Closing Recap

Thursday, July 14, 2022

Equity Market Recap

·     Volatility continued in stock, bond, commodity, and currency markets, with huge swings in each following another high inflation reading (PPI), weak earnings from some of Wall Street biggest banks (JPM, MS), and several comments from Fed members (Waller, Bullard). Stocks started the day battered on rising inflation readings and weak bank earnings, with major averages falling as much as 2%, before a sharp recovery early afternoon, as major averages ending the day mixed. A gain in semiconductors helped lift the Nasdaq into positive territory and commentary from Fed speakers Waller and Bullard helping boost sentiment (see comments below).

·     While declining stocks grabbed headlines early, the moves in currency, commodity and Treasury were astounding. Crude oil falls to lowest since February (hit lows of $90.56, giving up its entire Ukraine-invasion premium) before ending down only slightly above $95. Treasury yields bounce all over the place, as the yield curve inversion continues, though well-off biggest levels of 27 bps between 2s-10s earlier. Lastly, the U.S. dollar non-stop strength, posting more than 1% moves against the Euro, British pound, Aussie dollar which crushed commodity related names/prices early (gold, silver, oil). The euro back below parity, sterling lowest since March 2020 and dollar rises above 139 vs. yen (24-year highs). As mentioned, semiconductor chip strength (AMD, INTC, NVDA, QCOM) this afternoon helped the Nasdaq rebound off lows after reports U.S. Senate Majority Leader Chuck Schumer has been telling senators to expect voting to begin as early as Tuesday on a bill designed to increase U.S. competitiveness with China that would include emergency funding to boost the U.S. semiconductor industry.

·     Fed’s Waller the latest Fed member to weigh in on upcoming rate views (ahead of FOMC black-out period next week) saying he backs at least a 75 bp rate increase in July and is open to a larger hike than that seen last month. He could support the more aggressive action if retail sales and housing data are "materially" stronger than expected. He added that further increases in the Fed’s target rate will be needed after July, and he reiterated that policy needs to be "restrictive." He also said on the market pricing in a 100-basis point rate rise on Wednesday: "The market may have gotten ahead of themselves a little bit yesterday." "We don’t want to make snap policy decision based on some knee jerk reaction to what happened in the CPI report." Fed’s Bullard says favors 75 basis point increase at July meeting, does not support 100 bp move for now.

·     Stocks may have bounced off lows, but overall not a pretty picture with several 52-week lows today in NYSE in financials, industrials, and metals: for financials: AXP, AMP, BAC, BCS, BK, C, CS, JPM, KEY, LNC, MS, PIPR, PRU, RF, TFC, USB; Industrials: AGCO, AZZ, CNHI, ETN, EMR, FLS, HSC, ITW, JCI; Metals: AEM, AG, AU, CDE, GOLD, CLF, CMP, FCX, HMY, KGC, MP, RIO, SCCO. The Dow Transport index hit 52-week lows (12,748.12) as recession fears remain.

·     Wall Street strategists have been lowering their S&P end of year target levels in recent weeks, with Bank America the latest to do so, with new S&P 500 year-end target: 3600, lowest on the Street, and down from 4500, a 25% decline (31% is the avg. decline amid recessions).

Economic Data:

·     Weekly Jobless Claims rose to 244,000 in latest week, ahead of consensus 235K; the 4-week moving average rose to 235,750 in latest week from 232,500 prior; continued claims fell to 1.331 mln from 1.372 mln prior week; the US insured unemployment rate fell to 0.9%

·     Producer Price Index for June rises +1.1% vs. +0.8% consensus and +0.9% prior, while on a Y/Y basis, jumped +11.3% Y/Y vs. +10.8% consensus and +10.9% prior. Core PPI rises +0.4% M/M vs. +0.5% consensus and +0.6% prior and +8.2% Y/Y vs. +8.1% consensus and +8.3% prior.

Commodities

·     Oil prices fell -$0.52, or 0.54% to settle at $95.78 per barrel, recovering from session-low $90.56, having given up its entire Ukraine-invasion premium prior. Prices have tumbled in recent weeks on fears that aggressive interest rate hikes by the Federal Reserve and other major central banks in response to raging inflation could trigger a sharp economic slowdown. The S&P 500 Energy Sector index (XLE) has lost 25% since June 1.

·     Gold prices fell to 1-year lows, down -$29.70 or 1.7% to settle at $1,705.80 an ounce as the stronger dollar once again weighs on commodity prices. The dollar extended its sharp rally while expectations grew for a steep interest rate hike from the Federal Reserve.

Currencies & Treasuries

·     The U.S. dollar resumed its relentless rise, posting 24-year highs against the yen, rising more than 1% vs. the euro (fell back below parity), British Pound, and Aussie dollar as bets on the Federal Reserve ratcheting up interest rates to combat soaring inflation. The dollar index hit highs above the 109 level before paring gains following Fed comments (Waller and Bullard), extending its gains to over 18% YTD. The yen pushed above 139 yen per dollar for the first time since 1998. Traders have ramped up bets that the U.S. central bank could raise rates by 100 basis points when it meets on July 26-27. The Fed’s Waller had an impact on bond markets, as the U.S. Treasury 2/10 yield curve inversion shrinks to -16- bps after Fed’s Waller comments, from -27.60 bps earlier, while U.S. Interest rates futures reduce bets on 100-bps hike in July to 50% after Fed’s Waller’s comments, from 86% before his remarks. Bitcoin prices finally with some strength, rising over 5% above $20,600.

Sector News Breakdown

Consumer

·     Retailers; COST upgraded from Hold to Buy at Deutsche Bank and up tgt to $579 from $525 calling it one of the most consistent operators in their group, and its steady traffic gains and high membership renewal rates serve as key differentiators in an increasingly uncertain backdrop; AMZN proposed concessions to settle two antitrust cases against it in the European Union as the online retailer has promised not to use non-public data about sellers on its marketplace, after the EU accused Amazon of violating competition law by using non-public information from merchants to compete against them, the WSJ reported

·     Auto sector: GM announced a collaboration with Pilot Travel Centers LLC to build out a nationwide elective vehicle (EV) fast-charging network of 2,000 charging stalls – said the automaker said the network will be installed, operated, and maintained by EVGO; general market recession fears have weighed heavily on autos and suppliers (LEA, BWA, MGA)

·     Consumer Staples & Restaurants; CAG Q4 adj EPS $0.65 vs. est. $0.63; Q4 revs rose 6% Y/Y to $2.91B vs. est. $2.93B; sees fiscal 2023 organic net sales growth of 4% to 5% compared to fiscal 2022; sees fiscal 2023 adjusted eps growth of 1% to 5% compared to fiscal 2022; For the first time since 1952, grocery prices have risen by 1% or more for six straight months; MO announced that it will raise list prices on all cigarette brands by $1.50 per carton for most brands, as per RBC

Energy

·     Energy stock movers: sector has absolutely been decimated after leading markets higher the first half of 2022 as oil prices fall to fresh 3-month lows. Prices have tumbled recently on recession concerns and a surging dollar, despite a drop in crude and refined products exports from Russia amid Western sanctions and supply disruption in Libya. President Biden is in the Middle East this week to discuss energy security with Saudi Crown Prince Mohammed bin Salman (MBS) and the members of the Gulf Cooperation Council (GCC). Biggest decliners early in energy APA, EOG, FANG, MRO, HAL, DVN in the S&P 500 index.

Financials

·     Bank movers; Dow component JPM disappoints as Q2 EPS $2.76 misses the $2.88 estimate on revs $31.63B vs. est. $31.97B and said provision for credit losses $1.10 billion while says temporarily suspended share buybacks – Q2 investment banking revs $1.35B below est. $1.92B while trading numbers better; MS reported a Q2 profit of $2.4B, or $1.39 per share, vs. $3.4B, or $1.85, a year earlier as revenue fell 11% to $13.1B missing the $13.33B estimate as equities trading revenue $2.96B; and revenue from investment banking plummeted 55%, underlining a slow quarter for Wall Street; FRC reports Q2 EPS $2.16, consensus $2.09 on better revs

·     Insurance: UIHC said its Board has initiated a review of its strategic and capital raising alternatives and will consider a wide range of options: amongst other things, a potential sale, merger, subsidiary divestiture, formation of a new Florida-domiciled reciprocal exchange, as well as the sale of equity, surplus notes or other financing or strategic transactions; HMN guides FY22 core EPS $2.10-$2.30 below consensus $3.38 saying it experienced Q2 catastrophe losses well above the company’s 10-year historical average

·     Business Services: several changes at Goldman Sachs as they lower top-line estimates for 2023 to reflect GDP and consumer spending headwinds but still see the Payments sector as offering strong protection against inflation. They Favor bill pay, accounts receivable automation, large cap acquirers as upgrade FLYW to Buy on exposure to defensive verticals (education, healthcare), and see upside from cross-sell opportunities from its WPM acquisition, upgrade PAYO to Buy as we expect higher rates to boost revenues from its customer float balances and see continued strength in its B2B payables/receivables solutions and downgrade NVEI to Neutral

·     Consumer Finance: card services in focus after JPM quarter after co said consumer appetite for card loans strong, up +17% y/y after +15% in prior Q while personal lending tumbling. Also said credit card spend +21% y/y and on a 3-year stack, Q2 card spending +41%, accelerating from Q1’s 38% and total debit & credit card spend very healthy +15% (AXP, COF, JPM, DFS); the WSJ reported Stripe Inc., last valued by private investors at $95 billion, cut the internal value of its shares by 28%, to about $29, compared with $40 in the most previous internal valuation.

·     Bitcoin news: Celsius Network filed voluntary petitions for Chapter 11 protection and announced that the company initiated a financial restructuring; CLSK expands bitcoin mining capacity by over 90 petahashes with acquisition of latest generation machines

Healthcare

·     Pharma movers: CFRX tumbles as announces independent DSMB recommends exebacase phase 3 disrupt study be stopped for futility following interim analysis; TBPH rises after RPRX said it agreed to acquire a royalty interest in TRELEGY ELLIPTA (Trelegy) from TBPH and INVA for $1.31B in cash up front and up to $300 million in additional payments contingent on milestones; RARE said it is selling part of its royalty interest on sales of Crysvita to one of Canada’s largest public pension plans for $500M

·     Biotech movers: BGNE said the FDA has delayed a decision on its cancer drug as COVID-19 curbs in the country prevented the regulator from conducting inspections. The FDA was expected to decide on the drug, tislelizumab, by July 12 but has now delayed its move; NVAX said the FDA authorizes emergency use of Novavax COVID-19 vaccine has determined that adjuvanted has met the statutory criteria for issuance of an EUA – an event widely anticipated, as shares tumbled following the release

·     MedTech Equipment; for life science tools, Goldman Sachs lowers estimates across the sector to incorporate our macro forecasts of a 30% recession chance in the US and 40% chance in the Europe over the next year; Cowen also with an earnings preview saying TMO setup looks good, WAT should beat (though is expected), & AVTR appears too cheap for its growth / financial profile. Continues to see meaningful upside in NTRA, a top pick along with MXCT and CTKB. NSTG should beat, TXG 2H ramp feels aggressive and any de-risking likely met with buying given exciting product roadmap, SLGC selloff looks overdone. Preview their top picks (DNA, CDXS, TWST) as positively positioned ahead of 2Q results

·     Healthcare Services: CNC upgraded from Hold to Buy at Jefferies and raise tgt to $115 from $82 as think CNC’s total membership gets an MSD bump in a recession. Their EPS estimates move modestly higher beyond FY22, though do assume that Medicaid MLRs initially rise fractionally as new members enroll; OM downgraded from Overweight to Equal Weight and slash tgt to $20 from $48 saying the Tablo shipment hold has spawned commercial disruption and added uncertainty for Home commercialization, a critical long-term value driver.

Industrials & Materials

·     Transports, Industrial & Machinery; AGCO, AZZ, CNHI, ETN, EMR, FLS, HSC, ITW, JCI among names hitting 52-week lows today; defense stocks LHX, RTX, LMT all notable lower; MLM upgraded from Peer perform to Outperform at Wolfe noting shares have retreated 30% YTD, which they consider excessive given the industry’s pricing power and infrastructure stimulus boosting 2023 demand; MHK, JELD both downgraded at Barclays in building products as does not expect Q2 earnings to settle debates around 2023 volumes or price/cost.

·     Metals & Materials; GOLD said it sees lower realized copper prices in the second quarter, after a dip in the metal prices recently on fears of a recession from aggressive monetary policy tightening across countries; in lithium, ALB named Catalyst Call Buy at Deutsche Bank, fueled by sharply higher lithium prices and no signs of a slowdown in demand; in fertilizers, Credit Suisse initiated MOS at Outperform and $60 tgt in contrast to their Underperform initiations on NTR and CF as MOS is not exposed to the hydrocarbon-based nitrogen market

Technology, Media & Telecom

·     Internet movers: TWTR upgraded from Neutral to Buy at Rosenblatt with $52 tgt saying they reviewed new, more detailed disclosures in Twitter’s lawsuit against Elon Musk, and former skepticism about Twitter has been flipped; Meanwhile the SEC sent a letter to Elon Musk last month asking for clarification over some of the tweets the billionaire sent about his $44 billion deal for Twitter Inc, regulatory filing showed; in online travel (BKNG, EXPE, TRVG, ABNB, TRIP), Truist lowering ests/pt below consensus to reflect FX hit, 2023 recession risk; BABA shares slide after the WSJ reported executives from the co’s cloud division have been called in for talks by Shanghai authorities in connection with the theft of a vast police database

·     Semiconductors: sector rallied the market after reports U.S. Senate Majority Leader Chuck Schumer has been telling senators to expect voting to begin as early as Tuesday on a bill designed to increase U.S. competitiveness with China that would include emergency funding to boost the U.S. semiconductor industry. In stock news, TSM posted Q2 net income of $1.55 a share topping the $1.44 estimate, while revenue rose 43.5% Y/Y to $17.9 billion; forecast Q3 revenue of between $19.8B-$20.6B, ahead of the $18.6B estimate while warns of "excessive inventory" at its clients over the rest of the year and beyond; AMD upgraded to Outperform at BMO Capital and up tgt to $115 saying it is looking at AMD’s longer-term earnings power and expect AMD to continue to gain share vs. INTC; for HDD stocks (WDC, STX), Wells Fargo reducing forward estimates well below consensus ahead of Q4 results (now modeling W. Digital and Seagate 2HC2022 EPS at -37% and -20% vs. current street estimates)

·     Software movers: Morgan Stanley with Q2 SaaS preview, reducing estimate ahead of potential downtick in growth outlook given clearer signs of a weakening spend environment; reduced 2022 billings estimates by 2% on average to account for risk in 2h; growth stocks such as software hit hard again today with rising rate fears and inflation concerns: MDB

·     Hardware, Components & Services; APH, CDW and JNPR all upgraded to overweight at JPMorgan in networking/hardware space, taking a defensive stance as see increasing signs of the challenging macro feed into demand trends, and recommend investors look for diversification away from higher risk areas like Enterprise spending as well as Auto exposure relative to more resilient CAPEX spend from Cloud customers as well as Telco/Cable customers – the firm downgraded CSCO, FFIV and TEL to neutral from Overweight

·     Media & Telecom movers; WSJ reported that Brookfield Infrastructure Partners and DigitalBridge Group Inc. have agreed to buy a stake in Deutsche Telekom tower business for roughly 6.6 billion euros, equivalent to $6.64 billion, raising their bet on a telecommunications sector; WBD tgt cut to $23 from $45, maintain Buy and lower ests at bank America as no longer value the company on a SOTP basis to reflect current market conditions; ERIC falls as Q2 core earnings missed expectations as margins were hit by higher component and logistics costs; Bank America raised RBLX bookings estimates for 4Q22 to 17% Y/Y from 12% Y/Y, and for FY22 to 4% Y/Y from 3% Y/Y