Closing Recap

Tuesday, July 14, 2020

Equity Market Recap

·     U.S. stocks closed at the highs, as the Dow Jones Industrial Average and S&P 500 advanced following strength in energy and industrials despite another day of rising COVID-19 cases in the United States, while tech names pulled back initially after yesterday’s decline (Nasdaq was down over 2%), but reversed higher. Investors took yet another opportunity to scoop up stocks as the Nasdaq Composite still hasn’t had a back-to-back market decline in over 2-months (May 12-13). Banking stocks fall, led lower by WFC, while C, JPM also lag as all three big banks bolster credit-loss reserves more than investors expected in their quarterly reports today (Citigroup boosted its credit loss reserve by $5.6B, citing a deteriorating macro outlook since the end of Q1, JPMorgan built credit loss reserves by $8.9B and Wells added $8.4B in reserves). Airlines were mostly lower after DAL warned it will be more than two years before the industry sees a sustainable recovery, while cruise lines drop as two analysts (Macquarie, SunTrust) downgrade all names in the sector (CCL, NCLH, RCL). St. Louis Federal Reserve president James Bullard said the coronavirus pandemic has proven to be a "more persistent" threat to the U.S. economy than initially expected, and a more "granular" health strategy including ubiquitous mask usage is needed to avoid a possible economic depression. Oil prices rise modestly, but energy stocks were among top gainers in the S&P and Russell 2000. The Consumer Price Index (CPI) inflation reading saw its biggest monthly gains since 2012, rising 0.6%, as Treasury prices rise post data and yields fall (10-year back down to 0.6%). European and Asian markets both followed US markets lower after yesterday’s wash out in tech and rising COVID-19 cases in several parts of the country.

·     Coronavirus update: Arizona reported 4,273 new Covid-19 cases on Tuesday, the most in 11 days and a 3.5% increase that was above the prior seven-day average of 2.9%. Alabama coronavirus deaths rise by 40 on Tuesday to a total of 1,164, biggest daily increase since pandemic started. Florida Covid-19 cases rise 3.3% vs. previous 7-day avg. 4.6%, deaths up 3.03% (133) from previous day to 4514. California reports daily coronavirus hospitalizations for July 13 up 2.23% (7,346) from previous day to 336,508.

Commodities

·     Oil prices edged higher, with WTI crude rising 0.5% to settle at $40.29 per barrel reversing earlier losses as strong gains in equities boost risk appetite and more than offset worries over a coronavirus resurgence and the possibility OPEC will soon ramp up crude-oil production. Prices drifted between positive and negative territory several times ahead of weekly US oil inventory data (API data tonight and EIA gov’t data tomorrow morning).

·     Gold prices rebounded off earlier lows to settle at $1,813.40 an ounce, down only 70c (off earlier lows $1,791.10 an ounce) amid mounting concerns over coronavirus cases globally and as many regions reintroduced curbs to restrict the outbreak. The sharp afternoon drop in the U.S. dollar also helped commodity prices. Gold prices have risen nearly 19% so far this year, mainly benefiting from lower interest rates and widespread stimulus measures from major central banks

Currencies & Treasuries

·     The U.S. dollar fell vs. major rival currencies, as the euro rose about 0.5% to the 1.14 level on optimism that the European Union will agree on a rescue financing package that will limit the economic damage to the bloc from the coronavirus pandemic. The dollar also sunk following the CPI data earlier this morning. Treasury yields dropped, especially near the short-end of the curve as the 2, 3, 5 and 7 year yields ended not far off record all-time lows, while the 10-yr yield dipped slightly to around 0.60%.

Economic Data

·     Consumer Price Index (CPI) MoM for June rose 0.6% vs. est. 0.5%, while core CPI (Ex: Food & Energy MoM) was up 0.2% vs. est. 0.1%. Consumer Price Index (CPI) YoY for June rose 0.6% vs. est. 0.6% and core prices YoY (Ex: Food & Energy YoY for June) rose 1.2% vs. est. 1.1%; June real earnings all private workers -2.3% vs. May +0.5%

Sector News Breakdown

Consumer

·     Staples, Retailers, Restaurants; HBI was upgraded to outperform at Credit Suisse saying they think HBI weathered COVID-19 retail closures better than peers—with 50% of its store distribution remaining open during quarantine and new $300m+ masks biz to offset factory deleverage in 2Q; Piper said in a note that CPB, GIS, BGS, CMG, CROX, LULU, NKE, LOW, YETI & BIG are base case favorites in 2H consumer outlook as expect key 2H20 drivers to echo those currently in place, as they do not expect a COVID-19 vaccine to be available, and we expect further economic uncertainty, but also some extension of government assistance. We expect extensive working from home and sharply reduced levels of travel to continue.

·     Housing & Building Products; MHK shares fell following its disclosure of receiving subpoenas from a U.S. attorney and the SEC, shortly before a class action complaint alleging securities-law violations was filed; Wayfair (W) was upgraded to outperform from neutral and raise tgt to $240 from $165 at Wedbush as forecast 85% y/y revenue growth for W in 2Q, 46% y/y in 3Q and 39% y/y in 4Q, with more upside than downside risk; ZG positive mention at BTIG saying tracking shows ZG well ahead of 2Q guidance and they bring estimates up, but what we really need to see is progress on unit economics and aren’t likely to get that this quarter; LL was upgraded to buy from hold at Loop Capital and raise tgt to $18

·     Casino & Leisure movers; cruise lines CCL, RCL, an NCLH all downgraded from Outperform to Neutral at Macquarie noting CCL’s AIDA sailings are set to restart in August, but US infections are likely to keep domestic sailings off the table for now. We are incrementally positive on CCL vs. peers as the regional brand structure that was hurting revenues prior is now possibly going to help with piecemeal regulatory approvals (SunTrust also downgraded RCL, NCLH to hold and CCL to sell in the cruise industry); in lodging, Raymond James reduced estimates for nine of our covered lodging companies ahead of 2Q reporting season to more closely reflect the steep decline and gradual (emphasis on gradual) recovery trajectory of the hotel industry (also cutting price targets on RHP, HST, INN, RLJ, and PK)

·     Auto related; TSLA shares volatile again, trading in range of $1,590 high and $1,431 low as stocks continues gain investor attention; Ford (F) on Monday evening unveiled a new retro-looking Bronco reminiscent of the rugged, boxy original from the 1960s; HOG was upgraded to outperform at BMO Capital and raise tgt to $33 from $23 as more positive about the outlook for the company given recent management changes; auto retailers outpaced overall market gains with SAH, ABG, CVNA, PAG all jumping – SAH shares have quadrupled from March lows of $9

Energy

·     Energy stocks were among the top leaders in the S&P 500 index and helping the Russell 2000 recover from recent weakness as oil services (SLB, HAL) and E&P names (APA, FANG, PXD, HES) outperformed; MTDR was upgraded to buy at MKM Partners citing valuation and competitive development in the Northern Delaware Basin. RBC Capital previews quarter for refiners, mainly lowering 2Q20 estimates, with only HFC and VLO moving higher vs. consensus, sees MPC and PSX as most likely to beat – said EBITDA estimates are down 23%/17% for 2020/2021, and we’re lowering our price targets for our entire coverage

·     Coal, Utilities & Solar; XYL issued prelim Q2 EPS of 37c-39c, topping the 6c estimate while said it expects 2Q revenue declines of about -14%; CEIX and CCR said May marked a bottom for coal shipments, as June shipments improved sequentially and July shipments so far show significant improvement.

Financials

·     Bank movers; earnings center stage as: WFC posted a Q1 loss ($2.4B vs. $6.2B profit a year ago), its first since 2008 as loan-loss provisions soared on the economic impact of the coronavirus pandemic/WFC set aside a record $9.5B for credit losses, well above estimates and also cut its dividend to 10c from 51c; JPM posted Q2 net income of $4.7 billion, or $1.38 per share and revs of $33B topping views while Q2 included $8.9B of reserve builds firm wide and announced suspension of repurchases at least through the end of Q3/qtrly average loans up 4%; average deposits up 25%; Citigroup (C) said Q2 profit fell 73% to $1.32B from $4.8B YoY but topped estimates, weighed down by $7.9B set aside for potentially rising loan losses as the COVID-19 virus impact raised concerns about loan defaults by consumers and big businesses alike/Q2 revenue rose 5% to $19.77 billion while Citigroup’s loan-loss provision included $2.21 billion in net charge-offs and $5.7 billion it added to its reserves for loans that might default in the future; earnings tomorrow in banking space include BK, GS, PNC and USB; EIGI shares soared after issuing prelim Q2 results that topped consensus

·     Asset Managers out with monthly assets under mgmt data: AB June preliminary assets under management rose to $600B from $596B at the end of May led by market appreciation, partially offset by firm wide net outflows; IVZ preliminary assets under management of $1.14T at the end of June increased 0.2% from May; favorable market returns increased AUM by $22B while reinvested distributions and FX contributed $1.6B and $1.1B, respectively; MN preliminary assets under management of $18.6B at June 30, 2020 is little changed from the end of May; VCTR AUM of $129.1B at the end of June increased from $127.7B at the end of May

Healthcare

·     Pharma movers; ALT 3.37M share Secondary priced at $23.00; AZN will collaborate with contract research services and advanced analytics provider IQV under the U.S. government’s Operation Warp Speed to accelerate the delivery of U.S. clinical trials evaluating COVID-19 vaccine candidate AZD1222; CYTK agreed to a series of licensing, collaboration and royalty-monetization deals that will provide the biopharmaceutical company with up to $250M in committed capital; FLXN issues Q2 revs $15.4M topping the $10M estimate and says demand for Zilretta from healthcare providers increased MoM throughout Q2 with total demand in line with Q1; DVAX rises as Canada’s Medicago began an early-stage study of its experimental coronavirus vaccine using DVAX’s adjuvant or vaccine booster, CpG 1018

·     Biotech movers; BPMC shares rose after announced a collaboration with Roche (RHHBY) on the development of pralsetinib, as Roche to pay $675M in cash in addition to $100M equity investment, while BPMC is eligible to receive up to $927M in potential milestones; RIGL announces investigator-sponsored trial of Fostamatinib, its oral spleen tyrosine kinase (SYK) inhibitor in patients with COVID-19 pneumonia; EQ plunges after filed to sell up to $150M in stock (note shares surged 730% yesterday after clinical trial showed Itolizumab reduces mortality in patients hospitalized with covid-19); MRNA said its late-stage trials for its COVID-19 vaccine to start on July 27 at 87 trial locations in the United States

·     Medical equipment and devices; EW reached an agreement with ABT to settle all outstanding patent disputes between the companies regarding transcatheter mitral and transcatheter tricuspid repair products (two analysts said it removes an overhang on shares); ALGN tgt was raised to $310 at Leerink earlier from $260 sending shares soaring

·     Healthcare services and providers; lab companies DGX both upgraded to buy at Bank America on continuing COVID testing tailwinds and improving core and the fact that despite the strong runs since the March lows, both still trade at a discount relative to the S&P 500; UNH kicks off earnings for the managed care sector tomorrow morning

Industrials & Materials

·     Transports; airlines get weak earnings (as expected) from DAL as revenue was down 91% Y/Y to $1.2B excluding refinery sales, and system capacity was 85% lower during the quarter and said it sees 3rd qtr revenue 20% to 25% of year-ago levels/ended the quarter with $15.7B in liquidity but said continue to believe that it will be more than two years before we see a sustainable recovery; overall transport index held up well, rising as CAR, JBLU, MATX, JBHT among gainers

·     Aerospace & Defense; BA customers canceled orders for 355 of its 737 MAX jets in the first half of 2020, the U.S. plane maker said on Tuesday, as the damage done by the jet’s grounding and the coronavirus crisis to the airline industry continued to mount. Deliveries in the first half of the year also sank by 71% to just 70 planes as customers canceled or deferred shipments due to the collapse in air travel from coronavirus-led travel restrictions.

Technology, Media & Telecom

·     Technology stocks plunged initially as more profit taking ensues following the recent surge over the last few weeks – but stocks surged late in the day with mixed returns for momentum stocks such as NFLX, SPOT, FSLY, AMZN pulled back after push higher; in software, NCNO opens at $71 after its 8.06M share IPO priced @ $31; the UK bars new Huawei purchases for 5g networks from end 2020; UK says Huawei gear must be removed from 5g network by 2027; online education names spike further, led by gains in LRN after Citron Research out positive with $100 tgt; semiconductor stocks outperformed Internet, software and hardware sectors, with TER among top decliners on an analyst downgrade