Closing Recap

Tuesday, July 05, 2022

Equity Market Recap

·     Stocks finish mixed amid a stealth rally (on light volume) the first day of this holiday shortened week, as technology and consumer discretionary names outperform, though most other sectors lag on rising recession fears. To sum the day up simply, investors sold the biggest winners of 2022 (energy) and other commodity assets/stocks, while rotating into some of the biggest beaten-up names (1H 2022 tech losers and 2021 drags such as Biotech). Industrials, Metals (precious and industrial) saw healthy pullbacks, while investors also dumped defensive asset classes such as Healthcare, Utilities, and REITS which have held up better than most in recent weeks. Financials tumble alongside a sharp drop in Treasury yields, with banks, insurance names down. A surging dollar, tumbling Treasury yields and commodity prices such as oil, gold, copper, nat gas rounded out the top stories of the day. Earnings season is about 2-weeks away with low expectations – 130 of the companies in the S&P 500 have pre-announced so far, and of those, 45 have been positive and 77 have been negative, a weaker negative/positive ratio than a year ago, according to Refinitiv data. Stocks closing near the highs, rallying after the European close as Britain’s FTSE 100 was down 2.95%, Europe’s Stoxx 600 down 2.14%, Germany’s DAX down 3% and France’s CAC 40 down 2.82%. A quiet day overall that saw many stocks go from “red” to green” but will there be any follow-through remains the question.

Commodities

·     A brutal day for the energy complex that saw WTI and Brent crude each fall as much as 10% to 2-month lows before paring losses, as fears of a global slowdown take over commodity markets while investors expect U.S. energy production to climb. WTI crude fell -$8.93 or 8.24% to settle at $99.50 per barrel after hitting lows of $97.43. A cautious call about oil in a recession also spooked investors as Citigroup said crude oil could collapse to $65 per barrel by the end of this year and slump to $45 by end-2023 if a demand-crippling recession hits. Prices at the pump slipping further as National average continues to decline, $4.779/gal and falling. Median price $4.66/gal. Average for diesel also down 6.3c/gal from a week ago to $5.72/gallon.

·     Natural gas futures extend recent loses, falling 3.6% to $5.523/MMBtu as the U.S. ability to export liquefied neutral gas (LNG) remains severely reduced by last month’s fire on the Freeport plant, boosting local inventories and weakening prices. Mizuho noted earlier that if the storage number continues to miss expectations, look for Natural Gas to continue to slide

·     Precious metal prices tumble alongside weakness in energy and industrial metals in all out rout of commodity prices today on growing recession fears. Gold prices dropped -$37.60 or 2.1% to settle at $1,763.90 an ounce (lowest settlement since December), while silver drops -2.78% to $19.05 an ounce.

Currencies & Treasuries

·     Treasury yields extended recent losses, with the 10-yr down 11-bps to move below 2.8%, its lowest levels since the end of May and went inverted with the shorter-term 2-year yield (2.8%) for the first time since June 14 (an inversion of the 2-10s spread is considered an indicator of a recession, albeit with a lag). The U.S. five-year Treasury yields fall to 2.777%, lowest since May 31. Flight to safety, fear of a recession, or just a correction after the massive move up in yields to 10-year highs last month in anticipation of an overly aggressive Fed tightening to fight inflation, may have been the reasons for the ongoing volatility in bond markets.

·     The U.S. dollar surged, ripping to new 20-year highs vs. the euro as well as advanced vs. other currencies (British Pound fell over -1%) as investor concerns that the eurozone may be approaching an energy shock that could tip it into recession weighed heavily on those currency markets. The euro fell as much as -1.75% to lows around 1.0235 and the British Pound dropped below 1.19 before paring losses. The German government has moved closer to rationing natural gas after Russia cut deliveries to the country. Uniper SE, one of Europe’s largest utility companies, is in discussions with the German government over a bailout.

Economic Data:

·     Factory orders for May rise +1.6%, topping the consensus +0.5% and above prior April +0.7% while U.S. May factory orders ex-transportation +1.7% vs April +0.6%

·     Durables Goods orders for May revised to +0.8% from +0.7% and May nondurables orders +2.3% pct vs April +0.9%. U.S. May nondefense cap orders ex-aircraft revised to +0.6% from +0.5%; May shipments unrevised at +0.8%

Sector News Breakdown

Consumer

·     Leisure & Retailers; CROX upgraded to Buy from Hold with $75 tgt on encouraging checks and saying trading at 5x our current year EPS estimate and sporting a 16% FCF yield, they are willing to step in despite the dodgy macro environment; AZO, ORLY are among good buys in auto parts space, according to Barron’s saying auto parts retailers have outpaced the market for much of the pandemic, and current economic uncertainty should keep the group in the fast lane; retailers in general saw a bounce with easing energy prices on the day as well as restaurants, and leisure related names that have been hit hard (cruise lines and casinos – NCLH, CZR).

·     Auto sector; TSLA reported Q2 deliveries of 254,695, with 4% subject to operating lease accounting, and production of 258,580 vehicles; the delivery of 254,695 is 17.9% lower than 1Q22 deliveries of 310,048; Ford (F) June us sales 152,262, up 31.5% Y/Y on strong f-series and SUV mix; F-150 lightning best-selling electric truck in June as EV vehicle sales jump 77%; Lincoln SUV sales up 44%; CVNA tgt cut to $50 from $90 at Wedbush noting shares tumbled -31% last week as investors renewed liquidity concerns since CVNA did not complete a non-prime ABS transaction in 2Q22 that ended on June 30; CHPT filed for mixed shelf of up to $1 bln

Energy, Industrials and Materials

·     S&P 500 energy index hits lowest since Feb 28, down over 5% as energy stocks tumble broadly (XOM, CVX, HES, OXY, COP) along with metals and mining names (FCX, AA, CLF, X, MT) on rising recession fears; Saudi Arabian Oil Co. raised its benchmark Arab Light crude by $2.80 a barrel for Asian buyers to a premium of $9.30 a barrel compared to Oman and Dubai. Buyers in Northwest Europe saw the premium rise by $1 a barrel to $5.30 against ICE Brent oil benchmark, while Mediterranean buyers saw the premium rise by $1.20 a barrel to $5.10. Citigroup said today in a note that if a recession unfolds, oil prices could fall to the $60s by year end.

·     Metals & Materials; FCX tumbles as copper hits 17-month lows – recession fears impacting commodity markets heavily today with oil, nat gas, metals are sharply lower (physical and stocks) – big declines in other metals, energy, names; solar tumbles as ENPH falls to its 200-day MA of $181 with solar names broadly lower – SPWR, SHLS, SEDG, RUN, FSLR; utilities tumble, down over 4% as the defensive sector (which had been higher 8 of the last 9 trading days), sold off led by EXC, CEG, ED as investors sell defensive sectors (Healthcare and REITS also lower)

·     E&P and Majors; SHEL said it has been selected by QatarEnergy to participate in the North Field East liquefied natural gas expansion project in Qatar. The U.K. energy giant said it will hold a 25% stake in a JV which will own 25% of the project, including four LNG trains with a combined liquefaction capacity of 32 million metric tons a year; NFE said it formed a new liquefied natural gas joint venture with buyout firm APO and sold 11 vessels and storage units to the JV for $2B. New Fortress, which will own 20% of the JV and get $1.1B in proceeds from the LNG infrastructure sale, will also charter ten of the 11 vessels included in the sale for up to 20-yrs; REI to buy Permian assets of privately held Stronghold Energy in deal valued at $465M, with $200M in cash; AR upgraded to buy from hold at Truist Securities saying that a recent selloff in the oil company is an opportune entry point given gas and natural gas liquids are likely to remain strong; Berkshire Hathaway continued to buy more shares of OXY after filings showed purchases of about $580 million of stock on Wednesday, Thursday and Friday as stake now 17.4%.

Financials

·     Bank movers: COWN rises on a late Friday report that TD is considering a deal to acquire COWN according to a report late Friday afternoon from Bloomberg citing people familiar with the matter https://bloom.bg/3Rb95EU; weakness in insurance (PRU, LNC, PFG) amid declines yields, which is also hitting banks but to a lesser degree

·     FinTech & Payments; lending stocks UPST, AFRM, SOFI, RKT outperform in financials after several hitting or coming off recent 52-week lows after having recently from lower demand as interest rates rise. In the “Buy-Now-Pay-Later” (BNPL) space, out late Friday, the WSJ reported Klarna is set to raise cash at $6.5B valuation; recall that on 6/23, the WSJ reported that Klarna’s valuation could slip as low as $10B, down from a reported ~$15B on 6/16, and the low-$30B range a month prior; the co. was valued at $45.6B in 2021

Healthcare

·     Healthcare Service & Pharma movers; on Saturday, SGEN presented data from the pivotal MOUNTAINEER trial at ESMO GI (Tukysa plus trastuzumab in HER2+ colorectal cancer patients who failed previous SOC); late Friday, ABC, CAH and MCK said they will pay about $308 million after entering into an agreement to resolve opioid-related claims with Oklahoma; AZN is acquiring privately held TeneoTwo, paying $100M up-front and milestone payments for a total potential deal value of $1.27B, to acquire TeneoTwo which focused on blood cancers

·     Biotech movers: the IBB and XBI both rally as biotech, after lagging in 2021, showing strength in recent weeks; CVAC said it has filed a patent infringement lawsuit in a German court against BNTX seeking fair compensation for infringement of a portfolio of CureVac’s intellectual property rights which are used in BioNTech and Pfizer Ltd.’s mRNA COVID-19 vaccine; FULC enrolls first patient in pivotal global phase 3 clinical trial of losmapimod for facioscapulohumeral muscular dystrophy; DYN said the FDA has lifted clinical hold and cleared its application to start trial of its experimental drug DYNE-251 in patients with DMD

Technology, Media & Telecom

·     Internet movers: group held up well in tech along with software while semis declined; Bank America noted that late last week, META warned employees to brace for a tough 2H as the company copes with macroeconomic pressure on core ads business. We see this news as amounting to a 2H revenue warning, which may have been expected by the Street; for NFLX, Piper cuts tgt to $210 from $293 and notes Stranger Things 4 is now the most popular Netflix English-language TV series and second-most popular globally behind Squid Game. But user growth may remain subdued as "Top 10" hours in 2Q declined (4%) q/q; TWTR is seeking to overturn some Indian government orders to take down content on the social media platform, a source familiar with the matter said, in a legal challenge which alleges abuse of power by officials. The U.S. company’s attempt to get a judicial review is part of a growing confrontation with New Delhi. – Reuters

·     Semiconductors; Foxconn raised its full-year business outlook citing strong sales of smartphones and servers despite concerns of slowing demand due to rising inflation; said June sales jumped 31% Y/Y to a record high for the month; Japanese chemicals supplier Showa Denko K.K., a vital TSM supplier, said it expects to further raise prices and cut back unprofitable product lines as it grapples with a barrage of economic challenges confronting the $550B semiconductor industry https://bloom.bg/3uqQniP; The Semiconductor Industry Association (SIA) released solid global billings data for the month of May, at year-high levels – DRAM US$9.8bn (+39% MoM, +21% YoY) and NAND US$5.5bn (+24%, +16%); ASML underperforms after Bloomberg reported the U.S. is pushing the Netherlands to ban ASML Holding NV from selling to China mainstream technology essential in making a large chunk of the world’s chips

·     Hardware & Software movers; ATVI featured positively and suggests merger arbs should not be worried about MSFT’s purchase getting blocked; HPQ downgraded to In-Line from Outperform at Evercore/ISI saying PC headwinds could get more severe as PC units in aggregate could end up closer to 300M by year-end (vs. current expectations around 325-330M) and softness could be broader & beyond consumer markets; Digitimes reported panel makers, mainly those in Taiwan and China, are expected to scale back their output by at least 20% in the third quarter of 2022 as TV brands continue to revise their shipment targets downward for this year, according to industry sources; Software outperforms semi’s again (CRWD ) – recall Software outperformed semis (SOX) by ~5.46% on Friday (7/1), the largest one-day of Software outperformance going back to 2003

·     Media & Telecom movers; Bank America reiterates Underperform ratings on all ad agencies and cut tgts 30-35% for WPP, PUB, OMC, IPG, while downgrading JCDecaux to Underperform given high sensitivity to ad growth (EPS ’23E -45%); WBD shares dip after reports of its company unit, HBO Max, will no longer produce originals in Denmark, Sweden, Norway, Finland, Central Europe, the Netherlands and Turkey, entertainment outlet Variety reports