Closing Recap

Thursday, June 09, 2022

Equity Market Recap

·     Stocks reversed overnight gains, saw some early volatility around the open, then settled to a lower range for the remainder of the day. Higher Treasury yields and caution ahead of tomorrow’s CPI report kept investors in a sell-the-rip mood every time stocks tried to rally. Also adding to risk-off sentiment was the reported decline in US household net worth, marking the first quarterly decline since 1Q20. After multiple attempts to break lower, S&P futures were unable to rally back above the $4,092 daily support, while NASDAQ futures also slide below the $12,535 daily level and both finished near the lows.

·     Both growth and value slipped, with growth the slightly weaker segment today. Sector-wise, the Consumer and Energy were today’s winner (so to speak) with both the S&P Consumer Discretionary and Consumer Staples joining Energy as leaders, but none of the S&P sectors was able to finish in the green. Communications, Financials and Technology were S&P sector laggards.

·     European Treasury yields rise sharply after the European Central Bank (ECB) affirmed plans to raise the deposit rate by 25 basis points in July, as expected, and flagged a further rate rise in September. The ECB laid out plans to increase interest rates for the first time in more than a decade to tackle persistent inflation that is spreading far beyond the U.S. They also said they would end its large-scale bond-buying program on July 1^st. The ECB’s policy shift would come about a year after eurozone inflation rose above its 2% target. For this meeting, the ECB left its benchmark refinancing rate unchanged at 0.00%. note money markets increase bets on ECB rate hikes, now price in 140 bps by year-end.

Economic Data:

·     Weekly Jobless Claims rose to 229K from 202K prior week (consensus 210K), as the 4-week moving average rose to 215,000 from 207,000, continued claims unchanged at 1.306M and the U.S. insured unemployment rate unchanged at 0.9% in lone piece of economic data

Commodities

·     Gold finished off the lows, but settled at $1,852.80/oz, -$3.70 or 0.2% as ECB interest rate commentary, higher Treasury yields and a higher Dollar combined to apply pressure. Gold remains +0.1% for the week and +0.2% for the month. Silver also weakened, slipping $0.277, or 1.25%, to settle at $21.817/oz.

·     Natural gas reversed early losses to gain $0.264, +3.03%, and settle at $8.963/mmbtu after reports the Freeport LNG liquefaction site is to remain shut down for a minimum of three weeks.

·     Oil prices hovered near three-month highs on Thursday after parts of Shanghai imposed new COVID-19 lockdown measures although China’s stronger-than-expected exports in May offered a boost to the demand outlook. July WTI crude settled modestly lower at $121.51/bbl (-$0.60, or 0.49%) and Brent finished -$0.51, or -0.41%, to $123.07/bbl.

Currencies & Treasuries

·     Germany’s 2-year bond yield rises to its highest since August 2011 at 0.78%, up 8 bps on day

·     Italy’s 10-year bond yield rises to its highest since November 2018 at 3.585%, up 11 bps on day

·     The dollar index erased early weakness and rallied into the afternoon, with the DXY pushing back above $103.

·     The euro falls briefly after the European Central Bank said it expects to start raising interest rates in July by 25 basis points to tackle soaring inflation, disappointing some who had speculated it could flag a larger increase. Still, the ECB said it expects to raise rates again in September, and that a larger increment is possible if the outlook for inflation persists or deteriorates. It expects to raise rates gradually, although the pace it adjusts policy will depend on incoming economic data. EUR/USD falls as low as 1.0690 after the decision, from 1.0746 beforehand, before erasing some of those falls to trade last at 1.0737.

·     The euro EUR=EBS briefly slipped after the ECB decision before turning higher while money markets ramped up bets of more policy tightening from the central bank by the end of 2022. Benchmark 10-year German bond yields rose to fresh eight-year highs at 1.41%.

Sector News Breakdown

Consumer

·     Retailers: discount retailer FIVE cut its full-year guidance as sees FY net sales $3.04-3.12B below est. $3.2B on comps -2% to 0% and EPS $4.85-5.24 missing the $5.47 estimate (downgraded by one broker as well today); TGT raises quarterly dividend by 20% to $1.08; SIG Q1 sales and profit estimates on strong demand for its jewelry, rising 9% to $1.84B above ests $1.8B but issued mixed Q2 guidance, while sees FY adj. operating income $921M to $974M, above est. $899.5M and announces $500M stock buyback; BASE delivered Q1 results that beat expectations, with 27%/31% Y/Y-CC ARR growth, the company’s 3^rd straight quarter of Y/Y ARR growth acceleration; OXM Q1 adj EPS $3.50 vs est. $2.75 on sales $353Mm vs est. $329Mm, sees 2Q net sales $250-370Mm vs est. $347Mm and adj EPS $3.30-3.50 vs est. $3.29

·     Auto sector; TSLA sold 32,165 China-made vehicles in May, up from 1,152 vehicles in April, the China Passenger Car Association said as its Shanghai factory produced 33,544 vehicles last month (shares also upgraded to Buy from Hold at UBS with $1,100 tgt); NIO Q1 adj EPS loss (-$0.13), in-line with ests and revs $1.56B vs. est. $1.49B as Q1 deliveries were 25,768, up 28.5% y/y and up 2.9% q/q but falls on weaker revs and delivery outlook; DIDI said it will trade on the New York Stock Exchange for the last time on Friday, June 10^th; Guggenheim comments on Salvage Auction outlook as positive as remain buy on CPRT and upgrade IAA to Buy saying accident rates should increase as more people return to work and total loss rates should also rebound as repair costs increase and used car pricing normalizes – believe salvage auction industry volumes will grow double digits in 2022 and 2023, while RPU can remain near elevated levels. New-vehicle average transaction prices increased to $47,148 in May, according to Kelley Blue Book. Prices rose 1% from April and up 13.5%, or $5,613, from May 2021. The average price paid for a new vehicle in the U.S. last month was the second highest on record, behind December 2021

·     Housing & Building Products; JMP Securities transferred coverage of OPAD, VCSA, and ZG and initiating coverage of OPEN saying they like the iBuyers. Though investor concerns around rising interest rates and a cooling real estate market are valid, they believe OPEN and OPAD have shown an ability to grow their respective businesses pragmatically as rate both OPEN and OPAD at Market Outperform, with $12 and $8.50 PTs, respectively

·     Consumer Staples; HNST downgraded from Buy to Hold at Loop Capital and cut tgt from $5 to $3, concerned with comments from mass retailers, including HNST’s largest customer – TGT; Jefferies said the Beer Institute’s recently-released import data showed continued positive momentum in Mexican Imports, which grew +24%/+11% YoY in Mar/Apr (vs. +18.6% in F4Q) – says they favor beer stocks (TAP, STZ) and KDP in beverages (better relative value) w/ STZ our favored large-cap growth idea

·     Casinos, Gaming, Lodging & Leisure sector; in travel, Bloomberg reported EXPE CEO doesn’t see high prices stopping summer travel as pandemic wanes; in cruise lines, Susquehanna initiates CCL at Neutral, price target $15, NCLH at Positive, price target $20 and RCL at Positive, target $70; in theme parks, KeyBanc compared daily attendance trends for the week of 5/30-6/5 vs. the 5/27-6/2 period in 2019 to align with the Memorial Day holiday. On this basis, trends for SIX and FUN (using 2019 as a baseline) accelerated vs. last week while SEAS saw a slight deceleration w/w

Energy

·     E&P and Majors; DVN announced it has entered into a definitive purchase agreement to acquire the leasehold interest and related assets of RimRock Oil and Gas, LP, a Warburg Pincus portfolio company, in the Williston Basin for total cash consideration of $865M; CPE said it intends to offer $600M aggregate principal amount of senior unsecured notes due 2030 in a private offering

·     Utilities & Solar; SHLS upgraded to Buy from Hold and raise tgt to $25 from $16 at Truist saying the 2-yr tariff exemption on solar imports from countries providing critical U.S. supply provides much improved near-term visibility for SHLS’ core solar EBOS business; SWX was upgraded from Hold to Buy with $100 tgt at Argus

Financials

·     Bank movers: CS CEO Thomas Gottstein on Thursday called queries over a potential takeover offer from U.S. financial giant STT "really stupid", shutting down questions after a media report on the matter sent shares briefly higher the day before, according to Reuters

·     FinTech & Payments; UPST remains Underperform rated and $15 tgt at Wedbush noting the Consumer Financial Protection Bureau (CFPB) and Upstart mutually terminated the company’s no-action letter, which had immunized the company from being charged with fair lending law violations with respect to its underwriting algorithm. Firm says they believe UPST could be tightening its credit box even further than it did in March, and this could lead to incrementally lower originations than guidance had implied, thus putting the company’s guidance at risk

·     Financial Services: PAGS reported solid Total Revenue and Income of R$3,427m (+66% Y/Y), above consensus R$3,369m, alongside Adj. EPS of R$1.11, above Consensus forecast of R$1.08 as consolidated TPV of R$152.2bn combined with a better-than-anticipated take rate as PAGS pushes through pricing increases in response to rate hikes in Brazil

·     REITs; the ongoing weekly NAREIT conference taking place; in research, KBW upgraded mortgage back security REITs NLY, AGNC and DX to Outperform from Market Perform with price targets of $6.75, $13.25, and $18.75, respectively

Healthcare

·     Pharma movers: BLUE shares were halted today (and tomorrow) as the FDA Cellular, Tissue and Gene Therapy Advisory Committee (CTGTAC) will meet to discuss two BLAs from bluebird bio that could have broader implications for other gene therapy companies according to Mizuho (BLAs for beti-cel for beta-thalassemia & Eli-cel for cerebral adrenoleukodystrophy)

·     Biotech movers: NVAX shares slipped after CNBC reported the U.S. FDA decision on its Covid shots could be delayed reviewing changes in manufacturing; FUSN FPI-1434 Phase 1 data delayed from 2H’22 to 1H’23 – FPI-1966 dosing delayed from Q2 to 2H’22

·     Healthcare Services & MedTech: CVS reaffirms previously announced full year 2022 adjusted eps guidance range of $8.20 to $8.40 vs. est. $8.36 and reaffirm full year 2022 cash flow from operations guidance range of $12.0B-$13.0B; BJDX shares jump as the FDA agrees on device approval pathway; IRTC was downgraded to Neutral from Buy at Citigroup saying it expects a national coverage decision from the CMS for 2023 on the company’s Zio XT patch that would establish a fixed rate covering all Medicare beneficiaries, resulting in lower reimbursement rates

Industrials & Materials

·     Industrial & Machinery; ABM reported a largely in-line quarter as Deutsche Banks said EPS of $0.89 beat Street by $0.05, which was driven entirely by a lower tax rate while operating income and EBITDA were both in-line with estimates; PNR was upgraded to Equal Weight from Underweight at Barclay’s saying the risk/reward profiles for the residential exposed industrials is improving while maintain $50 price tgt

·     Metals & Materials; FCX upgraded to Neutral from Underperform at Credit Suisse as believe risk/reward is now neutral to bullish the sector; Lumber futures slid to the cheapest since September as rising interest rates put a damper on the housing market. Lumber futures fell as low as $568.40 per 1,000 board feet in Chicago on Wednesday, extending a slump to about 50% this year – Bloomberg reported

·     Packaging sector: Jefferies highlights CCK as top pick in sector as it offers the most attractive risk/reward profile in the group, while are also positive on SEE and BERY saying with fears of a recession around the corner, tactically packaging makes strategic sense, since the group has proven to be recession resilient (see 10% or less downside to shares in CCK, BERY, SEE, while we see 30-40% potential downside risk in IP ); GEF posted beat and raise on adj. EPS coming entirely from price/cost; volume went flat in F2Q, including a 2% decline in the industrial drums business

Technology, Media & Telecom

·     Internet & Media movers: BILI Q1 adj EPS loss (-$0.66) vs. est. loss (-$0.62); Q1 revs $797.3M vs. est. $755.72M; said Q1 average monthly active users reached 293.6M, and mobile MAUs reached 276.4M up 31% and 33% respectively y/y; average daily active users reached 79.4M, up 32% y/y; sees Q2 revenue RMB4.85B-RMB4.95B from RMB5.05B in Q1; U.S. listed Chinese stocks were all over the place, with BABA 1) higher overnight on reports Chinese financial regulators have started early stage discussions on a potential revival of Ant Group Co.’s IPO, only to slip 2) after China’s securities regulator CSRC said they are "not conducting evaluation and research work in reviving Ant Group’s IPO", but will support eligible platform companies to list at home and abroad, only to have a follow up headline on Reuters that 3) China central leadership has given initial nod to Ant Group to revive IPO plans in Shanghai and Hong Kong as soon as next month (shares of BIDU, PDD, JD, TCEHY were all volatile trading today); META started trading today under new symbol (formerly FB)

·     Software movers: ZEN shares fell after saying it completed its comprehensive review of strategic alternatives aimed at enhancing stockholder value, and Board decided strategic plan as an independent, public company is in the best interest of the Company and its stockholders at this time; FTNT announces five-for-one stock split; SKIL posted soft F1Q with weakness in bookings (down 5% y/y) that was partially offset by above-consensus adjusted total revenue and adjusted EBITDA results; MSFT said today it will bring several Xbox games to Samsung’s 2022 smart TVs from June 30 in a major step towards attracting gamers without the console

·     Hardware, Components & Services; for AAPL KeyBanc said First Look Data from credit cards suggests AAPL is tracking below historical seasonality with Indexed Spending -8% m/m in May, vs. the three-year average of +6%. -8% represents the weakest m/m May data point even going back pre-pandemic; Sharp Corp. shares fell sharply after the electronics maker projected a 32% drop in fiscal-year net profit, citing a deterioration in the market for large liquid-crystal-display panels; said it expects net profit to drop to Y50.00 billion ($372.4 million) for the fiscal year ending March 2023 from Y73.99 billion the previous fiscal year