Closing Recap

Tuesday, April 18, 2023

Index	Up/Down	%	Last
DJ Industrials	-10.65	0.03%	33,976
S&P 500	3.44	0.08%	4,154
Nasdaq	-4.31	0.04%	12,153
Russell 2000	-7.25	0.40%	1,795

 

 

 

 

 

 

 

 

 

Equity Market Recap

·     U.S. stocks struggled for direction most of the day, opening higher before pulling back as markets assessed mixed big-bank earnings (BAC, BK better, while GS disappoints), while hawkish comments from Federal Reserve officials (Bullard) spurred speculations for more interest-rate hikes again. Despite stocks continuing to climb the “wall of worry” with major averages back near the best levels of 2023 this morning, sentiment remains overly bearish with lots of money on the sidelines. Bank America noted that after its Global Fund Manager Survey, they found it was most bearish of ’23 as credit crunch causes double dip in global growth & highest bond allocation since March ’09. Said the Bull & Bear Indicator is at 2.3 so bear sentiment still contrarian supportive for risk assets (or continued “pain trade” up). Survey showed on Macro: net 63% expect weaker global growth (reversing 4 months of improvement) & net 84% say CPI heading lower.

·     Overnight, China’s GDP print better, led by Consumer/Travel and thus a muted read-thru for base metals. In an interview posted by Reuters Tuesday, St. Louis Federal Reserve President James Bullard reiterated his call for higher U.S. interest rates to combat inflation and said he doesn’t see a recession taking place anytime soon. Next up, earnings from NFLX in tech tonight, and a handful of banking results (FULT, HWC, MCB, WAL) – tomorrow morning ALLY, SYF, USB, TRV, MS, CFG in the financial space. Strength today in energy stocks, consumer discretionary and homebuilders (52-week highs PHM, TPH, MTH), while chemicals fell.

·     Debt ceiling remains a concern: Republicans in the U.S. House held discussions over Speaker Kevin McCarthy’s plans for raising the federal debt limit and cutting future government spending. On Monday, McCarthy outlined a plan for extending the government’s borrowing authority through sometime next year. He said it would have to be coupled with rolling back next year’s spending to 2022 levels, followed by a decade of only 1% annual increases.

 

Economic Data:

·     March Housing Starts fell (-0.8%) to 1.42M unit rate vs. estimate 1.4M and vs. Feb +7.3% at 1.432M units; single-family starts rose +2.7% to 861K unit rate; multifamily -5.9% to 559K; March housing permits fell -8.8% to 1.413M unit rate vs. consensus 1.450M and Feb 1.55M unit rate.

·     China’s economy grew in Q1 as gross domestic product (GDP) reported at +4.5% y/y in the first three months of the year, data from the National Bureau of Statistics (NBS) showed, faster than the 2.9% in Q4 and topping forecasts for a 4.0% expansion: the strongest growth in a year. China Q1 industrial output 3.9% vs 4.3% est., retail sales 10.6% vs 7.5% estimates.

·     U.S. February net overall capital flow +$28.0B vs +$183.2B in Jan (prev +183.1 bln); Feb net long-term flow (ex-swaps/other) +$71.0b vs. +$31.9B in January. China’s U.S. Treasury securities holdings %849B in Feb vs $859 bln in January.

 

Commodities, Currencies & Treasuries

·     Oil prices finished little changed, with WTI crude up $0.03 at $80.86 per barrel after briefly dipping below $80 earlier in the session. A weaker dollar may be driving some of oil’s gains, while markets await weekly inventory data as trade group API releases its report on inventories at 4:30 pm ET, followed by the official EIA data tomorrow morning. Stronger China GDP data also helped oil. Natural gas prices jump 4% to finish at $2.366/MMBtu, the highest closing price in over a month; prices have risen by 18% over the past three sessions.

·     June gold settles +$12.70/oz, or +0.63%, to $2,019.70, a day after dipping below $2,000 per ounce as the dollar pared some recent (after hitting 1-year lows late last week). Gold prices recently hit $2,055.30 an ounce, its 2^nd highest close ever ($2,069.40 in Aug ’20). May silver settled at $25.26 an ounce, up 18 cents, or 0.7%. June palladium rose $82.40, or 5.3%, to $1,642.90 an ounce, while July platinum added $37.70, or 3.6%, at $1,097.30 an ounce.

·     The U.S. dollar slipped after rising over 1% the last 2-days off 1-year lows, with a lot of focus recently about the dollar losing its dominance combined with efforts in China and beyond to ease dependence on the buck. After hitting its best level in more than two decades in late September, the ICE U.S. Dollar Index (DXY) has fallen more than 10% and euro at 1-yr lows vs. euro at 1.10.

 

 

Macro	Up/Down	Last
WTI Crude	0.03	80.86
Brent	0.01	84.77
Gold	12.70	2,019.70
EUR/USD	0.0045	1.0971
JPY/USD	-0.41	134.05
10-Year Note	-0.013	3.578%

 

 

Sector News Breakdown

Consumer

Retailers, Consumer Staples & Restaurants:

·     In restaurants: BJRI upgraded to Outperform at Wedbush and increased their already above-consensus ’23 estimates saying checks point to Q1 comp-store sales growth in line with-to-above consensus. MCD touched new all-time highs, rises for the 16th time in last 18 days (up 1-%YTD) ahead of earnings next week (4/25).

·     In Beverages: Bernstein downgraded Carlsberg (CABGY) to MP and upgraded Rémy Cointreau (REMYY) to OP on the back of recent share price moves. Notes in 1Q23, the European Beverages sector outperformed the market led by Carlsberg and Campari. Over the last 12months, Carlsberg has been the outperformer (up 25%) and Rémy Cointreau the weakest (down-12%).

·     Deutsche Bank provides Apparel Retail Mid-Quarter Update; Adjusting Estimates higher on the back of their March Promo Watch and recent channel checks for: AEO, BBWI, GPS, and URBN. Numbers move down for FL and KSS and are unchanged for DBI, JWN, and M.

 

Autos & Leisure:

·     NIO, XPEV BYD among Chinese EV startups rolling out their latest and greatest electric vehicles (EVs) at the Shanghai Auto event; reports indicate LI may announce its long-awaited plan for EVs powered solely by batteries. The biennial Shanghai Auto Show runs from April 18-27. Note TSLA earnings coming up later this week.

 

Energy

·     In refiners: Wells Fargo said they raised the caution flag on the refining sector saying rapidly contracting diesel/jet cracks restrict the potential for near-term outperformance. They lowered valuation multiples for all refiners and downgraded VLO and MPC to EW from OW.

·     E&P and equipment: Morgan Stanley said the market is signaling downside shale market risk, while companies maintain that NT risks are limited. They shift their ratings more in favor of int’l > U.S. shale exposure as they upgrade NBR to Equal Weight and downgrade HP to Underweight & LBRT cut to Equal Weight. Tilt ratings in favor of more global OFSE companies, and score service companies on revisions, balance sheet quality, and valuation as highlight TS as Top Pick. HAL also screens well vs. peers and prefer ACDC and PTEN among SMID caps.

·     In Solar and Alt Energy: Keybanc upgraded RUN and downgraded FSLR, PLUG: for RUNupgraded to Overweight based on attractive valuation; encouraging data from CA; view that residential solar companies have sufficient pricing power to execute in the higher interest rate environment. Downgraded FSLR to Sector Weight following the recent outperformance as shares are up ~40% YTD and ~157% y/y (vs. the NEX down ~9% and ~24%, respectively) on the back of significant tailwinds created by the passage of the IRA. PLUG downgraded to Sector Weight given the series of headwinds the Company faces in the near term.

 

Financials

Banks, Brokers, Asset Managers:

·     More bank earnings today as large caps wrapping up: 1) Dow component GS posted lower Q1 profit as net earnings of $3.09B compared with $3.83B y/y while earnings of $8.79 topped $8.10 estimate; said investment bank revs $12.2B miss ests $12.79B while Q1 deposits of $375B compared with $387B a year earlier. BAC Q1 EPS of $0.94 topped $0.82 estimate as NII of $14.4B tops views $14.34B; Q1 Trading revenue excluding DVA $5.05 billion, vs. est. $4.46 billion; FICC trading revenue excluding DVA $3.43B vs. est. $2.62B; equities trading revenue excluding DVA $1.62B vs. est. $1.8B; Provision for credit losses $931M. CBSH Q1 EPS $0.95 vs. est. $0.92; Q1 revs $389.24M vs. est. $388.83M; Q1 net interest income was $251.6M, a $3M decrease q/q.

·     In trust banks: a day after the group got crushed on weaker STT results and commentary, BK shares bounce after Q1 profit beats estimates with EPS $1.13 vs. est. $1.12 and in-line revs of $4.4B – said at qtr-end aum of $1.9 trillion, decreased 16%, primarily market impact. Reminder NTRS reports earnings next week in Trust banks.

·     In Consumer Finance: Citigroup previews earnings saying they expect the sector to report generally good results with few changes to the full-year outlooks. Said the higher loan growth shown in credit card issuer monthly data suggests higher reserve builds as CECL accounting causes the generally long-term positive of higher loan balances to be a near-term negative. Said they feel best about DFS and worst on COF

·     Earnings results tonight in financials/banking sector: EQBK, FHN, FULT, HWC, MCB, UCBI, WALIn research: MTB upgraded to Buy from Hold at Argus as believe that the company assuaged concerns following failure of Silicon Valley Bank and deposits for mid-sized banks with its 1Q results. BAM downgraded to underperform from MP at KBW saying at 21x BAM trades at a premium to FRE-centric large-cap peers ARES (18.5x) and BX (20.6x).

·     In Alt managers: BX shares rallied; Morgan Stanley noted the S&P Dow Jones announced changes to their Share Class Eligibility Rules for the S&P indices. The results of the review state that all companies with multiple share class structures are now considered eligible candidates for addition to the S&P Composite 1500 and its component indices provided they meet other eligibility criteria. As a result, Blackstone (BX) is now newly eligible for the S&P 500 index, and is among the largest Mega Cap names that currently pass all other S&P 500 index eligibility criteria.

 

Insurance & Services:

·     In P&C 1Q Preview, Citigroup upgraded CB and BRO to Buy heading into P&C prints, saying they continue to favor P&C Brokers for their relative lack of balance sheet risk vs. underwriters. For Commercial Lines, they point to property pricing firmness and reserve adequacy and for Personal Lines, are incrementally cautious on auto given the persistence of volatility in loss trends.

·     In Services: LZ was upgraded to Market Outperform from Market Perform at JMP Securities with $14 tgt (51% upside saying LegalZoom has fully rolled out "free" in its marketing, which they believe can accelerate share gains through 2023; OPEN said to cut workforce 22%.

·     Catastrophe: CINF pre-announces Q1, saying it expects $235mn in net catastrophe losses in 1Q23 (12.8% loss ratio impact) sees estimated losses, expenses from catastrophe-related claims to bring Q1 property casualty combined ratio to about 99% to 103%.

 

Healthcare

Biotech & Pharma:

·     JNJ Q1 adj EPS $2.68 tops consensus $2.51; Q1 revenue $24.7B vs. est. $23.67B; raises FY23 adj EPS to $10.60-$10.70 from $10.45-$10.65 (est. $10.51) and boosts FY23 revenue view to $97.9B-$98.9B from $96.9B-$97.9B (est. $97.71B); also raises dividend.

·     BLU shares surge after GSK to acquire the company for US $14.75/share in cash representing total equity value of $2B. ~103% premium to last.

·     INVA said a panel of U.S. FDA advisers unanimously voted 12-0 in favor of its experimental antibiotic in the treatment of serious bacterial infection.

·     OPGN requests U.S. FDA for "De Novo" clearance pathway for its investigational testing device to diagnose urinary tract infection.

·     RLAY shares tumbled after early study data for its RLY-2608 product candidate support initial clinical proof of mechanism, showing the drug selectively targets multiple PIK3CA mutations.

 

Industrials & Materials

·     In transports: in truckers, JBHT reported 1Q EPS ($1.89 vs. $2.00) and intermodal revenue that missed estimates as ICS and Truck were as bad as expected, if not somewhat worse according to Citigroup saying this is a negative read for CHRW and TL complex (KNW, WERN). In airlines, LUV grounded all flights mid-morning due to computer issue.

·     In industrials: PLOW reported a wider than expected Q1 loss as revs fall and narrows FY23 adjusted EPS view to $1.55-$2.00 from $1.55-$2.45 and FY23 revenue view to $620M-$650M from $620M-$680M (est. $646.8M); EMR upgraded to Outperform from Peer Perform at Wolfe Research; TDCowen says FLS, ST, ABB, and XYL are their favorite earnings plays in diversified industrials, automation, and think the toughest setups are for CGNX, PH, and APH as think the major outcomes this Q will be quarterly beats on weakening orders, holds or only modest raises to FY guides which likely implies a weaker end of the year, and downward revisions. UBS reiterates their Sell rating on CAT as see increasing risk of a downcycle, and at a minimum, see minimal growth in 2024-25 as end mkt momentum flattens in parts of construction and oil & gas.

·     In Aerospace & Defense: LMT trades record highs after Q1 EPS beat $6.43 vs. est. $6.08 on higher sales while notes that supply-chain issues stemming from the pandemic are still hurting F-35 production volumes. BA shares, along with supplier SPR popped on Bloomberg headlines that it is still planning to boost 737 outputs despite glitch and doesn’t see changing l-t guidance.

·     In Metals & Mining: World steel association forecasts global steel demand to rise 2.3% to 1.822 bln tonnes in 2023 (vs previous forecast 1% rise). World Steel Association forecasts global steel demand to rise 1.7% to 1.854 bln tonnes in 2024. BMO Capital noted the U.S. spot HRC prices increased slightly over the last two weeks to $1,175/st (+68% YTD). Looking ahead, with scrap prices currently expected to decline in May, other raw material/input prices decreasing more broadly, coupled with lead times starting to ease and expectations for increased supply availability in May, all together in our view increasingly imply spot HRC prices have likely peaked.

·     In packaging: RBC Capital previews the sector ahead of earnings, which includes modest 1Q EPS downward changes to BALL and CCK, and lower tgts for PTVE, BALL, and CCK as believe GPK has good price/cost visibility, resilient end markets, LT organic growth confidence (1-2%), no material market capacity additions in 2023-24, and strong FCF generation to invest.

·     In Materials: MP was downgraded to Market Perform from Outperform at Northland saying the backdrop has gotten murky with NdPr pricing having a precipitous fall in last few months and believe Street estimates need to be revised down to adjust for that. Fertilizer stocks NTR, MOS, CF under pressure most of the afternoon, underperform broader markets.

 

Technology

Internet, Media & Telecom

·     BABA shares rise after Reuters reported that Chinese regulators are expected to cut a fine on Ant Group to $700 million from an initially planned amount of more than $1 billion.

·     NFLX kicks off earnings in the Internet/Media sector tonight after the close.

·     GOOGL shares fell on Monday; today UBS said they think increasing competition from Bing (MSFT) could help distribution partners get more leverage with TAC negotiations with Google, pressuring margins, but think an actual partner loss (per NYT article Monday) is highly unlikely and see the cost specific to Samsung as manageable.

·     META positive mention by JPMorgan noting the online ad market showed signs of stabilization in February and March after a weak start to 2023, naming Meta Platforms Inc top pick in the sector as they have a $270 tgt on shares (Meta’s shares have surged 80% this year on cost-control measures after a 64% plunge in 2022).

·     In Cable: CMCSA upgraded from Neutral to Overweight at Atlantic Securities and up tgt to $44 from $36 noting Comcast has underperformed the S&P 500 by 30% over the past two years but believe broadband expectations are now de-risked with some potential upside to estimates.

·     In telecom/equipment: ERIC Q1 beats a low bar according to Bank America saying FCF was negative though; Networks was broadly in-line. Q2 guidance v cautious – they expect 46% cut to group EBITA CSS on the back of weak Networks sales and margins.

 

Hardware & Software movers:

·     In Emerging Software, Goldman Sachs upgraded TYL to Buy saying company-specific catalysts stand out against predictable buying backdrop. Said they favor exposure to government end-markets over the next 12 months, given ongoing macro volatility and a less predictable fundamental outlook in enterprise software.

 

Semiconductors:

·     NVDA rises behind another positive analyst call as HSBC upgraded to Buy from Reduce and tgt to $355 from $175 saying they are shocked by Nvidia’s pricing power on AI chips that they see driving earnings upside, higher valuation. HSBC said prices of its AI chips (GPUs) are $10K for the A100 and $20K for the H100, more than 10x-20x higher than the average gaming GPU price of $1K. Meanwhile the Information reported MSFT is readying AI chip machine learning.