US EARLY MORNING: Index futures are continuing to the downside today after Wednesday’s slide

US equity futures are continuing to the downside (YM -0.9%, RTY -0.9%, ES -1.0%, NQ -1.3%) following Wednesday’s worst day for US stocks since June 2020. Treasuries are bid, with yields lower by around 3bps across the curve, while the shape of the curve is biased towards slight steepening. Grim earnings reports from US retailers have exacerbated growth and inflation concerns, leaving little for the bulls to rally behind. ECB minutes today may offer clues about its own tightening trajectory. In the US, weekly jobless claims are due, while the Philly Fed will be eyed after the Empire Fed manufacturing survey or May disappointed.

NO CATALYSTS FOR BULLS: Grim retail earnings reports have exacerbated concerns about global inflation and growth, all at a time when central bank officials are reiterating commitments to tighten policy (possibly into restrictive territory) to put a lid on rising consumer prices – crucially, these officials have not relented on their hawkishness in remarks given this week. Although the growth impulse in China is becoming more constructive as the nation’s COVID situation improves and policymakers announce actions to support the economy, it still faces challenges around its zero tolerance policies. Meanwhile, the situation in Ukraine–which is wreaking havoc on energy and agricultural markets–continues with no meaningful signs that we are moving towards a more peaceful outcome. This concoction of factors here has left very few explicit catalysts for the bulls to latch-on to, and has made selling ‘bad news’ easy for traders.

RECESSION RISKS: The sell-side is also strategizing on how recessions will impact stocks, even though the consensus on the sell-side–and among officials too–is that a recession can be avoided. The fact that the conversation is even being had is enough to add caution into risk sentiment. The folks at Goldman Sachs, for instance, have been discussing how S&P 500 price, earnings, valuations, sector and factor performance have fared in past recessions; it notes that in the 12 recessions since World War II, the S&P 500 index has fallen from peak to trough by a median 24%; since 1948, S&P 500 earnings have dropped from peak to trough around recessions by a median of 13%, while the S&P 500 forward P/E ratio has contracted by a median of 21% between the pre-recession peak and the eventual trough.

IMPACT ON STOCKS: Capital Economics’ analysts have been arguing that it is only a matter of time before the S&P 500 re-enters bear-market territory, and sees the index slumping to 3,750 by the middle of next year (which would be a peak-to-trough decline of around 22%). “The current struggles of the S&P 500 don’t have much in common with most previous bear markets, but we still think one is likely as the Fed presses ahead with monetary tightening,” it writes. CapEco notes that most previous S&P 500 declines into bear market territory have been accompanied by recessions, and while it sees recessionary risks as elevated due to falling real incomes and tighter monetary policy, it does not have a recession in its base case. “One driver of big falls in equity prices that need not be associated with a recession is a large increase–and subsequent unwind–of the valuation of equities relative to other assets, but that doesn’t seem to be present this time either.” They say that a better historical comparison would be with previous tightening cycles; since the 1980s, these previous episodes of tightening have usually coincided with upside in the S&P 500, but it says that the main difference between now and then is the increase in discount rates this time around, and accordingly, the change in equity valuations has been much larger and much quicker, reflecting valuations being higher at the start of this year than going into the previous cycles, while the reassessment of the monetary policy has been rapid. It says that if the current woes of the S&P 500 are a function of monetary tightening, then it argues that any recession could drag the index a lot lower, but if the economy avoids a recession, CapEco says the bottom for equities may come when the pressure from monetary policy on valuations eases-that could still be some time away.

DAY AHEAD: Commentary from ECB officials–who have generally been amongst the more dovish G10 central bankers in recent years–is also starting to tilt towards tightening; further insight may be gained today with the release of the ECB’s latest meeting minutes (our primer is here); analysts believe that the central bank will use its June meeting to telegraph rate rises once its asset purchases conclude in Q3, leaving potential to inject further hawkishness into today’s market narrative. Elsewhere on the economic docket, the US will release weekly jobless claims data, while the Philly Fed manufacturing report will be eyed after the weak NY Fed manufacturing data for May. EMFX traders will be watching the SARB rate decision (+50bps expected, our primer can be found in the week ahead preview here). Our full ‘Day Ahead’ calendar can be accessed here.

KEY US EQUITY LEVELS (per Credit Suisse):

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  SPX: 3932/30, 3964, 3984/80, 4001, 4044/34, 4091, 4123/28, 4139, 4156/58, 4174.


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  NDX: 11878, 11945, 12069, 12196, 12334, 12608, 12694, 12805, 12889, 12927/82.


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  RUT: 1705/01, 1748/39, 1781/78, 1804/1796, 1822, 1839/41, 1852, 1868/80, 1894, 1920.

INDICES:

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  S&P 500 (SPX), Nasdaq-100 (NDX) - US companies are increasing investments despite slower economic growth, as the impact of supply chain disruptions and deglobalisation override worries about a looming recession, FT reported.

CONSUMER CYCLICAL:

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  Amazon, Inc. (AMZN) - A leaked email shows Amazon’s retail business is cutting back hiring targets this year as growth slows and costs rise, according to Business Insider. One team is expected to reduce its hiring target by 7% this year.


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  Bath & Body Works, Inc. (BBWI) - Q1 adj. EPS 0.64 (exp. 0.50), Q1 revenue USD 1.45bln (exp. 1.39bln). Sees Q2 EPS between 0.60-0.65 (exp. 0.64, vs 0.77 from cont. ops/diluted share in the prior year). Lowers FY22 EPS outlook to USD 3.80-4.15 (exp. 4.43, prev. 4.30-4.70). Outlook reflects the company’s decision to accelerate investments in IT and its customer loyalty program, as well as projected increases in inflationary pressures, exec said.


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  Elior (ELORY) - Derichbourg is to acquire 14.7% stake from BIM and Gilles Cojan at EUR 5.65/shr.


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  Kohl’s Corporation (KSS) - Fell 4.5% after hours on reports it was losing two top executives, as it searches for a potential buyer amid activist pressure to sell the business, CNBC reported. Chief merchandising officer Doug Howe will depart immediately, Kohl’s said, and chief marketing officer Greg Revelle is expected to depart in June.


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  Packaging Corporation of America (PKG) - Boosts quarterly dividend +25% to USD 1.25/shr.


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  Under Armour (UAA) - CEO Frisk to step down, Colin Browne appointed interim President and CEO. Board has initiated search for a permanent successor.

COMMUNICATIONS:

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  AT&T Inc. (T), DISH Network Corporation (DISH) - AT&T and DISH entered into a distribution agreement that will allow DISH to offer AT&T Internet services to DISH customers.


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  Frontier Communications Parent, Inc. (FYBR) - Plans to exceed its target of 1mln fibre locations in 2022, CEO said at a conference.


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  Telefonica (TEF) - Readying sale of its 9% stake in “El País” owner Prisa, El Confidential reports. Several offers were sent to Telefonica. Stake comes with high political value amid the close relationship between the government and the publishing group.

MATERIALS:

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  BHP (BHP), Woodside Petroleum (WOPEY) - Woodside approved a merger with BHP’s petroleum arm to create an oil and gas producer worth some USD 40bln, according to proxy votes cited by Reuters.


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  Rio Tinto plc (RIO), Turquoise Hill Resources Ltd. (TRQ) - Rio agreed to amend the previously agreed funding plan with Turquoise Hill Resources in order to provide liquidity of up to USD 400mln in short-term early advances, while the special committee of Turquoise Hill evaluates Rio Tinto’s CAD 34/shr all-cash proposal to acquire the approximately 49% of the issued and outstanding shares of TRQ that Rio Tinto does not currently own.

TECH:

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  BlackBerry Limited (BB) - Provided long-term financial targets. Sees FY22 revenue USD 655mln (exp. 730.1mln). Targets 5yr revenue CAGR of +13%, sees FY25 revenue at USD 886mln, FY27 revenue at 1.21bln. Sees approaching breakeven adj. EPS and cashflow in FY24, and will begin generating positive adj. EPS and cashflow in FY25.


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  Cisco Systems Inc (CSCO) - Fell 12.8% after hours, with sales falling short of expectations in Q3, and the company lowering its guidance. Q3 adj. EPS 0.87 (exp. 0.86), Q3 revenue USD 12.8bln (exp. 13.34bln). Q3 adj. gross margin 65.3%, sees Q4 adj. gross margin between 64-65%. Sees Q4 adjusted EPS 0.76-0.84 (exp. 0.92). Lowers FY adjusted EPS guidance to USD 3.29-3.37 from 3.41-3.46 (exp. 3.44). Lowers FY revenue growth forecast to 2%-3% from 5.5%-6.5%, (exp. 6.05%). Exec said order cancellations were still at low levels. Execs expect supply problems to continue next quarter.


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  Synopsys Inc (SNPS) - Rose almost 5% after hours following results. Q2 adj. EPS 2.50 (exp. 2.37), Q2 revenue USD 1.28bln (exp. 1.26bln). Q2 Semiconductor & System Design revenue 1.17bln (exp. 1.14bln), Q2 Software Integrity revenue 112.9mln (exp. 114.9mln), Q2 Cash and cash equivalents 1.57bln (exp. 1.61bln). Sees Q3 revenue between USD 1.21-1.24bln (exp. 1.13bln), and sees FY revenue between USD 5.0-5.05bln (exp. 4.81bln, prev. 4.78-4.83bln)

INDUSTRIALS:

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  Boeing Company (BA), International Consolidated Airlines Group (ICAGY) - IAG reaches agreement with Boeing to order 25 737-8200, 25 737-10 aircraft, and an option for a further 100. Delivery will take place between 2023-27. IAG has negotiated a ‘substantial’ discount vs list price, reports said.


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  FedEx Corporation (FDX), Aurora Innovation, Inc. (AUR) - Aurora (up over 3% after hours) and FedEx (down around half-a-percent) announced the expansion of their pilot program to autonomously move FedEx shipments on an additional commercial lane in Texas.


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  General Dynamics Corporation (GD) - Awarded a USD 313.95mln Navy contract modification for additional UK Strategic Weapon Support System kit manufacturing, and submarine industrial base development and expansion.


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  Joby Aviation, Inc. (JOBY) - Electric vertical take-off and landing vehicles manufacturer Joby Aviation will acquire aerospace software engineering firm Avionyx, TechCrunch reported. No terms were disclosed.


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  Tesla, Inc. (TSLA) - Lower by 1.4% after hours. Reuters reported that the NHTSA has opened an investigation into a fatal crash involving a Tesla vehicle in California this month that resulted in three deaths and could have been caused by its advanced driver assistance system, adding that the crash was one of 35 under investigation involving Tesla vehicles and its advanced driver assistance systems. Separately, CEO Musk agreed with Cathie Wood’s view that Tesla losing its place on S&P’s ESG index over concerns around crashes and working conditions was “ridiculous”; Musk added that it was “a clear case of wacktivism”.


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  Veolia (VEOEY) - UK CMA provisional review into the Veolia-Suez deal finds competition concerns, according to Bloomberg.


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  Volkswagen (VWAGY) - A group led by the automaker is set to win EU antitrust approval for the acquisition of Europecar, with the bid at EUR 3bln, according to Reuters. Separately, VW and Mahindra have signed a partnership for MEB electric components in Shanghai.

FINANCIALS:

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  Credit Suisse (CS) - Fitch Ratings downgrades Credit Suisse’ rating to “BBB+” from “A-”; outlook stable.


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  Generali (ARZGY) - Q1 operating profit EUR 1.63bln (prev. 1.61bln Y/Y). Q1 net EUR 727mln (prev. 802mln). Q1 gross written premiums EUR 22.3bln (prev. 19.7bln). Affirms FY EPS target.


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  SocGen (SCGLY) - Closed the sale of Rosbank, will result in a EUR 3.2bln hit.

ENERGY:

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  Denbury Inc. (DEN), Nutrien Ltd. (NTR) - Denbury and Nutrien announced an agreement for transportation and storage of CO2 to be captured from Nutrien’s planned clean ammonia project in Louisiana, significantly expanding their longstanding CCUS partnership.

UTILITIES:

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  EDF (ECIFY) - Estimates outages at nuclear power plants would have a negative impact of around EUR 18.5bln on core earnings this year, greater than previously estimated.


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  UK - PM Johnson’s advisers reportedly resisting a windfall tax on energy companies, would be seen as an attack on the sector, Times reported. But officials believe that the levy is “politically unavoidable.”

HEALTH CARE:

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  Enanta Pharmaceuticals, Inc. (ENTA) - Tumbled 15% after reporting topline data from an RSVP study of EDP-938 which did not meet its primary endpoint.


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  Laboratory Corporation of America Holdings (LH) - Announced new test measures for Lymphocyte-activation gene 3 expression levels by immunohistochemistry in tumour tissue. LAG-3 is an immune-oncology target with demonstrable clinical benefit in patients with melanoma. The test is available for use in both clinical trials and for the care and treatment of patients.


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  Orpea (ORRRY) - Said it had not currently identified any material negative impact on cash flow and real estate assets as a resulted of the reported fraudulent activities.


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  Valneva (VALN) - EMA has accepted filing of marketing authorization application (MMA) for Valneva’s inactivated COVID-19 Vaccine Candidate VLA2001.

CONSUMER STAPLES:

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  L’Oreal (LRLCY) - Is finalising the acquisition of Byredo perfumes, transaction will be based on a valuation of EUR 1bln, Les Echos said.


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  The Kraft Heinz Company (KHC) - CEO Miguel Patricio sold 260k of common stock this week for a total transaction size of USD 11.5mln, according to a filing.

19 May 2022 - 09:30- EquitiesResearch Sheet- Source: Newsquawk