Closing Recap

Thursday, March 12, 2020

Equity Market Recap

·     U.S. stocks tumbled on Thursday as the S&P 500 and Dow Jones Industrials fell for the 13^th time in the last 15-days, fighting fears of a recession, liquidity concerns, health issues to the general public and massive economic impact from the coronavirus that has essentially shut down travel, sporting events and having workers do their jobs from home (when they can) as markets and people try and navigate through the uncertainty of this virus. The pullback resumed last night (after a dreadful day Wednesday) when President Trump took extreme measures by suspending all flights from Europe over the next 30 days, adding to travel related fears, while major sporting organizations such as the NBA, NHL, MLS and others shut down operations as well raising concerns to a new level for the general public. Stocks bounced briefly off the lows midday after the Federal Reserve took the highly unusual step of injecting more money into the bond market Thursday to ensure the financial system remains stable. The New York Fed will pump $1.5 trillion into the short-term lending markets that banks use to lend to each other on Thursday and Friday. The Fed also announced it will buy $60 billion worth of Treasury bonds for the next month (March 13 through April 13) to help keep that market functioning appropriately.

·     Overall, U.S. equities are now down around 25% from record highs, ending its more than decade long bull-run and now considered a bear market (defined as down 10% form highs) as fears grow the U.S. is now in a recession amid the impact of the coronavirus impact to the economy. U.S. stock markets were halted for 15-minutes (second time this week) after falling over 7% just moments after the open, while the Nasdaq Composite fell over 8% to lows of 7,279 (dropping below its prior 52-week low in June 2019 of 7,296). The market uncertainty of the coronavirus gains momentum each day, raising more fears as schools, businesses, and sporting events and in some cases, even countries are closing to prevent the further outbreak of the virus.

·     European stocks benchmark loses almost a third of value since the middle of February after today’s more than 10% declines as the Stoxx 600 index dropped -11.0%, the UK FTSE 100 dropped around -10%, France’s Cac 40 fell -11.4%, Spain’s market over -11% and Germany’s DAX declined -11.4% in what was a brutal trading session.

·     Central banks continue to try and help liquidity issues as the Fed increases size of overnight REPO, while last week slashed its benchmark overnight interest rate by 50 bps to range of 1.00% to 1.25% (and expected to cut another 50 bps next week), while the ECB today announces new LTRO, boosting liquidity, while keeps rates unchanged (adds 120B of net asset purchases through end of 2020) – additional longer-term refinancing operations (LTROs) will be conducted, temporarily, to provide immediate liquidity support to the euro area financial system. Unusual times calling for unusual measures, which at this time markets have not seen from the gov’t, which has added to the panic seen in global markets with Emerging Markets (Brazil) Europe and Asia plunging as well overnight

Coronavirus headlines today:

·     According to latest reports, global COVID-19 cases are now north of 133K compared to ~96K a week ago. Fatalities stand at over 4,850 versus ~3,300 last week. The top 10 countries are: China (80,931), Italy (15,113), Iran (10,075), South Korea (7,869), France (2,281), Spain (2,277), Germany (2,078), U.S. (1,301), Norway (702) and Switzerland (652).Congress shutting US Capitol, House and Senate office buildings to public until April 1 due to coronavirus. Canada PM Justin Trudeau & wife Self-Quarantine after she developed “virus-liked symptoms” following trip abroad. The NHL joined the NBA and MLS by suspending their seasons until further notice. In college sports, the Big Ten, SEC and Big 12 are among the conferences to cancel their yearly tournaments due to the coronavirus outbreak.  Italy reports 15,113 total coronavirus cases from 12,462 and coronavirus deaths rise to 1,016 from 827.

Commodities

·     Oil prices plunge again as the worsening rout drove U.S. energy stocks to 16-year lows amid crippling demand given the travel ban announces last night by the U.S. due to the coronavirus breakout, the ongoing price war between Saudi Arabia and Russia and building inventories. WTI crude declined -$1.48 or 4.5% to $31.50 per barrel. The S&P 500 Energy Index fell more than 10% on Thursday to its lowest since March 2004 after having fallen almost 30% this week as crude lost about a quarter of its value. The sector has been among the hardest hit as the coronavirus pandemic reduces the demand outlook while Russia, Saudi Arabia and other Middle East nations jostle to raise production. Gold prices dropped 3.2% or $52.00 to settle at $1,590.30 an ounce (but off earlier lows of $1,560.40 an ounce), its lowest level on over 2-weeks following a full-blown market sell-off that saw stocks and commodities tumble, as investors scramble for cash.

Currencies & Treasuries

·     The U.S. dollar was king on the day, rising against nearly all major rival currencies as the British Pound fell 2% against the buck to lows around 1.2565 as investors sought for the safety of the US dollar, which rose broadly vs. most rival currencies. The dollar index (DXY) topped highs of 98.30 before leveling off to around 97.40 (up 0.9%). Even Bitcoin prices saw a flash crash today with crypto currency space plunging over 20% this morning (Bitcoin around $6,000). The buck rose up to 105.80 vs. the yen from opening lows of 103.51. Treasury market’s erased gained late day as the yield on the 10-year rose to around 0.9% after falling to 0.69% earlier and the 30-year yield jumped 7 bps to 1.46% (from earlier lows 1.135%). There wasn’t a big reaction to the ECB’s decision to boost liquidity and QE, but not cut rates.

Economic Data

·     Producer Price Index (PPI) for final demand dropped -0.6% last month, the biggest decline since January 2015, after surging 0.5% in January and more than the expected (-0.1%) decline, while YoY, the PPI increased 1.3% after gaining 2.1% in January (est. 1.8%). Excluding the volatile food, energy and trade services components, PPI slipped (-0.1%), the first drop since June, after climbing 0.4% in January (vs. est. +0.1%) and PPI core advanced 1.4% YoY vs. est. 1.5%

·     Weekly jobless claims unexpectedly fell to 211K in the latest week, below prior week revised 215K level and below the 220K estimate, but could rise in the coming weeks as the coronavirus pandemic causes companies to lay off workers amid supply chain disruptions; the four-week moving average of initial claims rose 1,250 to 214,000 last week.

Sector News Breakdown

Consumer

·     Retailers; sector hurt by slowing traffic, impacting revenues and travel bans; news overnight that the NBA suspended it season and the NHL following suit and the NCAA holding games for its tournament (as of now) without fans, also hurting retail; NKE, UAA, FL among names likely to see impact on game news, while overall retail department stores also dropping

·     Consumer Staples; LMNR sharply reduced its FY2020 EBITDA guidance, due to a weak Q1 result and the negative impact of Coronavirus on near-term exports to Asia; BREW swung to a wider than expected Q4 EPS loss and also misses on revenue; restaurant sector has been one of the hardest hit amid slowing demand to eat out given the virus breakout, with many casual dining names losing over 50% from their highs over the last few weeks on expected lower demand (CAKE, BJRI, EAT, DRI, TXRH, RRGB)

·     Housing & Building Products; homebuilder sector not immune to selling pressure despite interest and mortgage rates plunging as housing industry hurt by stock market swoon, reduced confidence in buyers – Bank America downgraded LEN, TOL, NVR

·     Casino & Leisure movers; cruise industry pummeled again as CCL announced its Princess cruises announces a voluntary and temporary pause of its global ship operations for 60 days; in autos, industry down on slowing production fears (F, GM, FCAU, TSLA), while China’s vehicle sales plunged 79.1% yr/yr in February; MANU drops in soccer world as Real Madrid soccer team in quarantine after basketball player for club tests positive for coronavirus; casinos drop again on reduced traffic, quarantines, flight travel bans (WYNN, MGM, LVS), which continues to hit hotels and lodging names (HLT, MAR, HST); AMC, CNK, IMAX crumble in movie theatre sector

Energy

·     Energy stocks tumble on growing fears as APA announced plans to cut 2020 capital spending to $1B-$1.2B from previous guidance of $1.6B-$1.9B, a ~37% drop at the midpoint, and cut its quarterly dividend by 90% to 2.5c from 25cand will reduce its Permian rig count to zero, limiting exposure to short-cycle oil projects; MUR cut its capital expenditure forecast for the full year to $950M from prior view $1.45B-$1.5B; DVN cuts 2020 capex by 30% to ~$1.3B from $1.8B, joining shale peers as the industry battles a slump in crude prices – says while the spending cut will affect entire portfolio, assets in the STACK play of Oklahoma and Powder River basin in Wyoming will be the most hit; PDCE reduced its 2020 capex guide by 20-25% due to a weak commodity price environment, though PDCE cut its 2020 oil production guide by 8.8%. PDCE also reduced its 2021 capex guide by 29%. MLPs slammed again with plunging oil and slowing demand fears; Raymond James the latest research firm to downgrade a handful of names (twelve MLPs in total (PAA, CEQP, PAGP, TRGP, DCP, DKL, ENLC, MPLX, NGL, PBFX, RTLR, TELL) following oil price crash and subsequent bleak outlook from oil and gas producers

Financials

·     Bank movers; between plunging Treasury yields on fight to bonds, slowing global growth concerns, exposure to loans in the energy sector that could potentially default with oil prices tumbling, banking related stocks were again among the biggest losers on the day in what was another broad based market decline; CME said it will close its Chicago trading floor after the close of business on Friday, March 13, 2020, as a precaution to reduce large gatherings that can contribute to the spread of Covid-19. All products will continue to trade on CME Globex as they do today. No coronavirus has been reported on the trading floor or in the CBOT.

Healthcare

·     Pharma movers; MNK said it is currently evaluating the limited published evidence suggesting a potential role for inhaled nitric oxide as a supportive measure in treating those patients infected with coronavirus (SARS-CoV-2) and having associated pulmonary complications; names leveraged to vaccinations, protective equipment, which have been very volatile of late saw more high volume (APT, CODX, INO, TLSA, VIR, NVAX among them); again pharma not really a place to hide as large cap PFE, MRK, JNJ, BMY, LLY, ABBV all declined

Industrials & Materials

·     Aerospace & Defense; shares of Dow component BA, which had already been dealing with delays of its Max 737 prior this year, posted a roughly 30% two-day drop on the travel ban for airlines to Europe from the U.S. and after JPM said today it expects the company to cut its dividend to free up cash – comment comes a day after Boeing said it was planning to draw down the full amount of a $13.8 billion loan, sparking investor concerns about liquidity. Overall, the global coronavirus pandemic has upended the airline sector worldwide, forcing companies to cancel flights, cut capacities, and withdraw financial guidance amid growing uncertainty, and supply chains are also feeling the impact (suppliers SPR, and specialty metals ATI, HAYN)

·     Transports; Dow Transports fell as much as 7% (earlier lows 7,371), while its June 2016 lows stands just above the 7,000 level (index off 52-week highs of 11,359 on January 17th of this year); airline industry extends declines, hurt by the 30-day travel ban by the U.S. overnight to Europe as well as the cancellation of major sporting events in the U.S., as near-term demand has fallen off a cliff (LUV, DAL, AAL, UAL, plunge); UAL discloses that it entered into a $2B term loan facility to pay certain transaction fees and expenses and for general corporate purposes; JBLU falls after coronavirus-positive passenger takes flight

·     Chemicals hammered over the last few weeks on demand fears due to coronavirus and the impact felt from energy prices; Citigroup lowered estimates for lithium producers ALB as believe the coronavirus and the Saudi Arabia-Russia oil price war will be negative for them given the continuation of high stock levels and possibly slower EV demand; ag chemicals NTR, MOS, CF shares plunge to decade/all-time lows in broad meltdown; Seaport recently lowered estimates on ASH and PPG to reflect some additional softness primarily in industrial markets (~40% of sales for ASH) and auto, industrial impact in China for PPG; DOW recently had estimates lowered at SunTrust to reflect 1QCOVID-19 impacts and pricing pressure in the ethylene chain due to the 44% collapse of Brent crude oil prices YTD

Technology, Media & Telecom

·     Internet; SNAP was upgraded by at least two analysts (Argus and Deutsche Bank) following sell-off in shares saying fundamentals have not been negatively impacted by the coronavirus outbreak or by steps taken by governments to limit public assembly; online travel stocks (BKNG, EXPE, TRIP) have continued to suffer due to the travel bans/less demand

·     Semiconductors; quick roll again for Philly semi index (SOX) down as much as 7.5% or over 100 points to its lowest levels since last August with every name in the SOX down at least 4% my mid-morning on fears of disruption to supply chain; SLAB cuts Q1 guidance due to estimated impacts from the novel coronavirus and Covid-19 as sees revs $200M-$205M down from $209M-$219M prior and lower EPS as well for quarter and year

·     Hardware & Component news; ZAGG shares drop around 50% after Q4 miss on EPS and revs and also said its board suspended its review of strategic alternatives, which was first publicly announced on August 6, 2019 saying was unable to finalize a definitive offer at a price that was not significantly below current trading levels; Piper said given the outbreak of coronavirus and other macro-issues, they are updating estimates for ANET, CSCO, CVLT, FFIV, JNPR following further developments, earnings from peers, and analysis around the potential impact.