Closing Recap

Wednesday, June 10, 2020

Equity Market Recap

·     U.S. stocks were volatile in Wednesday’s trading session, ending mixed overall as a surge in large cap tech stocks helped push the Nasdaq to record highs for a 4^th straight session (along with AAPL, FB, AMZN, MSFT, TSLA, NVDA new highs), while the Dow and S&P 500 index were dragged down late day by financials as the Federal reserve commits to low rates until at least 2022, (also sending Treasury yields lower). The Federal Reserve pledged to hold rates at near-zero for some time in a unanimous decision as policymakers said the COVID-19 pandemic "weighs heavily" on the economy, and they will use any tools necessary to help for as long as needed. Powell said in his press conference that the PPP, stimulus checks, unemployment insurance programs and the Fed’s actions have mitigated economic harm. Stock markets in the U.S. whipsawed following the Fed prepared text, spiking to highs at first before slipping late day and paring losses. The U.S. dollar declined for its 10th straight day of weakness on the rate outlook. Demand remains subdued as seen in U.S. consumer prices, which fell for a third straight month in May, with underlying inflation weak. The consumer price index dipped 0.1% last month after plunging 0.8% in April, the largest decline since December 2008. In contra-indicator data, the weekly Investor Intelligence poll points to a market pullback soon after showing bullishness among stock market newsletter writers rises to 56.9% from 53.3% and has now recouped all of the decline since the February meltdown (Feb 19 reading was 54.7%) and is now flashing a caution signal for more gains (bulls rise for ten of last 11 weeks). Those expecting a correction slips to 22.5% from 22.8% last week (from 41% in March) and those considered bearish falls to 20.6% from 23.7% last week (reading was 41.7% in late March).

FOMC Meeting Comments

·     The Federal Reserve signaled it won’t raise near-zero interest rates at least through 2022, slashed its estimate for U.S. GDP this year to -6.5% and raised its median forecast for 2020 unemployment to 9.3%. The central bank released updated economic projections for the first time since the coronavirus pandemic began in March and temporarily shuttered most of the U.S. Inflation is likely to remain below 2% until 2023. The bank also projected its benchmark fed funds rate would stay unchanged for the next several years, sending a clear message to financial markets that the Fed will do whatever it takes to support the economy.

Commodities

·     Oil prices rose as WTI crude gained 66c or 1.69% to settle at $39.60 per barrel, erasing earlier losses when crude initially fell more than 2% after a report showed a rise in U.S. crude inventories, reviving concerns about oversupply and weak demand because of the coronavirus crisis. Those fears eased following the release of the FOMC meeting results where they were as dovish as could be, saying they will continue to use whatever tools necessary to help the economy. While EIA data shows US crude-oil exports held up well during the early part of the coronavirus pandemic outbreak, climbing to a solid 3.5M bpd for the week ended May 1, it’s been all downhill since then, and analysts say the trend could continue. Today’s EIA report shows a fifth straight week of declines, to 2.4M bpd, the lowest in seven months.

·     Gold prices reversed lower, with August gold down -$1.20 to settle at $1,720.70 an ounce, erasing earlier gains ahead of the FOMC announcement. Futures prices for gold had been moving higher Wednesday to touch a high above $1,735 before fading. Gold futures advanced following settlement after the dovish FOMC comments. Copper prices rose for a fifth straight session to their highest since January as the metal supported by demand hopes.

Currencies & Treasuries

·     Treasury prices advanced for a 3^rd day in a row, with the 10-year yield down 5 bps to 0.775% (down from multi-month highs Friday of 0.95% for the 10-yr) as stocks were mixed and investors rotate partially back into safe havens. 

·     The U.S. dollar fell broadly, sliding to a fresh three-month low vs. most rival currencies as the Fed indicated rates will not go higher until 2022. The euro topped the 1.14 level vs. the dollar, the Canadian dollar extends gains to notch a 3-month high at 1.3331, and the buck fell to a 3-week low vs. the yen around 107 after the Fed announcement. With today’s slide, the dollar has now been down for about 2-straight weeks.

Economic Data

·     Consumer Price Index (CPI) for May fell (-0.1%) vs. estimate unchanged (last month (-0.8%) and core prices (ex: food & energy) MoM was also down (-0.1%) vs. est. unchanged (last month (-0.4%); May real earnings all private workers +0.5% vs. April +5.9%; YoY CPI rose 0.1% vs. est. 0.3% and core CPI YoY rose 1.2% vs. est. 1.3%

Sector News Breakdown

Consumer

·     Retailers; CHWY reported strong Q1 results, topping estimates while Q2 and year sales views also above views noting coronavirus-related pantry stocking is a one-time benefit/net adds 1.56M in Q1 (more than double the avg pace), bringing active customers to 15M; CHS posted Q1 EPS loss with sales down -46% YoY to $280.3M and gross margin 4% vs. 36.9% YoY; GME posts Q1 in line with prior pre-announce as sales slightly worse along with in-line Ebitda but says aggressively guiding to positive adj EBITDA for 2020; GES Q1 EPS loss ($1.81) on sales down 52% YoY to $260.3M and says based on trends, it currently expects Q2 revenues to have a decrease similar to that of Q1; FIVE posts Q1 sales below estimates and wider-than-expected loss, but analysts raise tgts (Gugg, RBC, CSFB) noting weakness unsurprising as 1Q comps declined (51.8%) as GM/SG&A took a hit from fixed cost deleverage due to the sales impact of store closures

·     Consumer Staples; Nielsen data showed grocery sales trends remained very strong in May for supermarkets (+23% y/y) and All outlets (+15% y/y); SAM tgt raised to $609 from $549 at Guggenheim and raises sales growth estimates for Truly and revising our margin assumptions to reflect the cadence of Truly manufacturing and SG&A leverage; NOMD said it sees Q2 ahead of expectations, with organic revenue growth now expected to increase in the low-double digit percent range; UNFI tumbled despite better results after saying it was delaying the sale of some stores for up to 24-months

·     Restaurants; SBUX said it estimates 3Q consolidated revenue decline attributable to COVID-19 to be approximately $3.0B-$3.2B and sees Q3 preliminary adj EPS loss 55c-70c and said May comp sales were down (-43%) in May/sees China’s comparable sales down 20% to 25% in 3Q, and trend towards roughly flat by the end of 4Q; RRGB posted a Q1 comp sales figure down -21% as overall revs fell -25% YoY to $306.1M and EPS loss ($6.66). op margins 8.8% vs. 18.3% YoY; YUM discloses that global comparable same-store sales are down (-19%) on a quarter-to-date basis, including drops at KFC (-26%), Pizza Hut (-10%) and Taco Bell (-11%)

·     Casino & Leisure movers; AMC reported Q1 earnings largely in line with preliminary figures it released earlier, with a final net loss to the better side of its expectations and as revenue dropped 21.5% as expected, to $941.5M amid closures of theatres due to global lockdown; KeyBanc raised its tgt on RV makers PATK to $75, THO to $140 and WGO to $80 as continue to find evidence that consumers are secularly shifting their behaviors to outdoor recreation, forcing a rethinking of the traditional leisure playbook, where we see RVs as best positioned; EB falls after announcing a convertible senior notes offering

·     Autos; TRUE rises after B Riley upgraded shares to buy saying there is the loss of partner USAA – which accounted for 28% of units – but stock is already discounting that headwind; NIO files to sell 60M American depositary shares; TSLA tgt raised from $800 to $1000 at Wedbush as believe that the China growth story is worth at least $300 per share as this EV penetration is set to ramp significantly over the next 12 to 18 months; also on TSLA, company memo notes CEO Musk said that it is time to bring its Semi commercial truck to "volume production"; Ford (F) & Volkswagen to collaborate on three commercial vehicles and expect to produce up to combined 8 million of the three models, according to statement; GNTX tgt to $31 from $28 at Guggenheim with investor focus on auto suppliers shifting away from COVID-19 production disruption / liquidity risks and towards 2021 earnings power; HTZ received a letter from the staff of NYSE regulation that it had determined to commence proceedings to delist. The company appealed and requested a hearing. At this time, the common stock will continue to be listed and trade; UBER shares slipped after CNBC’s David Faber said looks to be exiting deal talks with GRUB while the WSJ reported Just Eat nears all-stock deal to acquire GrubHub

Energy

·     Inventory data: the EIA reported weekly crude oil stockpiles unexpectedly rose 5.72M, vs. a forecast for a draw of -1.85M barrels while gasoline inventories rose 866K barrels vs. est. draw of -1.0M barrels and distillates rose 1.56M barrels vs. est. 3.5M barrels. The American Petroleum Institute (API) showed a build of 8.42M barrels of oil for the week ending June 5, while gasoline inventories showed a draw of 2.91M barrels, distillate inventories show a build of 4.27M barrels, and Cushing inventories show a draw of 2.29M barrels

·     In research, CVX was downgraded to Underperform from Sector Perform at RBC following strong performance relative to peers saying the balance sheet is defensive but P&L hasn’t been, CVX is now trading at a substantial premium relative to historical norms; overall energy stocks small roll today despite bearish inventory data, bouncing off morning lows for many names

Financials

·     Bank movers; WFC among early decliners in banks after saying it expects full-year interest income down more than 11%, and Q2 loan-loss reserve will be bigger than Q1, while noting Q2 expenses will be lower sequentially; USB says 2q NIM will be down 30 basis points from 1q; banks were all over the place late day, falling late as Treasury yields plunged after the Fed said no rate hikes until at least 2022; a big deal in the real estate sector falls through as SPG terminated its deal to buy TCO after Simon said TCO breached its obligations (deal was previously announced in February for $52 per share in $6.4B deal)

·     Asset managers out with monthly Assets under Management (AUM) metrics: AB preliminary assets under management increased 3.5% to $596 billion during May 2020 from $576 billion at the end of April; APAM AUM as of May 31 totaled $114.4B; IVZ preliminary month-end assets under management (AUM) of $1,142.5 billion, an increase of 2.1% versus previous month-end; LM preliminary assets under management of $780.2B as of May 31, 2020. This month’s AUM included long-term net inflows of $0.4B, driven by fixed income and alternative net inflows of $0.7B and $0.1B, respectively, partially offset by equity net outflows of $0.4B; WDR assets under management of $64 billion; May net flows -$302 million; TROW preliminary AUM $1.19T at May 31, up 11% YoY; CNS reports preliminary AUM $63.8B as of May 31, an increase of $1.7B from assets under management at April 30

Healthcare

·     Pharma movers; PFE announces top-line results from the Phase 3 JADE TEEN study of abrocitinib, an investigational oral once-daily Janus kinase 1 inhibitor, in patients 12 to <18 years of age with moderate to severe atopic dermatitis who were also on background topical therapy; JNJ announces acceleration of its covid-19 vaccine candidate; phase 1/2a clinical trial to begin in second half of July; ABBV and Genmab A/S said they will jointly develop and commercialize three of Genmab’s early-stage investigational bispecific antibody product candidates and form a discovery research collaboration for future differentiated antibody therapeutics for cancer; RDHL said its submission of clinical trial application with the Ministry of Health of the Russian Federation evaluating opaganib in patients with severe SARS-CoV-2 infection.

·     Biotech movers; DNLI shares slipped after saying it will pause clinical studies with DNL747, which it is collaborating with SNY following results from Phase 1b studies of the molecule in Alzheimer’s disease and amyotrophic lateral sclerosis; NK rises following the publication of two peer-reviewed manuscripts in the Journal of Immunotherapy of Cancer based on invitro and in-vivo studies conducted in collaboration with the National Cancer Institute; WSJ reported that the NIH/NIAID is working towards funding and running three Phase 3 trials of COVID-19 vaccine candidates from MRNA (July), Oxford University/AZN (August) and JNJ (September), with each study is expected to include ~30K participants across 50+ sites

·     Medical equipment and devices; LAKE shares surge as reported revenues of $45.6M, which significantly beat high estimate of $39.5M (est. $27.8M) with strength seen across all geographies/inventory drawdown of $6.8M (shares of APT moved in sympathy); in services, CVS affirms its full-year earnings and cash flow guidance ahead of investor meetings as still expects EPS of $5.47-$5.60, adjusted EPS of $7.04-$7.17 and cash flow from operations of $10.5B-$11B for the year

Industrials & Materials

·     Industrial & Machinery; CARR downgraded to neutral at JPMorgan as see the stock as a relatively cheap name and well positioned within the HVAC space, but having come a long way since April; MSM posts May net sales of $269.6M, a 6.3% rise compared with the same period in the prior fiscal year, as backlog of orders was fulfilled; BA shares slipped a second day after its recent 160% jump off March lows – midday was reported Boeing notifying airlines of 737 max wiring fix today — company is also sharing draft of new training for plane

·     Transports; airlines slip a second day following massive run-up in shares off March lows as UAL downgraded to neutral from overweight at JPMorgan which also downgraded JBLU to underweight from neutral as do not believe the current pace of equity ascent can be potentially maintained for much longer; in trucking, Loop Capital upgraded MRTN to buy from hold and raise tgt to $27 noting shares have underperformed the truck group and the S&P 500 over the past month, offering an attractive potential return to his price objective

·     Metals & Materials; in steel space, NUE tgt raised to $49 and MT tgt to $14 at KeyBanc as increase 2020 real carbon steel demand view to a decline of 16% y/y (from decline of ~22%) with more resilient non-res and improved outlooks in non-energy markets; gold miners (AEM, NEM, GOLD) jumped late day after the Fed projected interest rates will remain near zero through 2022, as policy makers attempt to support the economy’s recovery from the recession.

Technology, Media & Telecom

·     Internet; AMZN, FB add to record all-time highs; EBAY upgraded to Hold as believe EBAY’s GMV will benefit from the shift to online spending/also faces easy GMV comparisons throughout 2020, possesses tailwinds to revenue from payments/advertising, and has relatively low expectations; AMZN is introducing a new digital credit line for merchants based in the U.S., CNBC reports, and will receive targeted invitations from Goldman’s Marcus brand for credit lines of up to $1M; GRPN announces a 1 for 20 reverse stock split

·     Semiconductors; TSM reported May revenue at NT$94B, which was 17% higher YoY, but was slower than April sales and declined 2% MoM; CREE downgraded from Buy to Neutral at Goldman Sachs as see modest downside to our revised $56 tgt following the stock’s recent strength; AMD and NVDA (record highs) among leaders again in semiconductors

·     Software movers; VRNT shares slide after management said customers delayed planned projects in April due to the pandemic; CTSH was upgraded to neutral from underperform at Bank America; overall software space one of true bright spots throughout the session

·     Hardware & Component news; CSCO downgraded to neutral from outperform with $48 tgt at Baird saying the current environment could lead to a de-emphasis on the corporate network, which they expect would be a headwind and says ZS and NET are better positioned to benefit from the work from home trend