Closing Recap

Monday, October 31, 2022

Equity Market Recap

·     The S&P 500 index pulled back from six-week highs while the Dow snaps its 6-day win streak but still posts its best monthly advance (14%) since mid-1970’s as markets awaits the FOMC policy meeting this week. Market fully expecting a 75-bps rate hike on Wednesday, anything else would be a big surprise, as markets are banking on more dovish outlook for pace and size of future hikes. Rising U.S. Treasury yields are driving the dollar broadly higher against the G10 currencies at the beginning of a potentially crucial week. Also on tap, a very busy week of corporate earnings with another 150 S&P components expected this week!

·     On macro front: China economic data was weaker while Eurozone CPI hit record highs (10.7%). There was also a slew of COVID headlines: MGM Macau shut down over the weekend and mass testing is now rolling out throughout Macau; a large iPhone plant in Mainland China has been dealing w/ an outbreak of COVID, w/ a Reuters report noting iPhone production at that plant could slump 30%; and Shanghai’s Disney Resort abruptly suspended operations on Monday to comply with COVID-19 prevention measures, with all visitors at the time of the announcement directed to stay in the park until they return a negative test for the virus. Over the weekend Russia withdrew from the grain export pact; Russia bombarded Kyiv and other cities w/ missiles.

·     Earnings: UBS noted that only 68% of S&P 500 companies have beaten Q3 consensus estimates, which is near 10y lows outside of the COVID crisis. For those that have reported, Q3 EPS has beaten consensus estimates by a median of 3.4% and by 2.5% in aggregate with a few large misses. Despite USD strength, sales have surprised by 1.2%, above historical averages and in line with our view that sales beats would help offset margin weakness. Firms beating on EPS have outperformed by a median 77bp on the day of announcement while those missing have underperformed by 2.1% – largely in line with avg levels

·     Oppenheimer noted coming into today, 53% of the S&P500’s companies has reported Q3 results, earnings are up 1.78% on back of 11.4% revenue growth. Of the 11 sectors, four have reported double-digit earnings growth, one has reported triple-digit earnings growth, and five have reported negative earnings growth. Ten of the 11 sectors have reported positive revenue growth with only one showing negative growth thus far this season. This week we hear from over 34% of the SPX!

Commodities

·     Oil prices end lower as WTI crude falls by -$1.37 or 1.56% to settle at $86.53 per barrel, weighed down by a jump in the dollar, weaker than expected factory activity data out of China and on concerns that the country’s widening COVID-19 curbs will curtail demand. Brent Crude futures settle at $94.83/bbl, down 94 cents, 0.98%. Still, but both benchmarks record their first monthly gains since May (WTI crude rose nearly 9% for October). Natural-gas futures jumped $0.67 or 11.8% to settle at $6.355 per million British thermal units, paring losses to down -6.1% for the month. The United Arab Emirates’ energy minister said on Monday that OPEC+ was always willing to balance crude oil markets if needed, and that if consumers require its help, the alliance of top producers was "only a phone call away". Gold prices dip on day and posts its 7^th consecutive monthly decline (-1.9%) as the US dollar and Treasury yields rose.

Currencies & Treasuries

·     Tight range for Treasury yields today, with no big bets ahead of the FOMC policy meeting mid-week as the 10-yr yield up a few bps to 4.03% and the 2-yr up around 4.5%. Quiet now but massive upward move this year given the aggressive Fed stance. The 3-Month Treasury Bill yield ended the week at 4.18%, its highest level since October 2007. It entered the year at 0.06%. The US dollar advanced all day against rival currencies, with big moves vs. euro, yen, and Pound, bolstered by expectations of another supersized rate increase at this week’s Fed meeting. Investors widely expect the Fed on Wednesday to raise its benchmark overnight interest rate by 75 basis points to a range of 3.75% to 4.00%, its fourth such increase in a row.

Sector News Breakdown

Consumer

·     Retailers: HBI was double downgraded from Overweight to Underweight at Wells Fargo and cut tgt to $5 from $13 as now see greater risk to numbers, and potential headwinds via the company’s debt/leverage position; Bank America said dollar Store foot traffic (DG, DLTR) implies slowdown in F3Q (thru 10/25) at all 3 banners and is in line w/their expectation; into earnings for Wayfair (W), Wedbush said they remain sidelined into 3Q22 earnings on Thursday, November 3, as recent industry data points and commentary were mixed and suggest category demand potentially stabilized within 3Q but remains pressured—especially within the online channel

·     Consumer Staples & Restaurants: KDP downgraded to Hold at Truist; NOMD with positive pre Q3 adjusted EBITDA EU153M vs est. EU130.1M and organic revs +7.2% (3.4 decline in volume offset by price); TXRH downgraded from Buy to Hold at Deutsche Bank on the back of TXRH’s recent 3Q22 earnings release and outlook, saying this is a risk reward and valuation call, and there is not much more to it than that

·     Casinos, Gaming, Lodging & Leisure sector: in casinos, WYNN shares bounce after Golden Nugget owner Tilman Fertitta has amassed a 6.1% stake, buying 7 million shares; in leisure/theme parks, FUN was downgraded to Neutral from Outperform at Credit Suisse saying they think street numbers for ’23 imply somewhat aggressive growth assumptions in this environment, and company is more at risk of downward estimate revisions vs peers should the economy slow (they also lowered tgt on SEAS to $85 from $97 ahead of earnings)

Energy

·     Energy stock movers: beat performing sector in the S&P early despite mixed energy prices as shares of CVX, COP, ET, XOM, MMP hitting 52-week highs; natural gas outperforms lifting shares of producers EQT, AR, CHK, RRC, SWN was downgraded to Neutral at JPMorgan saying as a state-owned enterprise, Petrobras’ strategic directions do change with changes in the country’s political leadership. Brazil has just elected President Lula from the PT party, to replace President Bolsonaro starting in 2023; solar stocks outperformed as well with oil stocks (FSLR, CSIQ); energy stocks pared gains midday after reports President Biden to float windfall tax on energy producers

Financials

·     Insurance: PFG downgraded to Underperform at KBW Inc. saying they struggle to justify the magnitude of its premium valuation. Notes the company has been executing well, producing positive YTD asset management flows, generating NII upside but equity market headwinds are unavoidable, and PFG is one of the least interest rate sensitive life insurers; CNA and Loew’s (L) both reported earnings this morning; in FinTech & Payments: GPN Q3 EPS and revs reported in-line with ests while said for 2022, continue to expect constant currency adjusted net revenue growth of 10% to 11% over 2021, excluding dispositions

Healthcare

·     Pharma movers: EPIX tumbles as announced that Janssen R&D is suspending enrollment into the Phase 1 clinical study of EPI-7386 with apalutamide or EPI-7386 with abiraterone acetate plus prednisone in metastatic castration-resistant prostate cancer patients; YMAB tumbles after an advisory committee to the U.S. FDA unanimously voted 16-0 against the use of its cancer drug omburtamab, saying it did not provide sufficient evidence it improves overall survival in pediatric patients with neuroblastoma; FOLD late Friday received an FDA deferred action letter on the AT-GAA BLA/NDA – FDA is delaying a decision pending the only outstanding review item: inspection of the WuXi plant; BMY announces positive topline results of phase 3 COMMANDS Trial; BMRN upgrade from Perform to Outperform at Oppenheimer saying Roctavian is in review for potential late March FDA approval for severe hemophilia; cannabis names (CGC, GTBIF, TLRY) jumped after Senator Schumer says Congress is ‘very close’ to passing marijuana banking and expungements bill after work with ‘a bunch of Republicans’ https://bit.ly/3ffTPc0

·     Biotech movers: ATNM announced that the Phase III SIERRA trial of Iomab-B met the primary endpoint of complete response lasting for at least six-months (p<0.0001, easily beating the threshold of 0.046); AMGN downgrade from Equal Weight to Underweight at Barclays noting shares have added $25bn+ in Mkt Cap since Oct 1, primarily on the back of optimism surrounding early-stage obesity asset, AMG133, and a sector-wide melt-up; GILD upgraded from Underweight to Equal Weight at Barclay’s saying its Q3 update represented it’s most comprehensively positive call in 2+ years, as HIV & Kite both bettered estimates; TIL shares tumble after voluntarily pausing patient enrollment in trials testing its experimental cancer therapies, ITIL-168 and ITIL-306; DYN receives FDA fast track designation for Dyne-251 for the treatment of DMD

·     Healthcare Services: Cowen noted on Friday, CMS announced it will finalize its long-delayed MA RADV rule by 2/1/23 – a surprise to them as had expected CMS to delay at least another year – and said as implemented in 2012, viewed the rule as relatively immaterial; VillageMD, which is majority owned by WBA is said to evaluating a deal to merge with Warburg Pincus-backed Summit Health, the parent of CityMD. The acquisition of Summit Health is expected to value the combined company between $5B-$10B said Bloomberg report https://bit.ly/3Wsqaw ; in Healthcare IT, Wells Fargo initiated DOCS overweight tgt $38, HCAT equal weight tgt $10, and VEEV Equal weight tgt $180; managed care names UNH, ELV hit 52-week highs

Industrials & Materials

·     Aerospace & Defense HWM cut its revenue guidance for the full year to $5.6B-$5.65B from prior $5.65B-$5.72B and slightly lower EPS after a narrow miss for Q3; Reuters reported this weekend China Southern Airlines Co Ltd has cancelled plans for two Boeing Co (BA) 737 MAX flights on Sunday that would have represented the model’s return to passenger flying in China after more than three years, according to the airline’s website

·     Transports, Industrials, & Machinery: EMR enters into an agreement to sell a majority stake in its climate technologies business to Blackstone Inc. in a deal that values the business at $14.0B, with the co to receive upfront cash proceeds of $9.5 billion; CAT downgraded from Buy to Neutral at UBS to reflect more balanced risk/reward as thesis on positive margin inflection is playing out; Transports XPO and SAIA both movers after earnings

·     Metals & Materials: chemicals names (CF, MOS, NTR, FMC) active as Russia’s suspension of an agreement that allowed the export of agricultural products from Ukrainian ports could tighten global supply further and drive-up prices, potentially helping suppliers of agricultural chemicals amid a favorable demand environment; industrial metals again falter early behind weaker China economic data, with copper, aluminum names slipping; TECK downgraded to neutral at Citi

·     In packaging: GEF downgraded from Market Perform to Underperform at BMO Capital and cut tgt to $62 from $72, part of a broader rating shift around industrially oriented packagers saying despite a more cyclical portfolio, GEF is one of only a few packagers with positive YTD; SON also downgraded from Market Perform to Underperform at BMO and cut tgt to $58 from $65

Technology, Media & Telecom

·     Media, Internet: Twitter is planning to start charging $20 per month for verification / And if the employees building it don’t meet their deadline, they’ll be fired by Elon Musk, the Verge reported https://bit.ly/3Wh9nNb ; for DIS, Shanghai’s Disney Resort abruptly suspended operations on Monday to comply with COVID-19 prevention measures, with all visitors at the time of the announcement directed to stay in the park until they return a negative test for the virus; PARA downgraded from Equal Weight to Underweight at Wells Fargo and cut tgt to $13 from $19 saying they can no longer justify its premium multiple amid our more negative view on linear trends and an uncertain DTC outlook; Citigroup opened a 30- day positive catalyst watch for ROKU into earnings saying there is a reasonable correlation between YouTube’s and Roku’s revenue growth rates; China stocks BABA, BIDU, JD, PDD slip early, adding to recent weakness after data showing factory and services activity in China contracted in October (group rebounds)

·     Semiconductors: ON Q3 revs rose 26% y/y to $2.19B vs. est. $2.12B and EPS above views on better margins; Foxconn Technology Group, the world’s largest maker of iPhones, said it may boost capacity at alternative sites to mitigate potential disruption at its main Covid-stricken plant in China; AMD downgraded from Outperform to Market Perform at Northland with $60 tgt saying they believe indigenous Chinese demand will be very slow to recover and ARM CPU market share gains will continue, particularly in China; Deutsche Bank noted SIA data showed September semi revs of $49.4B came in below their ests ($53.1B) and below typical September seasonality (total revs +5% m/m vs. 10-yr avg +11% m/m)

·     Hardware, Software movers: CDAY upgraded to equal weight from underweight, citing its international expansion strategy, shift to more cloud and product investments; PSTG was upgraded to Overweight at Morgan Stanley as believe PSTG should fare better than their general enterprise names in macro weakness, given share gains and growing value proposition