Closing Recap

Friday, August 02, 2024

U.S. stocks posted massive declines for a second straight day as fears of slowing economic growth, and the Fed being behind the curve with rate cuts took its toll on investor sentiment the last two days, as major averages fell below key technical levels. The Dow Jones Industrial Average fell as much as 900 points, the Nasdaq down as much as 900 points in the last 2-days (SOX Index -10% this week), the S&P 500 down as much as 270 points from yesterday peak and the Russell 2000 -6.5% in two days after surging 10% in July to play catchup to other averages. A combination of weaker nonfarm/private payroll data for July this morning, coupled with an 8-month low ISM Manufacturing reading yesterday caught investors off guard just 2-days after the Fed kept rates unchanged at their FOMC meeting. There have also been several lower guidance outlooks in leisure, chemicals, transports, food, restaurants, semiconductors, and retail sectors the last few days that showed the impact on consumer spending. Amazon shares dropped over -10% after lower guidance which hit consumer discretionary, slowing demand fears pushed oil prices to lows/coupled with weaker Chevron earnings pushed Energy (XLE) down over 3%. Apple (AAPL) shares were strong all day after results last night while INTC lost 25% of its value on guidance/suspending its dividend. For the week, the S&P 500 fell 2.06%, the Nasdaq declined 3.35%, and the Dow fell 2.11%.

There were lots of earnings results this week, with now roughly 375 of the 500 S&P components having reported this quarter (still awaiting several in retail and consumer staples), but the macro picture continues to remain the key driver for markets including impact from central banks, economic data, currencies, treasuries and technicals. Sectors such as financials, energy, materials, industrials, technology tumbled on the slowing growth concerns while defensive sectors fared better (Utilities, Staples). The CBOE Volatility Index (VIX) soared as much as 58% to high 29.66 as stocks tumbled (prior to today, the biggest one-day bounce for the VIX was 22% on 7/24 last week and then prior to that 18.2% in March of 2023).

Stock markets appear concerned the Fed is way behind the curve in cutting rates, especially after several central banks this year have already cut: 1) Swiss National Bank in March implemented the first rate cut among developed market economies and lowered borrowing costs again to 1.25% in June. It is expected to cut again in September; 2) Bank of Canada has lowered borrowing costs by half a percentage point to 4.5% since June; 3) Sweden’s Riksbank ended a long era of monetary tightening in May, with its first rate cut of this cycle to 3.75%; and 4) the Bank of England cut interest rates from a 16-year high on Thursday to 5%. 5) The European Central Bank kept rates unchanged at 3.75% last month, following a cut in June. Swaps now show a 50% chance that one of Fed’s 2024 cuts is 50-bps (up from 27% late yesterday for September). The fact that 50 basis point rate cuts became the base case overnight should be concerning to everyone.

Another factor that has impacted risk appetite is the “unwind” of the so called “carry-trade”. Much has been talked about the trade (where investors borrow in low-interest-rate currencies and invest in higher-yielding currencies), as the Japanese yen has surged/dollar fallen the last 2 weeks from 162 to below 147 today as the yen strengthened after the Bank of Japan raised rates and the Fed held steady. Impact is also likely being felt for the sharp tech unwind as well during this stretch.

• U.S. June factory orders fell -3.3% vs. consensus -2.9% and vs May -0.5% while U.S. June factory orders ex-transportation +0.1% vs May -0.7% (prev -0.7%) and factory orders ex-defense -3.4% vs May -0.6%. June Durables orders revised to -6.7% from -6.6%, nondurables orders -0.1% vs May -1.0%.

• Oil prices tanked on Friday, concluding another down week as WTI crude fell -$2.79 or 3.66% to settle at $73.52 per barrel (down about -4.7% this week), while Brent Crude futures settle at $76.81/bbl, down $2.71, or 3.41% as slowing demand concerns impacting the energy sector. Front month Nymex natural gas fell 4.10% this week to settle at $1.9670 per million British thermal units, down 3-straight sessions and 8 of last 9.

• Given the weaker jobs data today and manufacturing report yesterday, expectations have surged for more aggressive rate cuts by the Fed (some asking for 50bps), pushing Treasury yields sharply lower. The short-term 2-year yield has fallen nearly 50bps this week alone from 4.38% last Friday to 3.85% this afternoon (lowest since May 2023) while the 10-yr yield fell below 3.8% after closing at 4.19% last week (down more than 15 bps today).

• In Retail Research: LULU downgraded to neutral from Buy at Goldman Sachs and cut tgt to $286 from $463 following recent execution challenges, lackluster innovation launches, and rising evidence of more regular promotionality; CROX downgraded to Outperform from Strong Buy at Raymond James citing appropriate caution around consumer spending trends” and geopolitical risk for its approach to Q3 guidance, which was set below expectations.
• In Consumer Products: CLX reported better results as Q4 adj EPS $1.82 vs. consensus $1.56; Q4 revs $1.9B vs. consensus $1.95B; FY25 adj EPS $6.55-$6.80 vs estimates $6.45 and FY sales seen flat to down 2% vs prior year; CHD Q2 EPS topped views on in-line revs but said it expects FY sales and profit at the lower end of its 8%-9% forecast as consumers turn cautious on spending and sees annual organic sales to grow by 4%, compared with prior forecast range of 4%-5%.

• In Casinos/Gambling: DKNG Q2 EBITDA of $128M came in -5% below the Street with net revenue pacing ahead and mgmt lowered its 2024 EBITDA guide meaningfully (-24% at the mid-point) on several factors (most notably higher IL taxes) and Consolidated EBITDA margins of ~11.5% were -40bps less favorable than Street.
• In Leisure/Recreation: XPOF shares tumbled after cutting its full-year revenue forecast, noting a cut to expectations for gross new studio openings and a shortfall in the second quarter; sees FY revs $310-320Mm vs est. $346.62Mm, adj EBITDA $120.124Mm vs est. $137.23Mm.

• In E&P Sector: EOG Q2 adj EPS $3.16 vs. consensus $2.96; Q2 revs $6.03B vs. est. $5.64B; Q2 total oil production of 490,700 Boepd was above the midpoint of the guidance range and up 1% from 1Q; updated full-year guidance to reflect higher volumes and lower per-unit cash operating costs.
• In Utilities: CNP was downgraded to Market Perform at BMO Capital and reduced target price to $28 after CenterPoint announced it was withdrawing its base rate case and the System Resiliency Plan currently being reviewed by the Public Utility Commission of Texas. The company was currently engaged in settlement negotiations in its general rate case with an order expected in December and was expecting the order in its SRP filing in October.

• In Banks: financials in general fell broadly early on slowing economic growth fears as jobs data disappoints a day after ISM manufacturing data coming in at 8-month lows while inflation edged higher. MS was downgraded to Underweight from Equal Weight at Wells Fargo saying it has the highest forward price-to-earnings valuation of any large cap bank despite its slowing wealth flows, downward pressure on net interest income and fee realization.
• In Crypto: Bitcoin prices held up early but succumbed to market weakness falling over 2.8% to below $63,000 after highs above $70,000 just a week earlier; MSTR and MARA reported earnings overnight, but group continues to trade in tandem with price of Bitcoin; Ethereum was down over 5% late morning below $3,000.
• In Insurance: PRU shares dropped over -10% after results last night, holding just above its 200dma support of $109 (off recent ATH $128.52 on 7/17).

• BNTX upgraded from Hold to Buy at HSBC and raise tgt to $101 saying they are encouraged by BioNTech’s recent business activities of building an Oncology franchise, in combination with its existing mRNA respiratory vaccine platform and cancer vaccine portfolio.
• DNA said it will be holding a special meeting for shareholders to vote on a reverse split of the company’s stock.
• In Insulin sector: TNDM shares jumped after reported Q2 results, which handily beat sales and adjusted EBITDA targets while the company raised full year guidance by more than the amount of the beat in Q2, and TNDM noted strong interest in Mobi, with continued uptake of t: slim in the marketplace.

• In Chemicals: CE Q2 results missed and lowered guidance as Q2 adj EPS $2.38 vs. consensus $2.71; Q2 revs fell -5.1% y/y to $2.65B vs. consensus $2.75B; sees FY24 adjusted EPS $10.25-$10.75 below consensus $11.11; said Q2 profit fell as it operated in a prolonged weak demand environment for chemicals and materials. LYB posted Q2 profit beat and said it expects margins to continue to benefit from lower feedstock prices in Q3.
• In Metals: US Steel (X) Q2 EPS and sales topped consensus but noted the impact of lower spot prices on Q3 earnings across all its segments; reported 56% y/y fall in Q2 per-share adjusted profit and ~18% yoy fall in Q2 net sales.
• In Building Services: FTDR upgraded from Market Perform to Outperform at William Blair ahead of earnings next week saying while core channels remain under pressure, believes it is nearing a turning point and expect better housing conditions from Fed easing, lower inflation, and expansion of discount/affinity programs to drive better growth.

• In Internet: GDDY reported an in-line revenue/guide though beat by 2% on key applications & commerce (A&C) segment and 6% on NEBTIDA and Airo GenAI suite launched late 1Q in English-speaking counties (U.S. ~2/3 of revs).
• In Social media: SNAP 2Q results were weaker than expected, as N. America revenue was lighter than expected and brand advertising declined y/y; Q2 revs $1.24B vs. est. $1.25B while guides Q3 revs $1.335B-$1.375B vs. est. $1.36B and sees Q3 adjusted EBITDA between $70M-$100M below expectations of $110.8M.
• In Telecom: ATUS downgraded to Neutral from Buy at UBS and cut tgt to $2 from $4 as they previously believed Altice’s fiber rollout would lead to improved subscriber trends but continued pressure from FWA, the ACP and accelerated expansion of the competitive fiber footprint make a return to growth less likely, in its view.

• TEAM shares tumble on results; Q4 Cloud revenue of $738M (31% y/y) modestly decelerated q/q, coming in a point below guidance, announced that it has a search underway for a Chief Revenue Officer as it targets broader enterprise penetration, 1Q guide calls for 27% cloud growth (street at 29%) and 35% Data Center growth (street at 33%). Op. margin guide of 19.0% was two points below the street.

• LRCX, AMAT, KLAC shares tumbled in the semi-equipment sector behind weak capex spending by INTC.
• MCHP disappoints as guides Q2 EPS $0.40-$0.46 vs. est. $0.59 and revs $1.12B-$1.18B below consensus $1.31B after reporting mostly in-line quarterly results, prompting analyst tgt cuts and a downgrade at Bank America.
• MPWR shares jumped as reported strong 2Q results and provided 3Q guidance, which were both above expectations attributed to: 1) strong AI server demand; 2) a broad-based recovery except for Auto that extended beyond Enterprise Data; 3) the ramp of new design wins. Enterprise Data led the growth, increasing 290% y/y.
• NVDA shares fell after The U.S. Department of Justice has launched an investigation into Nvidia after complaints from competitors that it May have abused its market dominance in selling chips that power artificial intelligence, The Information reported last night.