Closing Recap

Monday, March 20, 2023

Equity Market Recap

·     Stocks finished higher as the waiting game begins ahead of the Federal Reserve monetary policy meeting outcome Wednesday afternoon when the 2-day meeting concludes. Fed officials face one of their toughest calls: whether to raise interest rates again to fight high inflation or take a timeout amid the most intense banking crisis since 2008. Wall Street is mixed in its views while fed fund futures point to the most likely outcome a 25-bps hike. Prior to Silicon Valley Bank and Signature Bank’s collapses, many traders had expected the Fed would raise interest rates by at least a quarter of a percentage point, with calls for 50-bps hike as well. Goldman Sachs said today that stress in the banking system makes it likely the Fed will instead pause in March, then potentially resume interest-rate increases at its May, June, and July meetings. "While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient," Goldman said. On the day, nearly all eleven S&P sectors closed higher with last weeks’ leader technology lagging. NYSE breadth favored advances to decliners, but the margin narrowed all afternoon. Energy, Materials, and Staples paves the gains. Meanwhile financials were mixed following a flurry of events this weekend intended to allay investor concerns about liquidity (see below under financials). The Federal Home Loan Bank System (FHLB) issued $304B in debt last week in sign that banks were bolstering liquidity.

·     WSJ’s @NickTimiraos said: Recent data point to strong wage and price pressures. The debate could be as much about psychology as economics. "I would advise them to go ahead with the 25. If they pause, you can get into this ‘what do they know that we don’t know,’" said former vice chair Richard Clarida. He also noted: “That argument cuts both ways, said Eric Rosengren: "I wouldn’t add fuel to the fire by raising interest rates." "People talk about Federal Reserve credibility with inflation, but Federal Reserve credibility is best upheld by doing what makes sense for the economy."

Commodities, Currencies & Treasuries

·     Oil prices dropped to their lowest in 15 months on Monday before rebounding on the day, settling at $67.64 per barrel, up $0.90 or 1.35% (earlier hit lows of $64.12). Prices have been in a downward spiral over the last 2-weeks amid concern that risks in the global banking sector and a potential increase to U.S. interest rates could spark a recession that would sap fuel demand. Global benchmark Brent also dropped after plunging 12% last week.

·     Gold prices pulled back off earlier highs ($2,014.90), but still finishing higher at $1,985.70 an ounce, up 0.6% or $12.20 an ounce while silver rose 14.8c of 0.7% to settle at $22.61 per ounce after touching 6-week highs earlier. Gold retreats from their highest level in a year in volatile trading as stock markets rebounded along with Treasury yields on central banks’ efforts to shore up confidence in the financial sector. Gold prices have rallied more than $100 after the collapse of U.S.-based Silicon Valley Bank earlier this month led the dollar and Treasury yields lower, while investors sough haven assets.

·     Treasury yields jumped after extreme volatility the last 2-weeks on big changes in interest rate expectations (from a possible 50-bps hike Wednesday view as of a week ago to now possibly only 25-bps or a pause – and possible cuts my mid-year) and the impact on the banking system after two big bank failures. The 10-yr rose about 10 bps to about 3.5% and the 2-yr up 11-bps to just under 4% (after highs of 5.09% 2-weeks ago).

·     The dollar index (DXY) extended its overnight slide, falling to a low of 103.286 before bouncing slightly. It has lost some of its haven appeal amid concerns over First Republic Bank, even though the regional banks in general rallied today. The yen continued to gain ground overnight on risk aversion with USD-JPY having corrected to 130.544, the lowest since February 2, but has bounced back to 131.636. EUR-USD climbed to 1.0721 and Cable firmed to hit 1.2278. Bitcoin soars to nine-month high above $28K as investors weigh bank risks and interest rates.

Sector News Breakdown

Consumer Staples and Retailers

·     In retailers: AMZN said it was laying off another 9,000 workers; FL issued weaker-than-expected FY23 guidance ($3.35-$3.65 vs. $4.11) following stronger-than-expected Q4 results (EPS $0.97 vs. est. $0.51; Q4 sales fell -0.3% y/y to $2.33B vs. est. $2.16B) and same-store sales rose 4.2%, boosted by increased traffic.

·     In specialty retail: FRG announced that it has received an unsolicited non-binding proposal, which is subject to certain conditions, to acquire all the outstanding shares of the common stock of the Company for a price of $30.00 per share in cash. BBBY said late Friday it is planning a reverse stock split – late Friday said will ask investors to vote on proposed 1-for-5 to 1-for-10 split.

·     In staples: Deutsche Bank upgraded shares of CAG, KMB to Hold but lowering PTs across many in its coverage universe due to higher discount rates, while in grocers, KR was upgraded to Buy at Northcoast. PEP upgraded to market-perform from underperform at Bernstein and raises PT to $185 from $172 noting the company has delivered strongest organic growth across mainstream U.S. staples and they see signs of improvement in beverages; notes category growth in beverages and snacks has recorded an upside over past two years on strong pricing and sales volumes.

Energy, Industrials and Materials

·     In solar: ENPH upgraded from Market Perform to Outperform at Raymond James, turning positive on Enphase for the first time since 2013, i.e., amid the broader market’s risk-off trade, saying they are trying to catch a proverbial falling knife with shares down -31% YTD. JKS launched liquid cooling energy storage system for commercial and industrial applications.

·     In metals: CLF and U.S. Steel (X) both upgraded from Underperform to Peer Perform at Wolfe Research after a recent drop in share value, which contrasts with sharply higher sheet steel prices in recent weeks; says channel checks continue to see pricing resilience through Q2, driven largely by light supply. Last week, the price of gold surged 6% higher on the back of increased volatility in broader markets, primarily from contagion in the U.S. and global banking sectors. Gold continues to demonstrate its role as a lower risk asset in times of heightened uncertainty. strength again in gold miners (NEM, AEM, AUY, HMY, GOLD) as the price of gold topped $2,000 an ounce earlier this morning before paring gains.

·     In Paper & Containerboard: WRK was upgraded to Buy at Citigroup; says Friday after market close, P&PW indicated March Containerboard prices were flat, a surprise to them as they expected a -$10-20/ton decline. Firm notes while industry challenges remain, there appears to be some stabilization in market conditions after 4 consecutive months of price declines. Stress testing for an uncertain macro environment, lowering est. for IP, PKG

·     In chemicals: CF to acquire Ammonia Production complex in Louisiana for $1.68 Billion; in research, Keybanc lowered DOW tgt to $44 from $51 as continue to view plastics recycling as a major growth area for chemicals, as well as the upstream Waste Management industry. In lithium space (ALB, LTHM, LAC, SQM), IBD reported Lithium price declines steepened in China Monday, with battery-grade lithium carbonate prices seeing their biggest-one day drop of the year, a new report says. The average price of battery-grade lithium carbonate fell by RMB 12,500 per ton ($1,814 per ton) from last Friday to RMB 312,500 per ton Monday.

Financials

Banks, Brokers, Asset Managers:

·     Lots of moving parts in global banks and U.S. regional banks, adding to last week’s volatility after the failure of two big banks last weekend.

·     In Europe, UBS agreed to buy Credit Suisse (CS) for CHF3 billion ($3.2 billion U.S.), valuing CS shares at CHF0.76 per share, while the Swiss National Bank offers $100 Billion in liquidity to UBS as part of the deal to help it take on the operations of Credit Suisse Group AG. Credit Suisse also writes down $17 billion of its Additional Tier 1 bonds to zero as part of its takeover by UBS.

·     On Sunday, the Fed released a statement announcing coordinated central bank action with five other central banks to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements. The participating central banks are the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank.

·     NYCB shares surge after its Flagstar unit acquired Signature Bank’s (SBNY) deposits and some of its loans after a $38 billion purchase from the FDIC ($25B in cash and $3B in loans). The purchase includes $34bn in deposits. NYCB upgraded to Outperform from Neutral at Wedbush owing to material EPS accretion of 20% from the Signature deal. Signature’s 40 former branches will operate under the Flagstar brand starting Monday, March 20. Wedbush noted NYCB is acquiring $38.4 billion in assets, including $12.9 billion of loans purchased at a $2.7 billion discount.

·     In Regional banks: FRC was downgraded again by S&P, days after the ratings firm cut the lender to junk; long-term issuer credit rating to B+ from BB+. The stock opened lower on the news but extended losses midday (lows of $11.52) after the WSJ reported JPM CEO Jamie Dimon is working to raise additional capital for FRC, leading banks in a fresh campaign to shore up the regional. Eleven banks last week placed $30 billion in deposits with First Republic.

·     Friday evening, PACW provided a week-end update, including 1) available cash of >$10.8B at 3/17, exceeding total $’s of uninsured deposits, 2) elevated net deposit outflows, concentrated in venture occurred early in week but slowed throughout with fluctuations substantially stabilizing at weeks end, and 3) insured deposits are >62% of total at 3/16. Venture is ~25% of deposits at 3/16. Shares of regional banks among early leaders in the S&P (ZION, FITB, CMA, USB, KEY, RF).

·     In insurance sector: Bank America noted banking contagion fears has spread to insurance with P&C stocks down 9% and life stocks down 18% recently. Firm said while insurance companies are largely inoculated from a run-on-the-bank phenomenon that could force them to take losses on investments simply to fund operational liquidity needs, they are not protected from broad concerns about corporate credit, commercial real estate, and interest rate volatility.

·     In Services, FinTech: FLT struck an agreement with activist shareholder D. E. Shaw Group to refresh its board and consider separating parts of its business. Crypto assets extend gains with Bitcoin moving above the $28,000 level, rising over 4%.

Healthcare

Biotech & Pharma:

·     ARWR said the FDA granted Fast Track designation to its experimental drug candidate ARO-APOC3 to treat a type of metabolic disorder called familial chylomicronemia syndrome.

·     AZYO shares fell after the FDA earlier declined the clearance application for its device intended to securely hold a cardiac implantable electronic device or neurostimulator.

·     KRTX said its experimental drug, KarXT, met its primary goal by showing a statistically significant and clinically meaningful 8.4-point reduction in a medical scale used to measure the severity of schizophrenia symptoms; on track to submit application to the U.S. FDA in mid-2023, with a potential launch in H2 2024 if approved.

·     EXEL announces $550 million share repurchase program.

·     NUVA gets FDA 510(k) clearance for Precice limb lengthening solution.

Technology

·     In software: PDD reported Q4 revenue of 39.82 billion yuan ($5.79 billion) for the quarter ended Dec. 31, up 46% year-on-year, but this fell short of estimates for 41.01 billion yuan. In general, pullback n growth names and software after leading markets higher last week.

·     In semiconductors: NVDA will be hosting its GTC 2023 this coming week, along with an Analyst Q&A session, on Tuesday, March 21; MU estimates reduced at Susquehanna ahead of MU’s 3/28 earnings report, projecting AugQ to be the trough, though not certain how to fully dial in the impact of inventory write-downs; AMD and INTC tgt raised to $115 and $33 respectively at Raymond James after meeting tech Supply Chain companies in Taiwan and Korea saying near-term business conditions appear mixed with signs of a bottom in PC, TV, and Smartphone markets while Data Center orders appeared to have weakened further in the past few weeks.