Closing Recap

Thursday, June 30, 2022

Equity Market Recap

·     Stocks crumbled as Treasury yields tumbled to end a challenging 1H of 2022 to say the least, as investors looked to haven related assets. The attention-grabbing headline all day was the S&P 500 posting its steepest first-half percentage drop since at least 1970, and remains down around 20% YTD, though the tech heavy Nasdaq underperformed, down over -28% for the 1H. All three major averages post their second straight quarterly declines, a feat not seen since 2015 for the S&P and the Dow, and 2016 for the Nasdaq. There has been the tail end of Covid, the Russia and Ukraine conflict which created food shortages, surging inflation prices in various sectors (housing, energy, food, used cars), all of which have pushed the Fed to act aggressively by raising rates several times this year, with more hikes on the table – all stoking fears of recession. For the first 6-months of the year, energy was the only sector higher. On the day, investors bid down travel and leisure stocks once again as recession fears continue to weigh on the outlook for the back half of the year and 2023. With the second quarter earnings season set to start in a few weeks, anxiety has increased that guidance will disappoint. European stocks slumped as the pan-European Stoxx 600 index fell -1.6% with all sectors in negative territory. The benchmark index ended Q2 down 9% — the worst three-month period since the onset of the coronavirus pandemic in 2020 and is down -16.66% YTD.

Economic Data:

·     Weekly Jobless Claims fell to 231K in latest week from 233K prior (est. 228K); the 4-week moving average rose to 231,750 from 224,500 prior week; continued claims fell to 1.328M from 1.331M prior week and vs. est. 1.310M and U.S. insured unemployment rate fell to 0.9%

·     Personal Income for May rises +0.5%, in-line with estimates and up from +0.4% prior, while Personal Spending for May rises +0.2%, below estimates of +0.4% and down from prior + 0.9%. Real Personal Spending for May fell -0.4%. The savings rate rose to 5.4% from 5.2%.

·     PCE price index for May rises +0.6% vs. est. +0.7% and vs April +0.2% and core PCE price index for May rises +0.3% vs. est. +0.4%. May Y/Y PCE price index +6.3% vs April +6.3% and core PCE Y/Y rises +4.7% vs. est. +4.8%

·     Chicago PMI for June falls to 56.0 from 60.3 prior month and below est. 58 9reading was the lightest since August 2020)

·     Mortgage rates paused their ascent this week after weeks of increases, as the average rate on a 30-year fixed-rate mortgage fell to 5.70% from 5.81% last week. A year ago this week, the average rate was 2.98%. Average 15-year rates were 4.83%, down from 4.92% a week ago. A year ago, the average 15-year fixed-rate mortgage rate was 2.26% – Freddie Mac

Commodities

·     Oil prices finish lower as WTI crude falls -4.02 or 2.66% to settle at $105.76 per barrel, falling on recession fears, demand fears after OPEC+ confirmed it would only increase output in August as much as previously announced despite tight global supplies, but left the market wondering about future output. Previously, OPEC+ decided to increase output each month by 648,000 barrels per day (bpd) in July and August. Gold prices end the day and month lower, falling -$10.20 or 0.6% to settle at $1,807.30 an ounce despite a pull in the dollar, and settles down 2% for the month.

Currencies & Treasuries

·     Crypto assets tumble as Bitcoin dropped below $19K, now more than -70% from its November peak of $67.9K in another rout in crypto assets; Ethereum tests the $1,000 level to the downside. The fall has been fast and swift after the November all time highs, extending losses when the Fed began rate hikes earlier this year and then confidence lost in the space after Terra collapsed, followed by Celsius pausing withdrawals, Three Arrow Capital going under.

·     Bonds rally as the flight to safety continues in a big way. The 10-year note yield dropped below 3% for first time since June 10^th and is now more than 50-bps of its decade level highs of 3.5% touched this month. The U.S. 10-year yield also off a high of 3.258% earlier in the week. The 2-yr yield dropped 11-bps to 2.94% and 5-yr down -13-bps to 3.02%.

·     The U.S. dollar reversed earlier gains, as the dollar index (DXY) fell to 104.65 after highs above 105.2); the euro recovered from a two-week low vs. the buck around 1.04 to 1.0475 late day. The euro has posted a roughly 6% drop vs. the buck this quarter, worst in about 6-years as haven assets have been bid up on renewed worries about higher rates and a global recession. Euro zone unemployment fell to a new record low in May, likely bolstering the ECB to raise rates further.

Sector News Breakdown

Consumer

·     Auto sector: TSLA quarterly vehicle delivery data expected any day now and several analysts preview: Wedbush forecasting Tesla lost around 70,000 EV units from China given lockdowns in this country and sees Q2 deliveries of roughly 250,000 “with anything above 260k viewed positively by the Street.” Guggenheim modestly lowering estimate to 251k units to reflect China downtime and slower ramps at the new Austin/Berlin factories. Deutsche Bank cut 2Q deliveries estimate by 65k to 245k units (+22% YoY, -21% QoQ), reflecting a prolonged COVID-19-related shutdown and logistical challenges in the Shanghai factory. Credit Suisse said they expect Tesla 2Q’22 deliveries of 242k vs. sell-side consensus of ~280k.

·     Housing & Building Products; RH Corp. shares drop after updating its 2022 outlook as sees Q2 revenue down 3% to down 1% ((vs. the prior guidance calling for sales flat to up 2% y/y) and operating margin 23%-23.5%, while for the year sees rev growth down 2% to down 5% and op margins 21%-22% as expectation is for demand to slow throughout the year. The read-through to other big-ticket discretionary retailers was negative, especially for home furnishing retailers such as WSM and Wayfair (W)

·     Consumer Staples: STZ Q1 EPS of $2.66 topped the $2.50 estimate on better sales of $2.36B while still sees FY operating cash flow $2.6B-$2.8B and still sees FY comparable EPS $11.20-$11.50, vs. est. $11.03; EL said it expects to record restructuring, other charges of about $154 mln (before tax) in connection with PCBA initiatives; expects majority of charges to be recorded through H1 of fiscal 2023; sees FY22 charges of $120M-$140M.

Energy

·     Energy stock movers: OPEC+ said on Thursday it would stick to its planned oil output hikes in August but avoided discussing policy from September onwards even as prices have risen on tight global supplies and worries that the group has little ability to pump more crude. At its last gathering on June 2, OPEC+ decided to increase output each month by 648,000 barrels per day (bpd) in July and August, up from a previous plan to add 432,000 bpd per month.

·     U.S. natural gas futures dropped as much as 14% to a 12-week low following bearish weekly inventory data and as the shutdown of Freeport’s liquefied natural gas (LNG) export plant in Texas allowed utilities to stockpile more fuel than expected. The U.S. Energy Information Administration (EIA) said utilities added 82 billion cubic feet (bcf) of gas to storage during the week ended June 24, exceeding the 74-bcf build analysts forecast in a Reuters poll. Prices are down 40% since June 8 shutdown of Freeport LNG Plant

·     E&P and Majors; Cowen on oilfield services says quarterly update shows SLB and HAL sound the best, while BKR and CHX may have some downside to consensus that may drive relative performance leading up to and perhaps through 2Q reports; USEG agreed to acquire operated oil and gas producing properties in east Texas from an unnamed private party for $11.8M in cash.

·     Utilities & Solar; AEE was downgraded from Buy to Neutral at UBS noting the stock has slightly outperformed the XLU in the last 3 months and year-to-date (+2%/+3% respectively) but trades at a top quartile valuation at an 8% premium; DUK downgraded from Buy to Neutral at UBS and cut tgt to $112 as see shares as currently fairly valued to the company’s 2nd quartile regulatory quality and 4th quartile EPS growth which we forecast at ~6%, midpoint of guidance. The US Supreme Court restricted the EPA’s authority to curb greenhouse gases from power plants, a major blow in the fight against climate change.

Financials

·     Bank movers: AX, EWBC, HBAN, KEY, SIVB, WAL and WBS all downgraded to Neutral from Outperform at Wedbush to reflect our cautious stance and believe that we’re in the midst of a significant macro reset driven by the Fed’s aggressive rate hiking campaign to combat inflation in which we believe we’re only in the early-to-middle innings. We believe a recession is more likely as the yield curve is on the cusp of inverting as measured by the 2/10 treasury yield spread, and the chance of a recession has increased to 72% according to Bloomberg. The main impacts of a recession on bank stocks tend to be headwinds related to loan growth and credit costs, and we expect the impacts from the looming recession to be no different.

·     FinTech & Payments; Truist lowered price tgts for Fintech saying legacy margin headwind, digital native rolls on, consolidation coming: FIS to $100 from $105, FISV to $95 from $105, FLT to $275 from $290, FOUR to $55 from $80, GPN to $150 from $175, MA to $420 from $450, PAYA to $9.50 from $7, PYPL to $80 from $85, RPAY to $20 from $18, SQ to $105 from $145, V to $250 from $275, WEX to $170 from $185 and cut MA ests and PTs, and remain bullish on the Traditional networks, which should be safe havens.

·     Bitcoin news: crypto assets under siege again with Bitcoin dropping below $19,000 overnight, falling over 5% and dragging down many Bitcoin miners, investors, bank related names (COIN, MARA, RIOT, MSTR, SI, SBNY) while the EU says provisional agreement reached on transparency of crypto asset transfers); U.S. SEC rejects Grayscale’s spot bitcoin ETF application

·     REITs: Jefferies upgraded the data center REIT names EQIX and DLR to Buy saying they have been able to push rents in the current environment, with a return to positive leasing spreads last quarter while achieving record leasing volumes; the firm also upgraded VTR (health care), and CCI (digital infrastructure) to buys in REIT space.

Healthcare

·     Pharma movers: SNY said the FDA paused some Phase 3 trials of drug tolebrutinib for treatment of multiple sclerosis and the muscle-weakness condition myasthenia gravis; CARA said its lead product difelikefalin reached the primary endpoint in a Phase 2 trial designed to evaluate it in pruritus in patients with notalgia paresthetica; ANGN announces discontinuation of Phase 2 Trial of ANG-3070 in patients with primary protein uric kidney disease; HYPR said Dave Scott will step down from his role as CEO for personal reasons, effective July 29; in cannabis space, CGC slides after announcing exchanges with holders of ~$198M of convertible notes; HRTX said it was planning to reduce its employee headcount by 34% as part of a restructuring and cost reduction plan; ENDP misses s $38M interest payment on 6% senior notes due 2028

·     Biotech movers; BPMC announces transformative $1.25 billion strategic financing collaborations with Sixth Street and Royalty Pharma; AURA said the FDA granted fast track designation to belzupacap sarotalocan (AU-011) to treat non-muscle invasive bladder cancer; MCRB announced registered direct offering of 31.7M shares of stock at a purchase price of $3.15 per share; LXRX announces positive top-line results from phase 2 proof-of-concept study of lx9211 in painful diabetic neuropathy

·     Healthcare Services; WBA Q3 EPS $0.96 vs. est. $0.92 (though earnings fell more than 73% due to its payment of a $683M opioid settlement) on in-line revs above $32B (but down from $34B Y/Y) while backs FY22 EPS outlook of low single digit growth, WBA sold 6.0M shares of ABC common stock, with proceeds of $900M; hospital providers tumble after UHS cut its full-year guidance as a result of lower-than-expected patient volumes, revenues and income negatively affecting operations – revised FY revs to $13.24B-$13.37B from prior $13.42B-$13.69B view and EPS to between $9.60-$10.40 from prior $11.90-$12.90 – shares of other hospital operators THC under pressure and MedTech names (MDT ) on slowing procedure fears

Industrials & Materials

·     Industrial, Aerospace & Defense; ASPN rallies after saying it won’t proceed with concurrent public offerings of common stock and green convertible senior notes due 2027, which were announced Tuesday; POWW reported results that missed expectations, but F2023 outlook was better than expected as the company prepares to transition to a new and expanded production facility; SBSW said it will increase its stake in Finnish lithium producer Keliber to 50% plus one share from over 30% for 146 million euros ($152.1 million). U.S. corn acreage forecast 89.9m acres planted this spring, USDA said; corn acreage forecast higher than previous assessment and soybean acreage declines more than expected by analysts, forecast at 88.3m acres; LNN shares rally behind better quarterly results

Technology, Media & Telecom

·     Semiconductors; AMD upgraded from Market Perform to Outperform at Northland and raise tgt to $95, though reducing estimates to account for a global recession by cutting $2.8B out of CY23 forecast and trimmed estimates for PC CPUs, GPUs, XLNX, and gaming consoles; SGH top and bottom line Q4 beat ($0.87 vs est. $0.76 on sales $463Mm vs est. $455.2Mm), but concerns tied to the consumer exposure in Brazil did materialize with SGH guiding F4Q(Aug) below consensus estimates (sees Q4 sales $420-460Mm vs est. $478.8Mm and adj EPS $0.55-0.75 vs est. $0.84)

·     Hardware & Software movers; DCT shares slide as posted Q3 results that beat on the top and bottom lines, but shares traded off as a result of management’s more cautious outlook for F4Q, and guided FY revs $295-297Mm vs est. $302.4Mm and adj EPS $0.09-0.10 vs est. $0.10; XRX said CEO John Visentin, 59, has died due to complications from an ongoing illness; the co named Steve Bandrowczak, president and chief operations officer, as interim CEO