Closing Recap

Wednesday, September 07, 2022

Equity Market Recap

·     A big-time rally on Wall Street as the Nasdaq Composite snapped its 7-day losing streak, rising over 2% as markets finally followed thru to the upside, finishing just off the highs of the day. Outside of Energy, all other S&P sectors were broadly higher, paced by gains in defensives such as utilities, but also cyclical like financials and materials. Technology shares got a much-needed boost as the dollar finally eased after hitting another fresh 20-yr high and as Treasury yields dipped (10-yr to 3.25%). Energy was the lone laggard, seeing hefty losses for stocks after WTI crude hit lowest levels in 7-months, dropping below $82 per barrel while natural gas prices extended recent declines. Apple (AAPL) shares rallied nicely following its new product announcement event this afternoon. All eyes on central banks as the Bank of Canada boosted interest rates by 75-bps to a 14-year high, as expected, and said the policy rate would need to go higher still given the fight against raging inflation. The central bank, in a regular rate decision, increased its policy rate to 3.25% from 2.5%. Rate hike comes ahead of ECB meeting tomorrow (50 or 75 hike expected). Earlier today the Bank of Chile raised rates by 100 bps to 10.75% (expectations were 75 bps). The FOMC meeting is in two-weeks. A nice day overall for Bulls after seeing three consecutive weeks of selling pressure, but will it continue? Or will this just provide Bears another opportunity to “sell the bounce”? To this point over the last 3-weeks, every rally has been met with selling pressure. Will this time be different?

Economic Data:

·     July International Trade in Goods and Services showed a deficit of (-$70.7B) vs. (-$70.5B) consensus and -$80.9B prior (revised from -$79.6B). July exports were $259.3B, $0.5B more than in June. Imports were $329.9B, $9.7B less than in June. The July decrease in goods and services deficit reflected a decrease in the goods deficit of $8.2B to $91.1B and an increase in the services surplus of $2.1B to $20.4B.

·     China’s export growth slowed more than expected in August and imports stagnated, hit by Covid lockdowns and a property slump. Exports in US dollar terms expanded 7.1% last month from a year earlier, the slowest pace since April and imports grew just 0.3%, leaving a trade surplus of $79.4 billion last month. China’s foreign exchange reserves fell more than expected in August, official data showed on Wednesday, as the dollar climbed against other major currencies.

Commodities

·     A big drop in oil today, with WTI crude dropping over 5% to lows below $82 (7-month lows) and now more than 33%, or roughly $40 from its $122 peak in early June. WTI crude declined -$4.94 or 5.69% to settle at $81.94 per barrel. Prices were briefly supported this morning after Russia President Putin threatened to cut supply if price caps on the country’s exports are introduced, but prices dumped with China’s zero-Covid tolerance now affecting nearly 300 million people and close to 25% of GDP and after downbeat Chinese trade data. Putin’s comments follow the Group of Seven agreeing to back an oil price cap for global purchases of Russian oil. For inventory data, U.S. crude stockpiles are expected to have fallen for a fourth consecutive week, declining by an estimated 733,000 barrels in the week to Sept. 2, a preliminary Reuters poll showed. U.S. natural gas futures fell about 4% to a fresh four-week low; Front-month gas futures fell 30.3c, or 3.7%, to settle at $7.842 per million British thermal units (MMBtu), their lowest close since Aug. 9 for a second day in a row. Gold gains $14.90 or 0.9% to settle at $1,727.80 an ounce, boosted by a pullback in the dollar and Treasury yields. Spot silver rose 1.9% to $18.40 per ounce.

Currencies & Treasuries

·     The U.S. dollar index (DXY) touched highs of 110.79 (20-year highs) and extended gains vs. the Japanese yen to highest level since the late 1990’s (moved above 145 level) this morning – but the greenback saw profit taking mid-afternoon (DXY dropped below 110) ahead of tomorrow’s European Central Bank (ECB) policy meeting where a rate hike between 50-75 bps is widely anticipated. The British Pound fell below $1.1413, moving it to the weakest level since 1985. Recent U.S. economic data has likely reinforced the view that the Federal Reserve will continue to tighten aggressively, which has pushed the dollar and Treasury yields higher.

·     Treasury yields finish lower, with the 10-year yield falling to 3.26% and the 2-yr yield pulled back a day after closing at its highest level in 15-years (above 3.5%). The recent run up in rates have been taken as a buying opportunity as a mounting energy crisis and the threat of significant slowing in growth are seen limiting central banks tightening actions down the road.

Sector News Breakdown

Consumer

·     Retailers: Piper said preliminary checks for Labor Day weekend suggest sales of both Furniture and Mattresses were better than expected (TPX, SNBR, PRPL) – falling in a broad range of 0% to +15%. This is a stark contrast to Memorial Day weekend when expectations were high, and sales were roughly -10%; PTON said the U.S. consumer safety regulator’s staff intends to recommend the agency that civil monetary penalties should be imposed on Co over recall of treadmills last year; GIII lowered its FY23 guidance citing higher supply-chain costs and the effects of inflationary pressures as sees sales $3.15B, down from prior view $3.24B and net income between $182M-$187M vs. prior view $205M-$215M; ASO mixed Q2 as EPS beat ($2.30 vs. est. $2.08) but sales fell -6% y/y and miss ($1.69B vs. est. $1.71B) on slightly weaker margins

·     Auto sector: CVNA reports 26% exposure to the company, equal to about 3.1 million shares, including 2.36 million Class A shares issuable upon exercise of the "Tranche 1 Warrant" which became exercisable on Sept. 1, according to an amended 13D filing, Bloomberg reported; CHPT was initiated at Outperform and $22 tgt at Credit Suisse as it benefits from a capital-light growth model, first mover advantage with integrated solutions, and an attractive valuation

·     Consumer Staples: NWL cuts FY22 EPS view to $1.56-$1.70 from $1.79-$1.86 (est. $1.84) and cuts FY22 revenue view to $9.37B-$9.58B from $9.76B-$9.98B (est. $9.90B) as anticipates higher impact from retailer inventory rebalancing and said experienced a significantly greater than expected pullback in retailer orders and continued inflationary pressures on consumer; shares down -1.7%; KHC said it continues to expect 2022 organic net sales growth in the high single digits versus the prior year period and 2022 adjusted EBITDA to be in the range of $5.8B-$6B; FRPT reiterates full year guidance and clarifies cadence of second half adjusted EBITDA

·     Restaurants; MCD tgt raised to $270 from $263 at Piper after August channel checks, highlighting McDonald’s defensive positioning and outperformance vs. peers; YUM remains number 1 pick, but WING moved up to number 2 pick in Restaurants at Cowen replacing DRI and SG number 3 while bottom two names are SHAK and JACK saying proprietary survey data prompts caution by suggesting middle income consumer trade-down is benefiting quick service sales

Energy

·     Energy stock movers: broad weakness in the energy sector as oil prices hit 6-month lows below $85 per barrel as fears over global recessions reignite and concerns grow over China’s falling demand partially caused by anti-epidemic measures; Credit rating agency Fitch on Tuesday said that the halting of the Nord Stream 1 pipeline has increased the likelihood of a recession in the euro zone. In stock news: SLB says international oil and gas activity growth could outpace North America going forward; SM raised the quarterly dividend to 15c a share from 1c and announced a share repurchase program of up to $500 million

·     Utilities & Solar; solar space among biggest moves to upside (ENPH, SPWR, RUN, SEDG), benefitting from weaker energy stocks; while defensive utility stocks (EIX ) benefit from as electricity use in California surged to all-time high on Tuesday; PCG had warned 525,000 homes and businesses may lose power per Bloomberg

Financials

·     Bank & Insurance movers; a big day for financial stocks and services, with strength across the board despite ongoing recession fears and Treasury yields pulling back off recent highs as investors looked to buy beaten up sectors; AIG said it was looking to raise up to $1.92 billion through the initial public offering of its unit CoreBridge Financial Inc.; TW reports Total August trading volume of $23.4 trillion with 13.0% yoy increase

·     Bitcoin news; SBNY released a mid-quarter update outlining current trends for 3Q22 noting spot deposits have declined by $1.64 billion driven by outflows in digital asset banking totaling $4.27 billion – but core business deposits excluding the digital asset banking team have increased by $2.64 billion 3QTD; MARA said produced 184 Bitcoin in August and total bitcoin holdings increased to 10,311 BTC with a fair market value of $206.7 mln as of August 31; RIOT said in August 2022, Riot produced 374 Bitcoin, a decrease of approximately 15% as compared to August 2021 production of 441 Bitcoin; as of August 31, 2022, riot held approximately 6,720 BTC, all produced by company’s self-mining operations

Healthcare

·     Pharma movers: AZN and IONS presented detailed results from a 35-week interim analysis of a phase 3 trial of eplontersen, which had met its main goal, in patients with hereditary transthyretin-mediated amyloid polyneuropathy (ATTRv-PN); PRAX said it plans to start its PRAX-222 clinical study for the treatment of pediatric patients with early-seizure-onset SCN2A developmental and epileptic encephalopathy; RHHBY is acquiring privately held Good Therapeutics to strengthen its immuno-oncology portfolio – paying $250M upfront for Good’s shares and additional payments based on milestones

·     Biotech movers: BIVI said its drug candidate to treat Alzheimer’s disease (NE3107) showed improvement in patient’s conditions, and abilities on an assessment scale in mid-stage trial; MCRB announces completion of rolling BLA submission to FDA for investigational microbiome therapeutic SER-109 for recurrent C. Difficile infection; GILD rises as under the Affordable Care Act, most health insurance plans must cover certain recommended preventive services, including HIV testing for people aged 15-65 and HIV PrEP for adults who are at high risk of getting HIV.

·     MedTech Equipment; GKOS announces positive topline outcomes for both phase 3 pivotal trials of iDose TR, achieving primary efficacy endpoints and demonstrating favorable tolerability and safety profiles; EW positive catalyst watch opened at Citigroup saying at the TCT meeting (September 16-19, Boston) we anticipate a slew of TAVR, LAAC, TMTT, and renal denervation data, plus EW’s and BSX’s analyst meetings.

·     Healthcare Services; CDMO strong quarter of bookings ($41M vs RBC $37M; +78% YoY) that helped contribute to the fourth consecutive increase in the company’s backlog, reaffirmed FY23 revenue guidance of $140-145M (consensus $143M); HQY FQ2 revenue and EBITDA were 1% and 4% above consensus, respectively; mgmt also raised its FY guidance for both by ~1% driven primarily by higher expected custodial yields; UNH and WMT announce a 10-year healthcare collaboration to deliver high-quality, affordable health services focused on improving health outcomes and patient experience. The collaboration is set to begin with 15 Walmart health locations in FL and GA in 2023

Industrials & Materials

·     Aerospace, Industrial, Materials, & Machinery; Weaker-than-expected economic data from top metals consumer China weighed early on metal stocks with shares of AA, BHP, CENX, FCX and others dropping initially, but paring losses as stocks rebounded. Gold miners saw a rebound along with gold prices (NEM, AEM, GOLD)

·     Transports; the sector underperformed led behind weakness in FDX, CAR and MATX initially; UAL raised its Q3 revenue growth outlook, citing continued "strong" demand exiting a "robust" summer; now expects revenue to be about 12% above the same period in pre-pandemic 2019, compared with previous growth guidance of about 11%; sees capacity to be down 10% to 11%, compared with previous expectations of down about 11%; ODFL reported Aug revenue per day increased 14.5% y/y due to an increase in LTL revenue per hundredweight that was slightly offset by a 0.9% decrease in LTL tons per day; AAL CEO says we continue to see revenue and expense and margins tracking as we expected

Technology, Media & Telecom

·     Apple (AAPL) updates at new iPhone event today: 1) Announced iPhone 14 and iPhone 14 Plus which has 6.7-inch display and will have A15 Bionic chip; says iphone 14 has new 12-megapixel main camera; comes with new autofocus for front camera; says new iphone to have emergency SOS via satellite; iPhone 14 priced at $799 and Plus at $899; says iphone 14 pro comes with 48 MP camera; says iphone 14 pro max starts at $1099 and the Pro at $999. 2) Announced Apple Watch Series 8 as expected with an added temperature sensor and comes with Crash Detection feature; Says Series 8 available in four standard colors and three stainless steel finishes; says Watch Series 8 priced at $399 for GPS edition and $499 for GPS + Cellular edition; its Ultra watch prices at $799. 3) Announces new AirPods Pro; says new AirPods pro to have personalized spatial audio with touch control; there is an added speaker to the bottom of case and starts at $249.

·     Media, Internet; NFLX upgrade from Underperform to Neutral w/ $230 PT up from $170 at Macquarie as estimate Netflix can generate as much as $3.6B in ad revenue in UCAN in 2025 and globally model an ad revenue opportunity of $8.5B or an incremental $2.1B in total revenue in 2025E, if Netflix were to ramp up its international ad sales efforts that quickly; LGF downgraded from Outperform to Peer Perform as now attribute a fair value range of $6/s-$15/s based on 12x CY23E EV/OIBDA and 16x, respectively – notes stock pressured due to increased investment activity, primarily at Starz, along with industry wide concerns related to slower streaming growth; PINS upgraded to Outperform and $28 tgt at Wolfe and Guggenheim said August global Pinterest Ads Manager shows a m/m increase in audience reach while Apptopia third-party app download data reflects a strong trailing 90-day trend

·     Software movers: COUP Q2 revenue 18% Y/Y to $211M, beating consensus by $7M as the company maintained its 1Q growth rate; subscription revenue grew 23% Y/Y to $193M on incremental subscription revenue of $14M and calculated billings of $235M (+21% Y/Y) were $15M ahead of consensus, while raising guidance; MKM downgraded EA to Neutral from Buy based on lowered growth outlook for FY24 and the likelihood for further margin compression; PATH tumbles after $2M ARR beat was its smallest beat in six quarters as a public company. ARR of $1.04B grew 44% Y/Y (+45% in constant currency), provided disappointing guidance on full-year metrics, attributed to increasing FX headwinds, the macro environment, and repositioning (sees FY23 revenue $1.00B-$1.01B vs. est. $1.09B); GWRE delivered a mixed F4Q with a solid topline beat offset by muted guide + commentary on softened demand

·     Telecom movers; AVYA announces restructuring, including job cuts, to reduce costs saying the cost saving plan will reduce more than $250M in annual expenses (vs. prior forecast of between $225M-$250M) and expects to incur about $23M-$26M in pre-tax restructuring charges; TMUS said it had agreed to sell its wireline business to CCOI in a deal that would also see T-Mobile provide some services to Cogent for a fee; GSAT said to partner with AAPL for a feature on the company’s flagship iPhone 14 series that will allow users to call for help during an emergency.