Closing Recap

Monday, August 03, 2020

Equity Market Recap

·     U.S. stocks were broadly higher as improving economic data in the manufacturing sector in the U.S. as well as in the EU and China overnight helped boost sentiment that economies are recovering more quickly than anticipated amid the coronavirus pandemic. Also, a drop in the rise in COVID-19 cases also boosted trading appetite as reports indicated the U.S. logged its lowest number of new Covid-19 cases in weeks. The Nasdaq Composite once again paced the broader market gains, trading to fresh all-time highs topping the 10,900 level (rising for a 4^th day) as quarterly earnings in the space has been impressive thus far. Dow component and tech giant Apple (AAPL) is quickly approaching a $2 trillion mkt cap while MSFT added to gains on reports they may get the green light from the U.S. to buy the TikTok domestic operation. Defensive Real Estate, Utilities, Discretionary, Staples and Communication Service sectors were down on the day in the S&P 500 while technology and healthcare/biotech were the top gainers (again). The dollar partially rebounds on better economic data (ISM Manufacturing results touch best levels since March 2019), while oil and natural gas prices rise. There were a few M&A deals to start the week as Varian (VAR) gets acquired in a $16B deal while Marathon Petroleum (MPC) announced an agreement for the sale of Speedway for $21B in an all-cash transaction. Markets handling news well that Washington failed to reach a compromise for the next round of Federal stimulus, as the two sides remain far apart on key items. Coronavirus cases news was mostly positive Monday as Arizona cases slowed to its slowest increase since late June, Florida Covid-19 cases rise 1%% vs. previous 7-day avg. 2%; California reports 5,739 virus cases vs 8,812 14-day average; though NJ retightens restrictions on indoor gatherings after the recent COVID surge. Stocks tumbled from highs in the final hour of trading after Treasury secretary Mnuchin said meetings with democratic leaders of congress on coronavirus relief bill done for the day (no chance of deal tonight).

Economic Data

·     U.S. ISM Manufacturing for July rises to 54.2, topping the 53.6 estimate , trading at its highest levels since March 2019 as production rose to 62.1 vs 57.3, new orders rose to 61.5 vs 56.4 prior (best levels since Sept. 2018 and employment rose to 44.3 vs 42.1

·     July Manufacturing Markit PMI 50.9 vs Flash Reading 51.3; Index rises to 50.9 from 49.8 in June; Year ago 50.4; New orders rise vs prior month

·     Construction Spending fell an unexpected (-0.7%) vs. est. for a rise of 1% as private construction fell 0.7% in June, Private residential construction fell 1.5%, Private residential home improvement spending fell 0.4% in June to $201.5b and Public construction fell 0.7% in June

·     The U.S. Treasury Department said it plans to borrow $947 billion in the third quarter as it anticipates the government continuing to need to spend heavily in order to reduce the impact of the coronavirus epidemic on the economy. It borrowed $2.753 trillion through credit markets in the April-June quarter, a record for any quarter and higher than the previous record borrowing for a full FY of $1.8 trillion in 2009. It ended the period with $1.722 trillion in cash.

Commodities

·     Oil prices rise, with WTI crude gaining 74c or 1.8% to settle at $41.01 per barrel, helped by positive economic data from Europe, Asia and the U.S. and hopes of improving global demand as rising coronavirus cases slowed over the last few days – at the same time, oversupply as OPEC begins to lift supply cuts remains a concern. ISM manufacturing data in the U.S. came in at its best levels in over a year, helping demand sentiment. A similar survey showed manufacturing activity across the euro zone expanded last month for the first time since early 2019. Natural gas futures rose 16.8% to settle at $2.101 mln btu on soaring on the prospects of hotter weather, which boosts the demand at power plants to run cooling and air conditioning systems.

·     Gold prices inched higher, rising 40c to settle at $1,986.30 an ounce as a small rebound in the dollar and global stocks markets jumping did not dent the appeal of the safe-haven investment, which has been rallying in lock-step with stocks over the last month. 

Currencies

·     The U.S. dollar rebounded off 2-year lows touched late last week, as the dollar index (DXY) rose to highs of around 93.99 before paring gains throughout the afternoon. Last month the dollar index fell more than 4% for its biggest monthly drop since September 2010, helping in part fuel the big jump in commodity related prices – today seemed to be a bit of a minor unwind of the trade, helped by better ISM Manufacturing data. The weakness has been tied to market expectations for further easing of U.S. monetary policy, and a lack of agreement among U.S. lawmakers on further fiscal stimulus. Falling U.S. bond yields have also been cited as a factor. Against the Japanese yen, the dollar gained 0.4% to push past the 106-yen-per dollar mark. The Russian rouble jumped against the U.S. dollar, surging off a three-month low hit earlier.

Bond Market

·     U.S. Treasuries prices remain in tight range, but slightly lower as yields partially recover off near record lows for many short-term Treasury yields (2, 5-yr). Yields remain at persistently low levels. The 2-yr yield is up one basis point to 0.11%, and the 10-yr yield is up one basis point to 0.55%, while the 5-year recovers from its all-time low yields last week.

Sector News Breakdown

Consumer

·     Retailers; were one of the “softer” sectors on the day as winners keep winning (tech), while losers fail to rebound meaningfully with broader markets; UAA failed to rally despite an upgrade to Neutral from Negative at Susquehanna; FOXF estimates and tgt raised to $85 at Truist following recent bike dealer survey as expect Bike (SSG) segment revenue to grow in excess of FOXF’s evergreen MSD-HSD% range; gun related names SWBI, RGR and SPWH rise after monthly NICS Firearm data shows July figures 3.639M checks, up from the 2.03M a year earlier, but down from June ’20 of 3.931M; Lord & Taylor and its owner, clothing rental startup Le Tote Inc., have filed for Chapter 11 bankruptcy protection

·     Consumer Staples; CLX Q4 EPS $2.41 vs. est. $1.99; sees flat to low single-digit increase in FY21 sales; says Linda Rendle promoted to CEO; Q4 sales $1.98B vs. est. $1.87B; TSN said in a filing that it is under investigation by the Department of Justice’s Antitrust Division. Tyson received a notice of the investigation on May 22, which is focused on its beef and cattle packing markets; BYND expands Club Store distribution with BJ’s Wholesale and Sam’s Club

·     Casino & Leisure movers; IGT reached a multi-year agreement with leading sports betting and iGaming provider, FanDuel Group to power high-volume retail sportsbooks through Sept. 2024; HGV raised our tgt from $23 to $27, VAC raised our tgt from $114 to $125, WYND raised our tgt from $39 to $43 at Truist as view drive-to domestic leisure-centric names as best positioned in our lodging and leisure coverage universe; cruise lines NCLH, CCL, and RCL were among the top decliners in the S&P 500 earlier on after CCL said canceled short trips on AIDA Cruises between Aug. 5 and 12 while it still waits for approvals from Italy

·     Autos; NIO reported deliveries growth of 322.1% to 3,533 vehicles in July, as delivered 17,702 vehicles YTD, +111.3% YoY; Hyundai North America sold total 57,677 units in July, a 1% increase YoY while retail sales were 53,555 units, up 4% YoY and the third consecutive month of increasing retail sales; RACE-Q2 adj ebitda EU124m, revs EU571M and guides 2020 adj ebitda EU1.08B-EU1.13B vs. est. EU1.16B; Mazda North America ytd sales down 5.5% y/y and North America July sales 24,085, up 3.4% y/y; auto retailers AN, GPI, KMX offer a compelling play on a recovery, according to Barron’s this weekend

·     Services; ADT shares surged entered into a long-term partnership with GOOGL to create the next generation of smart home security offerings; GOOG will commit an additional $150M for co-marketing, product development, technology and employee training and GOOGL will make a $450M investment in ADT in exchange for shares of a newly created Class B common stock

Energy

·     Energy stocks again lag broader markets despite a bounce in oil prices early and as natural gas prices jump over 15% above $2.00 mln btus; shares of RRC, EQT, AR, SWN, stocks leveraged to natural gas prices rise amid hotter weather forecasts which boosts the demand at power plants to run cooling and air conditioning systems. OPEC and its allies will pump about 1.5 million b/d more this month than in July as it starts to unwind its historic virus-driven output curbs, with Russia already having lifted its output slightly last month.

·     Oil E&P and equipment sector; MPC announced an agreement for the sale of Speedway for $21B in an all-cash transaction, $16.5B estimated after-tax proceeds; in equipment, HP was downgraded to underweight at Barclay’s saying its valuation was stretched as earnings expected to dry up; NBR was upgraded to equal-weight at Barclay’s

·     Utilities & Solar; SEDG was downgraded ahead of June quarter results tonight at JMP Securities, noting the company has performed well through the pandemic, and believe that any reasonable expectations for SEDG’s future success are now reflected in the company’s stock price

Financials

·     Services; Special purpose acquisition company (SPAC) DPHC and electric truck manufacturer Lordstown Motors Corp. said Monday they have agreed to a $1.6B merger, with the combined company to be listed on NASDAQ under the new ticker symbol "RIDE."

·     REITs; JCAP to be acquired by an affiliate of NexPoint Advisors, L.P. for $17.30 per share in all-cash transaction valued at ~$900M as deal was unanimously approved by Board; JCAP to discontinue its regular quarterly dividends; CLI shares slipped as Q2 results disappoint

·     Consumer finance and lending; COF cuts quarterly dividend to 10c from 40c; GPN Q2 adjusted EPS of $1.31 beat estimate of $1.20 while the company says business recovery continued through July and also reported a new multi-year agreement with TD Bank for processing and support services and a multi-year collaboration pact with Amazon Web; WEX downgraded at Wells Fargo saying the rebound in fundamentals has been a bit more gradual than we expected limiting our ability to raise our estimates, valuation and price target.

Healthcare

·     Pharma movers; MRK upgraded to buy at Goldman Sachs with $105 tgt citing its pipeline and balance sheet optionality and believe Keytruda LOE tail risk priced in; LLY initiates a Phase 3 clinical trial, BLAZE-2, evaluating LY-CoV555 for the prevention of COVID-19 in residents and staff at long-term care facilities in the U.S.; HTBX Phase 1 trials for its Covid-19 vaccine with the University of Wisconsin–Madison could begin in early 2021, the university announced; TYME said FDA granted Orphan Drug Designation for its lead pipeline candidate SM-88, or racemetyrosine, as a potential treatment for patients with pancreatic cancer; KODK shares dropped as disclosed that holders of convertible notes were exercising their right to convert notes into common stock

·     Biotech movers; BCRX said the FDA granted Fast Track designation to its experimental drug, BCX9930, to treat blood disorder called paroxysmal nocturnal hemoglobinuria (PNH); MorphoSys AG and INCY said the FDA has approved Monjuvi in combination with lenalidomide to treat adult patients with relapsed or refractory diffuse large B-cell lymphoma; IMUX jumps after the co’s multiple sclerosis treatment meets main goals in mid-stage trial; CBAY rises as announces positive results from a Phase 3 clinical trial, ENHANCE, evaluating lead drug seladelpar in patients with primary biliary cholangitis (PBC)

·     Healthcare suppliers, medical equipment and devices; VAR to be acquired by Siemens Healthineers, a spinoff in 2018 of Siemen’s AG (SIEGY) for $16.4B as VAR holders will receive $177.50 each in cash, representing a 24% premium to the U.S. company’s closing price on Friday https://on.mktw.net/33iI7op; MDT announces the FDA nod for its InterStim Micro sacral nerve modulator (SNM) for the treatment of overactive bladder, fecal incontinence and non-obstructive urinary retention; MCK reported Q1 EPS of $2.77 easily topping the $2.35 estimate while revs of $55.68B also topped views ($53.97B est.)

Industrials & Materials

·     Industrial & Machinery; in waste, CVA was upgraded to buy at Stifel saying the trends are favorable baring a return to broad economic shutdown; in engineering, Jacobs (J) posts Q3 adj EPS of $1.26, above consensus view of $1.00 on rev beat of $3.3B (est. $3.17B) while raises FY adj EPS to $5.05-$5.30, up from its prior forecast of $4.80-$5.30 (est. $4.96)

·     Aerospace & Defense; SPCE signs a non-binding memorandum of understanding with Rolls-Royce (RYCEF) to collaborate in designing and developing engine propulsion technology for high speed commercial aircraft; GD downgraded to hold at Argus as once again cautious on the stock due to problems in the Aerospace segment, this time related to the impact of the coronavirus on deliveries and, increasingly, orders; BAH downgraded from buy from hold at Truist on decelerating organic growth and premium valuation (says prefers CACI on accelerating book to bill and ICFI on benefit from increased spending on public health)

·     Transports; KSU rises again after surging late Friday on reports of possible takeover bid (WSJ had reported a group of buyout investors are considering a takeover bid for KSU for a deal that could exceed $21 bln)- shares were upgraded at JPM today as well; airlines weighed (JBLU, ALK, AAL) on the Dow index, which dropped back below the 10,000 level late morning

Technology, Media & Telecom

·     Internet; PINS shares surge after analyst upgrades (follows earnings last week), as Pivotal upgraded to buy with $44.50 tgt after recently posted strong Q220 revenue and MAU results – beating street estimates by 8% at $273mm vs Street at $252 and MAUs of 417mm vs Street at 379mm; EXPE was upgraded to buy from neutral at BTIG and tgt raised to $90 at Susquehanna after weaker earnings last week sunk the stock; SNAP shares pressured following the reports MSFT looks into acquiring at TikTok (news late last week); GOOGL sold $10B of bonds at record low yields

·     Semiconductors; the Philly semi index (SOX) making another record high, trading as high as 2,181 today, with 52-week highs for 10 names in the index (ENTG, NVDA, QRVO, SWKS, QCOM, MPWR, MKSI, TR, LRCX, CREE) – sector has outperformed following strong quarterly results in the sector, as well as good signals from AAPL sales, helping lift chip suppliers; QCOM was upgraded to outperform at Bernstein; MRVL tgt was raised to $50 at Bank America saying it is well-supported by a recent rise in demand due to the work-from-home trend

·     Software movers; AAPL adds to last Friday gains, new highs daily after better earnings results and upward momentum; MSFT confirmed talks to acquire TikTok following blessing from Trump, who gave the two sides until 15-Sep to secure a deal; ZM said it will no longer sell new or upgraded products direct to customers on the Chinese mainland/instead, it will be offering its video conferencing services via third-party partners; DT shares declined after pricing 25M share offering at $41.10 earlier; ZVO shares jump on earnings and deal with University of Arizona