Closing Stock Market SummaryThe stock market had a strong showing compared to yesterday, but that's not a big feat. The August PPI report came in better than yesterday's August CPI report, which alleviated some of the selling pressure in the Treasury market and fueled buy-the-dip interest that disproportionately benefitted mega cap stocks. The major indices saw some whipsaw price action, but ultimately closed with modest gains.
Strength from mega caps really drove index level performance today as evidenced by the Vanguard Mega Cap Growth ETF (MGK) closing with a 0.7% gain compared to a 0.3% gain in the S&P 500. The Invesco S&P 500 Equal Weight ETF (RSP) closed flat.
The advance-decline line paints a picture of a mixed market. Advancers led decliners by an 11-to-10 margin at the NYSE while decliners led advancers by the same margin at the Nasdaq.
S&P 500 sector performance also reflects mixed market action with roughly half of the 11 sectors closing in positive territory. Real estate (-1.4%) and materials (-1.2%) were today's top laggards while energy (+2.9%) and consumer discretionary (+1.3%) rose to the top of the leaderboard.
The materials sector was dragged down by an earnings warning from Nucor (NUE 120.71, -15.39, -11.3%) that followed on the heels of an earnings warning yesterday from Eastman Chemical (EMN 82.12, -1.23, -1.5%).
The energy sector outpaced its peers by a decent margin as oil prices rose above $88.00/bbl driven by a belief that the White House is tacitly attempting to put a floor under oil prices by suggesting it might buy oil around $80.00 per barrel to refill the Strategic Petroleum Reserve. WTI crude oil futures settled 1.3% higher to $88.58/bbl.
The 2-yr note yield, at 3.81% before the August PPI release, settled at 3.77% and the 10-yr note yield, at 3.46% before the release, settled at 3.41%. The US Dollar Index was down 0.1% to 109.67.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: August Retail Sales ( consensus 0.0%; prior 0.0%), Retail Sales ex-auto ( consensus 0.0%; prior 0.4%), weekly Initial Claims ( consensus 233,000; prior 222,000), Continuing Claims (prior 1.473 mln), August Import/Export Prices, September Empire State Manufacturing (consensus -13.5; prior -31.3), and September Philadelphia Fed Survey ( consensus 3.0; prior 6.2)
- 9:15 ET: August Industrial Production ( consensus 0.0%; prior 0.6%) and Capacity Utilization ( consensus 80.3%; prior 80.3%)
- 10:00 ET: July Business Inventories ( consensus 0.6%; prior 1.4%)
- 10:30 ET: Weekly natural gas inventories (prior +54 bcf)
Reviewing today's economic data:
- 09/10 MBA Mortgage Applications Index -1.2%; prior was -0.8%
- Aug PPI -0.1% vs Briefing.com consensus of -0.1%; prior was -0.4% revised from -0.5%
- The key takeaway from the report is that producers saw a moderation in price pressures, yet the report also shows that inflation is still far too high and broad based.
- Aug Core PPI 0.4% vs Briefing.com consensus of 0.3%; prior was 0.3% revised from 0.2%
- 09/10 EIA Crude Oil Inventories +2.44M; prior was +8.84M
Dow Jones Industrial Average: -14.3% YTD
S&P 400: -14.6% YTD
S&P 500: -17.2% YTD
Russell 2000: -18.1% YTD
Nasdaq Composite: -25.1% YTD
After Hours Summary: Quiet session after-hours; DHR +4.6% on plans to spin off its EAS segment as a separate publicly traded co; ARNC -8.3% on guidance; PYPL -1% on CFO taking a leave of absenceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: None
Companies trading higher in after hours in reaction to news: VLD +9% (Kevton Industries subsidiary acquires seven of its Sapphire printers), DHR +4.6% (spinning off its Environmental & Applied Solutions segment), APA +4.2% (increases quarterly dividend and share buyback authorization), SPIR +3% (files mixed securities shelf offering), FTI +1.9% (awarded contract by TotalEnergies), CMP +1.8% (provides strategic updates), LICY +1.6% (files common stock offering by selling shareholders), VMEO +0.6% (reports August statistics), META +0.5% (introduces payment feature in chat on Instagram), GVA +0.1% (awarded $17 mln construction contract)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: ARNC -8.3%
Companies trading lower in after hours in reaction to news: RYTM -11.2% (commences public offering), IDYA -10.7% (announces public offering), RBBN -3.9% (files common stock offering by selling shareholders), NEE -3.4% (to sell $2.0 bln of equity units), PYPL -1% (CFO is taking a leave of absence), ROLL -0.1% (listing of its common stock transferring to NYSE from The Nasdaq Global Select Market)
"Prologue To Third World War": Kremlin Reacts To Security Guarantees For Ukraine
Ukraine wants a 'NATO-esque' bloc which can be called upon to immediately defend borders with Russia, which was proposed by a working group established by President Volodymyr Zelensky. Crucially it would include the United States and other NATO allies providing Ukraine with "security guarantees". Kiev officials stressed in unveiling the plan Tuesday that it's not meant as a replacement for NATO, but as a legally binding alliance to be in place while Ukraine eventually pursues full NATO membership, as Newsweek describes of the proposal:
The Kyiv Security Compact (KSC)—proposed by Andriy Yermak, the head of Zelensky's office, and former NATO Secretary-General Anders Fogh Rasmussen—would also establish a "multi-decade" plan of investment, military training, and intelligence sharing to bolster Ukraine's defensive capabilities as the country pursues full NATO membership.
The Kremlin's reaction has been swift and fierce, with Deputy Chairman of the Security Council of Russia Dmitry Medvedev warning that it is "really a prologue to the Third World War" if it gets enacted. He described that nuclear holocaust would be the end result.
Dmitry Medvedev, via Shutterstock
According to a translation of Medvedev's reaction in state media, which had been posted in a statement to Telegram, he blamed "dull idiots" from "stupid think tanks" for concocting such a "hysterical appeal". Medvedev wrote:
"And then the Western nations will not be able to sit in their clean homes, laughing at how they carefully weaken Russia by proxy. Everything will be on fire around them. Their people will harvest their grief in full. The land will be on fire and the concrete will melt.""Yet still the narrow-minded politicians and their stupid think tanks, thoughtfully twirling a glass of wine in their hands, talk about how they can deal with us without entering into a direct war. Dull idiots with a classical education."
He said that already the conflict in Ukraine is sliding into unknown, unpredictable territory of escalation due to the West's "unrestrained pumping of the Kiev regime with the most dangerous types of weapons."
He added to the statements as follows according to a translation:
The Kyiv camarilla gave birth to a project of "security guarantees", which are a prologue to the third world war. Of course, no one will give any "guarantees" to the Ukrainian Nazis. After all, this is almost the same as applying Article 5 of the North Atlantic Pact (Washington Treaty) to Ukraine. For NATO – the same shit, only a side view. Therefore, it’s scary.
Given the grinding conflict which is still focused in the east and south of the country, and with Moscow having vowed to "liberate" the Donbass, the security guarantees being proposed are unlikely to get off the ground anytime soon, given also it calls for a return to Ukraine's pre-2014 borders and a return of all homes and property confiscated by the invading Russian forces.
Many pundits in the West are meanwhile expressing concern that amid a largely successful Ukrainian counteroffensive in the northeast Russia could grow more unpredictable and desperate. There's ongoing speculation that President Putin could declare a formal declaration of war, something which the Kremlin on Tuesday denied there is even discussion of at this point.
Inditex/Marta Ortega: inflation gives dynast a baptism of fire
Three challenges loom for the world’s biggest clothing retailer
Inditex is the world’s biggest clothing retailer. It remains remarkably nimble. Impressive interim results show it is coping with tough conditions better than peers.
A European economic crisis is giving a baptism of fire to a new top team. Marta Ortega, daughter of founder Amancio Ortega, took over as chair in April, albeit after a long apprenticeship. Chief executive Óscar García Maceiras became chief executive a few months earlier.
Three challenges loom. First, inflation is pushing up costs while cutting consumers’ spending power. Second, China’s Shein is proving tough competition. Third, the Ukraine war has forced Inditex to suspend its big Russian operation, which last year accounted for 8.5 per cent of operating profit.
The shares trade on a forward price/earnings ratio of 18 times, about 30 per cent less than the 10-year average. The stock is down just 5 per cent since Russia’s invasion of Ukraine. Swedish fashion group H&M has fallen far more.
Inditex’s big advantage is that it produces about half its clothing close to home. Manufacturing in Spain, Portugal, Morocco and Turkey allows it to respond quickly to demand. Short runs reduce unsold stock.
Inditex limits dollar-denominated costs. Analysts estimate it uses the dollar for 40 per cent of stock purchases, compared with about two-thirds for European rivals. The strength of the greenback prompted Primark owner ABF to warn on profits last week. Inditex also benefits from a growing US business.
No consumer company is immune from inflation. Shipping costs from Asia have soared. Inditex is stocking up to guard against disruption, eroding the benefits of short supply chains.
That will give Ortega and Maceiras headaches if sales cannot be sustained. The cost of living crisis will squeeze clothes budgets. More shoppers will trade down to cheaper offerings such as Shein’s.
Inditex will need all its skill in stock management and cost control to keep its shares out of the discount bin.
Low Energy Level
Gas and Power prices, not oil, are driving inflation and costs
We have seen unprecedented efforts of European governments to relieve the pain of higher energy prices for private households. Short term, this should be supportive for markets by keeping consumer confidence from eroding even further. However, transferring costs from private households to public debt might relieve the pain, but it does not heal the illness. Europe had already been facing rising energy costs due to its ambitious energy transition plans before the war in Ukraine. Today, having to replace Russian gas while transitioning into a greener future has aggravated the problem and could keep energy costs at uncomfortably high levels for years to come.
Power prices and earnings. While markets have been mostly concerned about European gas prices, we show that (slide 7) rising electricity costs are a bigger concern to corporate earnings than gas prices (as long as there is gas). With shrinking real disposable incomes, we expect that companies will find it increasingly difficult to pass on higher gas and power prices to
consumers. We estimate that average profit margins of European companies could shrink as much as 1% to 1.5% if this year’s gas and electricity prices were to persist into late next year
Research Calls
- Upgrades:
- Akero Therapeutics (AKRO) upgraded to Outperform from In-line at Evercore ISI; tgt raised to $50
- Brandywine Realty (BDN) upgraded to Buy from Hold at Truist; tgt $11
- Merck (MRK) upgraded to Buy from Hold at Berenberg; tgt raised to $100
- Nikola Corporation (NKLA) upgraded to Buy from Neutral at BTIG Research; tgt $12
- PayPal (PYPL) upgraded to Outperform from Mkt Perform at Raymond James; tgt $123
- Roche Hldg (RHHBY) upgraded to Buy from Hold at Berenberg
- Schneider Electric (SBGSY) upgraded to Buy from Hold at Deutsche Bank
- SL Green Realty (SLG) upgraded to Buy from Hold at Truist; tgt $59
- SoFi Technologies (SOFI) upgraded to Buy from Neutral at BofA Securities; tgt raised to $9
- Starbucks (SBUX) upgraded to Buy from Neutral at Fubon; tgt $103
- Downgrades:
- Auto Trader (ATDRY) downgraded to Equal-Weight from Overweight at Morgan Stanley
- Avantor (AVTR) downgraded to Market Perform from Outperform at Cowen; tgt lowered to $28
- Block (SQ) downgraded to Underperform from Outperform at Evercore ISI; tgt lowered to $55
- Bristol-Myers (BMY) downgraded to Hold from Buy at Berenberg; tgt lowered to $76
- Corp Office Props (OFC) downgraded to Hold from Buy at Truist; tgt lowered to $28
- CSX (CSX) downgraded to Mkt Perform from Outperform at Bernstein; tgt $32
- Eastman Chemical (EMN) downgraded to Equal Weight from Overweight at Wells Fargo; tgt lowered to $95
- Match Group (MTCH) downgraded to Hold from Buy at Loop Capital; tgt lowered to $60
- Motorola Solutions (MSI) downgraded to Equal-Weight from Overweight at Morgan Stanley; tgt raised to $260
- Nestle (NSRGY) downgraded to Neutral from Outperform at Exane BNP Paribas
- Novartis AG (NVS) downgraded to Hold from Buy at Berenberg
- Ocado (OCDGF) downgraded to Underperform from Neutral at Credit Suisse
- RBC Bearings (ROLL) downgraded to Underperform from Neutral at BofA Securities; tgt raised to $235
- Standard Life Aberdeen (SLFPF) downgraded to Sell from Hold at Deutsche Bank
- Straumann AG (SAUHY) downgraded to Sell from Neutral at UBS
- Syneos Health (SYNH) downgraded to Neutral from Buy at Guggenheim
- Union Pacific (UNP) downgraded to Mkt Perform from Outperform at Bernstein; tgt lowered to $230
- Woodward (WWD) downgraded to Hold from Buy at Jefferies; tgt $90
- Others:
- ADTRAN (ADTN) initiated with a Hold at WestPark Capital
- Blueprint Medicines (BPMC) initiated with a Buy at Berenberg; tgt $90
- Calix Networks (CALX) initiated with a Buy at WestPark Capital; tgt $75
- Clearfield (CLFD) initiated with a Hold at WestPark Capital
- Church & Dwight (CHD) resumed with an Underperform at BofA Securities; tgt $75
- Clorox (CLX) resumed with an Underperform at BofA Securities; tgt $130
- Coty (COTY) resumed with a Buy at BofA Securities; tgt $12
- DICE Therapeutics (DICE) initiated with an Overweight at Cantor Fitzgerald; tgt $36
- e.l.f. Beauty (ELF) initiated with a Buy at BofA Securities; tgt $45
- Extreme Networks (EXTR) initiated with a Buy at WestPark Capital; tgt $20
- Global Business Travel Group (GBTG) initiated with an Equal-Weight at Morgan Stanley; tgt $9
- Hershey Foods (HSY) initiated with a Market Perform at Cowen; tgt $238
- Kimberly-Clark (KMB) resumed with a Neutral at BofA Securities; tgt $130
- Koninklijke DSM (RDSMY) upgraded to Buy from Hold at Jefferies
- Kronos (KRON) initiated with a Buy at Berenberg; tgt $12
- LSB Industries (LXU) initiated with a Buy at Stifel; tgt $23
- MakeMyTrip (MMYT) initiated with an Overweight at JP Morgan; tgt $44
- Masimo (MASI) initiated with a Buy at Loop Capital; tgt $206
- Mondelez Int'l (MDLZ) initiated with an Outperform at Cowen; tgt $71
- NETSTREIT (NTST) initiated with a Strong Buy at Raymond James; tgt $24
- Oracle (ORCL) initiated with a Hold at Berenberg; tgt $72
- POINT Biopharma (PNT) initiated with a Buy at Berenberg; tgt $20
- Ribbon Communications (RBBN) initiated with a Hold at WestPark Capital
- SES AI Corporation (SES) initiated with a Hold at Deutsche Bank; tgt $7
- Southern Copper (SCCO) initiated with a Hold at Deutsche Bank; tgt $47
- Vir Biotechnology (VIR) initiated with an Outperform at SVB Leerink; tgt $40