Closing Recap

Tuesday, September 06, 2022

Equity Market Recap

·     Stocks slide again, as the Nasdaq Composite posts its 7^th straight day of losses (down about 9% during that stretch), its longest losing streak since Nov 2016 (which was 9-days as per CNBC) as rising Treasury yields (highest levels since June) and weaker economic data continue to plague high growth-related sectors, namely technology. Defensive sectors such as large cap healthcare, REITs and Utilities held up better than other sectors. Higher mortgage rates also hitting market sentiment, with a conventional 30-year fixed rate rising to 6.25% (the average cost on a $400K home with 20% down today vs. 1-year ago is +$680 per month). Many traders returned from their Labor Day three-day weekend but not much buying interest as stocks again sold off after early strength, failing to hold a rally. Major indexes have all fallen for three consecutive weeks on rising rate fears and recession concerns. European stock market rebounded after falling Monday following Russia’s indefinite halt of natural-gas flows through a major pipeline. Attention now turns to the European Central Bank’s interest-rate decision due on Thursday where a rate hike of 50-75 bps is widely anticipated (FOMC meeting not for 2-weeks). European natural gas prices were up over 25% on the weekend but has since pulled back while China won’t stop locking down their citizens and in doing so is taking a wrecking ball to economically sensitive sectors. Big week for central banks: the RBA in Australia was the latest central bank to raise rates, a 50bps increase as expected overnight, while hikes expected from the European Central Bank (ECB) on Thursday (50 or 75 bps), the Bank of Canada on Wednesday (again 50 or 75 hike expected). Note the FOMC meeting is set to take place September 20-21.

Economic Data:

·     S&P Global August final composite PMI at 44.6 (vs flash 45.0) and final July 47.7 and S&P Global august final services PMI at 43.7 (vs flash 44.1); U.S. Services sector final PMI for August at 43.7 vs flash 44.1 and final July 47.3; final prices charged index at 59.2 vs flash 60.2 and final July 60.4; final U.S. Composite output prices index for August at 59.8 vs flash 60.7 and final July 61.4

·     ISM U.S. Non-manufacturing sector shows PMI 56.9 in August vs 56.7 in July; ISM non-manufacturing business activity index 60.9 in August vs 59.9 in July; prices paid index 71.5 in August vs 72.3 in July (lowest since January 2021); new orders index 61.8 in August vs 59.9 in July; employment index 50.2 in August vs 49.1 in July

Commodities

·     In energy markets, Brent crude retreated -$2.91 or 3.04% to settle at $92.83 per barrel amid growing concerns that lockdowns in China could stem demand. Meanwhile, WTI crude was little changed at $86.88 per barrel a day after OPEC+ said to cut production by a small, 100,000 barrels a day could lead to slightly lower global supplies. Gas prices in the US move down to $3.77/gallon (national average), 25% below their all-time high in mid-June and at their lowest levels in 6 months. Natural gas prices in the U.S. slumped -7.3% to $8.133/MMBtu and are now down 12% over the past two trading sessions in a sell-off driven by falling prices for natural gas in Europe as worries there fade of any severe winter shortages

·     Gold prices slip from a one-week high hit earlier in the session ($1,737.40), down -$9.70 or 0.6% to settle at $1,712.90 an ounce as the dollar and Treasury yields climbed amid expectations for aggressive monetary policy tightening by major central banks in the coming week.

Currencies & Treasuries

·     The U.S. dollar index (DXY) jumped to a two decade high after data showed U.S. services industry picked up again in August. The U.S. dollar moved above the 143 level against the Japanese yen for the first time since 1998 while the euro dropped below the 0.99 level vs. the greenback ahead of key central bank meetings this week (ECB). Benchmark U.S. Treasury yields rose to their highest levels since June on expectations that the Fed will keep hiking interest rates. The 10-year yield hit highs of 3.35% and the 2-year above 3.52%. Bitcoin prices tumbled midday along with the drop in stocks markets, back down around the $19,000 level and Ethereum dropping below $1,600 as few risk assets were safe today.

Sector News Breakdown

Consumer

·     Retailers; PVH moving from the S&P 500 to the S&P 400 effective prior to the open of trading on 19-Sep to coincide with the quarterly rebalance; BBBY tumbles after announcement of CFO Arnal over the weekend; FOSL is being removed from the S&P 600 prior to the open of trading on 19-Sep to coincide with the quarterly rebalance

·     Consumer Staples: BUD upgraded to Buy from Hold at HSBC saying after having lost more than 20% of its value in the past year, they upgrade on valuation, and because revenues and margin pressure should ease into year-end and next year; in food, Deutsche Bank raises price targets on CASY to $276 from $255, and SPTN tgt to $36 from $26; Reuters noted European Union antitrust regulators have set Oct. 11 as a deadline for their preliminary review of PM’s $16 billion bid for tobacco and nicotine products maker Swedish Match, a European Commission filing showed

·     Restaurants: California Governor Gavin Newsom has signed a bill into law that will set a fast-food industry-standard hourly wage up to $22 and create a 10-person council to advocate for better wages and working conditions (shares of MCD, WEN, QSR among others could be impacted)

·     Casinos, Gaming, Lodging & Leisure sector; PENN is moving from the S&P 500 to the S&P 400 effective prior to the open of trading on 19-Sep to coincide with the quarterly rebalance; DKNG +positive mention at Susquehanna as reiterate Positive rating and increased tgt to $24; for regional gaming, KeyBanc noted traffic data for August (measured as a % of 2019) shows a deceleration from July, as July’s favorable calendar (an extra Fri/Sat/Sun in 2022 vs. an extra Mon/Tue/Wed in 2019) reversed in August.

Energy

·     Energy stock movers: Russia’s biggest natural gas pipeline to Europe (Nord Stream 1) will not resume pumping until Siemens Energy repairs faulty equipment, Gazprom’s Deputy CEO said this morning according to news wires. In stock news, SHEL and XOM have put up for sale one of Europe’s largest and oldest natural gas production ventures, betting on soaring energy prices amid tensions with Russia to attract buyers; RIG upgraded to Buy at BTIG with an $8 PT saying floater activity was flattish in August at ~120 floaters working, which was unchanged M-M.

·     Pipelines: STR said it would buy oil and gas rights company MNRL in a $4.8B deal, as the equity value of the all-stock deal is $1.73B and it is expected to close by Q1’23. Sitio and Brigham shareholders will own about 54% and 46% of the company, respectively https://bit.ly/3eqTmTx

·     Utilities & Solar; in solar, Wells Fargo noted NEM 3.0 could be a modest headwind for residential solar companies including: SPWR (50% CA exposure), RUN (40%), NOVA (36%), ENPH (20%), and SEDG (5%) as expect residential solar economics in California to be less attractive after NEM 3.0 is finalized (i.e., payback period increasing to 8-9 years versus 5-6 years currently under NEM 2.0). While in isolation this would cause a slowdown in new solar installations, the impact is likely to be partially offset by higher battery attach rates; NEE upgraded to Overweight at Morgan Stanley and raise tgt to $99 driven by increased renewables growth relating to the emergence of a large green hydrogen industry in the US because of recently passed IRA legislation.

Financials

·     Bank movers; large cap bank Citigroup (C) downgraded to Hold from Buy and both GS and MS downgraded to Sell from Hold at Odeon Capital saying that the top 6 US investment banks & CS saw a steep July & August decline in volume in debt markets banking year over year outside of investment grade bonds; JEF was upgraded to Outperform at KBW and raises target from $30 to $38 saying Jefferies is an attractive way to play a potential recovery in investment banking activity, with idiosyncratic catalysts, a cheap valuation (0.95x TBV), and, with limited downside; CG was double downgraded from Buy to Underperform at Bank America and cut tgt to $33 from $58 driven by a reduction to our distributable earnings estimates and lowered multiple due to an expected deceleration in growth, emerging fundraising challenges, and surprise CEO departure

Healthcare

·     Pharma movers: DYN announces initiation of Phase 1/2 ACHIEVE trial of DYNE-101 for the treatment of Myotonic Dystrophy Type 1; note on Wednesday, the FDA will convene a panel of expert advisers to weigh in on AMLX’s investigational treatment for ALS. It’s a do-over after a March meeting in which the same panel voted narrowly against the company’s supporting evidence; on Thursday, ALNY will present detailed data from a clinical trial whose top-line success sent the company’s share price up about 50% last month; IRWD reports positive Topline data from Phase 3 Trial of LINZESS in pediatric patients aged 6-17 with functional constipation; PRGO upgraded to Overweight at Wells Fargo with $54 tgt citing several reasons; LLY tgt raised to $396 from $369 at BMO based higher expectations for Mounjaro in T2D and obesity

·     Biotech movers: ALVO said on Monday the FDA declined to approve its anti-inflammatory drug candidate, AVT02, saying co needs to resolve certain issues with its facility at Reykjavik in Iceland (AVT02 is a biosimilar drug candidate of ABBV’s Humira); Citigroup double downgraded ALVO to Sell from Buy and cut tgt to $5 from $12 on news; EBS initiates Phase 1 study evaluating Lassa virus vaccine candidate; MNKD completes Phase 1 study of inhaled clofazimine inhalation suspension; ISEE said a second Phase 3 clinical trial for its geographic atrophy treatment Zimura met its primary endpoint with statistical significance and a favorable safety profile; ZYME falls after preliminary results from a Phase 1 study of cancer drug zanidatamab zovodotin, or ZW49

·     MedTech Equipment; MTD upgraded from Hold to Buy at Stifel with a $1,500 tgt as believe it is a stock that is best bought when the macro environment yields an opportunity, and with shares down 30% YTD, see the current moment as one of those times; GKOS announces more than 1M iStent technologies implanted worldwide; BSX receives FDA approval for expanded labeling of WATCHMAN FLX LAAC device for dual anti-platelet therapy as post-procedural medication option; SWAV downgraded to Underperform from Perform at Oppenheimer; ILMN will have to divest biotechnology company Grail after an EU veto of the $7.1B acquisition; PHG was upgraded to Neutral from Sell at UBS saying challenges well-reflected in stock price

·     Healthcare Services: CVS announced it will acquire SGFY for $30.50 per share in cash, with a total transaction value of ~$8B. This follows a report on 9/2/22 that CVS was in advanced talks to acquire Signify and had apparently prevailed over other interested parties, including AMZN and UNH https://on.mktw.net/3AJqWvm ; CAH announced initiatives aimed at positioning the Company for long-term success, building on Cardinal Health’s previously announced growth plans as initiatives have benefited from input received from Elliott Investment Management L.P.; AMZN disclosed that it received a request for additional information from the Federal Trade Commission related to its planned $3.9 billion purchase of ONEM The FTC received a so-called "second request" from the FTC on Friday.

Industrials & Materials

·     Industrial & Machinery; ROL upgraded to Outperform at RBC Capital and $40 tgt saying the pest-control firm offers a recession- resilient model against a tough current backdrop; in the HVAC industry, KeyBanc said they remain most constructive on WSO and CARR (raising price targets), while awaiting better entry points for LII and TT; Barron’s said global sales of industrial robots and factory automation are forecast to more than double by 2027 because of the labor shortage, and companies that dominate this market are ABBFanuc Corp. and Yaskawa Electric Corp.; GLT shares slide after being removed from the S&P SmallCap 600; POWW placed two members of management on administrative leave while it investigates potential misappropriation of the company’s data and digital assets

·     Transports: FDX downgraded to neutral from Buy at Citigroup citing concern that macro headwinds in the near-term are going to be more impactful to shares pressuring earnings growth potential in F2023; in the tanker sector, Jefferies upgraded its outlook and reiterate positive view on tankers saying spot rates have held firm across most segments over the past six months and VLCCs have finally joined the fray. Said VLCC recovery is final piece to the puzzle as they upgraded EURN, FRO, NAT and TNP to Buy while upping price targets and reiterating our Buy ratings for ASC, DHT, INSW, STNG and TNK; The TSA screened 8.76 million air travelers over Labor Day weekend, first time holiday weekend screening volume exceeds 2019 levels

·     Metals & Materials; lithium producers higher early (ALB, LAC, LTHM) after SQM’s Chilean counterpart voted against a proposed new constitution on Sunday, rejecting what would have been one of the world’s most progressive charters. Reuters noted Chile’s environmental regulator approved a compliance plan for lithium producer SQM, a step forward for the co’s operations following a years-long sanctioning process for environmental infractions; gold miner NEM upgraded to Buy at UBS as estimates now reflect 20% upside to the shares on top of a 5.4% dividend yield; Aluminium Dunkerque, France’s largest aluminium smelter, said it will cut production by 22% due to rising energy costs, while unions at other metallurgical firms have made similar plans for production curbs – Reuters reported

Technology, Media & Telecom

·     Media, Internet; DWAC shares tumbled early after Reuters reported the blank-check company did not get enough shareholder support for a one-year extension to complete its merger with Donald Trump’s social media company; NXST was upgraded to Buy and raise tgt to $246 from $181 at Rosenblatt saying they see a "surprising opportunity" in mix-driven ad resilience, hedges to cord-cutting and new revenues from next-gen transmission tech; OUT will replace FOSL in the S&P SmallCap 600

·     Semiconductors: AMD will replace DD in the S&P 100; in memory, for MU, Wells Fargo noted small Taiwan-based DRAM provider Nanya (~3% market share), reported August revenue at NT$ 3,419 million (~$115M at avg. FX rate), which represents a 22.2% m/m decline and -58.4% y/y – says they highlight this as an incremental weak DRAM data point; the SIA monthly data in July followed up a weaker June with another softer month. Specifically, July semi revs of $44.5B came in below Deutsche Bank ($46.7B) and below typical July seasonality (total revs -11% m/m vs. 10-yr avg -7% m/m) with a below seasonal decrease in ASPs (-4% m/m vs. 10-yr avg -1% m/m). The U.S. Department of Commerce released its plan for implementing its $50 billion program to subsidize domestic chip manufacturing and expand research early on Tuesday.

·     Software, Hardware, Components & Services; ADT rises as announces partnership with State Farm which will invest $1.2 billion in ADT at $9.00 per share, acquiring approximately 15% of the company, invest up to $300 million in an opportunity fund while GOOGL commits an incremental $150 million into a success fund; CIEN downgraded from Overweight to Neutral at JPMorgan and cut tgt to $45 from $62 despite the -13% decline in the shares over the last 2 trading days, following F3Q results which leaves investors with the combination of stretched targets for FY23; ECOM to be acquired for $23.10 per share by CommerceHub; cash price represents a premium of ~57% over the company’s Sep. 2 closing stock price https://bit.ly/3AQaWaP