Closing Recap

Tuesday, October 04, 2022

Equity Market Recap

·     After yesterday’s rally, the markets enjoyed a continuation of the risk-on momentum. Both the S&P and NASDAQ added more than 3%, while Bitcoin, gold, silver, and oil also saw solid gains. Oil accelerated to the upside after an OPEC+ headline indicating potential quota cuts of as much as 2m b/d from the existing output baseline. A lower-than-consensus JOLTS job openings report also kicked up renewed discussion of the potential for moderating macro data to lead to a less-aggressive Fed. The 1.2Mm decline in job vacancies for August was the largest since April 2020.

·     Drilling down on US equities, all the S&P sector groups were solidly positive on the day. Materials (XLB), Energy (XLE), Consumer Discretionary (XLY) and Financials (XLF) led the way, with recovery in the travel and leisure names. Consumer Staples (XLP) and Real Estate (XLRE) were today’s laggards despite notching gains more than 1%. Growth and value each gained more than 2.5%, with growth only modestly outperforming. All eyes will continue to be on macro data as the market looks for signs of moderation.

·     In foreign market news: 1) Brazilian assets jumped after President Jair Bolsonaro secured his way to a runoff election against Luiz Inacio Lula da Silva as investors cheered on the incumbent’s better-than-expected showing; 2) Australia’s central bank on Tuesday surprised markets by lifting interest rates by a smaller-than-expected 25 basis points, saying they had already risen substantially, although it added that further tightening would still be needed; 3) UK’s Kwasi Kwarteng signed off on a $113 billion of bond buying by the Bank of England as the market fell into turmoil last week, higher than the size of the plan announced by the central bank and an indication of the level of concern among officials about volatility in the gilt markets

Economic Data:

·     U.S. Aug factory orders unchanged, in-line with consensus and up vs. July -1.0%; factory orders ex-transportation +0.2% vs July (-1.1%); factory orders ex-defense (-0.3%) vs July (-0.6%)

·     U.S. Aug Durables orders unrevised at (-0.2%); nondurables orders +0.2% vs July (-1.9%); total manufacturing inventories (-0.1%) vs July unchanged; Aug inventories/shipments ratio 1.46 months’ worth vs July 1.47 months

·     JOLTS data weak – Job Openings 10.053MM, vs. expected 11.088MM (prior 11.239M); Quits rate at 2.7%, private sector rate down to 3%

Commodities, Currencies & Treasuries

·     Oil prices rose as WTI crude gained $2.89, or 3.5% to settle at $86.52 per barrel and up nearly 9% the last 2-days alone on expectations that OPEC+ may agree to a large cut in crude output in its meeting this week, while strong demand and upcoming sanctions on Russian oil also lent some support to prices. Also helping, rising hopes that the Fed may dial back its aggressive push toward much higher interest rates. Saudi Aramco reiterated its warning that producers’ spare capacity is running low. OPEC+ ministers are scheduled to discuss supply Wednesday. Brent crude futures settle at $91.80/bbl, up $2.94, 3.31%

·     Gold prices rise sharpy for a second day to 3-week highs, up $28.50 or 1.7% to settle at $2,730.50 an ounce, while silver gained $0.51 or 2.5% to settle at $21.09 an ounce. A pullback in the dollar and U.S. Treasury yields from multi-year highs amid hopes that the U.S. Federal Reserve could adopt a less aggressive approach to rate hikes after recent mixed data helped buoy precious metals. Looking ahead, U.S. non-farm payrolls data due on Friday could offer more clarity on policy. Also, Reuters reported gold-supplying banks have cut back shipments to India ahead of major festivals in favor of focusing on China, Turkey, and other markets where better premiums are offered, three bank officials and two vault operators told Reuters. That could create scarcity in the world’s second-biggest market for gold, and force Indian buyers to start paying hefty premiums for supplies in the approaching peak-demand season.

·     After hitting fresh 20-year highs last week for the dollar index (DXY) of 114.78, posting its biggest quarterly gains since Q1’15, the buck has fallen 5-days to 110.15 with the main news overnight being the Reserve Bank of Australia hiking by a “dovish” 25bps (vs consensus hike of 50bps) which is helping the “peak tightening” narrative for now for central banks. Fed Funds terminal rate now at 4.3%, down from about 4.8% in late September. Yields lower across the curve – the 2yr Bond yield was 4.34% a week ago, today down to 4.10% and the 10-year yield has moved from 3.945% to 3.62% in five sessions.

·     Natural gas prices rebound strongly from yesterday’s 12-week closing low, finishing today’s session 5.7% higher at $6.837/MMBtu, along with broad based gains across energy commodities and US stock markets amid hopes the Fed will ratchet down its rate-hike moves.

Sector News Breakdown

Consumer

·     Retailers: POSH agreed to be bought by South Korean internet company Naver in a $1.2 billion deal, paying $17.90 in cash per share, a 15% premium https://on.mktw.net/3fFQTF6 (shares of comps TDUP, SFIX, REAL advanced in sympathy); after 76-years of door-to-door sales, TUP will now be available at TGT; BBBY bondholders are organizing, looking to protect their investments in the struggling retailer as it looks for ways to ease its debt – WSJ https://on.wsj.com/3Rx1zU2 ; HAS lowered its full-year revenue outlook and issued dimmed projection for the current quarter.

·     Auto sector: TSLA shares pare gains after Elon musk confirms he will go ahead with his $54.20 proposal to buy TWTR; Ford Motor (F) U.S. September sales 142,644, -8.9% y/y; RIVN said produced 7,363 vehicles in Q3, delivered 6,584 vehicles in Q3 and says figures remain in line with the Co’s expectations; Yippit data on CVNA showed preliminary data suggests that 3Q22 unit sales declined -6% Y/Y, well below Visible Alpha consensus of +8% Y/Y, while revenue declined -3% Y/Y (vs. VA consensus of +12% Y/Y); HYRE said fleet partner AmeriDrive bought initial tranche of vehicles and reached agreement to purchase 1,500 more over next 6 months from one of the top three rental car cos in U.S. Sept Car sales up about 9% yoy, pickup truck sales up about 6% yoy, and SUV sales up about 12% yoy. Absolute units were down month-on-month to about 1.12M from 1.15M in August but up yoy from 1.02M y/y

·     Consumer Staples & Restaurants: DPZ upgraded to Buy from Neutral at UBS, while cut tgt to $385 from $430 given belief that demand weakness concerns are overblown; catalysts exist to accelerate US sales trends and compelling LT growth profile should remain largely intact; UTZ CEO Lissette is becoming chair of the board and they are hiring the COO from POST to be their new CEO; KRUS named Jeff Uttz as the Company’s new Chief Financial Officer

·     Casinos, Gaming, Lodging & Leisure sector: among the best performing sectors on the day with cruise lines (CCL, RCL, NCLH) surging, as well as theme parks (SEAS, SIX), casinos (WYNN, CZR, LVS, MGM), lodging (HLT, MAR, H), all getting a boost on hopes for a “softer” Fed outlook on rates given recent signs of slowing inflation and weaker US data.

Energy, Industrials and Materials

·     Transports, Industrial & Machinery: FDX announces plan to buyback aggregate of $1.5B of stock from Morgan Stanley; the Baltic Dry Index rises 4.31% to 1,865 in London; CHRW was downgraded to Underperform with $104 tgt at Wolfe Research; AYI Q4 adj EPS $3.95 vs. est. $3.59; Q4 revs rose 12% y/y to $1.11B vs. consensus $1.08B; posted higher profit and sales for its fiscal fourth quarter, citing strong demand across its end markets even as they raised prices.

·     Chemicals: MOS announced impact from Hurricane Ian, which RBC Capital viewed as a modest negative, as there was some hope the Hurricane had minimal impact given the path shifted away from Mosaic’s phosphate facilities; KeyBanc lowered prices tgts of AXTA to $29 from $31, DD to $80 from $82, DOW to $38 from $45, LYB to $65 from $73, OLN to $56 from $61, and WLK to $79 from $90, and took numbers down across industrial/commodity chemicals universe to reflect a weaker demand outlook, with ag and lithium being the main exceptions. Said they see 3Q earnings season to be much tougher than healthy 2Q

·     For natural gas, Reuters reported the White House has ruled out any ban or curbs on natural gas exports this winter, in a bid to help alleviate energy shortages in Europe, according to two people directly involved in the discussions. In March, U.S. President Joe Biden committed to deliver 15 billion cubic meters more of liquefied natural gas (LNG) to Europe following Russia’s invasion of Ukraine and has already surpassed that goal.

Financials

·     Bank movers: more strength in group; Citigroup refreshed models as the upgraded BK to Buy, downgraded MTB to Neutral, launched a positive catalyst watch on JPM, and launching three new pair trades leveraging implied CoE valuation model – believe the group remains oversold due to credit concerns, our strongest conviction Buys are JPM, GS, CMA, and BK. At BMO, company offers six trading ideas catalyzed exclusively by expected 3Q22 earnings announcements: 1) long BX, hedged by a short basket of traditional asset managers (BLK, TROW, BEN, and IVZ); 2) long ALLY, hedged by short CACC; 3) said is long OMF, hedged by short WRLD; 4) long JPM and BAC, hedged by short C; 5) long PYPL and, 6) long GS, as they are 13% ahead of 3Q22 GS consensus non-GAAP EPS due to higher expected revenues

·     Bitcoin, FinTech & Payments: big jump in Bitcoin related names COIN, SI, MARA, MSTR and others on “risk-on” mkt buying and Bitcoin moving back above $20K; RIOT announces September 2022 production and operations updates; produces 355 Bitcoin in Sept; held 6,775 Bitcoin as of Sept 30 and sold 300 Bitcoin in Sept., generating proceeds of $6.1M

·     Consumer Finance: CNBC reported that MA will debut a new piece of software that helps banks identify and cut off transactions from fraud-prone crypto exchanges. Called Crypto Secure, the system uses "sophisticated" artificial intelligence algorithms to determine the risk of crime associated with crypto exchanges on the Mastercard payment network

Healthcare

·     Pharma movers: KALV shares tumble after terminates mid-stage trial of experimental oral therapy KVD824 to prevent attacks in patients with hereditary angioedema citing elevated levels of liver enzymes after administering drug, which could lead to liver damage; VYGR announces PFE license of next-generation AAV capsid for rare neurologic disease as co is eligible for up to $290M in associated development, regulatory, and commercial milestones, plus tiered royalties; RCKT 6.8M share Spot Secondary priced at $14.75

·     Biotech movers: GILD upgraded from Neutral to Overweight at JPMorgan and up tgt to $80 from $72 as see the combination of increased visibility on the company’s HIV franchise and an emerging oncology franchise not well reflected in valuation at 9.5x 2022 EPS; VIR said it had received $55 million in funding from the U.S. government to support its influenza-focused antibody drug that is expected to enter mid-stage trials this year; INBX rises after announces potential to pursue accelerated approval in U.S. for INBRX-101

·     MedTech Equipment: ILMN shares jump after being upgraded to Outperform from Market Perform at Leerink with a price target of $270, up from $220, after NovaSeq X+ debuted last week should become "the instrument of choice" as both clinical and research end markets pivot to whole genomes; TFX lagged after Wells Fargo said in a note that UroLift tracker indicates sales were down sequentially in Q3

Technology, Media & Telecom

·     Media, Internet: TWTR shares jumped after the company confirmed it received the letter from the Musk parties filed with the SEC and that the company intends to close its merger transaction at the originally agreed upon price of $54.20 per share; AMZN named JPM’s favorite internet stock “by a wide margin,” with the firm positive on the e-commerce company’s prospects over the remainder of the year; PARA downgraded to Equal Weight at Wells Fargo and slashed tgt to $19 from $40 as are increasingly worried about the linear ecosystem across Media and this strips away visibility into what we were playing for as bulls: a trough in earnings with streaming driving growth; META planning to close one of its offices in NYC (225 Park Ave S) after scaling down its expansion plans in the city

·     Semiconductors: AXTI guides Q3 revs to range $34M-$35M, below prior view $39M-$41M and below consensus of $40M, primarily attributable to weakening macroeconomic conditions; Goldman Sachs reduces client and server CPU industry assumptions to reflect near-term weakness in PC and enterprise server end-demand as well as the ongoing inventory correction. Said they expect Buy-rated AMD to grow market share in server CPUs and believe near-term headwinds are well understood – lower tgt to $88 from $112 and INTC to $24 from $30; MU pledges up to $100 billion for semiconductor factory in New York, NY Times reported

·     Hardware, Components & Services: Bloomberg reported that Apple (AAPL) iPhone exports from India crossed $1B since April; LPL upgraded from Equal Weight to Overweight at Morgan Stanley saying the LCD TV panel cycle is inflecting, while IT panels are close to the bottom and they expect blended pricing to inflect soon helped by significant production cuts; AAPL supplier Foxconn said it was "cautiously optimistic" about its fourth-quarter revenue outlook after reporting record-breaking September sales; DXC said that its management has been approached by a financial adviser about a potential acquisition of the company https://on.mktw.net/3C62ULS

·     Software movers: APP announced its first NFT marketplace to launch in app stores through its subsidiary, OpenVessel Technologies, LLC. Vessel, which is currently live in Apple and Google Play app stores, enables mobile game developers to easily integrate non-fungible tokens (NFTs) into games to drive engagement and revenue; Oppenheimer trims estimates on MSFT . APPS most cautious, DOCN estimates appear too low, NET macro and higher spend to grow and MSFT macro and PC/Gaming unit weakness