a rebound in the labor market and an earlier tax deadline this year raised revenues. Receipts for June jumped 87% to $449 billion, in part a reflection of this year’s Internal Revenue Service income tax filing deadline being brought forward to May 17 compared to last year’s pandemic-induced delay to July 15.

Commodities

·     Oil prices with a nice recovery off the lows, as WTI crude rises $1.15 or 1.55% to settle at $75.25 per barrel (off morning lows $73.68). The bounce comes ahead of weekly inventory data with the API and EIA reports due tonight and tomorrow respectively (follows bullish data last week).

·     Gold prices finish higher, rising $4.00 or 0.2% to settle at $1,809.90 an ounce, off the highs of the day, but managed to close above the $1,800 for a 5^th straight session. Prices rise following data showing U.S. consumer prices rose by the most in 13 years last month, though an advancing dollar kept its gains in check. Next up for markets, Fed Chairman Jerome Powell’s testimony before Congress on Wednesday and Thursday on monetary policy and asset purchase questions.

Currencies & Treasuries

·     U.S. Treasury yields jump following dismal 30-year auction results as the U.S. Treasury sold $24B in 30-year notes at a yield of 2.00%, well above the 1.976% when issued prior, but the bid-to-cover (demand) was still weak at 2.19, while indirect bidders awarded 61.09% of the auction and directs 16.63%. Following the weaker auction, the 10-year yield hit highs above 1.41% (up 5 bps), the 7-yr rises 4 bps above 1.15% and the 5-yr rises 4 bps to 0.835%.

·     The U.S. dollar was broadly higher, picking up steam mid-afternoon following a spike in Treasury yields after a weak 30-year bond auction, adding to morning gains following a “hawkish” CPI inflation report, boosting chances of sooner Fed intervention on rates. The euro dropped below the 1.18 level against the dollar, down over -0.5%, while the British Pound dropped -0.4% to 1.3835 and the USD-JPY jumped above 110.50. The risk backdrop remains relatively neutral, which should limit downside potential.

Sector News Breakdown

Consumer

·     Retailers; HBI upgraded to Overweight at Wells Fargo with $23 tgt saying for the first time in many years, they see a clear path to potential upside as the company has begun to take back market share in innerwear, demonstrated sustainable growth potential for Champion, and laid out a more compelling plan around reinvestment; POSH upgraded to Buy from Hold with $50 tgt at Stifel as views Poshmark as the best positioned player in the resale e-commerce space, with an asset-light business model supporting attractive long-term margins

·     Housing & Building Products; Truist lowered FY2Q21 estimates on aggregate/cement names EXP, MLM, USCR, and VMC on very wet Texas weather but see more positives in volume and pricing slowly building. Firm said longer-term, the chances for an infrastructure bill are raising the possibility of well above average volume and pricing growth for years for the industry; homebuilders remain weak amid the spike in consumer prices data (CPI) – with shares of BZH, CCS, PHM, TOL, LEN falling; Lumber futures, the posterchild for rampant inflation, has crashed 55% in 2 months from its May highs and is now down 0.6% on the year (but still up from pre-pandemic levels)

·     Consumer Staples; beverage giant PEP with beat as Q2 core EPS $1.72 tops est. $1.53 on better revs of $19.22B vs. est. $17.69B and ups guidance as now expect our full year organic revenue to increase 6% (previous guidance of mid-single-digit growth) and core constant currency earnings per share to increase 11% (vs. previous guidance of high-single-digit growth); in food space, CAG shares slide after eking out modest Q4 beat but cuts year EPS view to $2.50 from $2.63-$2.73 (est. $2.63) to reflect increased inflation since the fiscal third quarter (CAG also lowered year margin guidance to 16% from 18%-19% prior – food sector active KHC, K, CPB)

·     Casinos, Gaming, Lodging & Leisure sector; ABNB received a double-notch upgrade to Buy from Underperform at Gordon Haskett saying digital engagement trends have materially improved for Airbnb and points to strong vaccination rates in Europe; AMC shares quietly down for the 7th time in last 8-sessions, while GME also falls for the 7th time in last 8-days, as old "meme" stocks seeing further weakness

Energy

·     E&P and Majors; in research, Mizuho said they believe that global appetite for US LNG exports will continue to increase, driven by European carbon costs and China’s emergence as a major LNG importer. They upgraded SWN to Buy from Neutral and raise its PT to $7 from $6 following the company’s recently announced acquisition of Hayneville pure-play private Indigo Resources and said continue to like EQT (target to $33 from $28) for scale in Appalachia and CRK (target to $10 from $8) for pure-play Haynesville exposure; RDSA upgraded to Overweight at Barclay’s as believes co set to deliver free cash flow (FCF) at record levels owing to rising oil price expectations across the market and natural gas prices at decade-high levels.

·     Pipelines: Brookfield Infrastructure Partners LP (BIP) said it was considering "further enhancements" to its offer to buy Canada’s Inter Pipeline Ltd. (IPPLF) The news comes a day after the Alberta Securities Commission (ASC) ruled that Inter did not engage in any improper defensive tactics to fend off a hostile takeover bid from Brookfield, which had alleged that Inter’s tactics favored an offer from Pembina Pipeline Corp PPL.TO. (PBA). https://bit.ly/2TX6ZA1 ; PAA and Oryx Midstream Holdings LLC to merge their assets, operations and commercial activities within the Permian Basin into a newly formed joint venture, Plains Oryx Permian Basin LLC

·     Utilities & Solar; FSLR downgraded to neutral from buy at Citigroup and closing the 90-day catalyst watch we instituted on April 19^th saying several of the catalysts we laid out in our April upgrade have played out; in utilities, EIX downgraded from Buy to Neutral at Bank America with California and Edison International facing a multitude of emerging risks; Goldman Sachs upgraded DTE to its Conviction Buy list with $135 pt post spin-off of its midstream assets, saying it represents their top regulated utility idea in our coverage universe; WTRG was removed from the Conviction Buy list after recent outperformance and a lack of major near-term catalysts; MSEX to replace Luminex in S&P 600 at open on 7/15

Financials

·     Bank movers; JPM 2Q EPS $3.78 vs est. $3.21 incl $3.0B or credit reserve releases firmwide; NII $12.9B, ROTCE 23%; reported revs $30.5B vs est. $31.4B; says consumer and wholesales balance sheets remain exceptionally strong; FRC Q2 EPS $1.95 vs. est. $1.73; Q2 revs $1.2B vs. est. $1.18B; Q1 NII +27.5% YoY to $1.0B; GS big earnings beat as Q2 EPS $15.02 vs. est. $10.23; Q2 revs $15.39B vs. est. $12.17B; announces reversal of credit losses of $92M (said trading rev. $4.90B, -32% YoY, with FICC sales & trading revenue $2.32B, -45% YoY, and equities sales & trading revenue $2.58B, down -12% YoY); HBMD to be acquired by FNB in an all-stock deal at $21.96 per share (about $418M) https://bit.ly/3r4TQkr ; earnings tomorrow from banks, brokers BAC, BLK, C, PNC and WFC

·     Asset Managers: AB said preliminary assets under management increased to $738 billion during June 2021 from $731 billion at the end of May; APAM prelim assets under management as of June 30, 2021 totaled $175.2 billion; CNS preliminary assets under management of $96.2 billion as of June 30, 2021, an increase of $2.0 billion from assets under management at May 31, 2021; BEN preliminary month-end assets under management (AUM) of $1,552.1 billion at June 30, 2021, compared to $1,543.5 billion at May 31, 2021; IVZ preliminary month-end assets under management (AUM) of $1,525.0 billion, an increase of 1.3% versus previous month-end.

·     Bitcoin, Lending, FinTech & Payments; CURO said it sees Q2 revs ~$187M for the quarter compared to the consensus of $190.16M and adj. EBITDA is to range between $43M and $47M; BTBT reported unaudited bitcoin production and mining operations update for Q2 with 70.8% of its miner fleet by hash rate was already deployed, in transit to or awaiting installation in North America at June 30, 2021; GBTC is using a tie-up with BK to further signal its intent to turn GBTC into a bitcoin ETF; PYPL, AFRM shares dipped in the afternoon after Bloomberg reported AAPL is working with Goldman to launch a "Buy Now, Pay Later," or BNPL, service

Healthcare

·     Pharma movers; HOTH said its experimental therapy, HT-003, showed promise against acne – an inflammatory skin disease – in a mice study; FGEN slides after the FDA posted a report on Roxadustat ahead of a decision by its advisory committee; for vaccine makers (PFE, BNTX, AZN, JNJ, MRNA), U.S. health official says COVID-19 boosters could risk more serious side effects. The official said the second dose for two-shot COVID-19 vaccine regimens was associated with higher rates of side effects, suggesting a third dose could potentially come with even greater risks; NVIV rises as the FDA has accepted its preclinical module, one of three individual modules required for the company’s humanitarian device exemption (HDE) application.

·     Biotech movers; EQ announces plans to initiate phase 3 pivotal study of itolizumab in first-line treatment of acute graft-versus-host disease following end-of-phase 1 meeting with the FDA; says on track to initiate study in Q4 2021; ISEE 11.65M share Spot Secondary priced at $8.60; TPST was initiated with a Buy and $51 tgt at HC Wainwright saying believes Tempest has the potential to deliver on their promising cancer pipeline

·     Cannabis sector strong (CURLF, TCNNF, GTBIF, TLRY, CGC) after reports Chuck Schumer, the leader of the U.S. Senate and colleagues will be releasing a discussion draft of a long-awaited bill to federally legalize cannabis on Wednesday, Marijuana Moment has learned. Senate Finance Committee Chairman Ron Wyden (D-OR) and Sen. Cory Booker (D-NJ) along with Schumer will hold a press conference Wednesday to unveil a preliminary version of what’s being titled the Cannabis Administration and Opportunity Act. https://bit.ly/3wI8P56  

·     MedTech Equipment; ANGO said Q4 loss narrowed as it benefited from higher sales in the period with sales reported at $76.8M, topping the $72.7M estimate; SLP shares slide after the maker of software used in drug discovery posted fiscal 3Q revenue that fell short of expectation

Industrials & Materials

·     Aerospace & Defense; BA shares slide after saying it would cut its 787-production rate as it works through a new production-related structural defect in its troubled twin-aisle airliner program. The company now forecasts delivering fewer than half of the lingering 100 or so 787s in its inventory this year…instead of the "vast majority" it had expected…as it continues forensic inspections and costly repairs to address quality flaws in the aircraft; UAL said it would buy 100 19-seat ES-19 electric planes from Swedish start-up Heart Aerospace

·     Industrial & Machinery; FTV announced that it has entered into a definitive agreement with Bayard Capital and Accel Partners to acquire ServiceChannel for roughly $1.2B; FAST Q2 earnings and revs in-line with consensus while gross profit as a percentage of sales, however, rose to $700.7M from $671.6M prior; RSG upgraded to Overweight from Equal Weight at Morgan Stanley given increasingly positive view of the waste sector relative to the market; JPMorgan upgraded shares of TEX, PCAR and AGCO to Overweight in industrials – TEX predicated on its current valuation, PCAR on view as a high-quality cyclical with a favorable competitive position and experienced management team and AGCO on valuation with $164 tgt; WBT slides after MIDD said it will not increase its offer for the co – allows merger agreement to terminate

·     Transports; Dow Transports remain below the 100-day moving average level (14,835), pressured by airlines (AAL, UAL, JBLU, LUV) after data shows U.S. consumer prices rose by the most in 13 years last month, while the so-called core CPI surged 4.5% on a year-on-year basis, the largest rise since November 1991; UAL was downgraded to hold at Argus as well; in trucking, ODFL upgraded to outperform at Raymond James on Heels of Proprietary Network Analysis

·     Metals & Materials; in gold miners, AU offers to acquire Corvus Gold (KOR) for C$4 per share or total consideration $370M (firm currently holds a 19.5% indirect interest) as co submits non-binding proposal submitted to Corvus https://bit.ly/3xCkFPl ; in chemicals, Citigroup raises 2Q EPS estimates for commodity chemicals by 8% on average due to higher pricing across chains including acetyls, PE, PVC, and MDI and see potential 2Q earnings beats from PE producers (LYB, DOW, WLK), ECU/PVC (OLN, WLK), acetyls (CE) and MDI (HUN); Wells Fargo raises its tgt on DD to $97 and lowers HUN tgt to $32 ahead of Q2 earnings

Technology, Media & Telecom

·     Internet; new record highs today for likes of AMZN, GOOGL; shares of Chinese firms listed in the U.S. bounced (DIDI, BIDU, BABA, JD) after recent weakness as investor concerns eased after TCEHY received official approval for its purchase of search engine developer SOGO; BABA pared gains after Deutsche Bank said the June quarter may be "masked by" growing investment spend.

·     Software movers; EA was upgraded to Outperform with $168 tgt at BMO Capital as see the video game industry trending better than many investors had expected coming out of the COVID-19 pandemic; RBLX initiated a new Sell with $75 tgt at Benchmark as believe the co offers investors a unique and compelling investment opportunity, but says the metaverse platform could unwind as social restrictions are removed, schools reopen and parental spend reallocates; ZI to buy conversation intelligence platform Chorus.ai for about $575M in cash (said announces offering of $300M of senior notes due in 2029); MSFT positive mention at Morgan Stanley saying CIO Survey signals a healthy software spending environment, with Microsoft poised to garner outsized share gains particularly as Cloud Computing becomes the top CIO priority

·     Hardware, Components & Services; AAPL setting a new all-time high as large cap tech upward momentum continues to drive broader markets; NOK said it saw continued strength in the business, improving its expectations for the entire year and now expects to revise upwards its prior outlook ranges for 2021; Nokia plans to provide full details on its Q2 and H1 financial performance and revised full-year 2021 guidance on July 29, 2021

·     Media & Telecom movers; SWIR announced that its managed IoT solution, Acculink, has been successfully integrated with Microsoft Azure IoT Central. Acculink helps companies to track the location and condition of high-value and sensitive assets; in the tower space, Lightshed downgraded AMT and CCI to Neutral from Buy on the back of a rally in treasuries, a contraction in the spread of AFFO yields to the 10 year treasury and a lack of near-term events that can drive better than expected growth; VZ signed a deal with MA to use 5G and wireless technology for contactless payments and provide an autonomous checkout service for retail stores.