Closing Recap

Wednesday, July 15, 2020

Equity Market Recap

·     U.S. stocks extended yesterday’s gains with energy, financials and industrials leading today’s positive trading action as positive COVID-19 vaccine related news from Moderna (MRNA) boosted sentiment for major averages. The S&P 500 turned positive for the year following the drug trial data in addition to better economic data, a rebound in energy prices on bullish inventory data and a recovery for financials after stronger bank earnings (GS, USB, and PNC). The vaccine hope propelled travel, leisure, and consumer related names higher as MRNA’s experimental COVID-19 vaccine showed it’s safe and provokes immune response in ongoing early-stage study. Markets overlooked increasing tensions with China after President Trump signed an order ending Hong Kong’s special status with the US and the UK banned Huawei from its tech infrastructures. Oil prices jumped on bullish inventory data (overshadowing headlines this morning at OPEC+ meeting that both Saudis and Russia support oil-cut tapering as demand recovers). Economic data continues to show improvement in the U.S. with NY manufacturing, Industrial Production and trade data all topping views. Stocks did get another boost midday after Bloomberg reported Trump leans against sanctions on Chinese officials for now.

·     In what is considered a contrarian indicator, Investor Intelligence Poll newsletter writers considered bullish rose again to 58.1% in the latest week, up from 57.7% the prior week and 54.5% two weeks ago (up over 300% from March lows) while bears tumbled for the 15th out of the past 16 weeks, to 18.1% from 18.3% last week and 19.8% two weeks ago – those expecting a correction fell to 23.8% from 24% last week and 25.7% two weeks ago, and 40.9% in early March.

·     The Fed in its Beige Book report showed: economic activity increased in almost all districts, but remained well below where it was prior to the covid-19 pandemic; said consumer spending picked up as many nonessential businesses were allowed to reopen; says retail sales rose in all districts, led by a rebound in vehicle sales; says outlooks remained highly uncertain, as contacts grappled with how long the pandemic would continue and the magnitude of its implications.

Economic Data

·     Empire Fed Manufacturing Index reported at 17.2, above the 10.0 estimate as business conditions first positive reading since February (general business conditions were -0.2 in the last month); prices paid fell to 14.9 from 16.9 prior, new orders rose to 13.9 from -0.6, employment rose to 0.4 vs -3.5 prior while the six-month general business conditions fell to 38.4 from 56.5

·     Industrial output for June rises +5.4% from May’s 1.4% and was above consensus up +4.3%; Capacity Utilization rate 68.6% tops the 67.7% estimate and above May figure 65.1%; Manufacturing output rose +7.2% topping the 5.6% estimate and above May 3.8%

·     Import prices for June rose 1.4%, topping the 1% estimate while June export prices also rise +1.4% topping the 0.8% estimate; June YoY import prices fall -3.8% and export prices -4.4%

Commodities

·     Oil prices jumped, erasing earlier declines, with WTI crude up 91c, or 2.2% to settle at $41.20 per barrel after the U.S. reports the biggest weekly decline in crude inventories so far this year, even as OPEC+ agreed to taper record production cuts of 9.7M barrels per day down to 7.7M barrels per day starting next month and lasting through the end of the year. The EIA said its weekly forecast that domestic crude supplies fell by 7.5M barrels for the week ending July 10, better than the expected small build while the API reported a draw of 8.3M barrels. In April, Saudi Arabia, the world’s largest oil exporter, led a push among the 23-member group to cut collective output by 9.7 million barrels a day, as the pandemic led to a collapse of oil demand. August gold futures gained 40c to $1,813.80 an ounce as the weaker dollar continues to underpin demand.

Currencies & Treasuries

·     The U.S. dollar slipped again, with the dollar index (DXY) moving to its lowest levels since June 10^th (below 96 level), as the euro pushed above the 1.14 level and other major currencies saw gains as investors fled safe-haven currencies (dollar and yen). Rising oil prices helped boost countries most leveraged to gains in oil (Russia, Canada). Despite stocks surging again on vaccine hopes, Treasury prices remain strong as yields stay weak – 10-yr little changed at 0.62%, the 2-yr 0.15% (all-time lows 0.10% on 5/8), 5-yr yield 0.28% (0.256% all-time lows 7/10).

Sector News Breakdown

Consumer

·     Retailers; HBI receives its 3rd analyst upgrade in two days as Bank America upgraded to neutral from underperform with $14 tgt and Raymond James upgraded to strong buy with $20 tgt saying that the potential positives are "piling up" for the company (was upgraded at Credit Suisse yesterday); GPS was upgraded to Outperform and tgt to $18 from $13 at RBC Capital saying with secular tailwinds at Old Navy and Athleta’s backs post-COVID, see potential for value unlock at the Gap brand; PVH said to cut 450 jobs in North America, affecting 12% of its office workforce, that would save ~$80M; overall retail sector seeing strength on the vaccine hopes

·     Consumer Staples; grocers and food names slip along with CLX (one of COVID-19 stock beneficiaries) as upbeat sentiment on the vaccine front takes steam out of recent winners; tobacco names positive mention at Morgan Stanley saying they are constructive on PM and MO as believe tobacco offers a safe haven in the current, uncertain environment; BYND shares rose midday after entering Brazil market with introduction of plant-based meat products at 19 St. Marche locations across Sao Paulo

·     Restaurants; delivery related restaurant names (WING, DPZ, PZZA) that have been the big winners during the pandemic seeing a little weakness today amid the positive vaccine news from Moderna – while dine-in stocks rally (EAT, DRI, CAKE, BLMN, BJRI, RRGB); WING was downgraded to hold at Northcoast saying it has done a good job of sustaining double-digit comp sales growth, but sees potential headwinds, including a slower recovery in Mexico, moderating US sales; Raymond James said the magnitude of the pullback in certain Outperform rated names (BLMN, CHUY, EAT, RUTH) seems overdone compared to what has been a relatively modest recent deterioration in industry trends (softened 3-5% vs. June trends)

·     Casino & Leisure movers; CZR said operating income for reopened destination properties for period operating in June through June 30, 2020 down about 75% to 85%; PENN and BYD tgts raised at JPMorgan as continue to see upside for both stocks given the prospect for higher margins and sports betting optionality; RV stocks get a boost after LCII said it expects net sales in a range of $515M-$530M for Q2 above the $387.2M estimate saying increased demand for RVs drove accelerated outdoor recreational products sales (shares of other RV companies WGO, CWH, PATK active); HOG gets the 5th upgraded in about 3-weeks today with UBS joining the fray upgrading to buy (also RBC, Northcoast, Wolfe, and BMO during that time frame); cruise line stocks (CCL, RCL, NCLH) were among the biggest gainers of the day

Energy

·     Energy stocks get a boost after bullish inventory data out of the EIA which showed weekly crude oil inventories fell -7.49M barrels vs. est. for build of 250K barrels (bullish), gasoline inventories fell a greater -3.174M barrels vs. est. draw -1.3M barrels and distillate inventories fell -453K barrels vs. est. build 1.5M barrels (data points bullish for energy). Overnight, the API showed a draw of 8.32M barrels of oil for the week ending July 10, gasoline inventories showed a draw of 3.61M barrels, distillate inventories show a build of 3.03M barrels and Cushing inventories show a build of 548K barrels. News helped offset earlier comments out of OPEC+ meeting that Saudis and Russia support oil-cut tapering going forward as demand recovers

·     E&P sector; FANG provided an update on 2Q20 operations. Oil production of 176.3 Mbo/d (total production: 294.1 Mboe/d) 2% below the consensus estimate (179.4 Mbo/d) largely due to the company’s decision to take a nearly three-month frac holiday (versus original expectations of just one month) and higher than expected production curtailment (average of 9 Mbo/d in 2Q, nearly all curtailed volumes back online). The company announced 2Q20 capex of $562 million, 32% higher than the consensus estimate of $426 million

·     Stock movers; HAL, SLB and PUMP were all upgraded to Outperform from Market Perform as they preview 2Q earnings where we expect updates on cost savings plans to be the most important drivers of relative stock performance where companies with a significant portion of cost yet to be realized in 2H20 should outperform.

Financials

·     Bank movers; GS with a blowout Q2 result as EPS of $6.26 topped the $3.78 estimate handily and revs of $13.3B crush the $9.7B estimate as Q2 FICC sales and trading revenue $4.24B topped the $2.64B estimate and equity trading revs were $2.94B also above views – Q2 Investment banking revs were $2.66B, up 36% YoY; USB posted a Q2 EPS beat while revs of $5.84B (+0.3% y/y) beats by $300M/provision for credit losses $1.74B vs. $993M in Q1; PNC Q2 EPS tops views (includes BlackRock sales) on in-line revs of $4.1B while net interest income of $2.5B increased $16M, and net interest margin (NIM) decreased 32 bps to 2.52% QoQ – provision for credit losses increased to $2.5B for Q2 compared with $914M in Q1; BK Q2 EPS $1.01 vs. est. 87c as Q2 Net-interest margin 0.88% and Q2 provision for credit losses $143M; WFC upgraded to outperform and raise tgt to $27 at Evercore/ISI as the steep dividend cut and bolstering of reserves help clear the decks on capital & credit uncertainty, while pending expense actions bode well for earnings

Healthcare

·     Pharma movers; AZN shares rise on vaccine hopes after reports indicate positive news may come Thursday on initial trials of the Oxford Covid-19 vaccine that is backed by the company, according to a report from U.K. television broadcaster ITV. The report said "apparently the vaccine is generating the kind of antibody and T-cell (killer cell) response that the researchers would hope to see." https://on.mktw.net/2ZvHANA ; CANF rises after saying based on feedback from U.S. FDA, company has amended design of its planned mid-stage trial testing experimental drug Piclidenoson on top of standard-of-care treatment in patients with moderate COVID-19

·     Biotech movers; MRNA shares jump after its COVID-19 vaccine candidate showed rapid and strong immune responses in patients, according to interim Phase 1 study results/study was based off 45 individuals who got two doses of the vaccine had high levels of virus-killing antibodies that exceeded the average levels seen in people who had recovered from COVID-19; ORGO guiding Q2 revenue above consensus as sees Q2 net revs $68M-$68.6M vs. est. $48.25M

·     Medical equipment and devices; WAT leads equipment names higher after guiding Q2 revenue to $517M-$523M view earlier, above the $485.4M estimate while also naming a new CEO (formerly of Life Science business of Merck KGaA); BDX said it supports U.S. government efforts to increase covid-19 testing capacity with point-of-care tests; ZYXI 2.5M share Block priced at $22.00

·     Healthcare services and providers; UNH provided mixed earnings results (beat on earnings while revenue missed estimates) and reaffirming its FY20 EPS guidance/Q2 medical care ratio declined to 70.2% from 83.1% last year, due to temporary deferral of care due to the pandemic

Industrials & Materials

·     Aerospace & Defense; SunTrust downgraded shares of TGI, ROLL and WWD to sell from hold and cut AIR and TDG to hold from buy saying they have become more negative on the commercial aero sector and believe the depth of the downturn will be deeper and longer in duration than their prior expectations; FLIR guides Q2 revs about $480M vs. est. $464.6M

·     Transports; airlines soar (AAL, DAL, UAL, JBLU, LUV) on the COVID-19 vaccine hopes after data from MRNA today and hopes for positive AZN news coming up – helping lift pandemic related names that have suffered the most; in trucking, UBS raised 2Q EPS estimates for WERN by 19% and for KNX and SNDR by 12% as freight demand improved more than anticipated off the bottom in April while reduces ests for JBHT

·     Metals & Materials; AA kicks off earnings in the metals sector tonight (already issued upbeat outlook last week); MOS was upgraded to buy from neutral and raise tgt to $16 from $13 at Citigroup ; ramping China tensions pressure metals names

Technology, Media & Telecom

·     Internet; GOOGL signed an agreement to invest $4.5B in India’s Jio Platforms Ltd, taking a 7.73% stake in the company, pending regulatory review in India; online education names LRN, CHGG, TWOU saw some profit taking early following their massive run-up on the positive vaccine news as well (may get schools open faster) – LRN rebounded after Citron Research positive on shares for a second straight day

·     Semiconductors; MRVL was downgraded at Wells Fargo following a significant rise in shares in recent weeks, and with shares up 40% YTD (vs. SOX up 12%), feel shares now discount an extreme bull-case scenario; ASML shares declined following its quarterly results as shares take a break after doubling since the March pandemic lows – the group underperformed late morning, with a big-roll for many of the semi and equipment names (KLAC, LRCX, NVDA); TSM expected to report overnight as semi earnings kick into gear

·     Software movers; FTNT was downgraded to neutral at Goldman Sachs (while raise tgt to $140) as its potential for rapid growth in the SD-WAN market is well priced in to current valuation; FSCT rises as private equity firm Advent International agrees to buy FSCT in a revised deal for about $1.43B, settles a legal battle after it pulled its previous bid/in May, FSCT had sued Advent for pulling out of a previous deal to buy company for $1.9B; software overall was weak today

·     Media & Telecom movers; Wells Fargo said to own three names into the 2Q20 print: SIRI, NXST and GTN (in that order) while to avoid SBGI, VIAC and FOXA as recently moved 2020E self-pay net adds from -1.45mm to -0.4mm as they think vehicle sales, conversion and churn are all proving more stable than we’d feared; CTL was downgraded at Opco to Perform as anticipate the next few quarters to be difficult as negative secular trends in legacy CTL worsen from COVID-19

·     Hardware & Component news; AAPL shares rise early after the General Court of the European Union today annulled the European Commission’s decision that Apple owed $14.9B in taxes to Ireland. The court ruled that the EU failed to meet the legal standards in showing that Apple was granted illegal subsidy; QUMU guides Q2 revenue to be ~$9.3M vs. $6.7M consensus, while raised FY2020 revenue outlook from ~$28M to ~$29M (+14% Y/Y) vs. consensus of $28.2M