Mid-Morning Look

Monday, March 02, 2020

U.S. equities with a partial rebound initially after suffering the worst weekly decline since the 2008 financial crisis, as investors look to put money back to work, though Treasury prices surge once again, with yields falling to the lowest levels on record, including the 10-year nearing 1%. Stocks have since undergone a sharp market deceleration as tocks turned negative after the opening bounce. Fears remains prevalent for investors with the first two reported deaths in the U.S. on the coronavirus reported in Washington State this weekend, while several states now with new confirmed cases, including the first in New York. Also not helping, drastically weak China PMI data this weekend as the official manufacturing purchasing managers index tumbled to 35.7 in February from 50 in January and was below the lowered expectation of around 45. China’s nonmanufacturing PMI, also released on Saturday, sank to a record low of 29.6 in February from 54.1 in January. On a positive note, China’s Hubei had 196 new confirmed cases on Sunday, sharply down from 570 cases a day earlier and the lowest since Jan. 24. Transportation stock again getting hammered with fresh 52-week lows for many of the airline stocks (AAL), DAL, UAL) on slowing demand, dropped flights due to travel restrictions to specific countries on virus fears. Earnings results begin to slow, though a handful of big name retailers this week (TGT, KSS). Other market moving factors this week include: Super Tuesday election process with more than a dozen states holding voting, an OPEC meeting mid-week, and market hopes for FOMC intervention or possible worldwide coordinated action on rates to help stimulate economies amid the impact of the coronavirus (note many market strategists have changed view to include possible rate cut by Fed in March and April at this point) – follows dovish comments by Fed Chair Powell Friday and the ECB this morning.

Treasuries, Currencies and Commodities

·     In currency markets, the US dollar down about 1% vs. the euro, which rises to 1.132, best levels in about a month (and off 52-week lows on 2/20 of 1.0778) as the dollar extends recent pullback after hitting multi-year highs two weeks ago. Commodity prices actually higher led by a spike in gold prices back to the $1,600 an ounce level after last week’s pullback while oil prices also edging higher early to start ahead of OPEC meeting this week. Treasury market’s extend recent rally as Treasury yields fall to fresh record lows for the 10 and 30-year yield; the 10-year Treasury yield dropped as low as 1.029% overnight before paring losses to about 1.07% (down 8 bps), as the 30-year yield touched record low of 1.58% before paring losses and the 2-year yield hit lows of 0.7% before paring losses to 0.77% (still down over 13 bps)

Economic Data

·     Feb. Manufacturing PMI 50.7 (near lowest reading since August 2019) vs. Flash Reading 50.8 and falls from 51.9 in January (year ago 53 reading) ; new orders fall to 50.4 vs 52.4 in January, the lowest reading since May 2019

·     ISM Manufacturing for February falls to 50.1 from 50.9 prior and was slightly below the est. 50.5 as new orders fell to 49.8 vs 52.0 MoM, employment rose to 46.9 vs 46.6 from January, inventories fell to 46.5 vs 48.8 MoM and prices paid fell to 45.9 vs 53.3

·     Construction Spending for January rose 1.8%, topping the 0.6% estimate while December was revised to 0.2% gain from -0.2% (the increase of 1.8% largest since Feb. 2018); private construction rose 1.5% in January and private residential construction rose 2.1%

Sector Movers Today

·     Casino & Leisure movers; cruise operators (CCL, NCLH, RCL) slide early after Japanese cruise operator Luminous Cruise files for bankruptcy after being hit by cancellations amid concerns about the coronavirus outbreak; casinos active (WYNN, LVS, MLCO) after casinos in Macau reported a record drop in gaming revenue due to casino closures on virus fears as gross gaming revenue was 3.1 billion patacas ($386.5 million) in February, down 87.8% YoY

·     Semiconductors; NXPI reduced the 1Q20 revenue guidance by $100M at the midpoint due to impact from the Novel Coronavirus outbreak; PLXS warned that Q2 revs could fall below its guidance range because of the coronavirus outbreak (sees neg impact by about $40M); WDC, MU, and STX all upgraded to outperform at Baird and raise tgts noting the positive outlook for pricing in DRAM/NAND flash memory remains unchanged in spite of the current demand weakness in China

·     Retailers; BURBY was upgraded to buy from underperform noting shares are down 30% since mid-January, twice as much as its sector peers. However, while the coronavirus spread is a short-term concern across the luxury-goods sector, Burberry’s share price doesn’t reflect the company’s underlying value; COST, BJ, WMT shares active as weekend traffic was reportedly high in various parts of the country as consumers stockpiled supplies in anticipation of a wider outbreak of the coronavirus.

·     Hardware & Component news; AAPL was upgraded to outperform and $320 tgt at Oppenheimer as believe Apple products and services will prove more resilient than competitive products in uncertain times/additionally, Apple’s strong balance sheet offers the company tremendous flexibility to keep the supply chain nimble as well as continuing to support its capital return plan; NOK said its Board of Directors has appointed Pekka Lundmark as President and CEO of Nokia, who is expected to start in his new role on September 1, 2020

Stock GAINERS

·     APDN +44%; after saying design of four DNA vaccine candidates for coronavirus will be produced for animal testing via co’s proprietary manufacturing systems

·     CLX +5%; shares remain active on reports of consumers stocking up on antibacterial products

·     CODX +15%; after announcing that its coronavirus virus test kits are now available for purchase by CLIA-certified laboratories who have yet to complete their Emergency Use Authorization submissions with the FDA

·     COST +6%; shares active as weekend traffic was reportedly high in various parts of the country as consumers stockpiled supplies in anticipation of a wider outbreak of the coronavirus

·     DXR +68%; after the company said it is actively engaging both hospitals and government agencies in the military and civilian sectors regarding the use of its technology to help guide fluid management of critically ill patients with Covid-19.

·     FTSV +61%; to be acquired by GILD for $4.9 billion in cash, with Gilead paying $95.50 for each share of Forty Seven, representing a premium of 64.7% https://on.mktw.net/2I8s80v

·     JD +6%; Q1 guide better than feared which overshadows the lower than expected flow-through on the Q4 beat

·     KPTI +43%; as Phase III clinical trial, BOSTON met the primary endpoint of a statistically significant improvement in progression-free survival (PFS)

·     MINI +7%; as WSC agreed to buy MINI in a stock swap valued at about $1.86 billion; WillScot said it will issue 2.405 shares, valued at about $42.18 based on Friday’s closing price of $17.54, for each share of Mobile Mini. https://on.mktw.net/2wVf6kq

·     TWTR +7%; after reports Paul Singer’s Elliott Management has taken a sizable stake in the company and plans to push for changes, including replacing CEO Jack Dorsey, while Elliott has nominated four directors to Twitter’s board https://on.mktw.net/3aoMC17

Stock LAGGARDS

·     AAL -6%; as airlines continue to fall to 523-week lows given the impact of the virus on travel

·     BAC -3%; banks continue to tumble given the ongoing plunge in Treasury yields, with 52-week lows for WFC, ZION, in the S&P 500 index

·     CCL -3%; after Japanese cruise operator Luminous Cruise files for bankruptcy after being hit by cancellations amid concerns about the coronavirus outbreak (weighs on beaten up cruise lines)

·     NVAX -21%; filed to sell up to $150M in shares

·     MGM -3%; casinos in Macau reported a record drop in gaming revenue due to casino closures on virus fears as gross gaming revenue was 3.1 billion patacas ($386.5 million) in February, down 87.8% YoY

·     PODD -7%; after saying that it plans to pause the pivotal study of the Omnipod Horizon™ Automated Glucose Control System to correct a software anomaly