Closing Recap

Wednesday, November 04, 2020

Equity Market Recap

·     U.S. stocks surged all of Tuesday, led by a rally in technology shares as the Nasdaq Composite jumped as much as 4.5% in a straight move higher as investors accept a divided U.S. government with the GOP holding on to the Senate though the Presidential election still remains uncertain with key states still finalizing vote counts. Crucial battleground states like Georgia, Michigan, Wisconsin, North Carolina, Nevada, and Pennsylvania continued to tally votes, but Biden appears to be leading some of those states, which would give him enough electoral votes to win the White House. Technology jumped as concerns of greater regulatory scrutiny, as well as higher corporate and capital gains taxes eased, while the Healthcare sector surged across the board, paced by gains in BIIB following a positive Ad Com vote for its Alzheimer’s drug as well as gains in large cap Pharma (LLY) and managed care (UNH) on expectations Biden will take over (less pressure on drug pricing). Infrastructure stocks (MLM, VMC) shares fell on less chances of big stimulus with dividend gov’t. Financials were the biggest drag in the S&P as large cap banks drop amid fears of higher corporate taxes and increased capital gains taxes. Markets appeared completely unphased by a divided government and the expectation it could hamper any ability by Democrats to push a mor progressive agenda/stimulus. Wednesday’s gains followed a wild night of premarket trading that saw huge swings as S&P 500 futures had briefly turned red after President Trump accused Democrats of trying to disenfranchise his voters and promised to petition the Supreme Court. Bonds rallied along with stocks leading to a decline in yields with the 10-yr yield down more than 10bps (biggest roll since June). Economic data was mixed, markets brace for another round of earnings results today and tomorrow and jobs data Friday.

Economic Data

·     ADP National Employment report shows U.S. employment increased by 365,000 private sector jobs in October, missing the 650K est.; September payroll change revised to +753,000 from +749,000

·     ISM non-manufacturing for Oct shows PMI 56.6 vs. est. 57.5 and compared to 57.8 in September; business activity index 61.2 in October from 63.0 in September; prices paid index 63.9 in October vs 59.0 in September; new orders index 58.8 in October vs 61.5 in September and the employment index 50.1 in October vs. 51.8 in september

·     U.S. Sept trade deficit was (-$63.9B) vs. est. (-$63.8B) and August deficit (-$67.0B) from prior (-$67.10B); U.S. Sept goods deficit $80.69B, services surplus $16.82B

·     U.S. IHS Markit October final composite PMI at 56.3 (vs flash 55.5) and Markit October final services PMI at 56.9 (vs flash 56.0)

Commodities

·     Oil prices got a double boost of investors moving back into riskier assets alongside the surge in U.S. equities, as well as bullish inventory data as the EIA reported a surprise weekly drawdown of -8M barrels in the latest week as WTI crude rose $1.49 or 2.96% to settle at $39.15 per barrel. Most other commodities were dragged lower as the dollar rallied.

·     Gold prices fell -$14.20 or 0.7% to settle back under $1,900 an ounce at $1,896.20 an ounce, pulling back from 1-week highs as stocks and the dollar gained, pressuring gold prices and as expectations grew that Joe Biden could win the election, raising hopes for a larger U.S. stimulus. Silver settles 1.81% lower at $23.86 and copper rises 0.45% to $3.10 a pound.

Currencies & Treasuries

·     Treasury prices soared alongside big gains in equities as yields fell from five-month highs the day prior as a close U.S. election raised concerns over prolonged uncertainty and the fate of further stimulus measures. The 10-year yield fell as much as 12 bps to lows around 0.76% from highs above 0.945% overnight as the Presidential race comes down to a handful of key states, as both President Donald Trump and Democratic rival Joe Biden had possible paths to reach the required 270 Electoral College votes to win the White House. Yields fell when chances for a Democratic sweep that had been priced into the market faded as the GOP held the Senate. The 30-year yield, which traded as high as 1.757%, was last at 1.5477%, up from a session low of 1.506%.

·     The U.S. dollar advanced after the GOP held the Senate, leading investors to unwind bets that a large fiscal package is likely, as the dollar index (DXY) gained 0.3% to around 93.50. The euro gained 0.08% to $1.1720, after earlier dropping to $1.1602, its lowest since July 24, while the buck was unchanged against the Japanese yen at 104.46 yen, falling off 2-week highs around 105.35. Despite uncertainty over the U.S. election result, risk appetite remained solid with stocks rising, which likely limited the strength of Wednesday’s dollar rally.

Sector News Breakdown

Consumer

·     Auto sector; UBER and LYFT rise as Californians have overwhelmingly voted in favor of Proposition 22, a ballot measure that would exempt drivers for app-based transportation and delivery companies from being classified as employees; Ford (F) issues safety recall for select 2013-17 explorer vehicles recall affects about 350,000 vehicles in U.S, affects about 25,200 vehicles in Canada; Goldman Sachs reinstates BWA at Neutral as increased exposure to Battery Electric Vehicles (BEV) following the Delphi acquisition is offset by risks from high diesel exposure and from increasing OEM vertical integration in BEVs while raises VC to neutral and up tgt to $90; KNDI shares jumped after saying it received clearance from the U.S. Environmental Protection Agency (EPA) for two of its EV models, the K23 and K27

·     Retailers and Consumer Staples; SMG falls after Q4 EPS missed by 3c and in-line sales of $890M noting that selling, general and administrative expenses surged 47% in the quarter; gun stocks and sporting goods retailers under pressure early (SWBI, RGR, VSTO); ANDE posted a smaller quarterly loss and better sales for Q3; LANC reports Q1 Adj EPS $1.35, missing the lowest estimate on revs $349.2M, above est. $342.07Mm and the company expects continued net sales growth in Q2; RBC raises its price targets on WSM, FIVE, DKS, BBBY and lowers its targets on OLLI, LOW, HD, DLTR, DG, AZO, AAP

·     Restaurants; WEN misses analysts’ estimates for Q3 revenue, hurt by weak sales at its restaurants outside the United States which overshadowed a profit beat and a 40% increase in regular quarterly cash dividend; industry active after Florida became the eighth state to raise its minimum wage to $15 an hour as Floridians voted strongly in favor of a ballot measure that will increase it from its current $8.56 an hour over the next six years

·     Gaming sector active given several states passing some form of sports betting: DKNG, PENN among gainers early; 1) sports betting in Louisiana passed in the majority of parishes, 2) Maryland’s ballot measure passed which was essentially an advisory question asking if voters wanted sports betting (Truist said believe legal sports betting in Maryland is likely driving PENNs planned acquisition by year end of the operations at GLPI’s Hollywood Perryville TRS property); 3) South Dakota voters passed their sports betting legislation at retail locations though mobile betting (said benefits PENN, CZR, TRWH, and most notably, MCRI which Truist thinks could add $2-9 per share of value); 4) Virginia cities Bristol, Danville, Norfolk, and Portsmouth all voted to allow casino gaming in their towns; 5) Nebraska and Colorado voters approved measures for land-based casinos that opens up revenue opportunities and should support sports betting

·     Lodging & Leisure names; theme parks active as FUN posted Q3 EPS ($2.41) vs consensus ($1.87) and revenue $87.5M vs consensus $91.2M; EBITDA ($51.0M) vs consensus ($17.3M); says their season pass base increased by approximately 90,000 units, or 5%, since mid-June; HLT Q3 adjusted EPS of 6 cents vs. est. loss (2c), Q3 comparable RevPAR fell 59.9%, a slower pace than the prior quarter’s 81% drop; said it has seen a gradual improvement in demand; private prisons under pressure (GEO, CXW) as Joe Biden has said that he has plans to eliminate them

Energy

·     Energy stock movers; the EIA said weekly crude inventories fell an unexpected -8.0M barrels vs. +0.9M consensus build (and last week +4.3M barrels (bullish data) while gasoline +1.5M barrels vs. -0.9M consensus, -0.9M last week and distillates fell -1.6M barrels vs. -1.7M consensus; overnight, the API showed a draw of 8M barrels of oil for the week ending Oct. 30, gasoline inventories show a build of 2.5M barrels, distillate inventories show a draw of 577K barrels and Cushing inventories show a build of 981K barrels;

·     Energy stock movers; NEX reported Q3 results (EPS (38c) loss, revs $163.7M, adj EBITDA loss ($2.4M)) and Q4 outlook that were generally in-line across the board; AM upgraded to Equal Weight from Underweight at Wells who raises their price target to $7 from $5 on balance sheet progress by its sponsor and primary customer (AR) and Q3 results that were above estimates and modest increase of 2020 guidance; CLH Q3 revenues of $779.3M, compared with $891.7M in Q3 2019, beats consensus by $3.81M and adjusted EBITDA was $161.2M

·     Solar stocks down; Solar stocks (SPWR, FSLR, RUN, SEDG, ENPH, JKS, CSIQ) were weak after it appears unlikely that Democrats would wrestle control of the Senate from Republicans even if Joe Biden wins the presidency, paring recent gains off of Biden’s plans for a transition to clean energy; CSIQ downgraded at CFRA, and FSLR downgraded at Morgan Stanley

·     in utility, AVA reported Q3 EPS 7c on revs $272.65M, missing estimates, and the company reaffirms FY2020 EPS $1.75-1.95; VST Q3 EPS $1.03 (+312% YoY, est. $0.76) on revs $3.55B (+11.35% YoY, misses est. $3.86B) and reaffirms 2020 and 2021 guidance; ES reported in-line Q3 EPS $1.01 on revs $2.34B, both rising YoY, and reaffirmed FY2020 EPS range of $3.60-3.70; WTRG Q3 results were in-line with expectations (Adj EPS 23c on revs $348.6M) and the company sees FY20 adj EPS near the top end of its $1.53-1.58 range; Dominion (D) energy cuts qtrly dividend from 94c to 63c

Financials

·     Bank movers; banking stocks among the top declining sectors as Biden looks to be leading in undecided battleground states, weighing on the industry and fears of higher corporate taxes and increased capital gains taxes (WFC, JPM, BAC, C fall); the sharp drop in Treasury yields also weighing on the sector after recently touching 5-month highs; regional banks also slammed (CMA, ZION, HBAN); in insurance; PRU Q3 EPS beat with $3.14 vs est. $2.65 driven mainly by higher variable investment income and strength at PGIM, partially offset by weakness in Corporate while also announced a $250M increase to its cost save

·     Brokers and Exchanges; MKTX reported October ADNV of $23.3 billion (+6% MoM), while ex-MarketAxess Rates ADNV of $10.5 billion outperformed. U.S. High Grade market share decreased MoM to 21.0% while USHY market share increased MoM to a record 17.1%; NDAQ October volumes were mostly down MoM. U.S. Equities ADV of 1.6 billion shares per day decreased 21% MoM (+29% YoY), while U.S. Options ADV of 10.1 million per day decreased 7% MoM (+54% YoY) and slightly outperformed; TW reported October total trading volume of $19.4T with average daily volume at $910.8B (+28.8% Y/Y), marking its second highest month ever.

Healthcare

·     Pharma movers; big cap healthcare names surge (LLY, BMY, PFE, MRK, ABBV) on expectations Joe Biden will overtake Trump as President who has wanted to repeal Obamacare and go after drug pricing, giving a boost to the sector; cannabis sector (TLRY, CRON, CGC), Arizona, Montana, South Dakota, New Jersey voters all voted to legalize recreational pot while voters in South Dakota and Mississippi chose to legalize medical marijuana (Arizona and New Jersey will have the biggest impact on the cannabis industry due to the size of their population); SAVA reports additional data from a mid-stage study testing lead drug, sumifilam, in patients with Alzheimer’s disease; SUPN Q3 easily beats views/raises FY20 GAAP operating earnings view to $145M-$160M from $90M-$110M and raises FY20 net product sales view to $500M-$525M from $460M-$500M; LLY surges 15% with broader rally in healthcare and after Cantor said after an FDA panel found BIIB’s experimental Alzheimer’s disease drug, aducanumab, effective in a large trial that the FDA comments suggest that a similar bar could be set for Eli Lilly’s donanemab

·     Biotech movers; BIIB surges as its experimental Alzheimer’s disease drug was found effective enough in a large trial to support approval, a U.S. FDA panel – the drug will be reviewed by FDA’s independent experts in a meeting on Friday that will make recommendations to the agency; SLNO announces presentation of body composition data from its Phase III trial, DESTINY PWS (C601), evaluating once-daily Diazoxide Choline Controlled Release (DCCR) tablets for patients with Prader-Willi Syndrome (PWS); NVAX signed an agreement with the Australian government to supply 40M doses of the company’s NVX-CoV2373 Covid-19 vaccine candidate. Interim data expected as soon as early Q1 of 2021.

Technology, Media & Telecom

·     Large cap tech; shares of large cap tech such as AAPL, AMZN, GOOGL, NFLX rise as a more evenly balanced Senate (regardless of Biden or Trump in White House) makes higher capital gain tax or a legislation that regulates capital gain tax more aggressively less likely

·     Semiconductors; Goldman Sachs upgraded AMD to Buy and add shares to the CL as they view the recent pullback as an attractive entry point to gain exposure to a multi-year share gain and margin expansion story (up tgt to $96 from $84) – said look for Sell-rated INTC to continue to lose market share as they cut tgt to $38 from $46 and upgrade TER to Buy as we see an attractive entry point for a company with a strong product cycle and end-market tailwinds

·     Hardware & Software movers; SMCI which supplies servers to cloud computing firms reported adjusted profit of 55c vs. est. 16c as sales at $762.3M topped the $748M estimate mainly due to better performance from the U.S. segment, which saw an increase of ~6%; SBGI slides after its Q3 earnings, where it logged sharp headline losses alongside a 36% jump in revenues driven largely by its added regional sports networks