Closing Recap

Tuesday, July 07, 2020

Equity Market Recap

·     U.S. equities erased earlier gains, pulling back to session lows at the close as stocks took a “pause” following its recent rally as the S&P 500 snapped its 5-day winning streak led behind declines in energy, financials and transportation stocks. Defensive consumer staples and large cap tech continued to push higher, though the pace of gains slowed late afternoon, with the Nasdaq turning negative late in the session, snapping its 5-day win streak (still yet to post back to back losses since May 12-13). Large cap tech names that hit all-time highs prior to the late day slide included: AAPL, AMZN, FB, NFLX, TSLA, NVDA, and EBAY. U.S. Treasury yields fell as a worsening COVID-19 cases renewed concerns about reopening businesses too quickly as the 10-year yield slid to 0.65%. Markets have largely ignored (including today) the rising number of coronavirus outbreak cases in dozens of U.S. states the last 2-weeks and what it could potentially mean, focusing attention instead on the improving economic data, optimism of a US recovery from the forced pandemic lockdown closures and the fact that death rates and hospitalization rates have not spiked in conjunction.

·     In sector news, the biotech sector also hit record highs (IBB) with strong gains in REGN, NOVX on news; Transportation stocks lagged given cautious outlook from airline UAL, along with sector weakness in usual suspects such as financials and energy. Various industries that have been the most impacted by the virus lockdowns such as airlines, cruise lines, casinos, leisure and theme parks, restaurants and retailers have continued to slide in recent weeks. S&P 500 earnings for the April-June period are now seen plunging by 43.4% year-on-year from 43% forecast on July 1, and dramatically worse than the 11.7% decrease expected as of April 1, according to Refinitiv data.

Commodities

·     Oil prices end the session little changed, slipping 1c to $40.62 per barrel, not doing much ahead of weekly inventory data tonight (API) and tomorrow morning (EIA data). Earlier, U.S. crude output to fall 620,000 bpd to 11.01 million bpd in 2021 (vs. fall of 720,000 bpd forecast last month) the EIA said in its monthly report and said U.S. crude output to fall 600,000 bpd to 11.63 million bpd in 2020 (vs drop of 670,000 bpd forecast last month). Gold futures jumped $16.40 or 0.9% to settle at $1,809.90 an ounce, the best closing level since September 2011 as investors continue to hedge their bets amid rising COVID-19 cases and as a weaker dollar helps buoy commodity prices. Natural gas prices rose 2.5% to $1.876 mln btus.

Currencies & Treasuries

·     Treasury prices advanced as yields slumped to lows late afternoon, with the 10-year down over 3 bps to move below 0.65% as investors add to safe-haven assets with riskier assets pulling back. The U.S. Treasury sold $46B in 3-year notes at a yield of 0.19% vs. 0.189% when-issued prior, as the bid-to-cover (demand) was 2.44 vs. 2.55 prior auction and indirect bidders were awarded54.3% of the auction and directs 13.3%. The U.S. dollar pared morning gains, ending mixed on a day that lacked any incremental economic data.

Coronavirus update

·     U.S. CDC reports 322 new deaths due to coronavirus as of yesterday; total now 130,133 deaths vs 129,811 in previous report on July 6 and reports 46,329 new coronavirus cases as of yesterday; total now 2,932,596 cases vs 2,886,267 in previous report on July 6. Florida coronavirus cases rise by 7,347 on Tuesday to a total of 213,794, or rise 3.6% vs. previous 7-day avg. 5%. New York covid-19 cases rise 0.1% vs. 7-day avg. 0.2%. Arizona cases rise 3653 vs 3352 yesterday but positive % nears 30%. California sees 6,090 new virus cases vs 6,648 14-day average, deaths from virus climb by 111, a 1.8% increase.

Sector News Breakdown

Consumer

·     Restaurants; SHAK updates on Q2 results, disclosing sales of $91.8M vs. $101.0M estimate saying they were impacted negatively by ~$3.2M due to nationwide protest activity and resulting curfews while same-Shack sales were down 49% during the quarter on a 60.1% drop in traffic; DPZ was upgraded to buy from hold with $450 tgt at CFRA; CMG trades to another all-time record high as shares have nearly tripled off the March lows around $415

·     Housing & Building Products; TREX upgraded to outperform from neutral at Baird after the firm’s survey of decking contractors showed strong demand that they anticipate will continue in the third quarter; ROL said it expects Q2 revenue growth in the low to mid-single digits, driven by strong growth in its residential business, as people spent more time at home

·     Consumer Staples, retailers; PM shares slipped after IQOS wins modified exposure label from U.S. FDA; YETI downgraded to neutral at Goldman Sachs as believe strong brand momentum and growth opportunity is now better understood by investors and reflected in the shares; LEVI shares underperformed ahead of earnings tonight; retailers in general were weaker (KSS, DDS, JWN, M) along with REITs as market focus continues to be online focused (W, OSTK); WMT to launch AMZN Prime competitor that will cost $98 per year and includes same-day delivery, Recode reported late morning

Energy

·     Oil and gas stocks fell on concerns that a surge in new coronavirus cases, especially in the United States, will hamper any recovery in fuel demand as equipment, service companies, refiners, E&P names were among the top decliners in the S&P 500. The U.S. crude market faces some uncertainties after a court on Monday ordered the shutdown of the Dakota Access Pipeline, the biggest artery transporting crude oil from North Dakota’s Bakken shale basin to the Midwest and Gulf Coast regions, due to environmental concerns

·     Utilities & Solar; in the solar space, VSLR to be acquired by RUN in an all-stock transaction that implies an enterprise value of about $3.2B, with VSLR shareholders to receive 0.55 SunRun share for each Vivint share, leaving them with about a 36% stake in the combined entity https://on.mktw.net/2BOKNyC; in utilities, Dominion (D) shares downgraded by at least three analysts following the company’s agreement to sell its gas transmission and storage business, a guidance and dividend cut, and the cancellation of ACP

Financials

·     Bank movers; again the quiet before the storm for the banking sector, with earnings kicking into gear for large cap banks the next two-weeks, starting with JPM early next week; MC downgraded to underweight from neutral at JPMorgan citing uncertainty over the U.S. election, Brexit, and COVID-19 all expected to constrain the company’s advisory business well into 2021; CBOE downgraded to neutral at Piper as weakness in proprietary volumes (index options and VIX futures) in 2Q20 were down significantly QoQ and YoY and ran below 2019 levels; AXP, COF, ADS were weaker with consumer finance names among biggest drags in the financial space

·     Services, consumer finance and lending; PAYX mostly in-line quarterly results while sees 2H adj EPS flat to down low-single digits and sees Q1 revenue down high-single to low-double digits; SQ jumps to new all-time highs, rising for the 4th time in 5-days (shares have more than quadrupled since March lows of $32.33); PYPL another mover to the upside in online payment names

Healthcare

·     Biotech movers; NVAX received $1.6B in funding from the federal government’s accelerated COVID-19 vaccine development program (Operation Warp Speed) of its NVX-CoV2373 vaccine candidate including production of 100M doses starting in late 2020; ANVS gets Central Institutional Review Board (IRB) approval to begin mid-stage study of its lead drug candidate, ANVS401, in Parkinson’s and Alzheimer’s patients at 15 sites across the U.S; REGN said the U.S. govt grants them $450M contract to make and supply its double antibody cocktail that is being tested against COVID-19; OTIC announced review of OTIVIDEX’s statistical analysis plan as well as positive top-line OTO-313 Phase 1/2 data for Tinnitus; EOLS falls as Administrative Law Judge overseeing the U.S. ITC released a Notice of Initial Determination for a case filed by ABBV’s Allergan and its Korean partner Medytox in January 2019 to block imports of Evolus’ and Daewoong Pharma’s Jeuveau, a rival to Allergan’s Botox wrinkle treatment

·     Pharma movers; CLLS said its Phase 1 MELANI-01 trial in multiple myeloma patients was placed on clinical hold by the FDA after one participant who received candidate UCARTCS1A experienced a fatal heart attack; ENDP received FDA approval of QWO for the treatment of moderate to severe cellulite in the buttocks of adult women/first FDA-approved injectable treatment for cellulite; ACAD upgraded to buy at Stifel and raise tgt to $71 mainly on increased DRP sales (2025: ~$2B from ~$1B), still based on a realistic penetration (10%); CRVS initiated a Phase 1 study to investigate a novel immunotherapy approach for patients with Covid-19, following FDA’s acceptance of its investigational new drug application; PCRX announced private offering of $300 mln 5-yr convertible senior notes

·     Healthcare services, Medical equipment and devices; QDEL said it expects Q2 revenues to increase more than 80% to ~$201M – $202M, compared to consensus of $172.6M, driven by demand for COVID-19 diagnostic products; ILMN downgraded to neutral at Guggenheim following the 81% rally off the March lows while still think NIH spending and clinical mix shift can continue to benefit Illumina; LVGO raised its Q2 revenue outlook to $86M-$87M form prior view $73M-$75M saying its updated rev forecast includes about $2M-$3M of one-time items

Industrials & Materials

·     Transports; airlines active after the WSJ reports UAL has warned of booking declines due to new travel restrictions, with the drop-off most acute at its Newark hub/also tells employees to prepare to get notifications of potential furloughs as soon as this week; overall, the Transport index underperformed broader markets on the airline weakness as truckers (JBHT, LSTR, EXPD) and FDX performed the best

·     Aerospace & Defense; Avolon said it has cancelled another 27 of its BA 737 MAX orders on top of the 75 aircraft pulled earlier this year. Aircraft leasing companies have cancelled hundreds of Max orders and pushed back remaining deliveries this year; CUB was awarded $950M ceiling indefinite-delivery/indefinite-quantity (id/iq) contract for U.S. air force’s advanced battle management system; EADSY has been awarded an end-to-end turnkey contract for a telecommunications satellite by Optus, Australia’s number two telecom company

Technology, Media & Telecom

·     Internet; SNAP shares outperform, getting a boost after TikTok pulls out of Hong Kong, may be banned in U.S.; 52-week highs for AMZN before pulling back, while NFLX, GOOGL, FB exhibit early gains as large cap tech continues to fuel Nasdaq gains

·     Semiconductors; NVDA record highs, topping the $400 level for the first time; KeyBanc boosted estimates and targets for ADI, QCOM, MCHP and NXPI while also upgraded SWKS to overweight and recommend building long-term positions in semicap, memory (MU), and CPU (INTC) saying quarterly supply chain findings are mixed, with cautious sentiment and low visibility being dominant themes; AMBA was double upgraded from Underperform to Buy at Needham with $55 tgt as introduce our CY22 estimates, which reflect a strong ramp in CV revenue from the three waves of CV design wins; MXL raises its Q2 rev forecast to $$65M-$65.5M from prior view of $60M-$64M citing stronger-than-expected revenues, driven by higher broadband demand and recovery in its analog product sales

·     Software movers; in video games, EA tgt raised to $125 from $115 at Oppenheimer citing strength of its Sims game; ATVI tgt to $86 from $79 at Piper, shuffling expectations for Activision’s lineup through CY22, giving them further comfort in view as top pick in the space; ZM to use NOW Platform to help scale customer service operations and enable Hardware as a Service; Rosenblatt upped tgt for SPLK from $220 to $250, while also positive on shares of QLYS, DDOG, PANW and ZS while negative on CRM and WDAY saying most recent industry checks indicate that large deal activity is finally increasing, but with a big caveat. Much of it is driven by migration of workloads to the cloud – a key secular trend that we have been highlighting as a top spending priority over the last three months, along with cloud-based security

·     Media & Telecom movers; NLSN announces broad-based optimization plan to accelerate transformation saying it will exit several smaller, underperforming markets and non-core businesses in second half of 2020; COMM downgraded to Market Perform from Outperform based on valuation following a further estimate reduction at Raymond James and said they believe top customer CMCSA will spend less with CommScope in 2020 than they previously envisioned