Closing Recap

Monday, October 26, 2020

Equity Market Recap

·     U.S. stocks posted their worst daily declines in weeks as the Dow tumbled over 600-points as selling pressure took equities lower the entire session with nearly all eleven S&P sectors finishing negative on the day, led by energy, industrials, financials and tech the biggest drags (all last week top gainers). Software was the biggest decliner in tech after German software giant SAP issued a revenue warning, sending shares down over 20%. Energy was hit the hardest as oil prices tumble while mega-cap tech fell sharply after early gains in stay at home beneficiaries (AAPL, AMZN, NFLX). Cruise lines (CCL, RCL, NCLH), theme parks (DIS, SIX) and airlines (AAL, DAL, UAL) plunged as the faint hopes for a fiscal stimulus deal faded further and of course the rising Covid-19 cases. Both the S&P 500 and Dow Industrials dropped below their 50-day moving averages today (3,408 and 28,025 respectively) while the Nasdaq 50-day held support lower 11,304. The U.S. dollar rebounded after falling more than 1% last week as investors took to safe-haven assets with money pouring out of stocks, while Treasury prices advanced, sending yields lower.

·     Europe also declined as Europe’s Stoxx 600 down 1.81% at one-month low, Britain’s FTSE 100 down 1.18%, Germany’s Dax down 3.65% at near four-month low, France’s CAC 40 down 1.90%, Spain’s Ibex down 1.23% and the Euro Stoxx index down 2.39%. France on Sunday reported a record number of new confirmed COVID-19 cases in a 24-hour period, with 52,010 new infections, Coronavirus cases in the Netherlands rise by more than 10,300 in 24 hours, new record-official data, Spain’s coronavirus tally rises to 1,098,320 on Monday from 1,046,132 on Friday, and Italy reports 17,012 new coronavirus cases vs 21,273 Sunday.

·     Stocks tumbled ahead of the busiest week of earnings coming up, as roughly 186 of the S&P 500 are expected to report over the next five days, including Thursday’s (10/29) barrage of Apple, Alphabet, Amazon, Facebook and Twitter. Weighing on the market today included: 1) Spain, Italy impose curfews and other restrictions as coronavirus cases spike with France over 50K yesterday; 2) software names fall after German software giant SAP which cut its guidance for 2020, 3) stimulus deal still not looking good ahead of election next week after House Speaker Pelosi and White House Meadows accused the other of moving goalposts in stimulus talks; 4) China said it would impose unspecified sanctions on the defense industry after the U.S. approved $1.8 billion in arms sales to Taiwan last week; 5) housing data disappoints as new home sales unexpectedly declined in Sept vs. consensus for a rise of over 2%.

·     Spain, Italy impose curfews and other restrictions as coronavirus cases spike; Spain’s overnight curfew expected to last 6 months; Italy tightens rules but opts against full lockdown; Spanish Prime Minister Pedro Sánchez said the decision to restrict free movement on the streets of Spain between 11 p.m.-6 a.m. allows some exceptions – Italy shutting down gyms, pools and movie theaters, putting an early curfew on cafes and restaurants and mandating that people keep wearing masks outdoors. The seven-day average of new daily cases in the United States has reached a record high of 69,494, according to a Reuters tally, while deaths, hovering around 800 per day, are on an upward trend. At more than 41,500, the number of hospitalized COVID-19 patients is at two-month high, straining health care systems in some states.

·     Stimulus deal still not looking good ahead of election next week after House Speaker Pelosi and White House Meadows accused the other of moving goalposts in stimulus talks during Sunday interviews. Pelosi remains optimistic about passing a bill before Nov-3 and hopes to have some answers addressing her concerns about COVID testing and tracing program.

·     China sanctions vs. the U.S weigh on sentiment as well: defense stocks pressured early after China said it would impose unspecified sanctions on the defense unit of BA, LMT and RTX after the U.S. approved $1.8 billion in arms sales to Taiwan last week, Bloomberg reported.

Economic Data

·     New Home Sales unexpectedly fell -3% to 959k in Sept, below ests for up 2.8% to 1.025M (it would have been the first time in over 16-years we had over 1 mln units of reached consensus); Sept home sales northeast -28.9%, Midwest -4.1%, South -4.7% and West +3.8%; Sept new home supply 3.6 months’ worth at current pace vs Aug 3.4 months and median sale price $326,800, +3.5 pct from sept 2019 ($315,700)

Commodities

·     Nymex crude oil settles down $1.29, or 3.2% at 3-week-low $38.56 per barrel, extending losses from last week as increasing coronavirus cases in the U.S. and Europe raised worries about energy demand, while Libya’s fast-growing production also weighed on prices. Libya is set to restart the last of its major oil fields following a ceasefire in its civil war, a milestone for the OPEC member that has been largely offline since January. Of course, disappointment about the lack of a stimulus aid relief bill in Washington adds to market uncertainty. Natural gas inches higher 1.8% to 21-month highs of $3.024 mln btu following colder weather, fears of more production going offline as another storm threatens the Gulf

·     Gold prices end little changed, edging up 50c to $1,905.70 an ounce, supported early by worries over a spike in COVID-19 cases and uncertainty surrounding next month’s U.S. presidential election, though a stronger dollar limited the metal’s advance. Gold has been trapped in a range of $1,880-$1,930 the last few weeks on the dollar decline and mkt uncertainty.

Sector News Breakdown

Consumer

·     Retailers; BOOT downgraded to hold at Craig Hallum noting the stock has significantly outperformed the retail peer group since the company reported Q1 FY21 results in August and the risk/reward at current levels is more balanced; KTB upgraded to buy from Underperform at Bank America and raising tgt to $38 as consensus underestimates the sales trajectory (new distribution starting in 2H20, including WMT) and think KTB will reinstate the div in the n-t; HAS reported Q3 profit and revenue that beat expectations, and said deliveries are expected to improve in the fourth quarter, as shares opened higher before slipping with broader weakness; TPR and CPRI tgts both raised to $25 ahead of earnings this week in luxury retail citing healthy balance sheets and low wholesale exposure

·     Auto sector; TSLA guides for capital expenditure spending in 2020 to be in the high end of its prior outlook range of $2.5B to $3.5B and said it expects capex spending of $4.5B to $6.0B in each of the next two fiscal years

·     Housing & Building Products; DHI, PHM, TOL all upgraded at Raymond James in homebuilders saying with confidence growing in the continuing strength and sustainability of new home demand amid the pandemic recovery, they are using the sector’s recent pullback to better align our homebuilding ratings with our overall bullishness on U.S. single-family housing and the likelihood of a durable new housing cycle

·     Consumer Staples; KO mentioned positively in Barron’s, calling it as under-appreciated post-pandemic "reopening" play; SMPL Q4 EPS and sales ($222.3M vs. est. $205.4M) beats estimates boosted by a rebound in retail demand for its Quest protein bars and sees year Ebitda rising; in beverage space, CCEP made a bid to buy Coca-Cola Amatil in a deal worth ~$6.58B at an effective price of A$12.01 per share; SFM positive mention in Barron’s ahead of earnings with the publication citing increased stay-at-home dining.

·     Restaurants; DNKN said it is in talks to be taken private in a deal worth roughly $8.8 billion as it has held preliminary takeover talks with Inspire Brands (offering $106.50 per share), confirming a report by the New York Times over the weekend https://on.mktw.net/3or258H ; outside of the strength in DNKN, the rest of casual dining space was pressured on the rising Covid cases impact with EAT, CAKE, CMG, DRI, JACK all down sharply

Energy

·     Energy stock movers; E&P sector remains busy as industry consolidation continued this weekend as CVE agreed to buy Husky Energy Inc. (HSE) in an all-stock deal valuing Husky at about C$3.8 billion ($2.9 billion), the 4th deal in the E&P space in the last few weeks which included COP buying CXO, PXD acquiring PE and DVN buying WPX; another deal this morning as well as Contango Oil & Gas Co. (MCF) and Mid-Con Energy Partners LP (MCEP) said they have agreed to merge in an all-stock deal that values both companies at more than $400 million; energy names as a whole fell as oil prices extended last week losses as increasing coronavirus cases in the U.S. and Europe raised worries about energy demand, while Libya’s fast-growing production also weighed on prices; SLB files automatic mixed securities shelf

·     Solar; Roth downgrades DQ to Neutral from Buy on political, non-market risks surrounding the forced labor situation in Xinjiang even though they do not believe DQ is using forced labor as there is a risk that it could become the proverbial baby thrown out with the bath water; Roth also upgrades FSLR to Buy from Neutral with $100 tgt into Q3 results as they see the narrative around FSLR serving as a go-to company for customers seeking security of supply and reduced reliance on the Chinese supply chain gaining further momentum amid the forced labor risk; Credit Suisse downgraded FSLR to Underperform (price target raised to $64 from $54) on valuation and unlikely extensions of Section 201 tariffs or new tariffs, and SPWR to Neutral from Outperform (price target raised to $16 from $12), as the current price already implies strong EBITDA recovery through 2022, though the company could also benefit from any extension of solar tariffs as its module supplier MAXN is exempted from tariffs on Asian suppliers; Credit Suisse also maintained its Outperform rating on RUN and raised its price target to $68 from $39 and set street-high price targets on NOVA ($38 from $26, maintain Outperform) and SEDG ($247 from $180)

·     Utilities; EXC was downgraded to Neutral from Buy and removed as a Best Idea at Guggenheim who lowered their 12-month PT to $42 from $46 as they see a value trap on policy uncertainty in Illinois and they do not expect post-2021 clarity until next spring at the earliest; Barron’s says that utilities are attractive to investors due to offering safe and growing yields in addition to durable earnings and stability ahead of the election as many companies have not reduced their annual earnings estimates. NEE was named as being a utility “in a class of its own,” though XEL and ES were also pointed out as quality utilities offering stability, while CMS, LNT, and NJR were highlighted as utilities who should benefit from clean energy investments, and ATO as a natural gas distributor who is down YTD despite its 2.4% yield and expected increased earnings from last year; XEL was initiated at Citi with a Neutral rating and street-high $76 target

Financials

·     Banks giving back some of last week gains as treasury yield gains unwind given the pullback in stocks – the KRE fell over 2% after gains of more than 6% last week on better earnings in the space; in research, FMBI upgraded to Outperform at Raymond James as a beat in 3Q on fees and deposit growth, along with an expense initiative, drove a 15% increase in our 2021 PTPPI forecast; LOB upgraded to Strong Buy from Outperform and raising our target price to $42 following the strongest quarter in the company’s history and very positive accompanying commentary (and importantly, clarity) on the call around its especially unique business model

·     Consumer Finance: China’s Ant Group Co. is aiming to raise at least $34.4 billion in what is due to be the world’s biggest-ever initial public offering. Ant is seeking to raise about $17.2 billion each in Shanghai and Hong Kong, based on prices of 68.8 yuan and HK$80 respectively per share, according to regulatory filings. Ant could raise up to a maximum of about $5.2 billion more, if underwriters exercise their option to purchase up to 15% more shares in an arrangement known as a greenshoe.

Healthcare

·     Pharma movers; JNJ said late Friday it’s preparing to resume a large clinical trial of its experimental COVID-19 vaccine after finding no evidence the vaccine caused an "unexplained illness" in a study volunteer that caused the company to pause the trial earlier this month; NVS reports positive Phase II interim analysis results for iptacopan (LNP023), an investigational oral treatment for C3 glomerulopathy (C3G), a rare renal disease, affecting young patients with a poor prognosis; MRTX said this weekend that prelim data from two studies showed its experimental drug adagrasib caused tumor to shrink or disappear in 45% of patients with non-small cell lung cancer (NSCLC); JAZZ said it has acquired SWTX’s fatty acid amide hydrolase, or FAAH, inhibitor program for an initial $35M and said it would assume all milestone and royalty obligations owed by SpringsWorks to PFE said the FDA U.S. FDA delayed its regulatory decision on approving its drug for treating low white-blood cell levels in patients with cancer

·     Biotech movers; PDSB announces that the Phase 2 clinical trial of PDS0101 in combination with standard of care chemoradiotherapy for treatment of locally advanced cervical cancer is now open; Bayer announced the acquisition of privately held Asklepios Biopharmaceutical for a purchase price of $2bn upfront and up to $2bn in success-based milestone payments

·     Healthcare services and providers; HCA shares slipped in hospital space as Q3 Ebitda and EPS misses estimates (Q3 Ebitda -10% YoY to $2.05B vs. $2.16B est. and EPS $1.92 vs. $2.32) and said same-facility admissions and equivalent admission fell 3.8% and 9%, respectively

·     MedTech and Equipment; MDT received U.S. FDA approval for the Abre™ venous self-expanding stent system; BSGM shares plunged after the medical technology company halted a trial of its COVID-19 treatment given disappointing results

Industrials & Materials

·     Transports; after trading record levels a week ago around the 12,000 level, Dow Transports seeing a pullback today of over 2.5% to below 11,600 with airlines leading the declines as all 20 components are lower on the day; travel (AAL, UAL, DAL) and leisure stocks under pressure following further increase in coronavirus cases, prompting tighter restrictions in Europe this weekend (Italy and Spain); tanker STNG, EURN, FRO, TK, TNK trading at 52-week lows

·     Aerospace & Defense; defense stocks pressured early after China said it would impose unspecified sanctions on the defense unit of BA, LMT and RTX after the U.S. approved $1.8 billion in arms sales to Taiwan last week, Bloomberg reported.

·     Metals; Reuters reported late Friday night that Brazilian federal prosecutors have accused mining giants BHP and VALE of colluding with a lawyer to reduce compensation for victims of a fatal dam collapse and interfere with a landmark lawsuit against BHP in the UK; copper winners sliding on broader demand concerns

Technology, Media & Telecom

·     Internet; FB and TWTR CEO’s Mark Zuckerberg and Jack Dorsey have agreed to testify on Nov. 17 before a Senate panel looking into restrictions their companies put an on article about the son of Democratic presidential nominee Joe Biden; ETSY another benefit from stay at home space with rising Covid cases – RBC said believe there is upside to the Street’s Q4:20 GMS estimates of $2.5B; AMZN, NFLX other stay at home beneficiaries today helping boost the Nasdaq off lows

·     Software movers; sector got crushed after SAP cut its guidance for the year and abandoned its forecast that profitability would expand steadily over the medium term; lowers FY20 revenue guidance to EUR 27.2-EUR 27.8B, from EUR 27.8B-EUR 28.5B (weighed on software in general – ORCL, CRM); CHKP was upgraded to neutral from sell at Goldman Sachs while downgraded QLYS to sell from neutral with $99 tgt as view the company’s current margin profile as unsustainable with margin contraction expected in FY21

·     Media & Telecom movers; in tower space, CCI upgraded to Outperform with a $172 target price as the company finally reduced 2020 operational guidance, provided weak initial 2021 guidance that we feel is conservative with T-Mobile accelerating the Sprint integration efforts, DISH building a nationwide greenfield 5G network, and mid-band spectrum; CABO announces private offering of $500M of senior notes