Closing Recap

Monday, June 06, 2022

Equity Market Recap

·     U.S. stock sectors finish slightly higher as persistent worries over inflation offset some of the market optimism ahead of the CPI report later this week and several monetary policy meetings overseas. Helping sentiment were easing regulatory crackdowns in China and signs in parts of China of a return to more normal activity after the country’s biggest COVID-19 outbreak in two years. There were no Fed speakers today, as we have entered the blackout period ahead of next policy meeting 14-15 June, while Fed Chair Powell will give semi-annual monetary policy report to the Senate, on June 22. Upward pressure on bond yields was a focus today as the 10-year moved back above the 3% level while oil prices remain elevated. In stocks news (which was relatively quiet), AAPL held its Worldwide Developer Conference (WWDC) as it announces a new chip, new iOS, MacBook’s, and car software among other things.

·     Sector movers: solar stocks jump (ARRY FTCI, ENPH, RUN, SHLS) rise after the White House confirmed they won’t impose any new tariffs on solar imports for two years; U.S. listed China stocks rallied (BABA BIDU PDD JD) on further reopening of its economy post COVID-lockdown and signs of easing regulatory issues after WSJ report DIDI security probe almost concluded and may lift ban on new users; lodging sector strong as Hyatt (H) with upbeat May operating results (strongest RevPAR performance since November 2019), HLT CEO on CNBC talked about strong demand and PK raises Q2 forecast on improving demand across all of its portfolios; Big banks rise early as Treasury yield curve steepens, 10-year hits 3%, highest in 3-weeks; AR CTRA EQT RRC SWN nat gas producers outperform on surging natural gas prices.

·     Big week for monetary policy meetings overseas as: 1) The Reserve Bank of Australia is expected raise rates again this week (RBA began tightening by 25bps to 0.35% at its prior meeting on May 3rd, and the market is split on whether it will follow up with another +25bps, or hike by a larger 40bps according to economists), 2) the ECB is expected to raise rates at its policy meeting on Thursday and possibly confirm a July termination of its asset purchase plans. Other central bank meetings taking place this week for: Peru, Poland (set to raise the policy rate for a ninth consecutive meeting), Chile and Thailand.

Commodities, Currencies & Treasuries

·     Treasury yields jumped as the 10-yr hits 3.033% up nearly 8 bps and 30-yr up 7 bps to 3.184%; even shorter term yields up with 2-yr up 6 bps to 2.724% and 5-yr up about 8 bps to 3.03%. The U.S. dollar was mostly higher ahead of a key reading on inflation later in the week (CPI on Friday). After touching a near twenty-year high of 105.01 on May 13, the dollar index (DXY) has eased back to around the 102 level, although Friday’s strong payrolls report helped the dollar notch its first weekly gain in three. The euro slipped back to $1.07 ahead of a European Central Bank (ECB) policy meeting later this week where they are expected to raise rates while the Japanese yen weakened to 20-year lows vs. the dollar around 132 per dollar after BoJ Governor Kuroda said Monday the central bank’s top priority was to support the economy, stressing an unwavering commitment to maintaining "powerful" monetary stimulus. The Aussie dollar edged higher ahead of a policy meeting by the Reserve Bank of Australia on Tuesday. Canadian dollar strengthens to its highest in nearly seven weeks to the U.S. Dollar.

·     WTI crude fell -$0.37 or 0.31% to settle at $118.50 per barrel, but still holding strong gains year-to-date, Gasoline July futures settle at $4.1930 a gallon, but natural gas prices grab headlines, rising 9.4% at 14-year highs of $9.322 mln per BTUs as cooling demand rises. Oil prices topped $120 a barrel earlier after Saudi Arabia raised crude prices for July and amid doubts that an increased OPEC+ monthly output target will help ease tight supply. Gold prices slipped -$6.50, or 0.3%, to settle at $1,843.70 an ounce, falling as the U.S. Dollar index gained against a basket of rival currencies and amid rising yields.

Sector News Breakdown

Consumer

·     Retailers: NKE tgt (to 150 from 160) and ests lowered at Stifel for FY23/24 to reflect COVID restrictions in Greater China and USD strength; JOAN files a $100m mixed shelf and registers ~28m shares for holders; LULU upgraded to Market Perform from Underperform with a $300 price Target at Bernstein

·     Auto sector; DIDI surges (lifting other Chinese Internet names) after the WSJ reported Chinese regulators are concluding probes into the ride hailing giant and two other firms and are preparing to allow their apps back on domestic app stores as early as this week https://on.wsj.com/3aJc3Qr ; TSLA CEO Elon Musk said on Saturday that the electric vehicle maker’s total headcount will increase over the next 12 months, but the number of salaried staff should be little changed, backtracking from an email just two days ago saying that job cuts of 10% were needed.

·     Consumer Staples; KDP will replace UAA in the S&P 500, while Under Armour (UAA) will replace TRN in the S&P MidCap 400 effective prior to the open of trading on Tuesday, June 21; SAM estimates lowered at Cowen after saying five months of scanner data from Nielsen channels leaves them increasingly skeptical that SAM will be able to deliver FY23 guidance of +4-10% in shipment growth (coupled with 3-5 pts of price/mix); in tobacco, WSJ reported that if PM’s $16 billion offer for oral nicotine pouch maker Swedish Match is accepted, U.S. cigarette makers (MO) will suddenly have a nimble new competitor

·     Restaurants: SBUX said it is still on track with its search for a successor chief executive, as stated on its quarterly earnings conference call last month. The coffee shop chain said Howard Schultz has agreed to remain as interim CEO through the first fiscal quarter of 2023

·     Casinos, Gaming, Lodging & Leisure sector; casinos saw strength on improving China lockdown easing (WYNN ); in lodging: Hyatt Hotels (H) reports May comparable system-wide RevPAR of ~$127, marking it the strongest RevPAR performance in any individual month since November 2019 – system-wide RevPAR in May stood 6% below May 2019 levels or ~3% above May 2019 when excluding Asia Pacific; PK raises Q2 forecast on improving demand across all of its portfolios; expects Q2 RevPAR of $169 mln-$173 mln vs. prior forecast of $160 mln-$164 mln

Energy

·     Energy stock movers: Saudi Arabia raised the official selling price for its flagship Arab light crude to Asia to a $6.50 premium versus the average of the Oman and Dubai benchmarks, from a $4.40 premium in June. The move lifted global prices of crude oil. Barclays raised its Brent crude price forecasts by $11 per barrel for 2022 and $23 for 2023, citing a larger and sustained disruption in Russian supply following sanctions by the European Union. Natural gas jumps 9% to $9.305, for biggest one-day gain since mid-Feb (nat gas producers AR outperform); refiners another sub-sector of strength as VLO rises for the 9th time in last 10-days, PBF rises a 6th straight session, and MPC with the 10th gain in last 11-days

·     Utilities & Solar; Solar stocks surge (ARRY, FTCI, ENPH, RUN, SHLSafter Bloomberg reported President Joe Biden will take executive action to boost the U.S. solar sector, saying he won’t impose any new tariffs on solar imports for two years. Biden plans to invoke the Defense Production Act to provide support for US-made solar panels. Oppenheimer said this will help the companies exposed to utility scale projects more so SHLS, ARRY, CSIQ, NEP, CWEN

Financials

·     Bank and financial movers; were among early leaders as the yield curve steepened and the 10-year moved back above 3%; credit card names also benefitting on day; DNB downgraded at RBC Capital as monitor sustainability of the organic growth ramp, competitive positioning, and FCF conversion; cryptocurrency-linked stocks gain (COIN ) as Bitcoin rises for a third straight day to climb back above the $31,000 level; AFRM shares slipped midday after AAPL said at WWDC that pay later payments will be managed through Apple wallet

·     REITs: EGP files prospectus relates to potential resale from time to time by selling securityholders of some or all of 1.9 mln common shares; ESS raises Q2 core FFO view to $3.55-$3.61 from $3.43-$3.55 (Q2 est. is $3.50), raises FY22 core FFO view to $14.00-$14.32 from $13.77-$14.13 and raises FY22 same property revenue growth view to 9.1%-10.1% from 8.1%-9.1%; VICI will replace CERN in the S&P 500 prior to the open of trading on Wednesday, June 8. S&P 500 constituent ORCL is acquiring Cerner in a deal expected to be completed soon

Healthcare

·     Pharma movers: PRAX said that its experimental depression drug failed in a Phase 2/3 clinical trial as it did not meet the primary or secondary endpoints for the study; ACB upgraded from Sell to Hold at Stifel given the company’s enhanced liquidity position following the recent $173 million bought deal offering; ARQT announces positive topline results from STRATUM pivotal phase 3 trial of Roflumilast Foam 0.3% in seborrheic dermatitis; LLY said its diabetes drug Mounjaro (tirzepatide) spurred as much as 22.5% weight loss in overweight or obese patients compared to 2.4% loss on placebo; AZN and Daiichi Sankyo’s Enhertu met primary endpoint of progression-free survival, reducing risk of disease progression or death by 49% vs. chemo

·     Biotech movers: ICPT announced that the FDA has delayed the pre-submission meeting regarding its marketing application for the liver disease therapy Ocaliva in nonalcoholic steatohepatitis (NASH) to July from June; BCRX said Health Canada has approved its oral drug, Orladeyo, to prevent hereditary angioedema (HAE) attacks in patients aged 12 years and older; YTMX sold its lead clinical-stage product YTX-7739 to JNJ for $26M in cash and is merging with privately-held Kineta in an all-stock transaction https://bit.ly/3tgXgCG

·     MedTech Equipment; BDX said it would acquire pharmacy automation solutions provider Parata Systems for $1.52 billion; RMD upgraded from Sector Perform to Outperform at RBC Capital noting the share price has fallen significantly over the last 3 months because of revised sales guidance caused by raw material constraints and believe the stock has been overly penalized

Industrials & Materials

·     Industrial, Aerospace & Defense; Jefferies was out with their latest commercial aerospace primer saying top Commercial OE pick is BA, while SPR is SMID cap value play based on 44% exposure to BA and 25% now diversified to Airbus and 6% to biz jets and TDG is top aftermarket pick noting air traffic grew 22% in 2021, with ests factoring in 45% growth in 2022 driven by domestic travel; GNRC among top gainers in the S&P 500 index early, hitting its highest levels since 2nd week of April; ETN positive mention in Barron’s this weekend; industrial metals benefit as China COVID lockdowns ease further

·     Airlines: SAVE rises after JBLU said it has sweetened its bid for the airline, as it tries to wrestle the carrier from its planned merger with ULCC. JetBlue increased the size of the break-up fee it will pay Spirit if antitrust regulators block the deal to $350M, or about $3.20 per Spirit share, up from the $200M it had previously offered and also pledged to prepay about $164M of the break-up fee, or $1.50 a share, as a cash dividend to Spirit investors upon shareholder approval of an acquisition by JetBlue, which would boost total consideration of JetBlue’s deal to $31.50 a share

·     Transports: Ryder (R) upgraded from Underperform to Peer perform at Wolfe Research following its Analyst Day on Friday given its low valuation and potential for a higher buyout offer from HG Vora; ODFL said revenue per day for May 2022 up 26.0% vs May 2021 due to 2.3% increase in LTL tons per day & increase in LTL rev per hundredweight; XPO and Google Cloud announced a multi-year collaboration for further innovating how goods move through supply chains

Technology, Media & Telecom

·     Internet, Media & Telecom: TWTR slips after Tesla CEO Elon Musk says company has materially breached deal agreement; said reserves right to terminate Twitter merger pact if breach; strength in U.S. listed China stocks (BABA, BIDU, PDD, JD, TCEHY) on further reopening of its economy post COVID-lockdown and signs of easing regulatory issues (DIDI news), which overshadowed the Caixin services PMI coming in a lot weaker than forecast at 41.4 vs 46.0 forecast (but above 36.2 prior); AMZN 20-1 stock split went into effect today (closed at $2,447 on Friday) – note GOOGL and SHOP bounced today, rallying in sympathy perhaps on stock split bounce (SHOP expected to split 6/29 and GOOGL on 7/18); SPOT upgraded to Outperform with $150 tgt at Raymond James noting shares have traded off significantly from all-time highs in early 2021 due to slower than expected scaling of the company’s podcasting business and soft margin guidance but they believe that the bad news is priced in with relatively limited downside.

·     Semiconductors: ON will replace IPGP in the S&P 500, while IPG Photonics will replace YELP in the S&P MidCap 400 and Yelp will replace RRGB in the S&P SmallCap 600 effective prior to the open of trading on Tuesday, June 21 to coincide with the quarterly rebalance

·     Software movers; CRWD upgraded from Equal-weight to Overweight at Morgan Stanley and up tgt to $215 saying the company offers durable growth and FCF at a discount and calls the name defensive amidst an uncertain macro backdrop; QTWO shares slipped after Barron’s noted it is currently not pursuing a sale after bids came in below expectations, according to multiple people familiar with the matter https://bit.ly/3NnJEhj ; AMSWA upgraded to buy from neutral at B Riley Securities ahead of the June 8 release of the company’s fourth-quarter results

·     Hardware, Components & Services; AAPL kicked off its WWDC today, with several changes to iOS system and announced new M2 Silicon chip that has 18% better performance than previous chip and says MacBook air will be first to have new m2 chip – MacBook Air starts $1199, $1099 for education. Says MacBook Pro starts at $1299, $1199 for education – both available next month; PLAN slips after private-equity firm Thoma Bravo had lowered its takeover offer for co to $9.60 bln as shareholders will now receive $63.75/share, compared with previous offer of $66