Closing Recap

Monday, February 28, 2022

Equity Market Recap

·     U.S. stocks extremely volatile, finishing mixed alongside weakness in bond yields, while commodity prices were broadly higher in a reversal of Friday’s market action after Russia’s central bank opted for an emergency interest-rate hike to combat a collapse in the ruble, more than doubling its benchmark rate to 20%, hours after the U.S. and its allies imposed additional sanction on the country. Russia also temporarily banned brokers from handling sales of securities by nonresidents and kept the Moscow Stock Exchange closed Monday. Over the weekend, Western allies said they intended to cut off some Russian banks from the Swift network, a global payment system that connects international banks and facilitates cross-border financial transfers – in turn would prevent Russia’s central bank from deploying its more than $600 billion in reserves to aid the Russian economy. The news overnight into today was all that dominated market action and headlines. With earnings season behind us until mid-April now a trio of worries around rising interest rates, slowing growth (especially in technology), and the Russia-Ukraine conflict – the S&P 500 has endured a selloff from its early January peak by 11% on a closing basis and almost 15% intraday. Over the last two weeks, the primary driver has been the escalation in the Russia-Ukraine conflict, with 10y bond yields declining even as oil prices rose sharply. In one of the more amazing stats today, Bespoke noted that the Nasdaq 100 (QQQ) has had an intraday range of more than 1% every day this year.

·     Stock and Sector movers: Alt Energy/EV space strong with SEDG ENPH TSLA among the S&P leaders, FSLR SPWR NIO LCID outperforming, and Susquehanna’s upgrade of BE lifts fuel cell names PLUG FCEL BLDP; REGI also spikes after being acquired by CVX for a 40% premium to Friday’s close; RIDE notable outlier in the space, falling over 20% after its earnings; traditional energy stocks also area of strength as oil prices move higher again amidst the Russia-Ukraine invasion; OXY DVN EOG APA HES among S&P leaders; BP slides after exiting its stake in a Russian-controlled producer; crypto space rebounds with Bitcoin recapturing $41K level for first time since Feb. 17, ETH Ethereum climbing, and COIN RIOT MARA MSTR soaring; banks underperform with sliding Treasury yields – JPM GS among the Dow’s worst components, Citi weaker than other on its exposure to Ukraine and Russia; travel EXPE UAL DAL CCL also area of weakness. EPAM loses nearly half of its value after withdrawing guidance due to uncertainty surrounding Ukraine; while shares of Russian based companies halted by the Nasdaq and NYSE temporarily due to regulatory concerns following sanctions on Russia QIWI OZON YNDX HHR.

Economic Data:

·     February Chicago PMI was reported at 56.3 a big miss below the 63 consensus and 65.2 prior (unrevised).

·     Advance Retail Inventories rose +1.9% in January to $658.1B vs. +4.7% prior (revised from +4.2%)

·     International Trade in Goods for January with deficit -$107.6B vs. -$98.5B consensus and -$102.1B prior (revised from $101.0B); imports were $262.5B, up from $258.3B in December and exports were at $154.8B, down from $157.3B in December

Commodities

·     Oil prices jumped as WTI crude rose $4.13, or 4.51% to settle at $95.72 per barrel as the U.S. and its allies imposed more sanctions on Russia and blocked some Russian banks from a global payments system, which could cause severe disruption to its oil exports. Gold prices rose $13.10 or 0.7% to settle at $1,900.70 an ounce, off earlier highs of $1,935.20 an ounce to close out the month of February with a gain of just under 6% for the month. Gold prices got a boost this month as investors looked to safe-haven assets amid geopolitical uncertainty.

Currencies & Treasuries

·     Treasury prices jumped in a rotation back to “haven” and defensive assets, sending Treasury yields tumbling as investors worried about the impact of new financial sanctions on Russia after invading Ukraine last week, and its possible chain of events on financial markets. The yield on the benchmark 10-year fell over 13 bps to lows around 1.84% (3-week lows), while the 2-yr yield, more sensitive to Fed interest rate moves, fell a greater 16 bps to 1.42%. The U.S dollar was mixed, rising against the Euro which fell back to the 1.12 level while the Japanese yen was around the 115 mark. The Russian ruble plunged to a record low, trading at 119 rubles to $1 in the European morning before recovering moderately to around 97 rubles.

·     Bitcoin rebounded sharply mid-morning, topping the $41K level (off overnight lows around $37K) as trading volumes between the Russian ruble and BTC jump to a nine-month high, CoinDesk reported, citing data. It appears the Western sanctions against Russia and central bank restrictions on trading have triggered a flight from the ruble, as ruble-denominated bitcoin volume jumped to nearly 1.5B RUB on Thursday, the highest since May, CoinDesk highlighted.

Sector News Breakdown

Consumer

·     Retailers; BMO Capital upgraded DLTR to Outperform with a $170 PT from $155 on favorable risk/reward with expectations that are too low for the gross margin impact of the shift to $1.25, which could support upside to 2022 earnings guidance, though even disappointing guidance could prompt activist investor-led management/Board changes; Deutsche expects relatively in line Q4 reports this week from TGT, DLTR, BJ, BIG, COST and expect the focus to shift entirely to Q1/FY22 guidance where they are now modeling below consensus for TGT, DG, BIG; PRTY Q4 adj EPS 40c vs est. 41c on revs $698.3M vs est. $697.5M, comp sales +17.8%, sees 2022 comp sales +2-4% with revenue $2.275-2.35B vs est. $2.21B, adj EBITDA $275-300M vs est. $301.9M; Bank of America downgraded QRTEA to Neutral with a new $6.30 PT from $11.50; FL was double-downgraded to Sell from Buy at Citi, downgraded to UW from EW at Morgan Stanley and to Neutral at Seaport and Credit Suisse after Friday’s guidance included lower NKE sales as it focuses on DTC; Wells raised their FY23 EPS estimates on TPR above the Street consensus and say it remains a Top Pick in their space given double-digit EPS growth over the next several years and it trading at <10x P/E and sees compelling long-term value in CVNA after its -46% YTD selloff; Wells also lowered their PT on BBY to $90 from $110 ahead of its investor event Thursday

·     Auto sector; TSLA supplier Panasonic (PCRFY) announced that its Energy Company will establish a production facility at its Wakayama Factory in western Japan to manufacture new, "4680" lithium-ion batteries for electric vehicles to expand its business globally; in auto suppliers, LEA downgraded at Morgan Stanley and cut tgt to $175 from $200 saying along with Q4, company gave revenue, op income, and EBITDA guidance that were all lower than consensus; the firm upgraded AXL to Overweight, doubling tgt to $16 on improved top-line growth outlook where ICE-derived FCF is harvested for longer than the market expects; TM suspends all domestic factory operations after suspected cyber-attack; NIO applied for a secondary listing of its Class A shares on Hong Kong stock exchange by way of introduction; GT positive mention in Barron’s

·     Consumer Staples & Restaurants; New York City Mayor Eric Adams indicated that the vaccine passports will no longer be required in New York City starting on March 7 barring "unforeseen spikes" in COVID cases – the news will cover restaurants, gyms, and indoor venues in New York City – the news, coupled with lessening restrictions around the country failed to boost shares of restaurant related stocks this morning; no safety in defensive staples today (PEP, PM, TAP fall)

·     Casinos, Gaming, Lodging & Leisure sector; Travel and leisure underperformed in early trading on Monday after the weekend news of war in Ukraine and global sanctions against Russia were digested. Hotel stocks, airline stocks and travel services stocks all fell – CCL, BKNG, EXPE, RCL, NCLH, HLT, H, UAL, AAL, DAL and other related sectors

Energy

·     Energy stock movers; the sector was among the top advancers in the S&P with big gains in OXY, APA, DVN, HES among them on the surging price of oil given possible disruption to supply given the Ukraine/Russia conflict; BP shares decline after saying this weekend it would exit its nearly 20% stake in Russia government-controlled oil producer Rosneft following pressure from U.K. officials after Russia’s invasion of Ukraine; SHEL said it will exit all its Russian operations, including a major liquefied natural gas plant; OVV was upgraded to Outperform at RBC Capital and boosted tgt to $50 per share following its fourth-quarter results and conference call

·     Utilities & Solar; REGI spikes after CVX agrees to acquire in the sustainable fuels producer in an all-cash deal valued at $3.15B, as Chevron will pay $61.50/share, a ~40% premium over Friday’s $43.81 closing price https://bit.ly/3C0GbAr ; BE upgraded to Positive from Neutral at Susquehanna and up tgt to $33 from $18 which reflect recent bullish medium-term outlook and potential tailwinds from higher geopolitical risks that could benefit alternative energy sources; EXC reaffirmed its guidance range for full year; solar stocks saw strength again (RUN, SEDG, ENPH, FTCI, SPWR, ARRY) on expectations that meaningfully higher oil, natural gas, power may remain elevated and may provide renewed interest in clean energy stocks

Financials

·     Bank movers; as Treasury yields tumbled given the Russia/Ukraine news, which boosted bets that the Fed will pare back its expected aggressive rate hike cycle, sent shares of banks and insurance stocks lower; TD said it signed a definitive agreement to acquire FHN in an all-cash transaction valued at $13.4 billion, or $25.00 for each common share of First Horizon; Citigroup (C) said it has $5.4 billion in asset exposure to Ukraine, according a regulatory filings as exposure totals about 0.3% of Citigroup’s 2021 bank assets, and Citigroup also disclosed $8.2 billion of third party exposure to Russia https://on.mktw.net/3K6oBxJ

·     Bitcoin, FinTech & Payments; SQ was upgraded to Outperform at BMO Capital after earnings last week as expect SQ will re-rate to 60x 2023E P/E, given +32% organic revenue growth potential; this implies >30% upside and follows a 70% de-rating; an overall strong follow through rebound from Friday for the group after better SQ results with PYPL, UPST, AFRM seeing strength; in REITs; WPC agreed to acquire Corporate Property Associates 18 (CPA:18) in a transaction valued at $2.7B including the assumption of debt.

Healthcare

·     Pharma movers; VTRS said it will sell its biosimilars business to India-based biopharmaceutical company Biocon Biologics in a deal valued at up to $3.34 billion; AUPH falls as forecasts 2022 Lupkynis sales in range of $115-135M, which is well below $178M consensus estimate; LXRX voluntarily withdraws Sotagliflozin new drug application, resubmission targeted early 2q 2022; resubmission to correct recently identified technical issue; RETA expects to complete the submission of the rolling NDA for Omaveloxolone by the end of Q1; GSK said that it plans to demerge and list its consumer healthcare business–recently named Haleon–in July 2022, and set targets for the company, including 4%-to-6% sales growth in the medium term; ABBV downgraded to Neutral from Buy at UBS following a review of model and near-term pipeline opportunities and struggle to find further upside to the model

·     Biotech movers; ABUS files lawsuit against MRNA seeking damages for infringement of patents related to the latter’s COVID-19 vaccine saying they seek fair compensation for Moderna’s use of our patented technology that was developed with great effort and at great expense; GILD downgraded from Outperform to Market Perform at BMO Capital and cut tgt to $65 from $75 on revised view of the TROPiCS-02 readout; IFRX slides after reported that the Company has received an advice letter from the U.S. FDA related to its Phase III program with Vilobelimab for the treatment of hidradenitis suppurativa

·     Healthcare Services, MedTech Equipment; IIN enters into agreement to be acquired by an affiliate of Altaris capital partners for $241M, with shareholders to receive $24.25 per share in cash https://bit.ly/3ItdwWN ; MOH will join the S&P 500 index, replacing INFO, which is being acquired by SPGI; CI to deploy more than $7B in capital to share buyback; CANO said it is delaying its Q4 and full year 2021 earnings results due to a recent internal audit; TDOC shares active after teaming up with AMZN to launch Teladoc on Alexa

Industrials & Materials

·     Aerospace & Defense; Wolfe Research upgraded the Defense sector ahead of what they view to be a multi-year upcycle in global defense spend and upgrade LMT to outperform on that better global spend outlook. Following Russia’s invasion of Ukraine last week on 2/24/22 the global perceived threat environment has significantly worsened. Shares of defense contractors such as RTX, NOC, GD, LMT active as well – note Germany said this weekend they would increase its military spending; AER shares fell after saying it will cease leasing activity with Russian airlines saying this is in full compliance with all applicable sanctions against Russia

·     Transports, Industrial & Machinery; travel stocks initially lower on geopolitical fears (NCLH, UAL, RCL, CCL, DAL, AAL, JBLU); ITRI Q4 EPS $0.75 vs. est. $0.19; Q4 revs fell -8% to $485.64M vs. est. $505.7M; guides FY22 EPS $1.25-$1.75 vs. est. $2.12 and revs $2B-$2.1B vs. est. $2.2B saying headwinds due to semi component shortages impacting results

·     Metals & Materials; aluminum stocks active (AA, CENX) as Rusal Ukraine alumina plant halts shipments; commodity prices remain in focus as Barron’s notes Russia is the world’s No. 1 supplier of wheat, while Ukraine exports corn, wheat, and oilseeds, according to Barron’s; gold miners again active (AUY, GFI, NEM, GOLD) with volatility in the price of gold; LIN announces new up to $10 billion share repurchase program

Technology, Media & Telecom

·     Semiconductors; for MU, Hynix, KeyBanc noted inSpectrum released its memory contract pricing for the month of February. 8Gb DRAM pricing was flat m/m, and 256Gb NAND was up 3.8% m/m; no lift overall for the semi chip sector, lagging the broader Nasdaq; AMBA earnings after the close tonight; AMD one of few upside outliers today in semis

·     Software movers; EPAM withdrew its first quarter and 2022 financial outlook due to heightened uncertainties and regional impacts resulting from military actions in Ukraine – Piper also downgraded shares saying Ukraine conflict elevates downside risk; ZEN on Friday terminated its $4B deal to acquire SurveyMonkey parent Momentive Global Inc. (MNTV) – MNTV also guided Q1 revs $114.5M-$116.5M vs. est. $122.4M; strength in cyber-security stocks (CRWD, FTNT, PANW, OKTA) with Wedbush saying "now expect unfortunately a significant ramp-up of cyber warfare by Russian nation-state backed organizations over the coming weeks targeting various US/ Europe enterprises and government agencies"

·     Media & Telecom movers; NLSN mixed results for Q4 as adjusted EPS $0.46 vs. est. $0.35; Q4 revs $894M vs. est. $898.13M; approves $1B shares repurchase program; sees 2022 total revenue growth on a constant currency basis of +3.5% to 4.5%; VSAT said cyberattack was disrupting its broadband services in Ukraine and adjoining regions; ERIC was downgraded at Citigroup saying they expect Ericsson stock to be uninvestable for most investors for the foreseeable future (note a new report over the weekend revealed more details about alleged payments the telecommunications company made to ISIS) https://bit.ly/3hrq5pL