Closing Recap

Monday, May 22, 2023

Index	Up/Down	%	Last
DJ Industrials	-140.08	0.42%	33,286
S&P 500	0.70	0.02%	4,192
Nasdaq	62.88	0.50%	12,720
Russell 2000	21.67	1.22%	1,795

 

 

 

 

 

 

 

 

 

U.S. equity markets were mostly higher, paced by gains in regional banks, small cap stocks, and you guessed it, technology, and communications, the two sectors that have been driving markets higher all year so far. All eyes are on debt ceiling talks later this afternoon as President Joe Biden and top congressional Republican Speaker Kevin McCarthy will meet at 5:30 PM ET to discuss raising the federal government’s debt ceiling. We are now just 9 days away from June 1st, the day the U.S. Treasury Secretary Yellen has said could trigger a default if the debt ceiling is not raised. Any deal to raise the $31.4 trillion debt limit must pass both chambers of Congress before Biden could sign it into law. Despite all the headlines, odds of a US default are slim based on the lack of fear in markets, surging last week and rising again today. The S&P 500 Index hovered around the 4,200 level most of the day but failed to close above it for a second day. Treasury yields and the dollar edged higher. There were a few M& deal headlines today including a $6.3B deal in the Energy sector (Chevron to acquire PDC Energy), with another in the financial sector and in healthcare (details below). Consumer Staples was the main S&P sector lower (down -1.5%) while Communications led +0.8% (now +29% YTD) and REITs up about +0.6%. Two market stats that are mind boggling: JPM now has more than 13% of the nation’s deposits and 21% of all credit-card spending as per article on the WSJ, https://on.wsj.com/42S2yV8 and AAPL 7.4% current weighting in the SPX is the largest for any single company in the index with data going back to 1980. Some companies with just too much control of the broader market environment.

 

Goldman Sachs this morning put odds at 25% chance of no debt ceiling deal saying they are confident that Congress will avoid going past the deadline without action, but there are many paths this could take. The most likely is a full-fledged deal that suspends the debt limit to early 2025 along with spending caps (70% chance). There is a small chance this could be announced over the weekend (10%) but we think a deal is more likely later next week (30%) or shortly before the deadline (30%). It is much less likely but possible that a deal does not come together by the deadline (25% chance).

 

Fed Comments

·     The Federal Reserve may still need to raise its benchmark interest rate by another 50-bps this year, St. Louis Fed President James Bullard said (non-FOMC voter), suggesting that any decision to pause on any increase at the upcoming June meeting won’t mark a full stop to the Fed’s tightening cycle.

·     Federal Reserve Bank of San Francisco President Mary Daly (non-FOMC voter) said it’s too soon to say what the central bank will do next on monetary policy, as its June policy meeting draws closer. “We have to be extremely data dependent” right now, Daly said in a virtual appearance.

·     Fed survey of household wellbeing: 73% of adults were doing at least okay financially in 2022, down 5 pp from 2021. The share who said they were worse off financially than a year earlier rose to 35%, the highest since the question was first asked in 2014.

 

Commodities, Treasuries and Currencies

·     Oil prices edge higher, with WTI crude rose $0.44 or 0.61% to settle at $71.99 per barrel after snapping streak of four-straight losing weeks last Friday and Brent crude rose $0.41 to $75.99 per barrel. Gold prices slip -$4.40 to settle at $1,977.20 an ounce. The U.S. dollar index (DXY) was little changed most of the day. Treasury yields edged higher before paring gains, as shorter-term yields rose the most; the 10-yr touched 3.73% before pulling back to 3.7% while the 1-yr rose over 5-bps to 5.07% and the 2-yr up 2-bps to 4.31%.

 

 

Macro	Up/Down	Last
WTI Crude	0.44	71.99
Brent	0.41	75.99
Gold	-4.40	1,977.20
EUR/USD	0.0010	1.0812
JPY/USD	0.55	138.50
10-Year Note	0.011	3.703%

 

 

Sector News Breakdown

Consumer

Retailers, Consumer Staples & Restaurants:

·     Williams Trading downgrades FL, HIBB, NKE. NKE cut from Hold to Sell saying NIKE’s business in the U.S. has become far more difficult than what was expected when 3Q23 earnings were reported in March, and the turnaround in China appears to be choppy. HIBB was downgraded to Hold from Buy and FL cut to Sell.

·     Consumer Staples (XLP) lagged in the S&P with underperformance from WBA, PG, PEP, GIS.

·     DDS Announces $500m Share Buyback

·     RVLV was downgraded from Outperform to Market Perform at TD Cowen, says moves to the sidelines as believes stock will be rangebound in the near-term citing exposure to aspirational shoppers & elevated returns, margin upside less likely and lack of visibility.

 

Autos, Leisure, Gaming & Lodging:

·     In autos: Ford (F) hold investor meeting today: said for FY23, maintains guidance of $9B-$11B in adjusted Ebit and about $6B in adjusted free cash flow; will announce new battery raw-material definitive agreements, strengthening ford’s sourcing to produce two million EVs by end of 2026/beyond; sees full-year loss of about $3 billion for startup ford Model E.

·     In Casinos/Gaming: DKNG upgraded from Neutral to Buy at UBS and raised tgt to $30 from $19 based on higher revenue growth and greater flow through to EBITDA; sees runway for DKNG to deliver a +20% revenue CAGR from ’23E to ’26E.

 

Energy

·     In E&P sector: PDCE to be acquired by CVX in an all-stock deal valued at $6.3B or $72 per share, roughly a 10% premium to PDCE Friday close; deal expected to increase Chevron’s proved reserves by 10% https://on.wsj.com/3pVYrbX ; SDPI said it is exploring strategic alternatives to maximize shareholder value; said considering options including sales, acquisitions, mergers, and divestiture of assets. Natural-Gas Futures End Down 7.2%, Largest One-Day Drop in 4 Weeks.

·     In Utilities, Solar, Alt Energy: PLUG said it landed three deals in Europe for its green hydrogen-producing electrolyzers; solar stocks were mostly higher early SPWR, ENPH, CSIQ, ARRY, RUN; FSLR underperformed a mostly higher solar space, slips for a 6th straight decline.

 

Financials

Banks, Brokers, Asset Managers:

·     GHL rises after Mizuho agreed to buy the company for $15 per share in cash for a total value of ~$550 mln including debt; deal is expected to close by year end https://on.mktw.net/42dY36p

·     PACW agreed to sell a $2.6 billion portfolio of 74 real estate construction loans to KW for about $2.4 billion as part of its previously announced plan to sell assets to shore up liquidity. https://on.mktw.net/3BO2KZS

·     JPM boosted its outlook for net interest income this year to $84 billion, excluding its trading business, up from a previous forecast of $81 billion after its purchase of First Republic Bank.

·     JPMorgan (JPM) now has more than 13% of the nation’s deposits and 21% of all credit-card spending https://on.wsj.com/42S2yV8

·     U.S. bank deposits fell to $17.123t from $17.150t in prior week according to Fed data late Friday. U.S. bank loans & leases fell by $3.3b in week ended May 10 – Fed data.

 

FinTech, Insurance & Services:

·     AFRM, PYPL, SQ: Barron’s discusses how AAPL is a threat to all three firms as it pushes deeper into financial services.

·     In lending, RKT upgraded to Hold from Sell at Argus saying the company should post a narrower loss in 2023 and return to profitability in 2024, making the stock "fairly valued" at current levels.

 

Healthcare

Biotech & Pharma:

·     ICPT shares fell after a panel of FDA advisers said late Friday study data suggested that the benefits of Intercept’s drug, obeticholic acid (OCA), did not outweigh the risks in patients with NASH (non-alcoholic steatohepatitis) and fibrosis, or scarring.

·     PFE shares rise after a study of its diabetes treatment danuglipron found that a high dose of the drug reduced body weight by more than nine pounds over 16 weeks; news weigh on shares of rival weight loss drug company NVO.

·     AVRO shares jump after saying it will sell rights for its investigational gene therapy as a treatment for cystinosis to NVS for $87.5 million in cash.

·     IRWD said it was acquiring Swiss biotech company VECT in an all-cash transaction for $17 a share totals an estimated $1 billion, net of cash and debt; deal expands pipeline of drugs that can advance the treatment of gastrointestinal diseases – https://on.mktw.net/3MssQ9n

·     ANAB was upgraded from Underweight to Neutral at JPMorgan noting shares are trading essentially at cash (end-1Q) and does not see significant downside risk from current levels, given near and intermediate-term focus is on clinical execution for lead programs rather than catalysts.

·     Eisai submits MAA for Lecanemab for the treatment of early Alzheimer’s disease to the MHRA (note BIIB is partner of Eisai).

·     GMAB announced the FDA approval of CD3xCD20 bispecific epcoritamab (trade name Epkinly) in r/r DLBCL post market close on Friday, May 19. The approval represents the first approval of a bispecific antibody in the setting and comes in line with the FDA target PDUFA date of May 21.

·     HEPA said a Phase II study of its lead drug candidate rencofilstat met its key goals in the chronic liver condition nonalcoholic steatohepatitis, commonly known as NASH.

·     IMVT rises after results earlier and FDA approval for its Phase 1 study of its IMVT-1402 drug candidate for autoimmune disease.

·     OCS announced positive top line results from Stage 1 of its Phase 3 DIAMOND trial of OCS-01 eye drops in Diabetic Macular Edema.

·     RAIN shares slide after saying its lead drug candidate, milademetan, did not meet main goal in a late-stage study in patients with dedifferentiated liposarcoma; said does not expect to pursue further development of the drug in the particular indication.

·     TEVA extended-release schizophrenia drug Uzedy (risperidone) reduced the risk of relapse by up to 80%, according to trial data.

 

Industrials & Materials

Transports

·     In Rails: Citigroup upgraded railroads CSX, NSC, UNP to Buy from Neutral (CNI downgraded to Neutral) and upgraded KNX to Buy as believe Transport fundamentals are running at/near lows for this cycle and second-derivative improvement in 2H23 will be a catalyst. Ultimately, CITI sees upside to valuation and stock prices as the 2024 recovery story builds. NSC was upgraded to Overweight from Equal Weight at Wells Fargo and raised its price target to $250 from $225 saying service driven pricing and accelerating intermodal volume can drive growth.

·     In Airlines: Late Friday a federal judge issued a decision siding with the DOJ to block AAL Northeast Alliance (NEA) based on antitrust. Raymond James said believes the Friday ruling is negative for American, mostly negative for JetBlue, and a positive for DAL and UAL. RYAAY CEO said it aims to boost profit by 10% this year after almost record earnings for its last financial year. CO said robust demand showed customers were treating travel as essential this summer and that fares would grow by a double-digit percentage.

 

Industrials, Materials, Aerospace & Defense

·     In Aerospace: MOG upgraded to Buy from Hold at Truist and raising tgt to $130 from $85 as believes it’s now or never for MOGA mgmt to start driving sustained operational improvements.

·     In lithium, ALB said to supply more than 100,000 metric tons of battery-grade lithium hydroxide to Ford Motor Co (F) to support automaker’s plan to scale electric vehicle production.

·     In Metals: industrial metals were mixed while precious metals slid amid a further bounce in Treasury yields and the U.S. dollar.

·     Packaging & Containers: GPK, IP, PKG, PTVE, SON, WRK shares slipped after Pulp & Paper Week reported late Friday that pricing for domestic kraft linerboard declined $20 per ton. Deutsche Bank said they believe the market expectation was for kraft linerboard prices to fall only $10 per ton and therefore view these declines as greater than anticipated.

 

Technology

Hardware, Internet, Media & Telecom

·     META fined $1.3 billion for violating E.U. Data Privacy Rules; said it would appeal an order to stop sending data about European Union users to the United States.

·     AAPL was downgraded from Buy to Hold at Loop Capital as has now seen AAPL reduce its builds (and it believes shipment forecasts) for essentially the second time in the last 4 weeks and notes this is incremental to the reduced Jun Q guidance AAPL provided on 5/4.

 

Semiconductors:

·     MU shares slip but finish off worst level after reports of failing a national security review, China’s cybersecurity watchdog said on Sunday, telling operators of "critical information infrastructure" to stop buying its products.

·     AMAT said it plans to spend up to $4 billion over 7-years on a research center in the heart of Silicon Valley to speed up advances in semiconductor manufacturing.

·     TSM has won significant AI chip orders and continues to see an increase in orders amid a surge in demand for generative AI – Digitimes reported.

·     CRUS was downgraded to Hold and tgt cut to $80 at Loop Capital as the most recent AAPL iPhone work suggests material incremental build reductions to Jun Q (to 34M units from 38M – iPhone Builds Slashed Again).

·     PLAB was downgraded from Outperform to Market Perform at Northland as thinks PLAB’s GM has peaked and will remain under pressure.