Mid-Morning Look

Tuesday, March 31, 2020

U.S. equities bounce sharply off morning lows, with major U.S. averages getting a boost after U.S. health official Dr. Fauci said in a CNN interview that he is starting to see “glimmers” that social distancing dampening spread of coronavirus in the U.S. saying believes the mitigation strategies are working (though noted cases are still going up and seeing more people in 30’s-40’s getting very ill). The comment giving a boost to sentiment early as many sectors hardest hit from the coronavirus business shutdown (airlines, cruise, retail, restaurant, lodging) are leading markets higher initially (after falling the most yesterday). Also this morning, the U.S. Federal Reserve broadened the ability of dozens of foreign central banks to access U.S. dollars during the coronavirus crisis by allowing them to exchange their holdings of U.S. Treasury securities for overnight dollar loans. Economic data also a positive this morning as Chicago PMI and Consumer Confidence for March fell from the prior month, but were above the consensus estimates, while in China overnight, its manufacturing purchasing managers index (PMI) jumped to 52.0 for March, up from 35.7, and the services PMI rose to 52.3 from 29.6. Cruise lines a big bounce early as Carnival offers to sell shares to help liquidity issues while energy stocks rebound with oil recovering off 18-year lows yesterday. Markets also seeing stock positioning on the final day of the quarter with the Dow down 21% YTD, the S&P 500 down -18% and the NASDAQ down -12%.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar advances early, while commodity prices are mixed with gold prices slipping but oil rebounding after prices touched their lowest levels in 18-years on Monday, falling below $20 per barrel for WTI crude after U.S. President Donald Trump and his Russian counterpart Vladimir Putin agree to talks aimed at stabilizing energy markets

·     Treasury markets are up slightly as yields dipped after the Federal Reserve continued its aggressive purchases and managers rebalanced their portfolios with the end of the first quarter. The benchmark 10-year yield down 4 bps to 0.68% on last day of the quarter (started the year close to 2% and then traded down to a record low of 0.318% on March 9)

Economic Data

·     Chicago PMI falls to 47.8 from 49.0 prior month but ahead of the 40 estimate; business barometer fell at a faster pace, signaling contraction while prices paid rose at a faster pace, signaling expansion

·     Consumer Confidence for March falls to 120.0 from upwardly revised 132.6 (from 130.7) but was above the 110.0 estimate; present situation confidence fell to 167.7 vs 169.3 last month and expectations index fell to 88.2 vs 108.1 last month

Sector Movers Today

·     Auto sector; DLPH shares tumbled after the company said they received notice from auto parts maker BWA that Delphi’s decision to draw on its credit facility represents a material breach of the buyout agreement; UBS upgraded shares of TM and HMC to buy from neutral while downgrade NSANY to sell noting that the retreat in auto sales and earnings has been historic, and while the fiscal stimulus is expected to drive a sales rebound, expects stiffer competition to slow profit growth in the medium term; few analysts preview TSLA as it will be delivering its much anticipated 1Q20 (March) production and delivery numbers

·     Energy stocks try to recover after oil prices touched their lowest levels in 18-years on Monday, falling below $20 per barrel for WTI crude. Today, prices got a boost after U.S. President Donald Trump and his Russian counterpart Vladimir Putin agree to talks aimed at stabilizing energy markets; in stocks new, RDSA said expects only a “relatively minor” impact from the coronavirus on overall demand for its oil products during Q1 while said it has secured a new $12B credit facility as it seeks to safeguard dividends; PXD, PE both ask Texas oil regulators for an emergency meeting to consider curbs on production in the state in response to the collapsing oil market; the co CEO’s seeks a virtual meeting among the three-member Texas Railroad Commission no later than April 13, Bloomberg reports; RRC reduced its 2020 all-in capital budget from $520 million to $430 million. Range still expects to maintain production at approximately 2.3 Bcfe per day

·     Chemical movers; MOS upgraded to Buy at Bank America reversing its downgrade of shares earlier in the month saying now a Chinese potash contract appears likely in coming weeks, as domestic demand has substantially increased; DD shares higher after late Monday evening, a Delaware court upheld DuPont’s demand for arbitration of a dispute with CC over PFOA/PFAS liabilities, one of the key issues for DD shares (KeyBanc said they view the event as a significant positive that could start bringing investors’ attention back to shares); SQM downgraded to underperform at Bank America saying lithium prices are in “free fall” due to lower electric vehicle sales; SSL said it hedged ~80% of its synthetic fuel production in Q4 at near $32/bbl and will continue to hedge crude for the next 12 months

·     Retailers; BKE to furlough majority of store, corp office teammates, extends closure of stores indefinitely; URBN says it is furloughing a substantial number of store, wholesale and home office employees for 60 days, beginning April 1 (joins M, GPS, KSS); DG was upgraded to Overweight at Wells Fargo saying it has numerous underappreciated tailwinds gaining steam that they believe make the stock a particularly attractive investment at the moment; VSTO tgt raised to $11 at Cowen saying see near term trading upside

·     Restaurants; seeing an early rebound in casual dining, restaurants after falling lately; WEN was upgraded to outperform at Wedbush saying the restaurant chain is well positioned to accelerate top and bottom line growth after the Covid-19 pandemic subsides; DPZ shares slipped after saying Q1 same store sales growth for U.S. company-owned stores of 3.9%, U.S. franchise stores of 1.5%, U.S. stores of 1.6% (better than peers, but street wanting more)

Stock GAINERS

·     AKRO +17%; as announces positive results from a Phase 2 clinical trial, BALANCED, evaluating lead candidate AKR-001 patients with F1-F4 (minimal fibrosis to severe fibrosis) in NASH/all three dose groups (28 mg, 50 mg, 70 mg) met the primary endpoint

·     CAG +4%; reported mixed Q3 results as EPS missed on slightly better sales while saying FY20 organic net sales and earnings will be above the high end of its previous range

·     CCL +5%; announced it was suspending its dividend and buyback, and sees sufficient liquidity for next 12 months. In addition, said it seeks to raise $6B through stock sale as lawsuits from passengers over COVID-19 emerge (shares bounce after falling over 17% this morning)

·     CTMX +7%; earned a $40M milestone payment from collaboration partner ABBV triggered by the achievement of pre-specified criteria for the dose-escalation portion of the ongoing Phase 1/2 clinical trial, PROCLAIM-CX-2029

·     CVLT +2%; shares were higher after Starboard Value, a well-known activist, filed a 13D disclosing that it had taken a 9.3% stake in Commvault

·     DD +5%; after late Monday evening, a Delaware court upheld DuPont’s demand for arbitration of a dispute with CC over PFOA/PFAS liabilities, one of the key issues for DD shares

·     DVN +14%; among top gainers in energy as oil prices recover off 18-year lows

·     KNSA +36%; following early data from a small study of mavrilimumab in a treatment protocol in patients with severe Covid-19 pneumonia and hyper-inflammation.

·     VVUS +290%; as accelerates the launch of telemedicine and remote monitoring modules to facilitate effective patient care during “social distancing”

Stock LAGGARDS

·     AEE -4%; utility stocks among worst performers in the S&P with CMS, AEE, SO, all down over 3.5% as stocks rally, leaving defensive sectors behind

·     AMRN -68%; after U.S. District Court for the District of Nevada ruled in favor of generic companies Dr. Reddy’s (RDY) and Hikma Pharmaceuticals in the patent litigation for its Vascepa capsule franchise, dealing a blow to the company (downgraded by several analysts)

·     DLPH -23%; after the company said they received notice from auto parts maker BWA that Delphi’s decision to draw on its credit facility represents a material breach of the buyout agreement that was reached in late January

·     RETA -7%; announced that the Phase 3 catalyst study in CTD-PAH has been stopped due to COVID-19, and an initial analysis suggested the study is unlikely to meet its primary endpoint

·     RH -9%; reported revenue of $665M in 4Q19, missing consensus estimates of $709M driven by the elimination of holiday items and a reduction in inventory forcing select items to be backordered as per Wedbush

·     ZM -3%; after reports NY Attorney General Letitia James is looking into the data privacy and security practices of the videoconferencing app, whose traffic has spiked amid COVID-19 outbreak