US EARLY MORNING: Equity futures and bonds are being heavily sold amid inflation and growth concerns, while geopolitical tensions remain tense

Equities and bonds are pressured. The weekend tenor of news focussed on surging consumer prices and growth risks. Geopolitical tensions are also ramping up. There isn’t much on the calendar for today, so these themes will continue to be in focus ahead of a huge week for central bank events. 

SNAPSHOT: US equity futures are tilting further to the downside, with concerns about inflation and growth at the forefront, ahead of a huge week of central bank events (YM -2.0%, ES -2.6%, RTY -2.7%, NQ -3.3%). Treasuries are bear-flattening, continuing the sell-off, with yields up by between 6-18bps across the curve, with most of this underperformance being felt in the short-end. The 2s10s part of the curve inverted again this morning, which many have argued is a signal of a future recession. 

COMMENT: It has been a grim weekend of news on almost every front. While incremental updates have been minimal, reports in wake of the hot US CPI data for May note that prices pressures are prevalent almost everywhere (except lumber, which is being smashed by diminished housing demand), the housing market faces risks of a sharp downturn, US gasoline prices are picking up to new highs as the driving season gets underway. Geopolitics continues to remain tense, with China’s language around Taiwan becoming increasingly bellicose, Ukraine is potentially facing a shortage of ammunition amid fears that Russia could take control of the entire Luhansk region within a few weeks. Let’s not forget COVID: while most of the world is moving on (and the demand recovery is stoking prices in travel and leisure sectors), China’s Beijing city is undergoing “ferocious” testing amid outbreaks – China has been trigger-happy with shutting regions down amid outbreaks, leaving downside risks to already lowered growth expectations for the country, which in turn has the potential to weigh on global activity too. Domestically, these themes are taking their toll on the administration; the NYT says that dozens of frustrated Democrats are expressing doubts about President Biden’s ability to rescue his party and take the fight to Republicans, and The Hill reports that Democrats could be on track to experience a historic rout worse than 1994 or 2010 at the upcoming midterm elections in November.

EQUITY VALUATIONS: In terms of the knock-on for stocks, Morgan Stanley strategist Wilson, whose bearish S&P 500 PT of 3,400 has recently been garnering much attention, argues that growth risks are still not fully priced in. Wilson says that at year-end 2021, equity risk premiums were not reflecting rising risks to growth this year that it was expecting, and now ERP even lower (it estimates it is around 295bps currently, which is 75bps below its estimate) of fair value. "Given the growing evidence of slowing growth and the risk to earnings, that estimate could even rise further," Wilson warns, and again reiterates that the S&P 500 is headed toward 3,400 before a more tradable low is in. "With growth now the main risk to stocks, our focus remains on names that can deliver on earnings in a very difficult environment for many companies to navigate," he says, "in short, it is still the year of the stock picker as the index remains challenged." MS continues to like classic late-cycle winners, like defensives and energy, as well as companies with high operational efficiency.

DAY AHEAD: The week ahead is packed with key central banking events, the standout being the Wednesday FOMC; the base case is for a hike of +50bps, although risks of +75bps move cannot be ruled out given signs that the Fed action thus far has not managed to contain runaway inflation, according to Barclays. Some also suggest that the Fed could start to talk about outright selling of MBS holdings in an effort to accelerate the balance sheet wind down and tighten financial conditions. That said, others warn that this might be detrimental to the Fed’s forward guidance and could damage its ability to signal upcoming policy tweaks (given it would be revising its recently issued guidance so soon) at a time that many already accuse the central bank of losing control of inflation and acting too slowly to manage surging prices. The day ahead is thin in terms of scheduled US events, but the themes noted above will likely be over-discussed, keeping the conversation about surging consumer prices, growth risks, and potential hawkish policy reaction all at the forefront. In equities, Oracle (ORCL) releases numbers after the bell. Day ahead calendar here, and our week ahead preview can be accessed here.

GEOPOLITICS:

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  China, Taiwan, US - The US and Taiwan are reportedly in the final stages of preparing strategic bilateral talks between security officials to take place by the end of June, according to sources cited by Nikkei. Friday’s remarks from China’s Defence minister continued to get coverage over the weekend, warning that China would not hesitate to go to war to prevent Taiwan independence. The US has pledged to maintain military capacity to defend Taiwan, FT writes, warning China against ‘provocative’ activity. Elsewhere, Chinese military officials are asserting that the Taiwan Strait is not international waters, which has generated concern within the Biden administration, Bloomberg reported.


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  Middle East, US - White House to this week announce that President Biden will travel to Israel and Saudi Arabia next month, according to Reuters.


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  US, South Korean - Defence ministers from the two nations plan to expand the scale of joint military exercises, said that North Korea’s nuclear test preparations are provocations that threaten peace and safety in the region.


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  Ukraine, Russia - EC President told Ukrainian President that the opinion on Ukraine’s membership for EU status will be ready by the end of the week ahead. UK intelligence said Russia was using its overmatch in force ratio and artillery to gradually seize territory in and around Severodonetsk, likely has begun preparing to deploy the third battalion from some combat formations in recent weeks.

COVID:

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  US COVID - US CDC rescinded COVID-19 international air testing rules effective from Sunday, according to Reuters.


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  China COVID - Beijing’s Chaoyang district announced three rounds of mass testing to quell a “ferocious” COVID outbreak shortly after it relaxed curbs imposed during an outbreak in April, Reuters reported.

CONSUMER STAPLES:

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  Kraft Heinz Co. (KHC), McDonald’s (MCD) - WSJ reports that some of the US’ largest food suppliers and restaurants, including Kraft and some McDonald’s franchisees, will continue to raise prices as they face starkly higher costs.


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  Tobacco Names - Biden administration will pursue rules requiring less nicotine in US cigarettes, WSJ reports. The FDA is to draft and publish a proposal, though the rules would likely not take effect for several years. Meanwhile, Canada is poised to print health warnings on individual cigarettes, according to Sky News, as health campaigners worry that graphic photographs on the outside of packaging may have lost their impact.


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  J.M. Smucker (SJM) - Will resume manufacturing Jif products at its Lexington plant after recent recall, where it is facing a USD 125mln hit. Reiterates FY23 adj. outlook between 7.85-8.25 (exp. 8.28), and FY23 revenue growth outlook of +3.5-4.5.


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  Costco Wholesale Corporation (COST), The Home Depot, Inc. (HD) - Positive mention in Barron’s, which said Costco and Home Depot were retail stocks to “scoop up now.”

CONSUMER CYCLICALS:

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  Walmart Inc. (WMT) - Cautious commentary in the WSJ, which said that Walmart’s hypermarket model was losing ground in China, as local rivals were performing better on quick deliveries, while geopolitical factors was also giving WMT troubles.


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  Inventories, Retailers, Simon Property Group, Inc. (SPG) - Exec at the biggest mall owner in the US told CNBC that it was not hearing anything about retailers’ excessive inventories, adding that SPG was doing some pop-up stores with certain retailers that do have that problem, but it was not seen as widespread.


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  Gun Names - A bipartisan group of Senators have reached a tentative agreement on legislation that would pair modest new gun restrictions with significant new mental health and school security investments, WaPo reported.


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  McDonald’s Corporation (MCD) - McDonald’s Russia business has reopened under new ownership, WSJ said. Siberian businessman Alexander Govor bought the Russian stores and has revived some of them with a new brand to mark Russia Day.


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  Marriott International, Inc. (MAR), Hilton Worldwide Holdings Inc. (HLT), Hyatt Hotels Corporation (H) - major hotel chain executives say rising room prices will not subside soon, according to CNBC. A recent Biden administration decision to repeal COVID testing requirements for inbound international air travellers will also support demand.


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  Jewellers - Blue Nile Inc. to become a publicly traded company following an agreement to combine with special purpose acquisition company Mudrick Capital Acquisition Corp. II, MarketWatch reported.


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  Luxury - Luxury brands are making watches that even fewer people can afford, WSJ reported. Swiss watch revenues hit a record high, driven by high-end models, but lower volumes spark concerns the industry is too elitist.

ENERGY:

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  US Gas Prices - US gasoline prices reached USD 5/gallon as the driving season gets underway, NYT reports, which it frames as largely due to the Russian invasion of Ukraine and resulting sanctions, as well as a rebound in energy use as the economy recovers from the coronavirus pandemic.


• 
  Energy Names - Norwegian Oil and Gas Association reached an agreement in principle with three unions of offshore workers to avert a strike although two of the unions will ask members before signing a deal, according to Reuters.


• 
  Shell (SHEL), Equinor (EQNR) - Shell, Equinor and Tanzania sign a framework agreement, which brings the commencement of a USD 30bln LNG export terminal closer.


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  TotalEnergies (TTE) - Secured a 6.25% stake within Qatar Energies first phase of a plan, North Field East, to increase gas exports.


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  EOG Resources (EOG), Enel (ENLAY), Sunrun (RUN), Philips 66 (PSX), Shell (SHEL), Liberty Energy (LBRT) - Positive mention in Barron’s, which said energy stocks were about “to get hotter,” and these six names could benefit.

HOUSING:

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  Housing Names - Freddie Mac economist said the US housing market was at the starting stages of its most significant contraction in activity since 2006, Barron’s reported. More speculators are jumping into home-flipping, a foreboding sign that the housing market could be at its peak, Business Insider reported.


• 
  Luxury Housing Sector - Bloomberg carried a story over the weekend noting that luxury home sales had plunged by the most since the start of the pandemic. WSJ ran a piece noting that even deep-pocketed buyers were starting to back away from the US housing market due to the uncertainty caused by rising interest rates, volatile stocks and frothy prices.


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  Lumber, Housing Names - Lumber prices are tanking as rising interest rates means more Americans are finding it harder to buy a home, according to Business Insider.

INDUSTRIALS:

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  Tesla, Inc. (TSLA) - Tesla filing revealed plans for a three-for-one stock split, and board member Larry Ellison does not plan to stand for re-election. Separately, Tesla CEO Musk said the automaker was working on accelerating production of its right-hand drive Model Y, and did not anticipate that demand would be so high.


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  BMW (BMWYY) - The automaker is reportedly considering exporting China-made electric Minis to the US market, Handelsblatt reported.


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  ThyssenKrupp (TKAMY) - IG Metall calls for steel workers to hold additional warning strikes after employers did not agree to their wage increase demands.

MATERIALS:

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  Linde plc (LIN) - Positive mention in Barron’s, noting that the stock was steady amid volatile market conditions, while it was also scoring high on ESG.

FINANCIALS:

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  Hedge Funds - HFR’s data showed that equity hedge funds, which manage around USD 1.2tln in assets, lost 8% on average through the YTD in May, outstripping losses in other years marked by crisis over the last 32 years, and leaves funds with a huge task to recoup losses over the rest of 2022. FT said this was a sign they were struggling to adjust to a dramatic change in market conditions.


• 
  Goldman Sachs Group, Inc. (GS) - SEC is investigating Goldman Sachs over ESG claims, FT reported, as the regulator puts more focus on potential ‘greenwashing’ in finance.


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  Credit Suisse (CS) - Foreign suitors for Credit Suisse face high hurdles, FT reported, Switzerland’s typically liberal M&A market might make an exception for such a national institution. Separately, the UK FCA has put CS on its watchlist of institutions which require tougher supervision, over concerns that it has not taken sufficient steps to improve its culture, governance and risk controls.


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  HSBC Holdings PLC (HSBC) - HSBC could generate USD 26.5bln of extra returns for shareholders if it spins out its Asian business, according to research by investor Ping An as it ramps its campaign to break up the bank, The Times reported.


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  ING (ING) - New 2022-2025 targets envisage an average annual total income growth of 3% and an annual average fee income growth between 5-10%.


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  UniCredit (UNCRY) - CEO reiterates that it does not need any M&A, but is open to the opportunity, Corrie Della Sera reported.


• 
  American Express Company (AXP), Marriott International, Inc. (MAR), Southwest Airlines Co. (LUV) - Positive mention in Barron’s, which said AXP was a buy to play the comeback in business travel.

COMMUNICATIONS:

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  Walt Disney Company (DIS) - Disney CEO Bob Chapek abruptly fired TV content chief Peter Rice replacing him with Dana Walden, positioning Walden as a possible future CEO of the company, according to Business Insider. Separately, Reuters reports that the bidding war for media rights to the Indian Premier League (IPL) will continue today with Disney, Sony and Reliance in contention for what could fetch the Indian cricket board up to USD 6bln.


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  Verizon Communications Inc. (VZ) - Verizon will raise tariff rates of older shared data plans, CNET reports.


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  Meta Platforms Inc (META) - Meta is proving outgoing COO Sandberg’s use of Facebook resources and the extent to which staffers worked on her personal projects over several years, WSJ reported.


• 
  Activision Blizzard, Inc. (ATVI), Microsoft Corporation (MSFT) - Blizzard Entertainment announced its Diablo IV game will be launched in 2023.


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  Alphabet Inc. (GOOG) - Google has reportedly side lined an engineer who claimed that its AI was sentient, according to the NYT. Blake Lemoine said that Google’s language model had a soul, although Alphabet disagreed.

TECH:

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  Apple Inc. (AAPL) - Apple-watcher Gene Munster thinks “something big is coming,” from the iPhone maker, but added that its “silence was deafening,” Barron’s reported. Munster notes Apple had touched on AR every year at WWDC since 2017, and the lack of an announcement recently suggests it is either winding down its AR ambitions or “somebody missed a target and they had to hold off,” arguing that the latter was more likely.


• 
  Micron Technology, Inc. (MU) - Micron will start mass-producing advanced DRAM memory chips at its Hiroshima plant by the end of the year, Chief Business Officer Sumit Sadana told Nikkei.


• 
  Intel Corporation (INTC) - Cautious mention in Barron’s, which said the chipmaker’s “long slumber has turned into a bad dream,” after its last week noted that a slowing global economy was hurting its business, and acknowledged another product delay.

HEALTH CARE:

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  UnitedHealth Group Incorporated (UNH), LHC Group, Inc. (LHCG) - FTC asks UnitedHealth and LHC for additional information related to their proposed USD 5.4bln, according to a filing. The request extends by 30 days the length of time the companies would have to wait before closing a deal once it has been approved by regulators, Modern Healthcare reported, adding that the FTC could remove that requirement.


• 
  Sanofi (SNY) - Next-gen COVID booster vaccine candidates demonstrate the potential to protect against the COVID variants of concern.


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  Vertex Pharmaceuticals Incorporated (VRTX), CRISPR Therapeutics AG (CRSP) - Vertex and CRISPR Therapeutics Present New Data on More Patients with Longer Follow-Up Treated With exagamglogene autotemcel (exa-cel) at the 2022 European Haematology Association (EHA) Congress.


• 
  Novartis AG (NVS) - Novartis five-year Kymriah data show durable remission and long-term survival maintained in children and young adults with advanced B-cell ALL.


• 
  Genmab A/S (GMAB) - Announces late-breaking phase 2 trial results of investigational epcoritamab in relapsed/refractory large B-cell lymphoma patients presented at European Haematology Association (EHA) Presidential Symposium.


• 
  Novo Nordisk A/S (NVO) - Sogroya data show potential as once-weekly treatment in children living with growth hormone deficiency.

13 Jun 2022 - 09:38- EnergyData- Source: Newsquawk