Closing Recap

Friday, March 04, 2022

Equity Market Recap

·     U.S. stocks fell hard to end the week, capping another weekly loss (4^th straight for the Dow) as escalation in Ukraine, including Russia’s seizure of Europe’s biggest nuclear plant in Ukraine, rattled investors, prompting selling into the weekend on heightened uncertainty. Nearly all Dow components ended lower, while 9 of 11 S&P sectors were down, with only energy and utilities posting gains on skyrocketing commodity costs. Several energy, metal and material names continue to outperform (AA, BTU, OXY, MRO, MOS, FCX) given the surge in commodity related prices including wheat at record highs, corn, oil 14-year highs, nat gas and coal on supply disruptions due to Ukraine/Russia conflict/sanctions. The negative overseas concerns overshadowed a bullish monthly jobs report that saw a headline jobs beat, lower unemployment, and flat wages. Banking stocks sinking further as Treasury yields tumble. Another volatile week as the CBOE Volatility index holds above the 30 level all week into the weekend.

·     Situation in Europe bleak given the Russia invasion of Ukraine and the impact on neighboring countries and currencies. Britain’s FTSE 100 was down 3.20%, hitting its lowest this year, Europe’s Stoxx 600 down 3.32% also at lowest in almost one year. Germany’s DAX down 4.27%, at lowest since Dec 2020, France’s CAC 40 down 4.67%, Spain’s IBEX up down 3.54% and Italy’s FTS MIB index down 6.0%, at lowest in more than one year. European banks hit hard this week as their lending and investment banking businesses remain at risk if the war triggers a broader slowdown that reduces consumer spending and discourages corporate investment.

·     Stock & Sector movers: COST slips despite a quarterly beat as comp sales slowed sequentially from last quarter and in February vs Dec, Jan; GPS jumps overnight to be open strong after its beat with better guidance but shares fade to red in the morning; AVGO tops $600 for the first time in more than 2 weeks after its strong quarter and guidance; Treasury yields slump yet again to approach Monday’s lows that were the lowest in nearly 2 months to weigh on banks – SBNY SIVB DFS IVZ among largest decliners in the S&P, dividend paying sectors outperform with utilities ES AWK DUK, REITs EXR ESS among the leaders; reopen names weak as BKNG tumbles below $2K level for the first time since February 2021, CZR AAL EXPE NCLH also rolling; rails CSX NSC UNP CHRW pocket of strength; SG surges after its first earnings as a public company topped expectations for sales and guidance while fellow 2021 IPO ; DUOL rallies off yesterday’s record low after posting a beat last night; 52-week lows in several blue chip companies including BA, C, JPM, GM, UAL, GE (several in the banking sector).

Economic Data:

·     February jobs report strong: February Nonfarm payrolls rose +678K topping consensus of +400K and January upwardly revised to +481K from +467K; private sector jobs +654K vs. est. +378K; manufacturing jobs +36K vs. est. 23K; average hourly earnings all private workers no change vs. expected to rise +0.5% after jumping +0.7% prior month; the unemployment rate slides to 3.8%

Commodities

·     Oil prices surge again on Friday, closing out the week with massive gains as WTI crude gains $8.01 or 7.44% to settle at $115.68 per barrel, its highest since September 2008 and Brent crude rises $7.65 or 6.93% to settle at $118.11 per barrel, its highest since February 2013. Natural gas prices jump over 6% to $5.016 mln Btu (up about 12% this week) after European natural gas prices surged to all-time highs on fears of shortages given Russia is a key supplier to the continent. Since Russia invaded Ukraine on Feb. 24, European gas futures have soared over 130% to a record high and U.S. crude jumped over 25%.

·     Gold prices rise $30.70 or 1.6% to settle at $1,966.60 an ounce, ending the week higher by over 4% to its best levels since September 202 while Palladium rises $251 or over 9% to $2,981.90 an ounce on supply deficit fears due to Russia/Ukraine conflict in another flight to safety. Industrial metals also faring well this week as copper rises over 3% today to $4.938 per lb and grains also a huge week as Chicago wheat futures rose by their daily limit yesterday to another 14-year high, powering past $11 per bushel for the first time since 2008, as the Russia-Ukraine war raises fears of a major disruption to grain exports from the Black Sea region. Russia and Ukraine combined account for 25% of global wheat exports and Ukraine alone for 13% of corn exports. CBOT May corn futures rise by 35-cent exchange limit to $7.8275/bushel (second day it rose by trade limit).

Currencies & Treasuries

·     The U.S. dollar index (DXY) rose over 1% to 98.80, the highest level since May 2020 while the euro fell 1.4% to its lowest level against the dollar below 1.09 since that same period as European currencies have in general been the hardest hit by the war. Europe’s common currency fell as much as 1.5% below 1.09 as traders weigh the impact of Russian sanctions on the European economy. Any growth hopes for the European region have been derailed due to the war in Ukraine. The Aussie Dollar continues to benefit from rising commodity prices with iron ore extending its recent gains and Canadian dollar benefitting from rising oil.

·     Treasury yields tumbled on the week, with the 10-year finishing down over 11 bps to 1.72%, while the 2-yr fell about 4.5 bps to 1.49% as curve narrows to under 25 bps, the smallest gap since March 2020. Two-year yields, which are highly sensitive to interest rate policy, have risen as investors prepare for the Federal Reserve to hike rates, with the first increase in borrowing costs expected at its March 15-16 meeting.

Sector News Breakdown

Consumer

·     Retailers; COST F2Q22 beat expectations and membership renewal rate continue to hit all-time highs in the US & Canada and internationally; FNKO shares jump after guiding 2022 earnings above views and after Q4 sales surged 48.5% to $336.3M, crushing estimates of $272.5M; GPS 4Q results and provided an FY adjusted EPS forecast that topped the average analyst estimate as Q4 adj EPS of $(0.02), better than consensus of (-$0.13) on Y/Y revenue up +2.3% and guides 1Q -mid-high single digits vs est. -3.8%; SWBI posted a Q3 miss with adj EPS 69c vs est. 83c on revs $177.7M vs est. $198.3M; HIBB Q4 EPS $1.25 missed est. $1.35 on in-line sales $383.3M, comps -1%, while guiding 1H comp sales to decline in the low-teen range and FY23 adj EPS expected $9.75-10.50 vs est. $9.85 on relatively flat sales from $1.69B (est. $1.705B); BBY downgraded at Raymond James to Market Perform; Credit Suisse lowered their price targets on GPS, BURLand BJ after earnings this week; Barclays says TDUP (reports EPS Monday pre-market) is well positioned to gain market share this year as its low AOV offers attractive consumer value amidst inflation and supply chain issues; DG plans to create about 10,000 new careers in 2022, about a 6% increase to its current workforce

·     Auto sector; among the worst sector performers on concerns the raging war in Ukraine will delay the recovery in the industry’s supply chain; autos have been one of the worst impacted groups amid the global supply-chain shortage with GM, F, NSANY, STLA pressured as well as auto suppliers feeling the pain with LEA, AXL, VC, MGA showing recent pressure

·     Restaurants & Consumer Staples; SG shares jump after guiding 2022 revenue of $515M-$535M vs. $513M consensus and said sees at least 35 net new restaurant openings are anticipated by Sweetgreen for 2022; in poultry sector (PPC, SAFM, TSN), the WSJ reported the Justice Department is investigating whether poultry companies have engaged in anticompetitive sharing about employment practices that held down plant workers’ wages

·     Casinos, Gaming, Lodging & Leisure sector; several "reopen" names seeing pullbacks over the last few days amid surging commodity prices and impact on consumers – shares of travel, leisure and casino pressured (BKNG, EXPE, AAL, DAL, WYNN, LVS, RCL, CCL); SIX upgraded to Buy from Hold at Deutsche bank and raise tgt to $57 from $45 while reiterate Buys on SEAS, FUN saying this is a group that should be broadly owned based on an expectation that a continuation of strong consumer spends on experiences, company-specific initiatives aimed at driving total per capita spend above last year’s record levels and lapping of significant inflationary pressures in 2H

Energy

·     Energy stock movers: one of the few bright spots for stock markets today, with big bounces in major oils and E&P stocks, tracking oil higher as fears over disruption to Russian exports due to Western sanctions outweigh the prospect of more Iranian supply in the event of a nuclear deal with Tehran. Oil majors CVX, XOM along with HES, OXY, MRO saw good gains while refiners and equipment names also saw gains; Defensive utilities also outperformed early in a flight to defensive, higher dividend paying sectors AWK, DUK, AEP, ES among early leaders.

Financials

·     Bank movers; U.S. bank stocks pummeled in a rough week for them (WFC, JPM, BAC, C, PNC, USB), dropping for a third straight week, as the escalating war between Russia and Ukraine diminishes investor appetite for risk assets, pushing treasury yields lower. European banks hit hard this week as their lending and investment banking businesses remain at risk if the war triggers a broader slowdown that reduces consumer spending and discourages corporate investment. Stock news was quiet for banks other than the larger move on macro situation. Banks had been a 2022 winner given rising interest rate expectations from the Fed, which were reinforced this week by Fed Chairman Powell in his testimony on monetary policy this week. Expectations are for a 25bps hike by the Fed at the March meeting and subsequent hikes at later meetings this year as they attempt to fight surging inflation.

·     Bitcoin, FinTech & Payments; a rough day again for Fintech with declines in PYPL, SQ and the like; UPST tumbles again, while credit cards remain weak on fears of slowing spending in Europe amid war concerns Bitcoin/blockchain leveraged stocks (COIN, MSTR, RIOT, NCTY) dropped late week as the crypto currency falls back below the $41K level (mid-week highs above $44K); MARA produced 360.3 self-mined bitcoin during February 2022, a Y/Y increase of 729%; total bitcoin holdings increased to ~8,956 BTC with a fair market value of ~$386.8M

Healthcare

·     Pharma movers; CHRS and Shanghai Junshi Biosciences esophageal cancer candidate toripalimab met co-primary endpoints in a phase 3 trial; EQ announces initiation of the phase 3 equator study of itolizumab in first-line acute graft-versus-host disease; OCGN tumbles as the FDA has declined to issue an EUA for COVAXIN for active immunization to prevent COVID19 in individuals 2 to 18 years of age.

·     Biotech movers; BIIB and Eisai (ESALY) began submission of application data in Japan aimed at getting an early approval of their Alzheimer’s disease (AD) therapy lecanemab; PBYI shares advance behind a top and bottom line beat as key NERLYNX revenue for Q4 was $51M vs. $50M y/y; operating expenses fell -24% y/y to $48.6M

·     MedTech Equipment; ILMN plans to reduce prices and allow competitors continued access to its technology had not yet convinced EU antitrust regulators reviewing the life sciences company’s $7.1B acquisition of Grail, Reuters reported

Industrials & Materials

·     Industrials, Aerospace & Defense; BA falling to lowest levels since Nov 2020, among top decliners in the Dow early, while defense stocks mixed LMT, RTX, LHX, GD on Ukraine situation; AVAV upgraded to Buy from Hold and raise tgt to $85 from $64 at Canaccord following earnings and saying its innovation with loitering munitions and sensor-to-shooter fusion with its JUMP 20 and Puma drones has led up to this crescendo moment; KBR rises after the GAO ruled against the two losing bidders of KBR’s $1.6B+/year Transcom logistics contract – Cowen said KBR indicated that it will raise its standing C25 EPS Target of $4-6 if the contract moves forward

·     Transports; mixed bag for Dow transports as airlines AAL, DAL, JBLU, UAL continue to feel the pressure of surging oil prices while rails CSX, NSC, UNP continue to benefit; SNDR and KNX both upgraded to Positive from Neutral, HUBG downgraded to Neutral with $92 tgt – Netting our view of too-high out-year consensus estimates and too-low valuation multiples for asset-based truckload names, we now capitalize our increasingly de-risked 2023E forecasts at multiples modestly below long-term averages. We upgrade KNX ($69 price Target) and SNDR to Positive ($32 price Target) and remain Neutral on WERN

·     Metals & Materials; fertilizer and potash names extend weekly gains MOS, NTR, CF, UAN as this morning IFX reported Russia recommends fertilizer makers to halt exports citing logistic issues; NTR files $5.0B mixed securities shelf; separately, NTR is asking the Canadian government to intervene and halt a potential strike at one of the nation’s largest railways, because the disruption could potentially lead to smaller harvests; grain related companies BG, ADM also extend gains given recent surge in wheat, corn, soy prices on supply disruption due to sanctions on Russia: Wheat futures up 40% this week, corn gains 17%; metals were mixed after a good week for steels, copper and aluminum names AA, FCX, CLF, X

Technology, Media & Telecom

·     Semiconductors; AVGO reported an in-line JanQ and guided to a solid AprQ at $7.9B (~7% above consensus), with strength highlighted in enterprise, which is accelerating, while cloud data center demand remains strong; Hardware/semi backlog remains strong and improved 14% q/q; IIVI’s planned purchase of COHR said to see Chinese antitrust concerns https://bit.ly/3Cbm3eU ; MRVL 4Q results and 1Q outlook were both above our expectations as demand continues to be strong but didn’t explicitly update FY23 outlook

·     Hardware & Software movers; VERI rises after earnings beat; Q4 EPS $0.37 vs. est. $0.20; Q4 revs $55.1M vs. est. $44.8M; sees Q1 revs $32.5M-$33.5M vs. est. $29.2M; sees year revs $180M-$190M vs. est. $177.1M; TTWO upgraded to Buy from Neutral at MKM as sees prospects of profit growth from Zynga acquisition coupled with TTWO’s sizable pipeline of internally developed intellectual properties; AI was downgraded to Sell from Hold at Deutsche Bank and cut tgt to $18 from $36 saying “all is not well” as revenue from customers unrelated to C3’s agreement with Baker Hughes declined quarter-over-quarter Q3; SPLK rises early after private equity co Hellman & Friedman has taken a 7.5% stake in SPLK, worth $1.45 bln, co discloses on Friday; MSFT said it suspends all new sales of products, services in Russia; OOMA Q4 adj EPS $0.13 vs. est. $0.10; Q4 revs $50.5M vs. est. $49.97M, but shares slipped as Q1 guidance mid-point fell just short of estimates; SE shares fall over 11% to lows below $98 – 4th straight day of declines since earnings, follows a downgrade at JPMorgan today as well

·     Internet, Media & Telecom movers; DIS is discussing the prospect of a more inexpensive ad-supported version of its Disney+ video-streaming service, The Information reported late Thursday; NOK selected by Indosat Ooredoo Hutchison as the principal vendor to deploy and expand its 4G and 5G network across Indonesia in a three-year deal; DUOL reported better-than-expected 4Q21 results whereby the company accelerated growth across nearly all metrics including MAUs (+15% Y/Y), DAU (+19% Y/Y), subscribers (+56% Y/Y), bookings (+59% Y/Y), and revenue (+51% Y/Y).