Closing Recap

Tuesday, May 31, 2022

Equity Market Recap

·     Following a strong rebound for U.S. stocks last week, posting more than 6% advances for major averages and snapping a near 2-month losing streak for the S&P and Nasdaq, stocks were choppy on this final day of trading for the month. The S&P 500 and Nasdaq slumped while the Russell 2000, Dow Transports and Healthcare saw sharper declines. Energy prices pull back from earlier highs (sending energy stocks well off their highs) following reports OPEC members are exploring the idea of suspending Russia’s participation in an oil-production deal. Treasury yields and the dollar both advanced, while NYSE breadth favored decliners over advancers, led by sharp declines in Healthcare, Industrials, Materials, and defensive Utilities and REITs, with very few pockets of strength. Morgan Stanley strategist Mike Wilson said today “it’s difficult to construct a case for more than a bear market rally, which could carry another 5%…inflation remains too high for the Fed’s liking and so whatever pivot investors might be hoping for will be too immaterial to change the downtrend.” So, the question remains, is that just a bear market rally over the last week or have we put in a near-term bottom? Economic data came in better than economic expectations ahead of a busy day tomorrow (see below). In Shanghai, its COVID-19 related lockdown ended at midnight morning, prompting celebrations tempered with fear that an outbreak could return (headlines helped a few industries early – casinos, hotels).

Economic Data:

·     Consumer Confidence index for May 106.4 above consensus 103.9 as April revised 108.6 (previous 107.3); present situation index 149.6 in May vs April revised 152.9 and expectations index 77.5 in May vs April revised 79.0 (previous 77.2)

·     CaseShiller March 20-metro area home prices +21.2% from year ago vs revised +20.3% in February; March home prices in 20 metro areas +2.4% seasonally adj vs +2.4% in February; March 20-metro area home prices non-adjusted +3.1% vs +2.4% in February

·     FHFA House-Price Index rises 1.5% in March vs. 2% expected gain while prior month revised to 1.9% gain, up 19% Year-Over-Year

·     Chicago PMI for May rises to 60.3 vs est. 55 after 56.4 the prior month; Prices paid rose at a faster pace; signaling expansion while new orders rose at a faster pace, Employment fell at a slower pace; inventories rose at a faster pace; and Production rose at a faster pace

Commodities

·     Oil prices reversed lower late day after the WSJ reported OPEC members are exploring the idea of suspending Russia’s participation in an oil-production deal – which would open door for Saudi Arabia, the UAE, and other producers in OPEC to pump significantly more crude. WTI crude fell -$0.40 or 0.35% to settle at $114.67 per barrel (well off earlier highs of $119.98). Prices jumped overnight on reports European Union officials agreed to ban ~2/3rds of Russian oil imports immediately, with 90% of imports embargoed by year end. Natural gas July futures fall a 3^rd straight session to settle at $8.1450/MMBtu, down over 6%.

·     Gold prices fell -$8.90 or 0.5% to settle at $1,848.40 an ounce as Treasury yields jump and the dollar rebounds which overshadowed support from concerns over soaring inflation. The U.S. dollar rebounded after recent loss after Fed Governor Christopher Waller said Monday the central bank should be prepared to raise interest rates by 50 bps at every meeting from now on until inflation is decisively curbed (slightly more hawkish than the Fed Minutes last week).

Currencies & Treasuries

·     Treasury yields were sharply higher, with the 10-yr rising as much as 12 bps to 2.88% before paring gains (ended near 2.84%) amid renewed concerns over inflation and worries over an aggressive hawkish Fed response. Month-end rebalancing also impacted prices. Note the 10-year yield coming into today was down ~40bp from its May 6 peak as the market outlook for the Fed Funds rate by Feb 2023 has declined to 2.77% from 3% in early May. Yields also saw a broad global spike on record high European inflation data.

Sector News Breakdown

Consumer

·     Retailers: KIRK posted larger-than-expected Q1 loss of (-$0.62) vs. est. loss (-$0.33) as sales fell -16% Y/Y to $103.3M saying results reflect continued macroeconomic headwinds hampering consumer demand for home décor and furnishings; AEO downgraded to Underweight from EW at Morgan Stanley and slash tgt to $8 from $22 after mgmt cut its 2022 guide significantly as its optimism proved excessive and firm sees room for further, material downside as 2H implied guide appears unachievable; AMZN outperformance in discretionary space rising over 5%

·     Auto sector: NIO has been recruiting professionals with experience in setting up production lines in the US, according to media reports from China. However, the Chinese EV maker has not commented on the matter https://bit.ly/3PU4vKM ; TSLA has restored weekly output at its Shanghai plant to nearly 70% of the level which it had operated at before the city’s COVID-19 lockdown – Reuters reported this weekend; TM upgraded to buy from hold at JPMorgan

·     Casinos & Leisure; weakness early in airlines (AAL ) and other transport/travel names amid another spike in oil prices after the EU decided Monday on a partial and phased ban on Russian oil; casinos (MLCO ) rally behind Shanghai’s end to its two-month long COVID-19 lockdown – await imminent reopen

·     Consumer Staples: UL said it would add Nelson Peltz to its board and disclosed his fund now holds a 1.5% stake; the investment is worth about $1.6 billion; EL named Top Pick, reit Outperform w/ $300 PT at Oppenheimer following improvement in China’s COVID-19 situation, including the loosening of restrictions in key cities including Shanghai and Beijing

Energy

·     Energy stock movers: Energy stocks rise as the price of crude soared as European Union leaders agreed to pursue a partial ban on Russian oil. Over the weekend, Europe agreed on a Russian oil embargo, while Russia cut natural gas supplies to the Netherlands. OPEC+ set to meet later this week after last week indicated there will be no change to production growth plans on the back of this weekend’s announcements.

·     Pipelines: MMP and NS upgraded to Overweight in Midstream on positive inflation exposure and downgrading SUN (on potential demand destruction and future margin pressure) and CQP (on valuation) to Underweight at Wells Fargo – says remain bullish midstream given continued strong demand across commodities with tight supplies, supporting robust pricing, wider margins, and growing volumes.

·     Utilities & Solar; NWE downgraded to Underperform at Bank America ahead of the upcoming Montana electric and gas rate case, saying hurdles remain ahead to getting back on track to drive 3-6% EPS growth off its 2020 base with constructive regulatory outcomes critical in its key MT jurisdiction

Financials

·     Banks, & Brokers: NY Times reports Senate Banking Panel Chairman Brown, in letter, urges WFC CEO to address governance, risk management, hiring practices saying they failed to properly administer system for alerting authorities to suspicious activity by brokerage customers; BEN agreed to buy European credit manager Alcentra from BK, consisting of a $350 million cash payment, with a further payout of up to $350 million on the achievement of certain performance

·     Fin Tech & Consumer Finance: RKT downgraded to Hold from Buy at Argus on significantly higher mortgage rates noting Rocket is the largest U.S. mortgage originator, with approximately 10% of the overall market; AFRM and Stripe partner to help businesses grow their revenue – Through the venture, Stripe merchants will be able to use Affirm’s adaptive checkout service, which allows customers to split purchases of up to $30,000 into installments

·     REITs: BEKE reports Q1 adjusted net loss of (-$0.08), smaller than the expected loss of (-$0.47) saying the co is facing significant uncertainties arising from the outbreaks of COVID-19 variants in some cities and a soft macroeconomic outlook; in research, BMO Capital downgraded office REITs JBGS, KRC and VNO; and apartment REIT ESS to Market Perform

Healthcare

·     Pharma movers; GSK agreed to buy privately-held Affinivax, a clinical-stage biopharmaceutical company for $2.1B upfront and up to $1.2B in potential milestones; TXMD surges after agreeing to be acquired by private-equity firm EW Healthcare Partners at a total enterprise value of about $177 million, with holders to receive $10 a share in cash, more than four times Friday’s closing price of $2.14 https://bit.ly/3x15MYR ; ETON said it was notified by its privately held partner Azurity Pharmaceuticals that the U.S. FDA had declined to approve their anti-seizure drug, lamotrigine; TGTX slips after FDA extended the review of its experimental drug, ublituximab, for the treatment of relapsing forms of MS and will now take a decision by Dec. 28; SNY slips after the FDA put on hold a trial to support switching ED medication, Cialis, to OTC from prescription

·     Biotech movers; MRNA and TAK announce plans to transfer marketing authorization for Spikevax COVID-19 Vaccine in Japan to Moderna; PYPD announces completion of enrollment in phase 3 shield I trial of d-plex for prevention of surgical site infections in abdominal surgery; REGN and SNY Dupixent Medical’s application seeking approval of Dupixent to treat prurigo nodularis received FDA priority review; AXSM announces publication of pivotal Gemini phase 3 trial of AXS-05 in major depressive disorder; BMRN slips after saying earlier it will re-submit its application seeking approval for its gene therapy in Sept, compared with prior expectations of June, due to FDA request for more info

·     Healthcare research: NRIX upgraded to Overweight at Wells Fargo after the co’s R&D Day when we got a positive, albeit modest update for its NX-2127 program; NVO upgraded to Buy at Guggenheim saying anticipation for NOVO’s SELECT interim analysis has been steadily rising after the company announced at its Capital Markets Day that the analysis was expected to occur in 3Q22, earlier than the previously communicated 2023

·     MedTech Equipment; PODD shares tumble after DXCM this morning denied it is in any merger talks (recall PDDO had risen ~16% since the start of last week on a media report from Bloomberg that DXCM was in talks to buy the company); SYK was granted 510(k) clearance to SYK’s Q Guidance System on Fri (5/27) for Spine Applications; ABT said the FDA cleared its FreeStyle Libre 3 glucose monitoring system (CGM) for diabetic patients aged four years and older.

Industrials & Materials

·     Industrials & Materials: PCH and CTT have entered into a definitive agreement to combine in an all-stock transaction. Based on the closing stock prices of PotlatchDeltic and CatchMark on May 27, 2022, the combined company is expected to have a pro forma market capitalization over $4B and total enterprise value of more than $5B, including $557M in net debt; lithium stocks (ALB slipped after Goldman Sachs said it sees sharp correction in lithium prices over the next two years – sees sharp correction in lithium prices (spot $60,350/ton vs brokerage’s avg estimates of $53,982/ton and $16,372/ton in 2022 and 2023, respectively)

·     Chemicals: FMC, SHW, and PPG all initiated at Underperform ratings at Credit Suisse saying a rising interest rate environment could negatively impact residential and commercial paint demand, while initiated outperform ratings on LIN and EMN; LIN upgrade from In Line to Outperform with $355 tgt at Evercore/ISI as like the defensive set up relative to a challenging market set up for cyclicals; at Alembic Global, DOW and LYB both downgraded to Neutral from Overweight citing expectation for a second half "air pocket" for the U.S. chemicals sector

·     Metals & Mining: M&A news in gold miners as South African miner Gold Fields Ltd (GFI) agreed to buy Canada-based miner Yamana Gold Inc (AUY) in an all-share deal valuing the company at $6.7 billion. Gold Fields said its shareholders will own about 61% of the combined group; in steels, STLD downgraded to Neutral from Buy at Goldman Sachs saying while remain constructive on the fundamentals of the business, we see this better reflected in current valuation with the stock having outperformed since initiation; overall steel and iron ore producers were generally weaker on the day (X, NUE, STLD, CLF)

Technology, Media & Telecom

·     Internet & Media: PARA’s "Top Gun: Maverick" set a record for Memorial Day weekend openings, drawing $126 million over the three-day weekend, and paced toward $156 million counting Monday’s Memorial Day holiday (AMC, CNK, IMAX moved as well); Jefferies lowered price tgts and cut FY23 ests for 11-Internet stocks saying negative sentiment across both consumers and businesses is likely to result in more cautious spending patterns, with headwinds worsening as the economic slowdown deepens (lowers tgt by 15% on LYFT, UBER, SONO, UPWK and sees least impact on BMBL, MTCH); U.S. listed China stocks (BIDU, BABA, PDD, JD) rise amid easing in lockdown measures in major cities and better-than-expected economic data

·     Telecom: RCI agreed to put their deal with SJR on hold as the telecom companies attempt to come to resolution with a Canadian antitrust regulator; DISH upgraded from Hold to Buy at Truist and up tgt to $60 from $25 saying with the DISH Network investor day now in the rearview mirror, the stock is now beginning to rebound after investors digest the lack of detail associated with the likely $20 billion+ build plan.

·     Semiconductors; Samsung (SSNLF) shares fall early following a report they notified its partners to cut smartphone production for the rest of 2022 and manufacture ~280M devices, down from ~310M as initially planned https://bit.ly/3N6s9Sg ; QCOM CEO said the co would be, along with its rivals, interested in buying a stake in British chip designer Arm, to maintain Arm’s neutrality.

·     Software movers; ZM upgraded to outperform from underperform at Daiwa securities in the wake of the video-conferencing company’s recent results; GRAB upgraded to Outperform at Bernstein as see risk-reward attractive and see it as a beneficiary of the post-pandemic reopening after having corrected 18% over the past month and 76% from its listing