Mid-Morning Look

Friday, April 03, 2020

U.S. equities fade off early gains, paring some of yesterday’s strong advance as investors are reminded of the global impact from the economic shutdown the U.S. is dealing with after non-farm payrolls plunged by a far more than forecast 701K in March (vs. estimate decline of -100K jobs). At the same time, oil remains a top story, with OPEC+ scheduling a virtual meeting for Monday and Russia reportedly willing to cut production if the U.S. and Saudis join following President Trump’s mediation over the last week (oil rises further after jumping 24% Thursday). But the rising number of cases and deaths, and the extreme social distancing measures being taken to prevent further outbreak contagion remains the key market driver (over 1 million global cases and 245K U.S. cases) amid restaurant, retail, sports venue closures impact millions of working Americans (over 10M have filed for first time unemployment over the last 2-weeks). ON a positive note, the governments Small Business Loan plan went into action today, with Bank America CEO noting on CNBC that it has already received over 10,000 applications for the relief act to help small business stay afloat.

Economic Data

·     Monthly jobs data worse than expected (but still not totally surprising given the number of jobless claims the last 2-weeks topping 10M). Nonfarm payrolls for March dropped -701K, well above the -100K estimate (Nonfarm payrolls, net revisions, -57k from prior two months), while private payrolls fell -713K vs. est. -132K and manufacturing jobs fell -18K vs. est. -10K. The unemployment rate spiked to 4.4% from 3.5% last month, while wages rose 0.4% vs. est. 0.2%. The participation rate fell to 62.7% vs. prior 63.4%

·     U.S. Markit services index was revised up to 39.8 in the final March print versus the 39.1 preliminary reading, but down -9.6 points from the 49.4 in February (vs. 55.3 a year ago). This marked a new record low and is a second straight month in contraction. The new business index dropped to 40 from 50.2 previously

·     The ISM Non-Manufacturing index for March falls to 52.5 but above the est. 43.0 (down from 57.3 reading last month); Employment fell to 47.0 vs 55.6 MoM (the biggest drop since Nov. 2008) while prices paid only dipped to 50.0 vs 50.8 and backlog of orders rose to 55.0 vs 53.2

·     The IHS Markit euro-zone services PMI in March slumped to a reading of 26.4 from 52.6 in February, the worst-ever reading in the history of the series, and the final reading was worse than the flash reading of 28.4. Italy services PMI fell to 17.4 in March, plunging from 52.1 in February

Sector Movers Today

·     E&P sector; CVE announced a further $150M reduction to its mid-point 2020 capital spending program to $800M, and the suspension of its common share dividend in order to protect its balance sheet; XOG lowered its planned 2020 upstream capex budget by 42% to $250M-$300M and cut its 2020 cash G&A budget by 18% to $40M-$50M; in research, Mizuho late to the part as downgraded COP, OXY, MRO, OVV, CLR, MUR to neutral and upgraded XEC; OVV announces plans to further reduce Q2 capital spending by an additional $200M, bringing total capital reductions in the quarter to $500M

·     Healthcare services and providers; CI is working with Buoy Health to provide an early intervention screening tool to help customers and members understand their personal risks for COVID-19; IQV cuts Q1 EPS guidance to $1.46-$1.51 from $1.59-$1.65 (est. $1.59) and cuts Q1 revenue view to $2.71B-$2.74B from $2.79B-$2.84B (est. $2.81B); BDX and BioGX say the FDA has granted Emergency Use Authorization for a new diagnostic test that will enable hospitals to screen for coronavirus on site and get results in under three hours

·     Internet; TWTR upgraded to buy from neutral at Goldman Sachs as believes increasing users’ numbers will create future opportunities that TWTR will be able to monetize better as it invests in ad technology through the crisis; AKAM upgraded to Outperform at Raymond James with the core CDN business likely a direct COVID beneficiary with increased web traffic in a WFH environment, and the expansive opportunity in cloud security; CHWY reported a strong fourth quarter, highlighted by ~35% normalized revenue growth driven by 10% normalized revenue/ customer growth and strong Autoship growth. EBITDA margins also expanded ~470 bps YoY

·     Exchanges/Services; Citigroup raised the rating on CBOE, ICE to buy and NDAQ to neutral saying model updates reinforce the high quality nature of the sector characterized by secure competitive/strategic positioning, high margins, cash generation, strong balance sheets and related durability; MKTX posted strong 1Q20 trading volumes as a meaningfully higher volatility environment benefited total industry volumes and the firm’s market share/in total, MarketAxess’ average daily volumes (ADV) expanded 26% y/y organically

·     Restaurants; CAKE said it expects Q1 comparable restaurant sales to be down approximately (-13%) while QTD comparable sales through February were up 3% before a March drop of approximately (-46%) after the virus impact led to store shutdown; PLAY Q4 sales and Ebitda topped views while temporarily shut down all units on March 20, was downgraded at BMO Capital to market perform and Reuters reported the company is in talks with private equity firms about a potential stake sale; SHAK was downgraded at Credit Suisse saying it is facing an outsized near-term risk from the impact of COVID-19 with its exposure to high-traffic, tourist areas

·     Aerospace & Defense; Macy’s was dropped from the S&P today to be replaced by Carrier Global (CARR) which is being spun out of United Technologies now that UTX merges with Raytheon and changes its name to Raytheon Technologies (RTX) – Otis Worldwide (OTIS) to replace Raytheon in the S&P 500 index; Airbus is studying a sharp cut in output of its top-selling A320 plane series amid an industry-wide slowdown triggered by the coronavirus crisis, Reuters reported

Stock GAINERS

·     FATE +9%; shares rose after the company signed a global collaboration and option agreement with JNJ’s unit Janssen Biotech aimed at developing cell therapies for cancer

·     LVGO +6%; Canaccord noted co announced Kaiser Permanente has added its tele-behavioral health service MyStrength to most of its health plan’s regions

·     STZ ; reported Q1 EPS that topped views ($2.06 vs. est. $1.65) on better sales of $1.9B (up 5.7% YoY) but issues no guidance for the year due to COVID-19 impact

·     TSLA +16%; after issuing strong delivery production update overnight as reported Q1 deliveries 88,400, -21% QoQ but above est. 78,052 as 1Q production dipped -2.1% QoQ to 102,672 vehicles

Stock LAGGARDS

·     COOP -27%; after Bloomberg reported that, though no final decision has been released, regulators are considering delaying the establishment of a program that would enable the Fed to provide liquidity to mortgage servicers

·     LYV -10%; extends recent weakness as leisure, ticket names sliding

·     MIC -19%; as withdrew its guidance and suspending its quarterly cash dividend which will result in retaining ~$260M through 2020; also drew $599M on its credit facility

·     RL -3%; downgraded along with PVH in the retail sector at RBC Capital

·     VMC -5%; as building materials give up recent rally