Mid-Morning Look

Wednesday, July 05, 2023

U.S. stocks flattish as investors return from the 4^th of July holiday to a low volume move, as the focus this week remains jobs (ADP, jobless claims tomorrow and nonfarm payroll Friday) as well as tensions with China weighing on sentiment overnight. US Treasury Secretary Janet Yellen visits China this week with the goal of finding areas of common economic ground and opening communication channels amid an increasingly turbulent relationship between the world’s two biggest economies. This weekend, China announced a decision to restrict exports of two metals – gallium, germanium – used in chips and EVs, while the WSJ reported the Biden administration plans to curb China’s access to cloud computing services provided by companies such as MSFT and AMZN. In data, China Caixin services PMI came in at a soft 53.9 vs 56.2 expected, and 57.1 prior, its lowest level in six-months, since January. Later this afternoon, Minutes of the June 13-14 FOMC meeting will be released at 2:00 PM ET – showing debate over holding rates unchanged. Early market leaders Communications (led by META, GOOGL), while Materials fall the most, down over -2% led by the likes STLD, FCX, FMC.

Economic Data

·     Factory orders for May rose +0.3% vs. consensus +0.8% and vs April +0.3% (prev +0.4%), while factory orders ex-transportation fell (-0.5%) vs April -0.6% (prev -0.2%) and factory orders ex-defense +0.8% vs April (-0.6%). U.S. May inventories/shipments ratio 1.49 months’ worth vs April 1.50 months.

Sector Movers Today

·     Semiconductors: The group was mixed to lower after China overnight announced a decision to restrict exports of two metals – gallium, germanium – used in chips and EVs (ON, NXPI among EV chip makers). AMD upgraded to Outperform from market Perform with $150 tgt at Northland saying they think AMD can reach a 20% market share in the AI GPU market over time. AXTI shares fell after saying it would seek permits to keep exporting gallium and germanium substrate products from China, after Beijing abruptly imposed export controls on the metals key to chipmaking. WOLF shares jumped after signing 10-year silicon carbide wafer supply agreement with Renesas Electronics Corp (offsetting the China curb news for semis).

·     In Metals & Materials: MP shares rise on China’s move to restrict exports of rare earth specialty materials germanium and gallium. Citigroup opened a 30-day downside catalyst watch for shares of SCCO saying results should be generally weak based on cost pressure as the Citi commodity team expects the copper price to fall ~10% during 3Q. In Chemicals: ECL price tgt raised to $208 from $195 at Wells Fargo on higher mkt multiples and add to its tactical idea list as firm sees ECL as a beneficiary of moderating and/or lower-trending costs for several important inputs, which should support margin/accelerating y/y EPS growth. ALB added to tactical idea list at Wells Fargo saying they expect strong Q and potential for FY guide increase based on improved index pricing.

Stock GAINERS

·     CCCC +20%; said the FDA cleared its investigational new drug application CFT8919 to begin human study for a potential treatment for a type of non-small cell lung cancer.

·     META +3%; likely seeing strength on “Threads”, which has been referred to as a “Twitter killer,” which will be launched under its Instagram.

·     MP +5%; on China’s move to restrict exports of rare earth specialty materials germanium and gallium.

·     PEGA +15%; upgraded to Outperform from Neutral at Wedbush and raise tgt to $65 from $50 reflecting incrementally better field checks and an under the radar AI story that is now starting to form and saying legal issues overblown/believe has an attractive risk/reward at current levels.

·     RIG +5%; NE, VAL initiated Buy and Neutral on SDRL and RIG upgraded to Buy at Citigroup in offshore drillers.

·     RIVN +1%; as analysts note its entry to Europe via delivery vans made for Amazon is much earlier than expected; more than 300 vans will hit German roads in the coming weeks. Davidson upgraded from Underperform to Neutral with $18 tgt on news.

·     WOLF +13%; after signing 10-year silicon carbide wafer supply agreement with Renesas Electronics Corp (offsetting the China curb news for semis).

Stock LAGGARDS

·     AMRX -16%; after saying on Monday received FDA request for additional information regarding an ingredient in IPX203 in Parkinson’s.

·     CAG -1%; downgrade from Buy to Hold at Jefferies and cut tgt to 38 from $46 saying U.S. tracked channel data for the quarter shows sales decelerated to ~+4% with volumes down ~6.5%, while trends worsened in June.

·     COIN -3%; Piper downgraded from Overweight to Neutral on valuation and a belief that the recent case brought forth by the SEC, as well as the continued lack of regulatory clarity in the US, has created too much uncertainty to prudently project revenues in future years.

·     KNX -2%; warned Q2 results will be lower than previously expected, largely driven by the full truckload market, where persistently soft demand has caused volumes and pricing to be under greater pressure (shares of JBHT, WERN, CHRW also active on guidance).

·     ON -2%; after China overnight announced a decision to restrict exports of two metals – gallium, germanium – used in chips and EVs (ON, NXPI among EV chip makers).

·     UPS -2%; said it hasn’t walked away from contract talks with the International Brotherhood of Teamsters (340K workers), and that it is encouraging the union to continue negotiations on a new labor deal that would avert a crippling strike.

·     WNC -10%; downgraded from Strong Buy to Market Perform at Raymond James saying sees an increasingly balanced risk/reward on the back of ongoing macro/truck market softness that in its view could negatively weigh on trailer demand into 2024.