Closing Recap

Tuesday, June 28, 2022

Equity Market Recap

·     After rallying overnight and a pop higher into the open thanks to China curbing COVID quarantine requirements for international visitor, stocks cascaded solidly into negative territory on weak consumer confidence data and closed near the lows. Yields also faded off early gains as recession fears reclaimed the market narrative.

·     Sector-wise only energy finished in the green, continuing an uptrend from late last week. Utilities and Financials also generally outperformed. On the downside, technology and consumer discretionary sectors took the biggest hit from recession fears and risk-off positioning. Communication-related names also underperformed.

·     From a data perspective, it is interesting to note that the consumer confidence spread (present – expectations) expanded and is not yet indicative of recession. Similarly, @SethCL noted, “Lot of talk about Consumer Confidence predicting recession/s. What proves more a correlation is not sentiment but labor market and consumer spending. Only once did Consumer Spending turn negative (’08). Forward 12-month $SPX returns avg. 25%.”

Economic Data:

·     Consumer sentiment in June falls to lowest levels since February 2021; 98.7 vs. 101.0 expected and 103.2 prior (revised from 106.4) while the present Situation Index to 147.1 from 147.4 in April (revised from 149.6) and expectations Index to 66.4 from 73.7, weakest since 2013

·     International Trade in Advance Goods for May falls -$104.31B vs. -$102.0B expected and -$106.7B prior (revised from -$105.94B); U.S. Advance may retail inventories excluding autos +0.8% and U.S. Advance may wholesale inventories +2.0%

·     U.S. S&P Case/Shiller home price index climbed 2.3% to 312.6 for the May 20-city index after increasing 3.1% to 305.6 in April. This was yet another fresh record peak, extending the string of new highs from March 2019

·     Richmond Fed composite manufacturing index -19 in June (worse than expected) while manufacturing shipments index -29 in June and services revenues index -7 in June

·     Dallas Fed Texas service sector revenue index 9.4 in June vs 6.3 in May; service sector index of general business activity outlook -12.4 in June vs 1.5 in May

Commodities

·     Gold slipped modestly on the session, settling at $1,821.20 an ounce (-$3.60, or -0.20%). The close was the second consecutive daily loss and marked the lowest in roughly two weeks. Silver also slid on the day, settling at $20.806 an ounce (-$0.36, -1.71%) as it digested weakness in the consumer confidence reading.

·     WTI crude held gains all day, settling +$2.19, or +2%, to $111.76/bbl. The gain marked the third consecutive up-session and marked the highest close since mid-June. Gains were supported by China’s easing of COVID quarantines and reports on UAE and Saudi production closer to capacity than previously believed by the markets. Brent crude saw a similar gain of +$2.89 (+2.51%) to settle at $117.98/bbl. Separately, natgas was flattish on the session, settling at $6.5510/mmbtu (+$0.005 or +0.08%).

Currencies & Treasuries

·     The Aussie and the Canadian dollar climbed on Tuesday on firmer oil prices while the euro held below $1.06 as European Central Bank (ECB) President Christine Lagarde offered no fresh insight on the central bank’s policy outlook. Oil strength helping the Norwegian crown and the Canadian dollar to outperform. The U.S. dollar index (DXY) struck a two-decade high of 105.79 this month and was last steady below 104. Bitcoin again testing $20K to the downside.

Sector News Breakdown

Consumer

·     Retailers; NKE beat Q4 revenue & EPS, though missed margins and guided down as N.A. sales missed, EMEA beat healthily, and China was slightly better than feared (the GM miss was first since COVID began), and authorized a new four-year, $18 bln program to repurchase shares; FTCH downgraded from Buy to Neutral at UBS and cut tgt to $10 from $13 as project 1.7% y/y growth for 2022, below the Street at 4% growth; LE announces $50 million share repurchase authorization and continues to explore debt refinancing options as part of its ongoing commitment to drive stockholder value; WHR struck a deal to sell its operations in Russia which will result in a loss of $300M-$400M in the current quarter

·     Housing & Building Products; in building products, JELD was downgraded to Equal Weight from Overweight at Wells Fargo and lower earnings estimates across the group from the ongoing pressured outlooks while they like the pricing momentum seen intra-quarter in the roofing industry with +HSD% increases for July & August—OC and BECN should relatively outperform; Wayfair (W) maintained Sell rating at Loop Capital and cut price target from $70 to $40 given outlook for a continuously tightening Fed and the end of the Covid-related demand pull-forward

·     Consumer Staples & Restaurants; SAM downgraded to Sell from Neutral at Goldman Sachs and cut tgt to $318 from $380 as is incrementally more negative and more positive on TAP which they upgraded and STZ; REV tumbles over 30% the last few sessions as bankruptcy rally wears off

·     Casinos, Gaming, Lodging & Leisure sector; casino stocks with a presence in Macau rise after China reduced quarantine times for inbound travelers by half, raising hopes of increased traffic to the gambling hub (MLCO, WYNN, MGM, LVS rise); PLTK active after Axios reported Monday that Joffre, a tech-focused buyout group, is looking to pay $21 a share to buy a majority stake in Israel-based Playtika from a group of Chinese investors https://bit.ly/3A8mFTo ; in autos, Cox Automotive lowers full-year new-vehicle sales forecast to 14.4 mln units, down from 15.3 mln as persistent supply problems continue to hold back auto industry.

Energy

·     E&P and Majors; OXY shares active after Berkshire Hathaway continues to add to its stake in the oil company, buying 794,000 shares this past Thursday, lifting its stake to 16.4% of the big U.S. energy company, according to a filing late Monday; OVV upgraded to Overweight from Neutral at JPMorgan and up tgt to $64 from $56 following the recent pullback; ESTE announces northern Delaware basin asset acquisition for ~$627 million, highly accretive expansion in northern Delaware basin meaningfully increases scale

Financials

·     Bank movers: among early leaders as the country’s biggest lenders unveiled dividend hikes and some share buybacks in the wake of the Federal Reserve’s annual bank stress tests last week. Among moves: MS increased its quarterly dividend by 11%, to 77.5c while authorizing a $20B share buyback, GS boosted its payout by 25%, to $2.50 per share, WFC said it plays to 20% hike, to 30c, CFG raises share repurchase authorization to $1B – will consider dividend increase for Q3, TFC said planned boost in div to 52c from 48c. Deutsche Bank lowered EPS estimates and price targets across interest rate sensitive coverage of trust banks and online brokers, while downgrading STT to Hold from Buy; JEF reported a top and bottom line miss

·     REITs: CWK and NMRK are said not to be involved in discussions about a possible deal after renewed speculation about a potential tie up was reported on Sunday. https://bit.ly/3OJwcnX ; for CUBE, PSA, NSA, LSI, EXR – Truist noted in June, net rents increased +3.8% (+5.0% street rates, promotions +1.2%), which is slower than the prior 3 months’ average of +6.5% net rents, their v2.0 of our pricing only data showed street rates +0.3% YoY, down from May’s +5.3%, mostly due to tougher comps

Healthcare

·     Pharma movers; ROIV and PFE unveiled Priovant Therapeutics, a biotechnology company focused on developing novel therapies for autoimmune diseases with the greatest morbidity and mortality; SPRO shares slide as receives complete response letter from U.S. FDA for Tebipenem HBR new drug application; KZR shares soar as reported positive results in its lupus nephritis drug trial; said zetomipzomib, "continues to demonstrate a favorable safety and tolerability profile for administration over the 6-month treatment period

·     Biotech movers: STRO and Astellas said they will collaborate to advance development of immunostimulatory antibody-drug conjugates, which are a modality for treating tumors and designed to boost anti-cancer activity

·     Healthcare Services: WBA concludes strategic review and decides to retain ownership of its successful Boots business – decided that it is in best interests of shareholders to keep focusing on further growth and profitability of two businesses; Reckitt Benckiser Group is considering if it should shelve the sale of its infant nutrition unit, as high-profile deals have fallen through due to a worsening financing market, Bloomberg News reported on Tuesday.

Industrials & Materials

·     Aerospace & Defense; RKLB successfully launches capstone spacecraft, completes first leg of Moon mission for NASA; VORB said it will send two satellites to low-earth orbit using LauncherOne launch platform aboard cosmic girl, modified Boeing 747 aircraft; EH announced strategic partnership with agricultural Bank of China Guangzhou branch with indicative facilities of rmb1 billion for long-term cooperation

·     Transports; in airlines M&A saga, JBLU sweetened its offer for SAVE with a ‘ticking fee’ and higher reverse termination fee, trying to sway Spirit’s shareholders from taking ULCC’s offer; with the move, they bump their offer to $34.15 from $33.50 per share; in transports, Credit Suisse initiates coverage with Outperform ratings on 13 companies UNP ($255 tgt), CSX ($35), NSC ($267), UPS ($225), FDX ($314), KNX ($70), SNDR ($32 TP), WERN ($51), SAIA ($234), XPO ($65), TFII ($103), ARCB ($102) and GXO ($65) and Neutrals on CNI, CP, JBHT, ODFL and an Underperform rating on one company CHRW noting the average stock in coverage has fallen in excess of 20%, with many now trading at steep valuation discounts to the broader market.

·     Metals & Materials; for steel industry (X ), BMO Capital noted U.S. spot HRC prices continued to decline over the past two weeks, with prices down 7.9% to $1,050/st (-30.0% since recent high on 4/14); Copper prices have been cooling off, trading ~$3.80/lb., a ~22% decline vs. ~$4.90/lb. in early March 2022 driven mainly by concerns of a Fed-driven recession and slowing global demand, particularly in China this year; PLL and lithium producer partner Sayona Mining approve restart of their spodumene plant in Canada

Technology, Media & Telecom

·     Media, Internet, and Telecom; EBAY downgraded to Neutral from Buy at UBS and cut tgt to $48 from $60 warning that eBay’s 2022 GMV is set to decline about 17% y/y, which is below the guided decline of 14%-16% and the Street at 15%; KeyBanc said First Look Data for streaming companies (DIS, NFLX, PARA, WBD) shows monthly churn increased slightly y/y to 3.0% in May 2022, +0.5% y/y vs. 2.5% in May 2021, and +0.2% m/m vs. 2.8% in April; TCOM reports first-quarter results that beat expectations and benefits from reduced quarantine time news in China

·     Semiconductors; MCHP upgraded to Buy from Hold at Stifel and up tgt to $75 noting the stock is down 31% from its peak on January 4, which creates a favorable risk/return level; Loop Capital lowered estimates for TER on weaker outlooks in mobility, memory noting global Smartphone shipments are declining and memory companies are curtailing their CAPEX – but remain positive on the rest of their operations; VLDR signs multi-year deal to supply its lidar sensors to mobile robotics company Boston Dynamics; TSM plans to raise prices for most of its manufacturing processes by about 6% starting in January 2023, despite concerns raised recently about a potentially disappointing second half of 2022 for several end market – Digitimes reported; IIVI planned purchase of COHR finally receives China antitrust approval; IDCC boosts Q2 revenue view to $120M-$124M from $114M-$120M as announced it closed a license agreement covering consumer electronics and other products.

·     Software movers; FTNT upgraded to Outperform and tgt to $350 from $325 at BMO Capital driven by preference of GARP over software growth, belief that security will remain amongst the most resilient parts of IT spend during a recession and that can sustain 20%+ rev/billing growth and high-30% FCF margins through CY23; SNOW upgraded to Buy from Hold at Jefferies and raise tgt to $200 from $125 as believe is well-positioned to benefit from continued execution and its strong top-line growth of +106% Y/Y in FY22

·     Hardware, Components & Services; SNX reported Q2 EPS $2.72 on revs $15.27B, topping the $2.65 and $15.25B estimate while guides Q3 revenue $14.5B-$15.5B, as mid-point below estimate $15.4B and year EPS mid-point of est. range also below views; CRNT rises after receiving $235M takeout offer from AVNW which owns more than 5% of shares already, offered $2.80 a share in cash for the shares https://bit.ly/3byoIG2