Closing Recap

Wednesday, July 20, 2022

Equity Market Recap

·     After massive market gains on Tuesday, today saw more upward momentum into earnings, with market breadth picking up steam and major averages topping key technical levels as investors buy into several upcoming market catalysts. Sector movers included declines for Healthcare, Utilities, and Consumer Staples while the market leaders were Communications and Technology both over 1% as well as Consumer Discretionary. The U.S. dollar rose against the euro ahead of a crucial ECB policy decision tomorrow where bets are for a more aggressive 50-bps hike than the 25-bps expected last week (the FOMC meeting takes place next week). The euro has rallied about 2% in the last three trading sessions after dropping below parity vs. the dollar, also helped by reports that a key Russian gas pipeline would reopen on time after maintenance. In addition to the ECB, the Bank of Japan will also announce a policy decision on Thursday but is not expected to make any changes to its ultra-loose monetary stance. Tesla (TSLA) earnings after the bell, as well as a handful of transportation stocks (UAL, CSX, KNX). Getting a lot of headlines, the sweltering heat across the country (and globe) as more than 100 million people under heat warnings and advisories. Texas recorded temperatures of 102°F or higher, with Oklahoma City peaking at a high of 110°F. This tied the city’s all-time high for July. The pattern has led to heat waves in Asia, the U.S., Europe, and the Middle East. Natural gas prices jumped on the news.

Economic Data:

·     June Existing Home Sales fell -5.4% to 5.12M vs. 5.395M expected and 5.41M prior; on a Y/Y basis, the figure fell 14.2%; the median existing-home price of all housing types continued to climb in June, to $416K from $407.6K in May; total housing inventory at the end of June stood at 1.26M units, up 9.6% from May and a 2.4% rise from a year ago. Unsold inventory increased to a 3.0-month supply at the current sales pace, up from 2.6 months in May.

Commodities, Currencies & Treasuries

·     Oil prices slipped in choppy trading on Wednesday, with WTI crude down -$1.96 or 1.88% to settle at $102.26 per barrel (highs $104.39 and lows $101.51) after a bounce in the dollar, bearish inventory data. U.S. crude oil stockpiles edged lower last week but gasoline inventories posted a larger-than-expected build on weakened demand, the EIA said. The new front-month contract, September WTI crude, settled at $99.88, down 86 cents

·     Natural-gas futures climbed by more than 10% as hot weather in much of the U.S. buoyed prospects for cooling demand. August natural gas rose 74 cents, or 10.2%, to settle at $8.007 per million British thermal units, the highest finish since June 13

·     The U.S. dollar rebounded off earlier declines, snapping a 3-day losing streak that left the greenback at two-week lows as expectations for upcoming rate hikes from the ECB and U.S Federal Reserve have shifted, with the market anticipating a larger 50 basis points hike from the ECB and the Fed hiking by 75 basis points as they attempt to combat inflation.

·     Treasury yields opened lower, but slowly crept higher throughout the day as the 10-year moved back above the 3% level, but still inverted more than 20-bps vs. the shorter-term 2-yr.

·     Gold prices stuck in downward momentum, falling -$10.50 or 0.6% to settle at $1,700.20 an ounce (15-month lows) as the dollar snapped its modest 3-day losing streak (after hitting 20-yr highs last week), with the euro falling back below the 1.02 level ahead of central bank meetings.

Sector News Breakdown

Consumer

·     Retailers: BBWI guides Q2 EPS $0.40-$0.42, below the prior $0.60-$0.65 view (and consensus $0.60) while said sees Q2 sales down 6% to 7% y/y, worse than the prior view of up low single digits; COOK said its board approved planned reduction in workforce, as part of plan to reduce Co’s costs, drive long-term operational efficiencies; CPRI provided revenue targets and other guidance at its investor day meeting as backs EPS view

·     Auto sector; TSLA quarterly earnings after the close tonight; in auto dealer retailers, LAD shares slip following in-line Q2 revs as EPS beat but same store new vehicle retail revenues down -16.9%, while qtrly same store used vehicle retail revenues up 17.5%; Bloomberg reported Ford (F) plans to cut up to 8,000 jobs to help fund investments in EVs

·     Housing & Building Products; FOR downgraded to Neutral from Buy at BTIG after weak F3Q EPS and a soft FY22 guide and given the recent drop in housing demand, believe low-end public spec builders will need to clear inventory and thus will slow down their lot takedowns as well as starts; weak housing data points yet again as the weekly MBA mortgage data showed the US mortgage market index falls 6.3% to 281.1 in week ended July 15, to lowest since 2000 as the purchase index falls 7.3% to 208.0 and the refinancing index falls 4.3% to 655.7 as the average 30-year mortgage rate rises 8 bps to 5.82% in latest week

·     Consumer Staples & Restaurants; CALM 4Q EPS and sales beat estimates as the top egg producer says supply is tight after bird flu; TSN received an analyst downgrade; German meal-kit maker HelloFresh reduced its 2022 outlook saying inflation, waning consumer confidence and the Ukraine war would weigh on earnings in the second half of the year

·     Casinos, Gaming, Lodging & Leisure sector; casino stocks with Macau exposure active (WYNN, MLCO, LVS, MGM) on reports the Macau gambling hub will reopen its casinos on Saturday the 23rd, as authorities seek to unwind some stringent measures that locked down the area for 12 days to curb its worst outbreak of COVID-19. Macau shut all its casinos for the first time in more than two years on July 11; in theatres, AMC said during Q2 it bought ~$72.5 mln of its 10% notes due 2026 for ~$50 mln, representing 31% discount to face value; in online travel, Stifel lowers tgts for BKNG, EXPE, ABNB and tempering top-line growth expectations for our large cap names with meaningful international exposure

Energy

·     Energy stock news: Vladimir Putin said Russia would fulfill its commitments to supply natural gas to Europe but warned that flows via the Nord Stream pipeline could be curbed soon if sanctions prevent additional maintenance on its components – WSJ; The European Union is set to propose a voluntary 15% cut in natural gas use by member states starting next month on concern Russia may halt supplies of the fuel, Bloomberg reported

·     Inventory data showed: The American Petroleum Institute said weekly crude oil inventories rose 1.86M barrels, Cushing rose 520K barrels, gasoline a reported 1.29M barrel build and distillates fell -2.15M barrels. For the EIA weekly data, U.S. Crude stocks in strategic petroleum reserve fell in latest week to lowest since July 1985 while overall crude stocks -446,000 barrels to 426.61 mln, vs forecast of 1.4 mln bbl build and gasoline stocks up +3.5M barrels to 228.44 mln

·     E&P and Majors; CVX upgraded from Hold to Buy at HSBC with $167 tgt noting Chevron’s stock has been one of the worst performers in the group in the past month, and has brought valuation back to levels which they think justify an upgrade; in oil services, group rallied Tuesday on better HAL results, but today BKR reported a bigger Q2 loss, hit by a $365 million charge from suspension of its Russian operations and supply chain inflation – posted a net loss of $839M compared to a loss of $68M a year ago – sent shares lower

·     Utilities & Solar; investors rotated money back into riskier sectors (tech) and out of defensive as utilities were among the worst performers in the S&P with AES, CEG, WEC, DTE, NRG all down; Stifel upgraded XYL in water space; WEC was downgraded to Underperform from Neutral at Credit Suisse seeing the current 15% premium to the large cap electric utilities group and ~7% premium to quality peers as unsustainable (said prefer both Outperform rated DTE and XEL)

Financials

·     Bank movers; CMA Q2 EPS adj EPS $1.92 vs. est. $1.78; net interest income increased to $561 million from $456 million in q1 22; Q2 common equity tier 1 capital ratio of 9.72% vs 10.35%; Q2 provision for credit losses increased to an expense of $10 million from a benefit of $11 million; HOPE Q2 EPS $0.43 vs. est. $0.41; Q2, net interest margin expanded 15 basis points from preceding Q1; Q2 net interest margin 3.36% vs 3.11%; MTB Q2 EPS $3.10 vs. est. $2.70; provision for credit losses was $302M in Q2 and NII expressed on a taxable-equivalent basis totaled $1.42B in qtr, vs $946M y/y; UCBI Q EPS $0.61 vs est. $0.68, NIM 3.19% +22bps vs 1Q

·     Bitcoin, FinTech & Payments; J.P. Morgan said valuations for larger-cap payment processing companies remain depressed on fears that consumer macro weakness will weigh on H2, going into Q2 earnings as top picks FISV, MA and Visa (V) but less confident on outlook for NVEI, PYPL; PYPL was downgraded at Wolfe Research due to the company having among the highest recession sensitivities and based on valuation (see shares range bound n-term), MLNK cut from Outperform to Peer Perform, and WU downgraded from Peer Perform to Underperform

·     Financial Services, Exchanges; NDAQ announces 3-for-1 stock split & qtrly div of $0.20/shr after earnings top views ($2.07 on revs +6% to $893M vs. est. $1.91/$881M); MKTX Q2 diluted EPS $1.78 vs. est. $1.74; Q2 revs $182.2M vs. est. $184.09M; IBKR top and bottom line miss as Q2 EPS $0.84 vs. est. $0.91; Q2 revs $656M vs. est. $737.18M; Q2 customer accounts increased 36% to 1.92 million, customer equity decreased 19% to $294.8B; HOOD said options trading in cash accounts is now available at Robinhood

Healthcare

·     Pharma movers: MRK shares slip after Keytruda fails to meet main goal in late-stage head and neck cancer trial; ABBV and iSTAR Medical SA, today announced a strategic transaction to further develop and commercialize iSTAR Medical’s MINIject device, a minimally invasive glaucoma surgical (MIGS) device for patients with glaucoma

·     Biotech movers; BIIB posted Q2 beat with EPS $5.25/$2.59B above the $4.10/$2.448B estimate and raised its FY adj EPS view to $15.25-$16.75 from prior $14.25-$16.00 while saw $55M headwind to FY revenue due to currency fluctuations; VBLT tumbles after the company said its ovarian cancer treatment didn’t achieve the results it was looking for in a recent clinical trial; PTCT said Upstaza granted marketing authorization by EC

·     MedTech Equipment; ABT Q2 results top ests ($1.43/$11.3B vs. est. $1.12/$10.29B) while raises FY22 adjusted EPS view to at least $4.90 from at least $4.70 (est. $4.88) – said Q2 Diagnostic sales increased 33.1% on a reported basis and 36.9% on an organic basis and reported global COVID-19-related testing sales of $2.3 billion in the quarter; HOLX receives its 2^nd analyst downgrade this week as Bank America cuts to Hold saying murky macro, margins, & multiples may impede upside (recall BTIG downgraded HOLX earlier this week as well)

·     Healthcare Services: in managed care, ELV falls after earnings (despite beat and raise) – shares falling below 50-day MA $484 as the Co says it couldn’t go forward with a planned deal to provide Medicare plans to New York City retirees due to uncertainty around the planned benefits and litigation related to the contract.

Industrials & Materials

·     Metals, Industrial & Machinery; CMI downgraded from Outperform to Market Perform and cut tgt to $190 from $238 and update ests saying demand is poised to slow materially in 2023 and at the current price, shares are not reflecting the near 40% downside risk to consensus earnings; mining names slip after VALE published its quarterly production report, and cut its 2022 iron ore production forecast to be between 310M-320M tonnes, down from a previous estimate of 320-335M tonnes; shares of RIO also down in reaction; in transports, JBHT slips on earnings while MATX rises – earnings tonight from UAL, CSX, KNX

·     In chemicals, AXTA upgraded from Sector Weight to Overweight at Keybanc as expect price/ cost improvement to keep earnings largely stable in coming quarters; upgraded ALB from Underweight to Sector Weight recognizing continued strength within Lithium demand, driven by rapid adoption of EVs and FMC upgraded to Overweight as expects U.S. chemicals companies to report "strong" Q2 results, but cautions that the second half of 2022 may prove tougher

·     Containers & Packaging: Credit Suisse upgraded BERY to Outperform from Neutral with a $78 price target as believes Berry is set up for strong performance into year-end as organic growth accelerates and strong price action allows for better inflation capture; Credit Suisse downgraded SEE to Neutral from Outperform with a $64 price target as believes the valuation multiple is unlikely to expand further and has more concerns about the model going forward; in timber, WY downgraded to Hold from Buy at Argus as expect Weyerhaeuser’s results to be hurt by lower lumber prices and a slowdown in new residential construction

Technology, Media & Telecom

·     Media & Internet; NFLX rallied as quarterly results not good but “better-than-feared” after reported a 1 million decline in subscribers, but was ahead of consensus for loss of -2 million while revs missed and Q2 operating income missed consensus by 8% while guided Q3 EPS, revs and subs all below views; BABA upgraded to Outperform at Bernstein as expect the co’s incremental GMV share to improve in the coming quarters as they lap the merchant exodus last year and softer macro comps; in advertising, OMC Q2 EPS $1.68 vs. est. $1.58; Q2 revs rose 11.3% y/y to $3.57B vs. est. $3.47B; qtrly increase in revenue from organic growth of 11.3% (a boost for IPG, WPP); GOOGL shares slipped after theinformation reported the company will pause hiring for two weeks, after saying last week it would slow its pace of hiring for the rest of the year.

·     Telecom movers: Morgan Stanley said Towers (AMT, CCI, SBAC) still represent an attractive place to hide, but they’re expecting negative earnings revisions this quarter on some non-core items like FX and downgrade their Communications Infrastructure industry view to In-Line from Attractive with risks increasing at the margin.

·     Semiconductors; ASML Q2 net income of EUR1.4 billion ($1.4 billion) on sales of EUR5.4 billion, delivering earnings per share of EUR3.54 vs. expectations EPS of EUR3.48 on revenue of EUR5.3 billion; cut its 2022 sales growth forecast to 10% from 20%; shares of NVDA rose a 7^th straight day, while semis in general extend recent gains on hopes for Chip bill in Washington

·     Software movers: in security software, CHKP double upgraded from Underperform to Buy at Bank America saying the co has seen accelerated revenue growth from low-single digit to mid-single digit YoY growth in recent quarters, supported by its CloudGuard and Harmony platforms; high beta software names saw solid gains (U, SNOW, ADBE, ESTC, MDB); NEWR shares jumped late day after Reuters reported the company will explore a potential sale following interest from private equity firms after

·     Hardware, Components & Services; JNPR double downgraded from Buy to Underperform at Bank America and cut tgt to $32 from $40 as flag the near-term risk for flat-to-negative order growth in the next few quarters as our Networking companies begin to lap tough comps; ANET also double downgraded from Buy to Underperform at Bofa with $105 tgt down from $140 as flag hints of Cloud/data center slowdown, which may pressure growth for Arista; FFIV downgraded from Buy to Neutral at Bank America flagging two main risks to F5’s stock in the near-term (shares have recently been downgraded at JPM, CSFB and Piper this month amid fears of slowing demand trends)