Closing Recap

Wednesday, October 05, 2022

Equity Market Recap

·     Stocks rallied following an initial downdraft, erasing substantial declines, but failed to extend yesterday’s gains following a late day slide. Oil prices jumped a third day as OPEC+ said it will reduce output by 2 million barrels a day in November – but since so many of its members aren’t meeting their output targets, the real cut would be smaller, about 950K barrels per day. Still, the move seen as a shot at the U.S. which has tried getting oil prices down (by depleting its SPR) to help curb energy costs that has been a root of inflation spiraling out of control. Economic data mixed with jobs data in-line (ahead of nonfarm payrolls Friday) and better ISM services data – minimizing hopes for a Fed rate hike slowdown. The Fed has really put themselves in a pickle, with markets just itching for any sign of a rate “pivot”, which could send stocks surging, and yields collapsing causing wealth to explode again – but as sticky inflation surges? But if they continue down the aggressive rate hike path (over 275-bps hikes this year with another 75 anticipated at its next meeting) many fear a hard landing and recession appears inevitable. Meanwhile the global economy faces "multiple shocks" that will slow its merchandise trade growth next year to 1% after a 3.5% gain this year, the World Trade Organization said. Earnings season around the corner, kicking into gear in about 2-weeks, where investors will get a glimpse on how rising rates has impacted them.

·     Stocks began to rally around 10:00 AM ET but picked up steam around noon. Bloomberg reported: "Around noontime a chunky derivatives trade hit the tape," Wells Fargo & Co. strategists led by Christopher Harvey wrote. "Our desk characterized it as ‘one of the biggest trades I have seen in my career from a contracts perspective.’ The structure bought SPX Oct 31st and Mar Calls vs. selling Jan Calls. The Greeks of the trade are likely what gave a midday pop to the S&P 500." The trade included buying 20,000 S&P 500 calls expiring in October with a strike price of 4,500 and 14,000 bullish contracts expiring in March at a strike of 4,300, while selling 48,000 calls maturing in January with an exercise price at 4,500 — a bet that essentially says stocks would rally in coming months. "The dealers who took the other side of this had a huge amount of risk to offset," said Gareth Ryan, managing director at IUR Capital, adding that they could have bought equity futures to keep their books neutral. "It certainly could’ve impacted the cash market. This is one of the largest trades by size that I have seen in a long time."

Economic Data:

·     Jobs data in-line – ADP national employment report shows U.S. Employment increased by 208,000 private sector jobs in September, slightly above the 200,000 consensus estimates (prior month was revised higher to 185K from 132K)

·     Aug trade deficit (-$67.40B), mostly in-line with consensus (-$67.7B) and vs July deficit (-$70.46B from prior (-$70.65B); Aug exports -0.3% vs July +0.3%, imports -1.1% vs July -2.8%; U.S. Aug exports $258.92B vs July $259.59B, imports $326.32B vs July $330.04B

·     ISM Non-Manufacturing for October ISM report 56.7 in September (above ests 56.0) and vs 56.9 in August; prices paid index 68.7 in September vs 71.5 in August; new orders index 60.6 in September vs 61.8 in August and employment index 53.0 in September vs 50.2 in August

·     S&P Global September final composite PMI at 49.5 (vs flash 49.3) and S&P global September final services PMI at 49.3 (vs flash 49.2); U.S. Services final prices charged index for September at 57.7 vs flash 58.3 and final August 59.2

Commodities

·     Oil prices rise with WTI crude up $1.24 or 1.43% to settle at $87.76 per barrel. Oil prices came into the day up roughly nearly 9% the last 2-days on expectations that OPEC+ may agree to a large cut in crude output in its meeting this week. Prices extended gains as the cartel confirmed output cuts of 2 million bpd or 2% of global demand would be made from existing baseline figures (though the real cut would be smaller, about 950,000 barrels per day as many members aren’t meeting output targets). At the same time, weekly inventory data showed US gasoline stockpiles drop -4.7M barrels to lowest since 2014 at 207M barrels, said the EIA while the SPR now 200 million barrels below its year ago level. Crude inventories fell by 1.4 million barrels in the week to Sept. 30 to 429.2 million barrels. Gold prices slip -$9.70 or 0.6% to settle at $1,720.80 an ounce, pulling back off 3-week highs amid a rebound in the dollar.

Currencies & Treasuries

·     Wednesday saw a rebound in Treasury yields after the recent sell-off from 15-yr highs, as the 10-year yield rises 16-bps to 3.78% after lows below 3.6% on Tuesday, while the 2-year rose 8-bps to 4.17% after lows sub 4.05% yesterday (the 2yr Bond yield was 4.34% a week ago). Economic data has been mixed of late, with key inflation data coming next week. Jobs reports this week so far mixed with ADP private payrolls in line with estimates, which follows big miss in JOLTs yesterday. The monthly nonfarm payroll report next data point to move needle this Friday.

·     The US dollar resumed its rally after two days of declines, as the dollar index (DXY) gains around 1% to 111.05 after falling roughly 400-bps in the last week from 20-year highs. After tumbling to a record low of $1.0327 against the dollar last week in the aftermath of the government’s budget announcement, the pound has recovered some ground (highs above 1.14 yesterday), after the government reversed a planned cut to the highest rate of income tax. However, Sterling slipped today, ending a 6-day rally as British Prime Minister Liz Truss spoke to Conservative party, urging them to stick together and help transform the economy and the country. Euro failed to get back to parity after rising above 0.99 earlier vs. the dollar.

Sector News Breakdown

Consumer

·     Retailers: HELE Q2 EPS/sales top views but slashes FY23 non-GAAP EPS view to $9.00-$9.40 from $9.85-$10.35 and revs to $2.00B-$2.05B from $2.15-$2.20B and announces restructuring plan, sees annualized savings $75M-$85M (stocks opened sharply lower before recovering); BBWI, CPRI, TPR remain top picks in retail at Wells Fargo and recently added BURL, all of which have idiosyncratic stories that position them to be relative outperformers, but firm remains cautious on retail saying traffic stabilizing, but still see a tough setup into holiday

·     Auto sector: TSLA shares slip to lowest level in 2-months after CEO Elon Musk reverses course, says he will buy social media platform Twitter Inc. renewing fears he may need to sell additional shares to help fund the purchase; Morgan Stanley upgraded Ford (F) to Overweight (keeps $14 tgt unchanged) while lowers price tgt for GM to $30 saying earnings mean-reversion is moving from a “risk” to a “necessity” as the Fed continues to curb inflation, hitting valuations and sentiment across the auto complex; AZO announces additional stock repurchase authorization of $2.5B; in auto suppliers, Wells Fargo said most Q3 results will likely be in-line with consensus, and expect more than half their coverage to hold guidance with the remainder guiding near the low end of current ranges. BWA, APTV screen best, partially helped by their high China mix; CHPT announced the launch of the CP6000, ChargePoint’s most flexible and serviceable global AC EV charging solution now available for vehicles of all types and sizes.

·     Housing & Building Products: rising rates still impacting mortgage rates which rise for a seventh week to highest in 16 years according to the Mortgage Brokers Association. US mortgage market index falls 14.2% to 218.7 in latest week, lowest since 1997, while purchase index falls 12.6% to 174.1 and refinancing index falls 17.8% as 30-yr rate jumps 23 bps to 6.75% (highest since 2006)

·     Consumer Staples & Restaurants: CHD upgraded to Buy from Hold at Deutsche Bank with $85 tgt saying recent sell-off is a compelling entry point (though acknowledges lingering headwinds in the discretionary business); LW reports Q1 adj EPS $0.75 vs. est. $0.50 and sales in-line at $1.13B and reaffirms FY adj EPS to $2.45-$2.85 vs. est. $2.81 and sales $485M-$535M; TSN said to close Chicago, South Dakota offices, relocate employees – meatpacking giant to shift employees to Arkansas headquarters in early 2023 as costs rise; CAG, MKC, STZ earnings tomorrow morning.

Energy

·     Energy stock movers: oil prices jumped this week on OPEC+ production cut headlines – Saudi energy minister said it’s not true that real oil cut will be 0.5 mln bpd, our estimates are 1.0-1.1 mln bpd. JPMorgan said earlier a 750k cut was most likely, which could move Brent prices by ~$3/bbl and a 1mm cut would move prices ~$5/bbl. Said any additional supply cuts from Russia could spike oil prices well above $100/bbl; shares of energy stocks were the top gainers in the S&P while solar names (ENPH, FSLR, SEDG, SPWR) were among some of the worst

·     E&P and Majors: in research, LPI downgraded to Neutral from OW at Piper as the company is expected to exhaust its Howard County inventory by YE23, and expect decline in productivity and capital efficiency and reiterate our OW rating for FANG and raise tgt to $193 from $187; XOM said it estimates that changes in liquid prices will have a negative effect of between $1.4B-$1.8B in Q3 compared with Q2 results; also predicted a favorable effect of $1.8B-$2.2B on results for the recent quarter due to changes in gas prices, compared with Q2

Financials

·     Bank movers: banks stocks stumble after rising over 7% the last 2-days; British finance minister Kwasi Kwarteng is expected to meet major high street banks later this week, Sky News reported on Wednesday, saying Barclays, Lloyds Banking Group and NatWest were among those due to attend. The Sky report said that the meeting was planned for Thursday; in research, MS downgraded to Neutral from Overweight at Atlantic Equities and the firm also downgraded GS to Underweight from Neutral due to declining investment banking activity, falling equity markets and concern that trading estimates remain too optimistic. Mizuho Financial Group’s securities business will acquire around 20% of shares in Rakuten Securities from its parent Rakuten Group for about 80 billion yen ($554 million), business daily Nikkei reported; SIVB downgraded to Equal Weigh at Morgan Stanley as push out estimates for a capital markets/VC rebound, saying that pressures NII as higher cost sweep accounts are moved temporarily onto the balance sheet; FMNB downgraded from OW to Neutral at Piper.

·     REITs: RBC Capital said they are shifting Mortgage REITs (AGNC, CIM, NLY, MFA, RITM, TWO) to a Neutral sector stance from positive previously due to several factors, including potential for ongoing volatility in agency MBS. A key question for investors is whether mortgage REITs’ common dividends are sustainable. In the current environment, we would highlight RITM as one of our favorite names in our coverage; BDN among REITS touching 52-week lows today.

Healthcare

·     Biotech & Pharma movers: Cantor lowered 3Q22 sales and EPS estimates for PFE and increased 4Q22 sales and EPS estimates which net changes lowered full-year 2022 EPS estimate but reiterate Overweight and $75 tgt; TAK announced it plans to discontinue manufacturing of Natpara to treat hypoparathyroidism (HP) globally by YE:24 due to unresolved supply issues; EIGR shares decline after saying will not submit an (EUA) application of peginterferon lambda for treatment of patients with mild-to-moderate COVID-19; DNA files $500M mixed equity shelf

·     MedTech Equipment: AVTR was upgrade from Neutral to Buy at Citigroup with $28 tgt as believe current valuation appropriately accounts for the M&A revenue shortfall and downside risk to core numbers; in North America Medical Supplies & Technology, Citigroup opens a positive catalyst on DXCM (awaiting the G7 approval), and a negative catalyst watch on NVRO (balancing PDN demand with a sluggish core SCS market); downgrade PEN to Neutral from Buy, remaining enthusiastic for its end markets and pipeline, but with a 57% upward move in the 3Q22 are pressed for valuation. Finally, bullish on device utilization in a normalized environment and (to us) the best thing that could come out of the 3Q season is an in-line delivery, 2022 reiterations, and a level setting for 2023. Top Picks remain: BSX, DXCM, and NUVA

·     Healthcare Services: Jefferies said clinical laboratory companies could see softening volumes in coming months from weakening macroeconomic conditions and tempers expectations for DGX and LH as lower estimates to levels below current Wall Street consensus starting Q3 2022 and cut price tgts (LH to $260 from $310). In hospitals, Wells Fargo said analysis indicates consensus revenue estimates will likely prove too high for CYH, HCA, and UHS as they update tracking of inpatient hospital utilization to reflect data through 9/29/22, essentially capturing all of 3Q22.

Industrials & Materials

·     Transports, Industrial & Machinery: Blackstone is in discussions to buy commercial and residential solutions assets from EMR, Bloomberg reported, saying the deal could be valued at $5B-$10B, depending on assets sold. Heavy duty class 8 truckers (CMI, PCAR, ALSN) positive data as September ACT Class 8 Orders of 53.7k (+98% Y/Y) set a record for the highest monthly total in history, up +157% M/M, on the heels of 21.6k orders in August. While Truckload Indicator suggests freight conditions are deteriorating, not getting better – forward demand and rates sentiment underperformed (negative read: KNX, WERN, SNDR, USX)

·     Metals, Chemicals & Materials: RPM said it expects to see sales rise further in Q2 after reaching a record in Q1, seeing sales to grow between 9% to 12%, mainly driven by its consumer segment, after Q1 topped views (Q1 adj EPS $1.47 vs. est. $1.33; Q1 revs $1.93B vs. est. $1.89B); RBC Capital lowered estimates and PTs on LYB, DOW, WLK, CE, and VTNR (they had already lowered on companies that pre-announced in Sep, namely OLN, HUN, CC, and EMN); CC downgraded to Hold from Buy at Argus saying it has been hurt by weaker economic conditions, rising input costs, and declining demand for titanium dioxide, which accounts for more than 50% of its business; SCHN guides Q4 adj EPS $0.42-$0.47 well below consensus of $0.90; sees Q4 adj EBITDA to be in the range of $38M-$40M; precious metals silver and gold slide on dollar rebound

Technology, Media & Telecom

·     Semiconductors: TSM is negotiating lower prices with suppliers TSMC has started negotiating prices with its equipment and materials suppliers for 2023, eyeing price drops of at least 10%, according to industry sources, citing Digitimes; AMD tgt cut to $90 from $130 at Wells Fargo and reduce estimates; overall weakness in chip names after strong 2-day rally prior initially, but helped lead a modest rebound late morning for tech

·     Hardware & Software movers: SGH stumbles on mixed results as Q4 adj EPS $0.80 vs. est. $0.65; Q4 revs fell -6.4% y/y to $438M vs. consensus $440M; sees Q1 adj EPS $0.60, plus or minus $0.15 vs. est. $0.76 and sees Q1 revenue $425M-$475M vs. consensus $455.91M

·     Media & Telecom movers: TWTR slips – after jumping more than 20% near deal price last night after a filing showed Elon Musk wants to go ahead with his original offer of $44 billion to buy Twitter, or $54.20 per share, shares slipped this morning on reports the two sides have not yet reached an agreement to end the litigation (note Musk would have to testify tomorrow if deal can’t be reached as deposition was moved to 10/6 and 10/7); LUMN downgraded to Equal Weight from Overweight at Wells Fargo and cut price target to $8 from $12.50, as we see increasing risks to the dividend in the near term