Closing Recap

Monday, March 02, 2020

Equity Market Recap

·     U.S. stocks with a massive recovery today, rising nearly across the board with the Dow Jones Industrials surging more than 1,200 points late day (biggest one day point gain in history), as U.S. stocks bounce following their worst week since the 2008 financial crisis, snapping its 7-day losing streak. While coronavirus cases in mainland China has slowly fallen in numbers, cases and death tolls have popped up around the globe, including the death toll rising to six in Washington State today in the U.S. which caused some concern early, but wasn’t enough to derail gains in some of the biggest large cap names (AAPL posted its best one-day return since 2018). The S&P 500 index posted its best one-day gains this year on rising expectations of central bank actions to help stimulate economies that are suffering from the impact of the virus on production, businesses and foot traffic, though Treasury prices surge once again, with yields falling to the lowest levels on record, including the 10-year nearing 1% (Treasury yields rallied off their lows late day). Weaker than expected manufacturing and services readings in China were not unexpected and failed to dent major averages as well (China official manufacturing purchasing managers index tumbled to 35.7 in February from 50 in January and was below the lowered expectation of around 45. China’s nonmanufacturing PMI, also released on Saturday, sank to a record low of 29.6 in February from 54.1 in January). Other market moving factors this week include: Super Tuesday primaries with more than a dozen states holding voting (while Klobuchar, Buttigieg the latest to drop out of Presidential campaign – both backing Biden ahead of tomorrow), an OPEC meeting late-week, and market hopes for FOMC intervention or possible worldwide coordinated action on rates to help stimulate economies amid the impact of the coronavirus (note many market strategists have changed view to include possible rate cut by Fed in March and April at this point) – follows dovish comments by Fed Chair Powell Friday and the ECB this morning.

Economic Data

·     Feb. Manufacturing PMI 50.7 (near lowest reading since August 2019) vs. Flash Reading 50.8 and falls from 51.9 in January (year ago 53 reading) ; new orders fall to 50.4 vs 52.4 in January, the lowest reading since May 2019

·     ISM Manufacturing for February falls to 50.1 from 50.9 prior and was slightly below the est. 50.5 as new orders fell to 49.8 vs 52.0 MoM, employment rose to 46.9 vs 46.6 from January, inventories fell to 46.5 vs 48.8 MoM and prices paid fell to 45.9 vs 53.3

·     Construction Spending for January rose 1.8%, topping the 0.6% estimate while December was revised to 0.2% gain from -0.2% (the increase of 1.8% largest since Feb. 2018); private construction rose 1.5% in January and private residential construction rose 2.1%

Commodities

·     Oil prices finish higher, rising $1.99 or 4.4% to settle at $46.75 per barrel, partially rebounding after last weeks’ 16% decline on coronavirus demand fears hitting demand. Prices got a boost today, rising the most in five months amid expectations central banks will move to prop up financial markets and OPEC will curb supplies in response to the virus-driven demand shock when they meet later this week in Vienna. Today’s gain snapped a six day losing streak.

·     Gold prices rise with April gold up $28.10 or 1.8% to settle at $1,594.80 an ounce, getting a boost after the U.S. dollar rolled to lows on rising expectations that the Fed could lower rates at the March and/or April meeting to help offset the impact of the coronavirus on the economy. Gold prices recovered from their biggest daily decline since June 2013

Currencies & Treasuries

·     The US dollar dropped sharply vs. most currencies, down over 1% vs. the euro, which rises to 1.18, its best levels in over a month (and off 52-week lows on 2/20 of 1.0778) as the dollar extends its recent pullback on expectations the Fed could cut rates by 25 bps in March and another 25 bps in April (calls a few Wall Street firms have made in recent days) to help stimulate the economy amid the impact of the corona virus on businesses, travel and production. That speculation has knocked the dollar down from 3-year highs reached just a week ago.

·     Treasury market’s extend their recent rally as yields fall to fresh record lows for the 10 and 30-year yield; the 10-year Treasury yield dropped as low as 1.029% overnight before paring losses to about 1.06% (down 9 bps), as the 30-year yield touched record low of 1.58% before paring losses and the 2-year yield hit lows of 0.7% before paring losses to 0.77% (still down over 13 bps). Investors still adding to safe-haven investments with broader market uncertainty.

Bond Market

·     Treasuries remain in rally mode, but off their best levels, in very choppy action as equities gyrate. The stronger than expected ISM and construction spending numbers haven’t ameliorated the panic trading. The front end continues to lead the charge on haven flows and as the market prices in aggressive Fed easing. The 2-year yield is 14 bps lower at 0.77%, though dropped to 0.705% overnight. The 5-year is down nearly 11 bps to 0.83%, but tested 0.786%. The 10-year is 8 bps richer at 1.06%, versus 1.028% in Asian action, while the 30-year is down 5.5 bps to 1.62%, versus 1.58%. For the longest maturities, these are record low rates

Sector News Breakdown

Consumer

·     Retailers; BURBY was upgraded to buy from underperform noting shares are down 30% since mid-January, twice as much as its sector peers. However, while the coronavirus spread is a short-term concern across the luxury-goods sector, Burberry’s share price doesn’t reflect the company’s underlying value; COST, BJ, WMT shares active as weekend traffic was reportedly high in various parts of the country as consumers stockpiled supplies in anticipation of a wider outbreak of the coronavirus.

·     Consumer Staples; CVGW downgraded to equal-weight from overweight at Stephens citing Friday’s surprise announcements in SEC filings of recent executive departures; CLX shares remain active on reports of consumers stocking up on antibacterial products; packaged food supplier CORE shares jumped following its Q4 earnings results and guidance; CMG shares plunged in the restaurant space which remains susceptible to lower traffic trends on virus fears

·     Housing & Building Products; BLDR and BMCH both upgraded to buy at SunTrust (BLDR tgt to 430 from $24 and BMCH to $33 from $28) noting virus fears have pushed Treasuries to all-time lows and will only enhance homebuilding cycle while market misunderstanding on lumber pressure in 1Q20 makes this one of our worst performing names

·     Casino & Leisure movers; cruise operators (CCL, NCLH, RCL) slide early after Japanese cruise operator Luminous Cruise files for bankruptcy after being hit by cancellations amid concerns about the coronavirus outbreak; casinos active (WYNN, LVS, MLCO) after casinos in Macau reported a record drop in gaming revenue due to casino closures on virus fears as gross gaming revenue was 3.1 billion patacas ($386.5 million) in February, down 87.8% YoY

·     Services; WSC agreed to buy MINI in a stock swap valued at about $1.86 billion; WillScot said it will issue 2.405 shares, valued at about $42.18 based on Friday’s closing price of $17.54, for each share of Mobile Mini. https://on.mktw.net/2wVf6kq

Energy

·     Energy stocks were among the biggest winners on the day on no specific news other than the group has been among the top sector laggards, and energy related stocks rebounded given the large bounce in oil prices after six straight losing sessions. The sector also surged as central bankers from around the world offered reassurances they’ll take stabilization measures. Investors were also hopeful that members of OPEC and allies including Russia are preparing to discuss output this week in Vienna. OPEC output plunged again last month as the group’s voluntary cutbacks were amplified by conflict in Libya that halted exports. Utilities were among the top S&P sector gainers given the rotation back into stocks, but focus being on defensive assets that are also interest rate sensitive with Treasury yields at record lows

Financials

·     Bank movers; banks tumbled again early given the ongoing plunge in Treasury yields, with 52-week lows for WFC, ZION, in the S&P 500 index; though overall bank stocks bounced back with the broader market overall; IBKR Feb highlights showed 1,346 thousand Daily Average Revenue Trades (DARTs), 63% higher than prior year and 32% higher than prior month and ending client equity of $170.1 billion, 18% higher than prior year and 3% lower than prior month.

·     Consumer finance and lending; SQ announced a $1B convertible notes offering; AXP was upgraded to buy at Argus saying recent weakness offers favorable entry point after shares declined 22% over the past week, in excess of the S&P 500’s 15% decline, which they believe reflects concerns about global spending volumes as the number of coronavirus cases increases

Healthcare

·     Pharma movers; MRK said a phase 3 study evaluating its cancer drug Keytruda in adults with relapsed or refractory classical Hodgkin lymphoma met one of its dual primary endpoints; industry remains pressured ahead of Super Tuesday (especially for managed care names UNH, HUM, CI) where Democrats in 14 states vote in the single biggest day of balloting, could cement Bernie Sanders’s position as the front-runner for the nomination. 

·     Biotech movers; FTSV to be acquired by GILD for $4.9 billion in cash, with Gilead paying $95.50 for each share of Forty Seven, representing a premium of 64.7% https://on.mktw.net/2I8s80v ; KPTI jumps in reaction to positive results from a Phase III clinical trial, BOSTON, evaluating the combination of Xpovio (selinexor), Takeda’s Velcade (bortezomib) as study met the primary endpoint of a statistically significant improvement in progression-free survival (PFS); NVAX filed to sell up to $150M in shares; KLDO filed up to $100M mixed securities shelf; FOLD guided FY’19 revenue $182.2M, exceeding the high end guidance range of $170M to $180M

·     Medical equipment and devices; DXR shares rose after the company said it is actively engaging both hospitals and government agencies in the military and civilian sectors regarding the use of its technology to help guide fluid management of critically ill patients with Covid-19; CODX shares surge after announcing that its coronavirus virus test kits are now available for purchase by CLIA-certified laboratories who have yet to complete their Emergency Use Authorization submissions with the FDA; PODD slips after saying that it plans to pause the pivotal study of the Omnipod Horizon™ Automated Glucose Control System to correct a software anomaly; APDN rises as announced that four DNA vaccine candidates will be produced for preclinical testing using its proprietary PCR-based DNA manufacturing systems.

Industrials & Materials

·     Industrial & Machinery; GE was upgraded to neutral from underweight at bear JPMorgan and up tgt to $8 from $5 as the spread between their FCF estimate and consensus is narrower after a better than expected ’19; LDOS upgraded to buy at Stifel citing valuation following a sell-off that was largely related to the coronavirus.

·     Transports; Dow Transports declined (hit lows of 9,156) led by another day of declines for airlines as AAL, DAL, LUV, UAL among those hitting 52-week lows, along with weakness in car rental names again (CAR), while transports and package delivery names were mixed

Technology, Media & Telecom

·     Internet; TWTR rises after reports Paul Singer’s Elliott Management has taken a sizable stake in the company and plans to push for changes, including replacing CEO Jack Dorsey, while Elliott has nominated four directors to Twitter’s board https://on.mktw.net/3aoMC17 ; JD Q1 guide better than feared which overshadows the lower than expected flow-through on the Q4 beat

·     Semiconductors; NXPI reduced the 1Q20 revenue guidance by $100M at the midpoint due to impact from the Novel Coronavirus outbreak; PLXS warned that Q2 revs could fall below its guidance range because of the coronavirus outbreak (sees neg impact by about $40M); WDC, MU, and STX all upgraded to outperform at Baird and raise tgts noting the positive outlook for pricing in DRAM/NAND flash memory remains unchanged in spite of the current demand weakness in China

·     Media & Telecom movers; AMC and CNK shares sunk on expectations of lower audiences at movie theaters due to virus fears; GTT shares declined following Q4 results as its Q4 loss narrowed, but still fell short of consensus views; VZ was upgraded to outperform at Cowen as see low EPS risk considering its U.S.-centric utility-like wireless business and a well-covered dividend which is currently yielding 4.5%; ticket event names like LYV shares fell on fears

·     Hardware & Component news; AAPL was upgraded to outperform and $320 tgt at Oppenheimer as believe Apple products and services will prove more resilient than competitive products in uncertain times/additionally, Apple’s strong balance sheet offers the company tremendous flexibility to keep the supply chain nimble as well as continuing to support its capital return plan; NOK said its Board of Directors has appointed Pekka Lundmark as President and CEO of Nokia, who is expected to start in his new role on September 1, 2020