Closing Recap

Monday, April 11, 2022

Equity Market Recap

·     Stocks weakened throughout the trading day ahead of key inflation data this week. Market participants watch key technical levels breached as the S&P 500 200-day moving average of 4,487 (roughly) failed to hold overnight after battling much of last week, while the 50-day moving average (MA roughly 4,420) also broke its support in the final 30-minutes of trading. Treasury yields extend their gains, with the 10-year at fresh 3-year highs above 2.78%, while the dollar to fresh 2-year highs overall, and 7-year highs vs. the Japanese yen on more aggressive Fed tightening expected. Oil prices tumbled, gold prices edge higher ahead of tomorrow’s CPI. A reminder that there’s only been one time since the start of 2021 that headline CPI came in weaker than expected (August 2021 report on 9/14/21), as per Bespoke. Tomorrow’s estimate is for March CPI m/m headline to rise +1.2% and y/y to rise +8.4%, while core CPI prices (ex food & energy) expected to rise +0.5% M/M AND +6.6% y/y. There wasn’t much in way of news, but energy, utilities (last week winners) and tech lagged, while discretionary and financials rebounded. Reminder last week the S&P 500 fell ~1.3% with small/mid-caps falling much more and defensive sectors outperforming cyclicals once again, as investors are clearly bracing for an uncertain earnings season. The Nasdaq 100 has now given up half of the ~16% gain it saw from 3/14-3/29, falling nearly 8% since 3/29. Stock selling picked up steam in the last 30-minutes.

·     Sector and Stock movers: TSLA LI XPEV among EV names sliding as China auto sales plunged in March as the country’s curbs to rein in COVID-19 outbreaks took their toll; NIO suspended production on Saturday after China’s measures to contain the recent surge of COVID-19 cases; NVDA AMD pace decline in semi’s as $SOX index falls near March lows; $NVDA downgraded by one analyst citing a slowdown in consumer and PC demand; SAIL rises as agrees to be taken private in near $7B deal; MSP rises on $5B takeover deal; OXY FANG COP APA EOG energy stocks among top S&P decliners on oil pullback; energy pares some of last week big gains.

Commodities

·     Oil prices slide as WTI crude falls -$3.97 or over 4% to settle at $94.29 per barrel while natural gas at fresh 13-year highs of $6.64 mln Btus. Note WTI crude oil has declined 24% since March 8th’s 13-year closing high of $123.70, when the Ukraine/Russia conflict was in early stages and production/supply concerns were higher. Since then, the U.S. along with the IEA have released barrels from the SPR to help supply, pushing prices lower.

·     Gold prices edge higher $2.60 to $1,948.20 an ounce, rising a 3^rd straight session, while silver gained 0.7% to $24.98 per ounce as investors position ahead of this week’s inflation reports (CPI tomorrow and PPI on Wednesday).

Currencies & Treasuries

·     The U.S. dollar index (DXY) topped the 100 level, its highest since May 2020, while the buck rose to 7-year highs vs. the haven Japanese yen (near 126), extending gains on rising interest rate hike expectations by the Fed along with surging Treasury yields. The Japanese currency has deteriorated as the Bank of Japan (BOJ) maintains a more dovish posture compared to increasingly hawkish peers such as the Fed. The euro advanced after French leader Emmanuel Macron beat far-right challenger Marine Le Pen in the country’s first round of presidential voting (euro snaps 7-day losing streak). Bitcoin hits lowest levels since March 21^st, testing $40K.

·     The U.S. Treasury auctioned $46B in 3-year notes at a yield of 2.738%, mostly in-line with the 2.739% when issued prior, with a bid-to-cover at 2.48 vs. 2.39 prior auction and indirect bidders awarded 53.45% and directs 17.56%. Treasury yields moved back near highs following the auction as the benchmark 10-yr back to fresh 3-year highs above 2.78%, with the 20-yr above 3% and 30-yr above 2.82%; the 2-yr slipped 2bps to 2.5%.

Sector News Breakdown

Consumer

·     Retailers; AMZN files for 7-part debt offering; SHOP announced a 10-for-1 stock split; Truist said Hardline retail biggest beneficiaries from higher inflation and believe the biggest beneficiaries from this dynamic in their sector include the auto parts (AAP, AZO, ORLY) and home improvement retailers (HD, LOW, TSCO) and said remain aggressive buyers of all 6 stocks; ETSY had more than 15,000 sellers on the digital marketplace have signed a petition against Etsy’s move to raise the commission it charges on each transaction to 6.5% from 5%, while some are also going as far as temporarily closing their shops in protest.

·     Auto sector; China auto sales plunged in March as the country’s curbs to rein in COVID-19 outbreaks took their toll (shares of LI, XPEV, NIO fall), while TSLA was among automakers feeling the pain of limits on production; NIO suspended production on Saturday after China’s measures to contain the recent surge of COVID-19 cases disrupted operations at its suppliers; TSLA China sales tumbled 11.7% in March from a year earlier to 2.23 mln vehicles – its first decline in three months, according to the China Association of Automobile Manufacturers; HYZN sells 18 trucks to Hylane GmbH, subsidiary of major German motor insurance provider DEVK Versicherung

·     Housing & Building Products; LOW announced its CFO left for PFEannounces $300m share buyback; in building products, MAS downgraded to Neutral from Buy (tgt to $55 from $75) and FBHS double downgraded to Underperform from Buy (tgt to $74 from $118) at Bank America citing gross margin headwinds, plumbing cost pressure, and raw material costs

·     Casinos, Gaming, Lodging & Leisure sector; in towables (WGO, CWH, THO), BMO Capital said February North American RV Retail Registrations -18% y/y against a 32% comp but rose +8% vs. 2020 (towables +10%, motorized +13%); in gaming, Oppenheimer raised ’23E/’24E DKNG gross profit 10%/15% to better reflect DKNG’s cohort dynamics (Actives/CAC/Payback Period), shared at its March Investor Day; for GOLF, Truist said is incrementally more upbeat on the golf industry in ’22 following our recent survey/store checks (n=50) of golf retailers

Energy

·     Energy stock movers; after leading the S&P last week, energy stocks taking a breather today as oil prices fell as low as $93 per barrel; OXY, APA, FANG, COP among early S&P decliners; U.S. Natural Gas Prices Jump above $6.465 early looking for highest close since 2008 on wide storage deficit, chilly April forecasts. Oil prices slid again after recent plans to release record volumes of crude and oil products from strategic stocks and on continuing coronavirus lockdowns in China. Stocks leveraged to natural gas (RRC, SWN, EQT, AR, CTRA) active as Natural gas prices extend their big gains from last week, up 3% at $6.465/MMBtu and on target to close at their highest level since late 2008 (EIA-tracked storage levels that are 17% below average)

·     Pipelines: KMI downgrade from Peer perform to Underperform at Wolfe on valuation, saying offers good exposure to high quality interstate gas pipelines, but also has a mix of other lower quality businesses like CO2 / EOR, refined products in California which has mandated a transition to EVs, and Jones Act / bulk terminals. TRP downgraded to Underperform from Peer Perform at Wolfe as well saying TRP has been one of the better performers in the space YTD, up 26%, and trades at the highest multiple. To be clear, we think a premium is warranted as TRP has the one of the most utility-like return profiles in the sector with energy transition upside LT.

Financials

·     Bank movers; banks coming off another awful week, but looking to rebound ahead of earnings this week from the big banks (JPM, Citi, WFC); tons of analyst weigh in with changes ahead of results: 1) CFG, STT, TFC, USB downgraded to Neutral from Buy and upgrade WFC to buy at Citigroup saying expectations for a rapid increase in rates can be problematic for some banks in the near-term; 2) at Wells Fargo, KEY upgraded to overweight tgt $27 given benefits from Main St banking while RF also upgraded to overweight on valuation – firm expects a muted 1Q22, as what is a seasonally slow loan growth qtr is made worse by plummeting mortgage volumes and fears of a potential recession…said would be buyers of value names ASB, FNB, SNV and BPOP into 1Q, as well as continued buyers of SBNY which remains our overall Top Pick. We remain underweight FRC, given its reliance on mortgages and weaker asset sensitivity; 3) KEY was downgraded to Hold from Buy at Jefferies saying the rapid transition to a higher rate environment could bring less revenue/ earnings upside for KEY vs. other large regional peers.

·     Bitcoin, FinTech & Payments; for COIN Raymond James said 1Q22 trading volumes for Coinbase were softer on both a y/y and sequential basis and are expected to finish below their forecast for the quarter. Average daily volumes (ADV) continued to trend lower throughout the quarter, with January representing ADV highs to start the year

·     Consumer Finance; JPMorgan with several changes into earnings as they lower price tgts by 18%, on average, due to increased economic uncertainty reducing our confidence in forward estimates and an increased probability of recession – the firm downgraded AXP from Overweight to Neutral, as believe the company’s valuation already incorporates a relatively positive base case, and NAVI from Neutral to Underweight, as the extension of the "student loan pause" limits consolidation opportunity and the company’s long-term growth drivers remain unclear. They upgrade ESNT from Neutral to Overweight, as we view a non-fundamental driven pull-back as creating an opportunity to own a best-in-class PMI at a trough multiple.

Healthcare

·     Pharma movers; PFE said David M. Denton will join the company as CFO on May 2, as he joins Pfizer from LOW, where he served as CFO; ETON said it received final approval from the FDA for its cysteine hydrochloride abbreviated new drug application, a bioequivalent generic of Exela Pharma Sciences’ Elcys; BCYC tumbles after interim data from a Phase 1 clinical trial for its urothelial-cancer treatment as its experimental therapy, BT8009, had a 50% ORR, and one of the eight patients enrolled in the study who received the smallest dose of the therapy reported a complete response; VERU novel COVID-19 drug candidate reduces deaths by 55% in hospitalized patients in interim analysis of phase 3 study; independent data monitoring committee halts study early for overwhelming efficacy; to meet with FDA to seek emergency use authorization

·     Biotech movers; BCRX extends losses after plunging Friday after the company paused enrollment in BCX9930 clinical trials; downgraded at Bank America today; AFMD rises after the co updated on a Phase 1/2 study of AFM13 precomplexed with cord blood-derived natural killer cells in lymphoma; Affimed said the data showed a 100% objective response rate and improvement in the rate of complete responses from 38% to 62% after a second cycle in 13 patients; HOTH jumps after saying its cancer therapy, HT-KIT, prevented cancer cell growth and induced death in disease cells over 72 hours in preclinical studies; CCC extends losses after falling -50% on Friday after CFT7455 (IKZF1/3 degrader) first clinical data negatively surprised with dose-limiting, on-target toxicities in the first dose cohort tested – prompts analyst downgrades/tgt cuts; SPPI said the resubmitted Biologics License Application for Eflapegrastim has been accepted for filing.

Industrials & Materials

·     Aerospace, Industrial & Machinery; Raymond James notes investor sentiment in truckload space has quickly soured and seemingly at this point, the market is already “pricing in” a freight recession scenario into 2H/2023 as truck spot rates have plummeted downward during the past four weeks (firm questions if PCAR trade on truck spot rates or on Class 8 orders); Cowen previews some names into earnings saying TDY, ROP among favs into earnings results and ROK, TYL with tough set-ups

·     Transports: the Baltic Exchange’s dry bulk sea freight index slipped for a 13th straight session, down 24 points, or about 1.2%, to 2,031 points, its lowest since Feb. 18 as Capesize rates hit their lowest level in more than two-months (slipped 49 points, or 3.4%, to 1,395 points), its lowest level since early February. Average daily earnings for capesizes, which typically transport 150,000 tonne cargoes such as iron ore and coal, decreased by $413 to $11,566; JBLU said it would reduce flights in May and throughout the summer due to staffing limitations, after canceling more than 300 flights over the weekend; JBLU upgrade from Sell to Neutral w/ $13 PT at MKM as believe much of the bad news is now baked into the stock; Cowen said on truckers its latest survey results seen as a net negative as pricing expectations declined sequentially as carriers expect rate increases of +5.8%, but down -20bps from our 4Q survey (CVLG, KNX, LSTR).

·     Metals & Materials; CCJ upgraded to Outperform at RBC Capital and raises tgt to $50 from $30 as believe the Russia/Ukraine war and subsequent shift in Western markets away from exposure to Russia have fundamentally changed the uranium market outlook and l-t market structure; in chemicals; Mizuho previews Global Coatings saying price trends poised for upside surprise, but magnitude of cost gap still a hurdle as AXTA PT lowered to $34 (from $36), PPG PT lowered to $169 (from $182), SHW PT lowered to $310 (from $350) – says still generally constructive on the Coatings industry in the intermediate to long-term

Technology, Media & Telecom

·     Semiconductors; NVDA pacing the declines in semiconductor sector after analyst downgrade; the broader SOX index falls near March lows below 3,050 on slowdown in consumer and PC demand; AMD broke psychological support of the $100 per share level; PLAB upgraded to Buy at Stifel as believes current prices represent an attractive entry point on a valuation basis with the broader market pullback

·     Software movers; agreed to a $6.9 billion buyout from private-equity group Thoma Bravo, where holders to receive $65.25 a share in cash https://on.mktw.net/3rgGMcQ ; MSP agreed be acquired by software-maker Kaseya in a $6.2 billion all-cash deal, where Datto stockholders will receive $35.50 per share, a nearly 24% premium https://bit.ly/3JsUDmz ; NTES, BILI shares rise after Bloomberg reported that the Chinese government has approved the first group of video game licenses since July 2021; UCTT lowered its Q1 rev outlook to $560M-$570M from $580M-$630M (est. $602.66M) citing China government mandated COVID lockdown policy affected

·     Hardware, Components & Services; HPQ a positive mention in Barron’s this weekend; meanwhile for PC sector, IDC this weekend noted shipments of PCs have finally slowed down after two years of double-digit growth, declining worldwide by 5.1% year-on-year in Q1 2022 – said while the decline reflects both rising costs and market saturation in some segments, IDC reassured it in no way represents a "downward spiral

·     Internet, Media & Telecom movers; TWTR CEO Parag Agrawal said this weekend Elon muck has decided not to join the company’s board after-all, a sharp reversal that cast new uncertainty over the relationship between the social-media platform and its largest shareholder. The move comes after Musk revealed a 9.2% stake in Twitter that was made public last Monday; WBD upgraded at Atlantic Securities and Evercore/ISI after Discovery closed its merger with WarnerMedia after the close on Friday 8th April and will begin trading as Warner Bros. Discovery on Monday 11th April; COMM downgrade from Market Perform to Underperform at Raymond James as expect sales above consensus with EPS in line with expectations but expect full year earnings miss consensus; in towers, SBAC downgraded to Neutral at MoffettNathanson