Closing Recap

Wednesday, July 07, 2021

Equity Market Recap

·     After snapping its 7-day win streak yesterday, the S&P 500 was back on track for a new all-time closing high (topping Tuesday’s record high of 4,356.46) while overall equity markets finished mixed. The benchmark S&P 500 index was boosted by strength in defensive sectors (consumer staples) and technology large caps (AAPL, ORCL, MSFT), while transports rebounded, but energy lagged as oil prices declined. U.S. Treasury yields continued their downward as 10-year yields posted a seventh straight session of declines, while the dollar advanced along with gold. The decline in yields have boosted high growth tech stocks recently with another leg higher for AMZN, AAPL, GOOGL, ORCL, MSFT, etc. Stocks that tend to benefit from low rates/yields (homebuilders) outperform as the 10-year yield falls to fresh 4-month lows (slipped below 1.3%). Cryptocurrencies advanced with Bitcoin approaching $35,000 and Ethereum nearing $2,400. Momentum stocks saw selling pressure with the old “meme” stocks falling again (AMC, GME, EXPR, BBBY, BB, KOSS among them). Minutes from the prior FOMC meeting out this afternoon, with commentary dovish again from the Fed on inflation and tapering views.

·     Stock/sector movers; Dow component and tech bellwether Apple (AAPL) rises for a 7th straight day, not far from all-time highs $145.09 on Jan 25; GNRC jumps to record highs after several analysts were positive on their Chilicon acquisition to enter the microinverter market (SEDG, ENPH slide on the deal due to increased competition); SAM jumps after Credit Suisse upgrades it to OP with 61% upside to its PT as the best positioned in hard seltzer; building products and homebuilders outperform with Treasury yields sliding to 1.3%, its lowest since mid-February and positive analyst comments; SGH surges, rising more than 20% to record highs after its strong beat-and-raise quarterly earnings report; energy stocks were broadly higher pre-market with oil rallying close to $75/barrel, but oil’s retreat to its lowest price in 2.5 weeks on the UAE’s reported push to boost production amid higher demand drags the sector; MKTX sinks as one of the S&P’s worst performer after its Q2 trading volume missed estimates.

FOMC Minutes Recap from prior meeting:

·     The committee’s standard of substantial further progress was generally seen as not having yet been met (headline boosted stocks initially); several participants saw benefits to reducing the pace of mortgage backed securities purchases more quickly or earlier than treasury purchases in light of valuation pressures in housing markets; several other participants, however, commented that reducing the pace of treasury and MBS purchases commensurately was preferable because this approach would be well aligned with the committee’s previous communications; officials tied upside inflation surprise to supply related issues; most officials expected inflation jump to subside (were among some of the highlights of commentary).

Commodities

·     Oil prices edge lower, with WTI crude down -$1.17 or 1.59% to settle at $72.20 per barrel (off yesterday 6-year highs $76.98 and off morning lows of $71.07), spooked earlier by the risk of UAE going solo to sell as much crude as possible – Brent falls -$1.10 or 1.48% to settle at $73.43 per barrel. OPEC+ members abandoned talks on Monday after three days of meetings failed to close divisions between Saudi Arabia and the United Arab Emirates. Oil rose to $75 this morning, rebounding from steep losses a day earlier with support coming from a tight market in the short term and as U.S. crude inventories are expected to fall this week.

·     Gold prices make it a 6^th straight day of gains, with prices rising $8.00 or 0.4% to settle at $1,802.10 an ounce, closing above the $1,800 level for the first time in 3-weeks, boosted by declining U.S. Treasury yields, which offset a jump in the U.S. dollar to 3-month highs.

Currencies & Treasuries

·     The U.S. dollar index (DXY) rises to a 3-month high of 92.84 before paring gains, getting a boost against currencies leveraged to oil prices (Canadian dollar and Russian Rouble), while little changed on day vs. major rival currencies (EUR, GBP, JPY). The USD-CAD eased to 1.2422 lows, down from overnight highs of 1.2475 but jumped back above 1.25 midday (ignoring oil price weakness, which negatively impacted the CAD on Tuesday). The Rouble gave up earlier gains and fell to a two-month low vs. the dollar hit from a sell-off on the crude oil market.

·     Treasury yields end lower as the benchmark 10-year note extends its longest streak of declines in 16-months (now 7-straight days) touching lows just below 1.3% to lowest levels since late February. The rally in U.S. Treasuries has picked up steam with 10-year yields dropping as the possibility of a COVID-19 resurgence drew in buyers. The move higher for Treasury prices likely caught many off guard as well, prompting an unwinding of large short positions that had built up in U.S. Treasury markets. The reflation story has also stumbled in recent days against a backdrop of higher COVID-19 caseloads in many countries across Asia and Europe and variant concerns.

Sector News Breakdown

Consumer

·     Auto sector; DIDI shares fall again early (dropped over 20% Tuesday) following a regulatory order this weekend that its app be removed from app stores in China – Sunday’s takedown order from the Cyberspace Administration of China (CAC) comes just two days after the regulator announced an investigation into Didi (YMM, BZ also plummet recently after Chinese regulators announce investigations into the companies)

·     Housing & Building Products; in building products, JPMorgan downgraded MAS to Underweight and upgraded BLD to Neutral saying on stock selection, highlight top picks and Overweight-rated WHR and MHK, as both face comps in 2H21 that are among the easiest across our universe, and also favor OW-rated FBHS, DOOR and IBPhomebuilders PHM, active again (higher) given the recent plunge n Treasury yields, pushing mortgage rates lower yet again

·     Restaurants & Consumer Staples; Chobani has filed for an IPO; SAM upgraded to Outperform from Neutral at Credit Suisse and raise tgt to $1,490 from $1,304 as believe the company is best positioned to navigate the "new rules" of the hard seltzer category; BJRI said CEO Gregory Trojan to Retire, President and CFO Gregory Levin to be appointed CEO; consumer staples outperformed (defensive sector) led by gains in CLX, CL, KMB, CHD, EL

·     Casinos, Gaming, Lodging & Leisure sector; IGT signs contract with Western Canada Lottery Corporation to provide 700 CrystalDual 27 video lottery terminals; Morgan Stanley remains cautious on CCL, RCL, NCLH as their cruise resumption tracker suggests full operations are unlikely before 2Q22 which is well below consensus expectations, they think 2019 profits will not recover until 2023, and valuations look steep

Energy

·     Energy stock movers; another bloodbath early for energy stocks as oil prices fail to hold early gains for a second straight day, putting pressure on several sub-sectors (refiners, E&P, integrated and services/equipment); OAS upgraded to Outperform and tgt raised to $115 at RBC Capital based on co’s quick progress in "simplifying the structure", strong operational execution and peer-leading shareholder returns

·     Oil services and equipment; BKR and TS top picks in oil field services at Piper in Q2 preview as anticipate orderly Q2 earnings results for most of OFS with cyclical demand tailwinds largely offsetting incipient inflationary pressures and lingering Covid impacts internationally; FTI said it was awarded a "significant" integrated engineering, procurement, construction and installation contract from Tullow Oil for the Jubilee South East development offshore Ghana; the company defines a "significant" contract as $75M-$250M

·     Utilities & Solar; solar names ENPH, SEDG shares fall as analyst weigh in on GNRC acquisition of Chilicon Power with Bank America saying perceive the latest GNRC acquisition as leading to incremental competition for the MLPE market for SEDG holding 90-95% of US resi market share and increasing int’l and commercial share penetration; in clean energy space, Raymond James upgraded NOVA from Outperform to Strong Buy, downgraded AQUA and ERII to Market Perform noting that the sector is currently trading in a more rational manner as compared to the ultra-euphoric highs of late 4Q20 / early 1Q21

Financials

·     Trading & Exchanges; CBOE June total options volume up 12.8%, June total options adv up 12.8%; June total futures adv down 0.9%; TW reports volume of $23.1 trillion in June and $62.0 trillion in second quarter; Tradeweb Markets Inc says June adv up 34.7% year over year; q2 adv up 25.5% year over year; MKTX recorded $567B in trading volume for June 2021, of which $239.5B was credit volume and $327.5B rates volume; total credit average daily trading volume and total credit trading volume dropped 10.1% Y/Y to $10.89B and $239.52B, respectively

Healthcare

·     Pharma movers; ONCS said it has entered into a collaboration and supply agreement with MRK to evaluate the combination of its interleukin-12 Tavo with Merck’s anti-cancer immunotherapy Keytruda in a global clinical trial; SEEL announces positive in vivo data demonstrating down-regulation of SNCA, MRNA and protein expression from a gene therapy study of sls-004 utilizing crispr-dcas9 for Parkinson’s disease pathology; DARE revealed on June 30, entered into an agreement with Bill & Melinda Gates Foundation for development of DARE-LARC1 implant, its experimental user-controlled, reversible contraceptive (awarded grant of up to $48.95M); OPNT reported positive top-line results from its confirmatory pharmacokinetic study for OPNT003

·     Biotech movers; BHVN reports preliminary sales of $93M from its migraine drug Nurtec ODT, beating estimates of $54.1M (said Launch to date net product revs for NURTEC ODT is approximately $200M with over 750K prescriptions filled since product launch in March 2020); MRNA announced the first participants have been dosed in the Phase 1/2 study of mRNA-1010, the Company’s quadrivalent seasonal influenza mRNA vaccine candidate; XBIT announces a $2.50/share special dividend to common shareholders.

·     Healthcare Services, MedTech Equipment; for DXCM, Piper notes with the increasingly critical diabetes mobile app downloads climbing higher, we assessed correlations with company performance and found that we could see some nice upside to Q2 consensus estimates for DXCM; PAHC downgraded from Equal weight to Underweight as see recent stock performance (+50% vs. S&P +17% YTD) as being disconnected from fundamentals, which are yet to improve; VVOS jumps as sees positive data for treatment of dental tissue anomalies; QDEL shares tumble late day as FDA notes the co recalls Lyra SARS-CoV-2 Assay due to ‘significant’ false negative risk

Industrials & Materials

·     Industrial & Machinery; MSM reported Q3 adj EPS $1.42 vs. est. $1.37 on revs $866.29M vs. est. $847.2M, average daily sales +2.2% YoY; Bank of America downgraded FTS to Underperform with a C$51 pt as it is relatively expensive vs comparable peers Hydro One and Ameren, and they see limited further upside with the stock reflecting a +3x premium for ITC and a cautious outlook on FTS’s Arizona and New York utilities where the regulatory environments remain below-average; Cowen upgraded FLS to OP and raised it price target to $48 from $40 on favorable risk-reward based on a later cycle acceleration with material upside to estimates, an internal turnaround that appears well underway, and the potential to demonstrate that they belong in the "energy transition" theme; Stifel sees an improved outlook for North American PVF distributors (DNOW, MRC, FLS, LECO, MTZ, etc.) driven primarily by the higher oil price environment with improved demand for gasoline, better site access and the return of projects/activity following COVID-19 shutdowns, as well as the anticipation that vaccination efforts and accelerating economic activity will continue to drive stronger demand, and their survey of distributors now shows them expecting sales +5.1% YoY vs +3.3% 3-months ago; RBC initiated OTIS at Outperform with a $95 price target given its competitive position, its strong and defensible profits, and low capital requirements are likely to support a continued high ROCE

·     Transports; airline data showed that TSA ’21/’19 checkpoint trends back in the -20% to -25% range after jumping to positive for a couple days related to the holiday weekend; The Baltic Dry overall index, which factors in rates for Capesize, panamax and Supramax shipping vessels, rose 62 points, or about 2%, to 3,241, snapping its 5-day losing streak on the back of strength in the Capesize vessel segment. which was up 206 points, or 6.3%, at 3,499.

·     Metals & Materials; STLD board authorizes a buyback of $1B in additional shares following the previous $500M program; UUUU said it will ship all or a portion of its rare earth carbonate to Neo Performance Materials Inc.’s Silmet rare earth separations facility (Neo said it will process the new supply into rare earth permanent magnets and other rare earth-based advanced materials); ATI upgraded to Neutral at Bank America (from Underperform) saying mgmt has flagged imminent benefits from share gains, specifically its new Airbus airframe contract; AXTA to acquire U-POL Holdings from Graphite Capital Management and other holders for ~$590M

Technology, Media & Telecom

·     Internet; Chinese ADR’s weak again as Bloomberg reported regulators in Beijing are planning rule changes that would allow them to block a Chinese company from listing overseas even if the unit selling shares is incorporated outside China, closing a loophole long-used by the country’s technology giants; shares of TWTR, FB volatile early as Donald Trump to sue Facebook’s Zuckerberg, and Twitter’s Dorsey claiming bias

·     Semiconductors; semiconductor sector weak with the SOX index down over 1% (despite the Nasdaq little changed); SGH posted F3Q results and the F4Q (Aug) revenue/EPS outlook significantly above consensus estimates with upside coming from demand for AI systems, data intensive compute requirements, increasing unit demands and growing markets for LED; SSNLF reported Q2 operating profit 12.5T won vs est. 11.04T won on sales 63T won vs est. 61.47T won

·     Hardware & Software movers; CRNC was downgraded at Raymond James noting shares have eclipsed their prior $115 price target and increased over 6-fold since September 2019 compared to the S&P 500’s 45% return; Lake initiated OSS with a Buy rating and $8 pt; Citi initiated BAND at Neutral/High-Risk with a $155 pt as they are positive on secular trends in the broader communication space but are cautious on potentially less lucrative long-term growth prospects; TTD launched Solimar, its new media trading platform that will help marketers optimize their digital advertising campaigns across the open internet; Piper lists TWLO, U, AVLR, BIGC as their top cloud ideas for 2H as investor sentiment has shifted back in favor of secular growers; SAP was upgraded to Buy at Bank America citing cloud momentum; ORCL shares extend gains to new record highs, now up over 10% for the month.

·     Media & Telecom movers; GILT announced an award of a multi-million-dollar contract to provide satellite communication (SATCOM) equipment to a large system integrator for its customer in Asia; SHEN downgraded to Underperform at Raymond James after the stock price increased ~24% the past two trading days despite no change in our opinion to the fundamental value of the company, as well as no unexpected news being announced; VZ chairman and CEO told CNBC that 5G represents one of the seven vectors of growth the company enjoys, as the consumer picks up its adoption of the new technology