Closing Recap

Thursday, July 16, 2020

Equity Market Recap

·     U.S. stocks finished the day lower, but settled off the lows amid fresh concerns about rising coronavirus infections and the global economy’s faltering recovery from the pandemic. Stocks started the day lower as China markets posted their biggest one day drop in over 5-months on talks of sanctions against officials by the U.S. and mixed economic data (better GDP for China but retail sales missed). U.S. economic data was better, helping the dollar recover off monthly lows, while oil prices slid along with gold. Several U.S. states have begun slowing their reopenings (California this week), while many have instituted mandatory mask wearing outdoors (Colorado, Arkansas, New Jersey last two days), which took the steam out of the leisure, travel and consumer space that bounced sharply on Wednesday amid positive vaccine news from Moderna. The S&P 500 retreated from a five-week high with banks active again as BAC shares dropped on earnings, the latest bank to increase reserves and their trading revs underperformed others (JPM, C, GS earlier this week) and posts a big decline in net interest income while MS outperforms after reporting record net revenue buoyed by trading results that beat consensus. In tech, TWTR falls after prominent accounts were hacked in a cryptocurrency scam, DIS weighed on the Dow after Cowen downgraded on their forecast for extended Covid-19 timeline for parks and movie theaters, CSCO slips on JPMorgan downgrade. NFLX highlights tonight’s earnings.

Economic Data

·     Weekly Jobless claims fell to 1.3M first time claims from 1.31M prior, btu was above the 1.25M estimate while continuing claims fell to 17.338M from 18.062M prior and vs. estimate 17.6M; insured unemployment rate fell to 11.9% from 12.2% prior; the 4-week moving average fell to 1,375,000 from 1,435,000

·     Retail sales MoM for June rose a greater-than-expected 7.5%, topping the 5% estimate while retail sales ex-auto and gas rose 6.7% also topping the 5% estimate; June gasoline sales rose +15.3% vs. May +11.9%

·     Philly Fed outlook for June fell to 24.1 from 27.5 last month, but came in above the 20.0 estimate as the Fed prices-received at 11.5 vs 11.0 and employment index at 20.1 vs -4.3

·     Business Inventories for May fell -2.3% MoM, in-line with estimates; May inventory/sales ratio 1.51 months’ worth vs. April 1.67 months; May business sales +8.4% vs. April -14.4%

·     The 30-year fixed mortgage rate for week ended today fell to 2.98% from 3.03%, lowest rate in survey records going back to 1971, Freddie Mac said while the 15-year rate avg 2.48%, down from 2.51% a week earlier

Commodities

·     Oil prices slipped as WTI crude finished lower by 45c or 1.09% to settle at $40.75 per barrel, retreating from its highest close in four months after the OPEC+ alliance confirmed it would start tapering output cuts from next month. Saudi Arabia and Russia said the producer bloc would proceed with its plan to add more supply next month and were confident that it wouldn’t hurt oil’s rally, with the tapering to be offset by extra cuts from countries that didn’t meet their targets. Gold futures for August fell -$13.50 or 0.7% to settle at $1,800.30 an ounce, sliding on the day following better China GDP data overnight (up 3.2% vs. est. 2% and reversing a -6.8% decline in Q1) while stronger than expected June retail sales in the U.S. boosted sentiment about the economy. Gold prices remain well bid, holding not far off 9-year highs amid COVID-19.

Currencies & Treasuries

·     U.S. Treasury yields fell as the increased spread of coronavirus cases across some American states weighed on risk sentiment, even as data showed U.S. economic improvement. A surge in COVID-19 infections in numerous U.S. Southern states has raised concerns that new business shutdowns meant to stem the spread of the virus will cause fresh economic damage. Benchmark 10-year notes yields fell 2 bps to 0.61% holding in a range from 0.569% to 0.784% since mid-June. Bonds rallied even after U.S. data showed recent improvement in the economy. The US dollar index near afternoon highs, up 0.3% after bottoming around noon below the 96 level; the euro near lows down -0.25% at 1.138 with the buck getting a boost from strong US economic data.

Sector News Breakdown

Consumer

·     Retailers; DLTR was upgraded to buy from neutral as believe there could be upside to our above consensus estimates of $0.95 for F2Q and $5.15 for F21 on potential for sales and margin upside in both the Family Dollar and Dollar Tree divisions; PTON downgraded to neutral from buy while raise tgt to $58 from $48 after 120% YTD return at UBS while raised forward revenue estimates for both connected fitness product and subscription revenues; SNBR shares slide in mattress space despite better earning, pulling back after good run into expected strong results

·     Restaurants & Consumer Staples; BYND shares were volatile after Marketwatch reported company partners with KFC (YUM) to launch limited-time plant-based beyond fried chicken; in the food sector, Deutsche Bank upgraded MDLZ and KHC to buy from hold, reinforcing their constructive view on Staples, and highlighting incremental preference for the Food subsector; DPZ reported strong Q2 results reflecting the company’s ability to keep getting food to consumers who stayed at home during coronavirus-related lockdowns as Q2 comp sales rose over 16% and EPS of $2.99 handily beat the $2.20 estimate

·     Housing & Building Products; mortgage rates fell as the 30-year fixed mortgage rate for week ended fell to 2.98% from 3.03%, lowest rate in survey records going back to 1971 (positive builders); Credit Suisse raised estimates for 2Q20/FY20/FY21 in homebuilders and target prices for the majority of companies in our coverage, given evidence that US construction has been much more resilient despite concerns around a more pronounced COVID-19 related slowdown; Goldman Sachs upgraded MTH to neutral from sell while firm downgraded KBH to sell with $26 tgt based on larger exposure to economies severely impacted by COVID-19

·     Casino & Leisure movers; cruise lines give up some of Wednesday’s strong gains after CCL and NCLH announce plans for new bond offerings – CCL said plans to raise about $1.26B in bond offering, raising even more debt while NCLH plans on offering about $925 mln of bonds and says it has also commenced a $250 mln equity offering; RV stocks jumped yesterday on better LCII guidance while today, Bank America upgraded THO and PATK both to neutral from underperform while raising their respective price targets to $122 from $73 and to $74 from $34 citing expectations for stronger RV industry volume demand; DKNG debuted its standalone casino and sports betting mobile app with Hollywood Casino at Charlestown Races in West Virginia.

Energy

·     Energy stocks seeing reversal of yesterday winners as energy stocks slip as oil prices fall from 4-month lows; BP was upped to Buy at Jefferies and also purchased the remaining 50% stake in its Indiana wind project from partner D. Tudor Pickering said it expects BP to cut its dividend by 30-40% by September and XOM to keep its dividend constant; Imperial Capital cuts their price target on FANG to $55 from $70, but maintains Outperform rating; Citi lowers their price target on PSX but maintains their Buy rating and increases their target on CLR and MPC while maintaining their Neutral rating on both stocks; TOT announced it has received almost $16B in financing for its Mozambique LNG project; SU released its 2020 Report on Sustainability, which focuses on company’s initiatives to reduce greenhouse gas emissions; CRC filed for bankruptcy

·     Utilities; overall utility index (UTY) higher on the day after underperformance on Wednesday, up over 1.3% TERP said that Institutional Shareholder Services has recommended shareholders vote for merger with BEP, the second advisory firm to recommend approval vote this week; UGI was upgraded to Buy at Barclays

Financials

·     Bank movers; BAC posted Q2 EPS beat on slightly higher revs just above $22B while qtrly provision for credit losses increased to $5.1 billion, driven by $4.0 billion reserve build – trading strong as FICC revs increased 50% to $3.2 billion and equities rev increased 7% to $1.2 billion; net interest income $10.85 bln vs. $12.19 bln reported last year; MS Q2 EPS $2.04 vs. est. $1.14 with net revenues of $13.4 bln and eps of $1.96; qtrly institutional securities net revenue $$7,977 bln vs about $5.11 bln reported last yr; qtrly equity sales and trading net revenues of $2.62 bln vs $2.13 bln; qtrly fixed income sales and trading net revenues of $3.03 bln vs $1.13; SCHW Q2 net revenue of $2.45B was below the consensus of $2.48B and $2.62B in Q1 and $2.68B in the year-ago quarter while Q2 trading revenue of $193M compared to $188M in Q1 and $207M YoY

·     Insurance; HIG pre-announces strong underlying results for Q2 as guided Q2 core EPS $1.22, topping the 93c estimate citing lower than expected COVID-19 charge, higher than expected catastrophe losses and better underlying results than we had expected; Evercore/ISI upgraded shares of both CB and RGA to in-line from underperform

Healthcare

·     Pharma movers; Dow component JNJ reported a beat on the top and bottom line for the quarter on strong medical device sales while raised its year outlook for profit and sales above consensus (now expecting revenue of $81B to $82.5B vs. prior $79.2B to $82.2B); HZNP tgt raised to $64 from $50 at Guggenheim as think the set-up remains attractive as it drives meaningful top-line growth and margin expansion; TCDA shares plunge after disclosing it had received a notification from the US FDA that it had received deficiencies that preclude discussion of labeling and post marketing requirements/commitments at this time; LCI rises as signs interim agreement with Neolpharma Pharmaceutical Group unit Cediprof for the exclusive supply and distribution of the latter’s Levothyroxine Sodium Tablets USP; PRNB shares jumped after Bloomberg reported that SNY is studying potential acquisitions of U.S. biotechnology companies including Principia in an effort to obtain treatments for clinical areas such as multiple sclerosis and immune disorders

·     Medical equipment and devices; medical device sector gets a boost after JNJ revenue beat for quarter largely due to strength in medical devices as Q2 worldwide medical device sales $4.29B vs. est. $3.4B; WAT was upgraded at Wells Fargo (follows better sales guidance yesterday) as believe their pick of Udit Batra as its next CEO is a home run as his industry experience and technical background make him uniquely well suited to the role; TMO agreed to raise its bid for QGEN by about 10% (to 43M euros from 39M euros), bringing the value of the deal to about $11.2 billion (up from prior offer of about $10.1B); ABT reported Q2 EPS 57c topping the 42c estimate though worldwide sales of $7.3B for the quarter was down (-5.4%) on an organic basis YoY with much of the decline in medical-devices division, where sales fell (-19.9%) YoY

Industrials & Materials

·     Aerospace & Defense; BA was downgraded to underperform at Wolfe Research; SPCE shares rallied after saying Michael Colglazier will replace George Whitesides, who will become Chief Space Officer, effective Jul 20 (Colglazier was formerly head of Disney Parks International)

·     Transports; airlines giving back some of yesterday strong gains (AAL, UAL, DAL, JBLU) in a reversal of yesterday vaccine induced rally for travel and leisure names; HTLD reported Q2 EPS of 24c beating estimates by 10c on better revs of $160.9M – boosting other names (WERN, MRTN earlier while the Dow Transports outperformed

·     Metals & Materials; AA posted a much smaller-than-expected Q2 loss (2c vs. est. loss 46c) despite the toll from the COVID-19 pandemic while revs of $2.15B just topped estimates while maintains 2020 shipment outlook for bauxite, alumina and aluminum unchanged; IP and PKG were both upgraded to buy at Bank America in the paper sector saying data suggests a much better undertone to fundamentals, even as our survey data has shown an improving

Technology, Media & Telecom

·     Internet; TWTR shares dropped after a number of major accounts on the social networking site were apparently hacked including the official Twitter accounts of Bill Gates, Jeff Bezos, Michael Bloomberg, Joe Biden and Elon Musk seeking bitcoin donations (raising security concerns); BABA tgt raised to $275 from $230 at Baird saying China reported a significant step up in Q2 e-commerce spending following a challenging Q1; GOOGL tgt raised to $1,805 at SunTrust and $1,550 at Stifel ahead of earnings in 2-weeks as they expect strong print; NFLX kicks off earnings for the Internet space tonight after the close

·     Software movers; PTC was upgraded to Buy from Hold at Stifel and raising our target price to $100 from $85 as we believe PTC is increasingly well-positioned across a number of strategic opportunities, which is not priced into the stock; FSLY shares extend recent pullback after touching record a highs a week-ago (now down over 20% from $102.95 high on 7/9)

·     Hardware & Component news; DELL was upgraded to overweight at Morgan Stanley and raise tgt to $69 with increasing likelihood of a VMW spin after the company said it is exploring a potential spin-off of its 81% stake in VMW; CSCO was downgraded to Neutral from Overweight with $50 tgt at JPMorgan led by expectation for limited investor enthusiasm for the shares in the absence of visibility into a return to revenue growth amidst continuing headwinds to Enterprise spending; GLW was upgraded to overweight at JPMorgan and raise tgt to $36 led by increasing visibility into improving demand in the different end-markets Corning is levered to — TV panels, automotive, as well as smartphones; Wedbush upgraded Indian IT stocks INFY and CTSH to outperform on improving visibility & growth re-acceleration prospects and raising tgts as believe, the market over-estimated COVID-19’s related challenges on FY21’s revenue growth, margin trends as well as the pace of recovery for the next 3-4 quarters