Market Snapshot
briefing.com
| Dow | 34312.17 | -106.21 | (-0.31%) | | Nasdaq | 13808.79 | -8.36 | (-0.06%) | | SP 500 | 4451.98 | -4.88 | (-0.11%) | | 10-yr Note | -29/32 | 3.95 |
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| | NYSE | Adv 850 | Dec 2035 | Vol 850 mln | | Nasdaq | Adv 1575 | Dec 2897 | Vol 5.3 bln |
Industry Watch
| Strong: Communication Services, Utilities, Real Estate |
| | Weak: Materials, Energy, Industrials, Information Technology, Financials |
Moving the Market
-- Relative strength from mega caps
-- Growth concerns after Services PMI readings for June from China and the eurozone were weaker than expected
-- Geopolitical angst following reports that the U.S. and China are pursuing protectionist policies
-- Reacting to the FOMC Minutes for the June 13-14 meeting
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Closing Summary
05-Jul-23 16:25 ET
Dow -129.83 at 34288.55, Nasdaq -25.12 at 13792.03, S&P -8.77 at 4448.09
[BRIEFING.COM] The major indices all registered losses ranging from 0.2% to 1.3%. Several catalysts drove market participants to take some money off the table today amid a lingering sense that the market is due for a pullback following its big run in the first half of the year.
Those catalysts included geopolitical angst and concerns about global growth following the news that Services PMI readings for June out of China and the eurozone were weaker than expected, that the U.S. is looking to restrict China's access to cloud computing, and that China said foreign entities will have to request permission to export gallium and germanium.
There was also some knee-jerk selling in the wake of the release of the FOMC Minutes for the June 13-14 meeting at 2:00 p.m. ET. The minutes didn't contain anything surprising, though, and the major indices quickly bounced back from the spate of selling interest. Ultimately, the stock and bond markets finished their sessions in close proximity to where they were trading when the minutes were released.
Expectations for future rate hikes were also little changed. The CME FedWatch Tool shows an 88.7% probability of a 25-basis points rate hike at the July FOMC meeting (versus 86.8% on July 3) and a 17.7% probability of a second rate hike at the September FOMC meeting (versus 20.8% on July 3).
Relative strength from the mega cap space helped to limit index losses while the Russell 2000 lagged, declining 1.3%. The Vanguard Mega Cap Growth ETF (MGK) rose 0.1% while the Invesco S&P 500 Equal Weight ETF (RSP) fell 0.4%.
Most of the S&P 500 sectors registered a loss, but the materials sector (-2.5%) saw the biggest loss by a wide margin. The industrials (-0.6%) and information technology (-0.6%) sectors were also notable underperformers.
The communication services (+1.2%) and utilities (+1.1%) sectors, meanwhile, rose to the top of the leaderboard.
Decliners led advancers by a better than 2-to-1 margin at the NYSE and a nearly 2-to-1 margin at the Nasdaq.
Treasuries settled with losses across the curve. The 2-yr note yield rose two basis points to 4.94% and the 10-yr note yield rose nine basis points to 3.95%.
- Nasdaq Composite: +31.8% YTD
- S&P 500: +15.8% YTD
- S&P Midcap 400: +7.3% YTD
- Russell 2000: +6.3% YTD
- Dow Jones Industrial Average: +3.4% YTD
Reviewing today's economic data:
- Factory orders increased 0.3% month-over-month in May (Briefing.com consensus 0.6%) following a downwardly revised 0.3% increase (from 0.4%) in April. Excluding transportation, factory orders declined 0.5% month-over-month on the heels of a 0.6% decline in April. Shipments of manufactured goods also increased 0.3% month-over-month after declining 0.6% in April.
- The key takeaway from the report is that new order activity for manufactured goods remained weak, excluding transportation.
Looking ahead to Thursday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior 3.0%)
- 8:15 ET: June ADP Employment Change (Briefing.com consensus 245,000; prior 278,000)
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 250,000; prior 239,000), Continuing Claims (prior 1.742 mln), May Trade Balance (Briefing.com consensus -$69.0 bln; prior -$74.6 bln)
- 9:45 ET: June IHS Markit Services PMI - Final (prior 54.9)
- 10:00 ET: June ISM Non-Manufacturing Index (Briefing.com consensus 51.1%; prior 50.3%) and May job openings (prior 10.103 mln)
- 10:30 ET: Weekly natural gas inventories (prior +76 bcf)
- 11:00 ET: Weekly crude oil inventories (prior -9.60 mln)
Econ data releases on Thursday
05-Jul-23 15:30 ET
Dow -110.52 at 34307.86, Nasdaq +2.23 at 13819.38, S&P -3.65 at 4453.21
[BRIEFING.COM] The major indices are nearly unchanged from levels seen before the 2:00 p.m. ET release of the FOMC Minutes for the June 13-14 meeting after some knee-jerk selling.
Looking ahead to Thursday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior 3.0%)
- 8:15 ET: June ADP Employment Change (Briefing.com consensus 245,000; prior 278,000)
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 250,000; prior 239,000), Continuing Claims (prior 1.742 mln), May Trade Balance (Briefing.com consensus -$69.0 bln; prior -$74.6 bln)
- 9:45 ET: June IHS Markit Services PMI - Final (prior 54.9)
- 10:00 ET: June ISM Non-Manufacturing Index (Briefing.com consensus 51.1%; prior 50.3%) and May job openings (prior 10.103 mln)
- 10:30 ET: Weekly natural gas inventories (prior +76 bcf)
- 11:00 ET: Weekly crude oil inventories (prior -9.60 mln)
Energy complex settles mixed
05-Jul-23 15:10 ET
Dow -106.21 at 34312.17, Nasdaq -8.36 at 13808.79, S&P -4.88 at 4451.98
[BRIEFING.COM] The major indices are trying to climb higher. The S&P 500 and Nasdaq are roughly flat while the Dow lags.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures rose 2.8% to $71.82/bbl while natural gas futures fell 1.7% to $2.64/mmbtu.
The 2-yr note yield is up three basis points to 4.95% and the 10-yr note yield is up eight basis points to 3.94%.
"Almost all" FOMC participants think more hikes in 2023 would be "appropriate"
05-Jul-23 14:25 ET
Dow -166.50 at 34251.88, Nasdaq -49.61 at 13767.54, S&P -15.74 at 4441.12
[BRIEFING.COM] The major averages didn't react much initially following the release of the FOMC's minutes from its June meeting. Recent trading has the S&P 500 (-0.35%), along with its counterparts, making a move toward session lows.
The minutes highlighted that almost all participants noted that in their economic projections that they judged that additional increases in the target federal funds rate during 2023 would be appropriate. Further, the minutes spelled out sentiment that there were few clear signs that inflation was on a path to return to the Committee's 2 percent objective over time.
A number of participants observed that the resolution of the federal government debt limit had removed one source of significant uncertainty for the economic outlook.
Almost all participants stated that, with inflation still well above the Committee's longer-run goal and the labor market remaining tight, upside risks to the inflation outlook or the possibility that persistently high inflation might cause inflation expectations to become unanchored remained key factors shaping the policy outlook.
In recent trading the yield on the benchmark 10-yr treasury note is up about seven basis points to 3.940%.
Gold slightly lower on Wednesday
05-Jul-23 14:00 ET
Dow -122.08 at 34296.30, Nasdaq -16.40 at 13800.75, S&P -7.18 at 4449.68
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-0.12%) is down about 16 points, the shallowest losses among the major averages.
Gold futures settled $2.40 lower (-0.1%) to $1,929.50/oz, pressured by a stronger dollar and higher yields.
Meanwhile, the U.S. Dollar Index is up about +0.3% to $103.30.
Negative disposition driven by macro and geopolitical excuses
The stock market is slated for a lower open as market participants get back to work after the Fourth of July holiday. Presumably, though, this week remains a popular vacation week, so it is reasonable to think that there won't be full-fledged participation today barring a major shock of some kind.
Currently, the S&P 500 futures are down 24 points and are trading 0.6% below fair value, the Nasdaq 100 futures are down 85 points and are trading 0.6% below fair value, and the Dow Jones Industrial Average futures are down 185 points and are trading 0.6% below fair value.
The negative disposition at the moment has a macro and geopolitical bent to it.
The macro is rooted in the understanding that Services PMI readings for June from China and the eurozone were weaker than expected. China's Caixin Services PMI fell to 53.9 (56.2 expected) from 57.1 while the eurozone's Services PMI fell to 52.0 (52.4 expected) from 55.1.
This news has piqued some slowdown worries that, naturally, evoked some concerns about companies living up to earnings expectations, especially those companies sporting premium valuations.
It would be remiss not to point, however, that the Treasury market doesn't appear to be latching onto the slowdown narrative at this point. The 3-month T-bill yield is up six basis points to 5.36%, the 2-yr note yield is down two basis points at 4.90%, and the 10-yr note yield is up two basis points to 3.88%.
In the same vein, the Treasury market's disposition doesn't seem to be corroborating the geopolitical tension narrative either. That stance could change, yet stocks and bonds don't appear to be trading on the same agenda at the moment.
Stocks are reportedly backtracking on reports that the U.S. and China are pursuing protectionist policies. Specifically, The Wall Street Journal reports that the U.S. is looking at restricting China's access to cloud computing; meanwhile, China's Ministry of Commerce announced foreign entities will have to request permission to export gallium and germanium from China.
This news hits just as Treasury Secretary Yellen visits China this week with the aim of trying to ease tensions between the two countries.
It sounds like she will have her work cut out for her, but in any case, there is an identifiable excuse for market participants to take some money off the table in stocks that have made big runs and it appears that is an aim ahead of today's open.
What traders will be watching is how stocks -- particularly the mega-cap stocks -- trade after the open. Will there be an inclination to buy the dip or will stocks trade today with a lead blanket feel to them?
The release of the FOMC Minutes for the June 13-14 meeting at 2:00 p.m. ET could hold some sway in leading to an answer, yet their market-moving capacity seems constrained in light of the fact that Fed Chair Powell provided his semiannual monetary policy testimony on June 21-22 and shared some policy insight at the ECB's Forum on Central Banking on June 28.
What is known now is that market participants have some ready excuses to take some money off the table and that they are acting on the macro and geopolitical excuses ahead of the open.
-- Patrick J. O'Hare, Briefing.com
Pegasystems jumps to 52-week highs today following an upgrade at Exane BNP Paribas (PEGA)
Pegasystems (PEGA +15%) broke out of its long sideways pattern today following an upgrade to "Outperform" from "Neutral" at Exane BNP Paribas. Today's upgrade marks the second this year from analysts Briefing.com covers, a positive reversal from the string of downgrades PEGA faced throughout 2022.
Briefing.com notes that after gapping above prior resistance following a massive Q4 earnings beat in mid-February, shares of PEGA consolidated, struggling to break above the $52 mark. However, after today's upgrade, the stock surged to 52-week highs. Even though Q1 earnings in late April were underwhelming, missing top and bottom line estimates by wide margins, PEGA is amid an AI-powered tailwind.
- PEGA is a low-code platform for workflow automation, helping organizations accelerate their digital transformations. Low-code automation tends to have components built into the modules, allowing users with little coding knowledge to automate workflows, develop applications, and speed up processes.
- Lately, automation has been attached to AI, and PEGA already has a few offerings to capitalize on generative AI trends. Its Customer Decision Hub is a real-time AI-powered decision engine that predicts customers' behaviors and recommends the best action. PEGA also has an AI chatbot that functions similarly to ChatGPT, being able to draft notes for prospects or helping customer service agents craft a proper response to customers.
However, the ongoing AI boom has not shown up in PEGA's recent financial performance.
- Alongside a top and bottom line miss in Q1, PEGA saw stagnant annual contract value (ACV) growth, what it refers to as its most crucial metric to measure its success. ACV grew 15% yr/yr, excluding FX impacts in Q1, similar to the 16% growth delivered in 4Q22 and 3Q22 and a minor deceleration from the 19% jump in 2Q22.
- Meanwhile, Pega Cloud ACV grew just 24% in constant currency, a considerable slowdown from the 60% spike in 4Q22 and 39% increase in 3Q22. With PEGA emphasizing the transition to the cloud, the meaningful deceleration in ACV growth within this business in Q1 is concerning.
- PEGA is also amid litigation with Appian (APPN), appealing a September 2022 court decision ruling that the company must pay a settlement north of $2.0 bln. This lawsuit has been a cloud hanging over the stock. If PEGA is unsuccessful in its appeal, the $2.0 bln judgment could have meaningful adverse impacts on the company's financials.
PEGA may be enjoying a solid breakout today on an analyst upgrade. Still, it may be better to remain on the sidelines. PEGA has some exciting developments in the pike, namely those surrounding generative AI. However, these offerings have not translated to meaningful ACV growth recently. Although investors may be more forgiving due to the unfavorable macroenvironment, unless PEGA begins to show solid gains, particularly with its upcoming Q2 earnings report later this month, its shares could endure a quick pullback.
Netflix on radar ahead of pivotal Q2 report, password sharing crackdown (NFLX)
Netflix (NFLX) is trading flat after Goldman upgraded its rating on the streaming giant to Neutral from Sell. The firm also increased it price target to $400 from $230. Goldman has been at a Sell rating since June 2022. Investors are happy to see the firm at least move up from its Sell rating, although Neutral is still not a ringing endorsement. However, the firm did get a bit more positive. The target price is still below where NFLX is currently trading, but at least it has moved higher.
Briefing.com wanted to provide some of its own analysis on NFLX ahead of earnings in a couple of weeks:
- Netflix is set to report Q2 results on July 19 after the close. We are keeping a close eye ahead of what should be a pivotal quarter. Following five double digit EPS beats, NFLX reported a miss in Q4 and only slight EPS upside in Q1.
- This will be an important quarter because NFLX started its long-awaited crackdown on password sharing in the US in Q2. It was originally going to start in late Q1, but NFLX bumped the start into Q2. That explains the downside Q2 guidance when NFLX reported Q1 results in April. We think investors should brace for a couple of volatile quarters especially for net adds as subscribers decide how to respond to NFLX cracking down on password sharing.
- We think investors should focus less on the net sub add metric in Q2 because it could be volatile. There may be an initial jump in cancellations before smoothing out. Or it may come in just fine. The focus should be more on the commentary from Netflix in terms of how US customers are reacting to the account changes.
- The password sharing crackdown is not the only big recent change. Recall that Netflix also rolled out its ad-supported tier in November 2022. Now that we are a few months in, we should get some clarity on how customers are responding to it. On its Q1 call, NFLX said engagement was above initial expectations and, as expected, NFLX has seen very little switching from its standard and premium plans. It's only a couple of quarters in, but the goal is to build a highly lucrative high-margin business.
- Overall, the stock has been making a strong move lately, up around 33% since early May. Tech stocks in general have been strong, but we also think part of the move is because investors are betting on a good Q2 report. The stock action also tells us investors are not expecting a huge push back from US customers on the password sharing changes. This should be an interesting quarter for Netflix.
Rivian runs out of range after charging higher on its first EDV rollout for AMZN in Europe (RIVN)
Rivian Automotive (RIVN +1%) tried overtaking February highs today before investors quickly faded the move following the company rolling out the first of its electric delivery vans (EDVs) for e-commerce mammoth Amazon (AMZN) in Europe on Monday, hours after the close. The first fleet will roll out in Germany, with over 300 vans hitting major cities in the country over the next few weeks, joining an existing fleet of electric vans from other OEMs used by Amazon. Rivian's rollout in Europe is part of Amazon's 2019 order of 100,000 electric delivery vehicles by 2030. Rivian also received upgrades from DA Davidson and Needham today.
The announcement initially provided another jolt to Rivian's shares before pulling back. The EV manufacturer, with an emphasis on adventure vehicles, gapped significantly higher on Monday after releasing upbeat Q2 production and delivery figures, tacking on nearly 10% on the day. However, zooming out, the stock remains in a downward trend, slipping around 50% from 52-week highs and over 80% from 2021 highs.
Still, with Rivian's commercial vans rolling out in Europe after deploying around 3,000 across over 500 U.S. cities since last year and management confident meeting its 50,000 annual production guidance, the company is showcasing encouraging developments that could continue powering its decent +14% rally YTD.
- Comprising roughly 20% of FY22 revs, Amazon is a crucial partner for Rivian, which derives revenue from the sale of its EDVs and related software and services. Although Rivian experienced criticisms for the relatively low range of its EDVs, with a full range typically around 150 miles, Amazon has noted that it is more than enough to complete a daily route.
- As Amazon continues building out charging infrastructure to support the utilization of its EDV fleet, to be carbon neutral by 2030, Rivian may continue to be a significant component of Amazon's future growth.
- Although Rivian is purely focused on its Amazon partnership regarding its commercial vehicle production, it remarked earlier this month that it sees plenty of interest and demand as it thinks about commercial customers over the long haul. Other major package delivery organizations, such as the United States Postal Service and UPS (UPS), are electrifying their fleets, tapping Oshkosh (OSK) and U.K. startup Arrival, respectively, to help reach specific targets.
- With nations seeking to reduce the number of gas-powered vehicles on the road over the next several years, companies like Rivian could be tasked by prominent companies in and around package delivery to meet EV targets.
Since its 2021 IPO, Rivian has struggled, going public at an unfavorable time as rising interest rates increased financing costs while supply chain shortages hurt production. However, the company may finally have turned a corner. Production is on track to reach management's 50,000 forecast. Meanwhile, Rivian's commercial fleet has now rolled out overseas. Although consumer demand could still take a hit if economic conditions worsen, especially given Rivian's consumer fleet costs upward of $70,000, its metrics continue to move in the right direction, a positive ahead of its Q2 earnings report on August 8.
Tesla's record deliveries in Q2, helped by price cuts and healthy demand, spark a nice gap up (TSLA)
Ongoing price cuts and U.S. tax credits for electric vehicles (EVs) again offset the broader economic headwinds in Q2, including higher interest rates and sticky inflation, fueling Tesla's (TSLA +7%) record deliveries in the quarter and energizing the stock. Tesla delivered 466,140 vehicles in Q2, nicely ahead of street estimates and a 10.5% improvement from the previous quarter, which was also a record.
Tesla's delivery report may also not be the sole factor sending its shares higher today. Several other EV manufacturers, including Rivian (RIVN), XPeng (XPEV), NIO (NIO), and Li Auto (LI), each registered solid delivery figures in Q2 and June, a broader reflection of underlying health within the EV industry. The upbeat reports are also lifting other non-pure EV OEMs, such as Ford (F), General Motors (GM), and Volkswagen (VWAGY).
- Tesla divides its deliveries into Model S/X (higher-priced models) and Model 3/Y (lower-priced models). Its lower-priced Model 3/Y group exhibited notable strength, with deliveries up a whopping 87.4% yr/yr and 8.4% sequentially to 446,915. The yr/yr growth showcased the pent-up demand following a lengthy chip shortage that hindered production last year.
- Meanwhile, Model S/X deliveries were the inverse, climbing 19.0% yr/yr and 79.8% sequentially to 19,225. The massive leap from Q1 is due to January price cuts, which were most significant across the Model S and X lineup, not taking effect until March. Additional reductions in April also saw Tesla's higher-tier lineup receive larger discounts than the Model 3 and Y.
- However, even though the slashed prices helped power higher deliveries, it likely came at the further expense of margins. Last quarter, this worry partly contributed to a notable sell-off. Tesla also did see margin erosion during Q1, with total gross margins contracting by 977 bps yr/yr and 450 bps sequentially to 19.3%, well shy of analyst expectations.
- Furthermore, a disparity between production (479,700) and deliveries (466,140) remained relatively wide in Q2. When production continues to exceed deliveries, it signals rising inventories, a reflection of potential demand weakness. However, the discrepancy continued to narrow over the past three quarters on an absolute and percentage basis. Additionally, management remarked last quarter that the production/delivery difference resulted from the company moving to a more-regional balanced mix of build and deliveries.
Tesla's recent price cuts to qualify its vehicle lineup for the new U.S. tax credits have sparked a significant rally in deliveries over the past two quarters. Unlike after its Q1 report, investors applaud Tesla's numbers from Q2, a reflection of dissipating worries that China-based competitors are stealing market share and macroeconomic conditions are eroding demand.
Although margins will likely undergo another quarter of contraction in Q2 (scheduled for July 19), Tesla's actions have spurred considerable demand. They may also accelerate its long-term goal of reaching 20 mln in annual deliveries. With Tesla's charging technology quickly becoming the U.S. standard following deals with Ford and GM and its long-awaited Cybertruck slated for launch this year, the company is showing no signs of letting off the throttle despite its shares already surging over 140% YTD.
Bank stocks are moving higher following announcements on post-stress test dividend hikes (XLF)
Bank stocks were the main attraction after the close on Friday. The Fed released its stress test results for 23 large banks after the close on Wednesday, June 28. However, at that time, the Fed asked the banks to hold off on commenting on plans for dividends and share buybacks until Friday after 4:30pm ET.
- First off, we are glad the Fed asked the banks to wait a couple of days to digest the information and to let investors digest the information before making decisions on dividends and buybacks. In past years, the banks would release press releases within an hour or so and it seemed rushed.
- The general theme that we noticed was that the largest banks mostly increased their dividends while the banks on the smaller side of the spectrum stood pat on dividends/buybacks. Several banks were silent regarding dividends/buybacks, which we interpret as them not making any changes. The banks also commented on their SCB and CET1 results, but those were made public in the Fed's report last Wednesday.
- Among the notable announcements were Goldman Sachs (GS), Morgan Stanley (MS) and State Street (STT) all announcing 10% dividend increases, which were quite large. Other big dividend hikes were announced by Wells Fargo (WFC), which plans a 17% increase, and BNY Mellon (BK), which plans a 14% increase. Citigroup (C) is planning a 4% increase to its dividend.
- There were not any share buyback increases, although Morgan Stanley plans to reauthorize a share repurchase program of up to $20 bln. STT also said it remains committed to repurchasing shares under existing authorization for up to $4.5 bln in 2023.
- JPMorgan Chase (JPM) seemed to strut its stuff a bit, and deservedly so, as it discussed its stress test results. JPM said it continues to maintain a "fortress balance sheet" and plans to increase its dividend by 5%.
Overall, bank stocks are moving modestly higher today which tells us investors are pleased with their announcements on Friday after the close. The commentary on the Fed stress ratios was generally positive. We had expected to see some more action on buyback increases, but it seems the banks want to stand pat. Also, the dividend increases strike us healthy, but still prudent given the macro picture as we head into 2H23. The banks do not seem to be overextending themselves on the dividend hikes, the sizes seem about right.
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