US EARLY MORNING: Index futures are lower after soft China data; weekend media focussed heavily on prospects for US recession

Index futures are trading lower after soft China activity data. Over the weekend, there was heavy focus in the media about the prospects for a US recession. Goldman lowered its US growth view, and its S&P 500 end-2022 price target, but its base case is for no recession. Ahead, Fed’s Williams, ECB’s Lane, and geopolitics; data-wise, the Empire manufacturing survey gives us a glimpse of manufacturing trends in early May.

US equity futures are trading lower (YM -0.1%, ES -0.3%, RTY -0.4%, NQ -0.6%). The overnight and European sessions have been mixed/downbeat amid soft China activity data for April, which highlights the drag on the economy from the nation’s strict COVID lockdown policies. For US focussed traders, the key question is whether the bounce in equities seen at the end of last week (bouncing off the levels that would have taken stocks back into a technical bear market) is the start of a turn around or a bear market rally. Analysts have explained the downside as a function of tightening monetary policy to manage high inflation, while that high inflation is weighing on growth amid a seeming economic slowdown globally. Over the weekend, there has been a heavy amount of commentary in US media on the prospects of a recession and by extension, a continuation of the downside in equities – we recap some of these arguments in the session below. The business of picking bottoms is perilous; a Barron's commentary over the weekend notes that the average annual return for the S&P 500 since 1988 is 10.6%, and buyers who put money in when the index was trading at 17x–as it is now–and held for 10 years, averaged mid- to high-single-digit returns, or less than the average. Analysts have argued that this time is different for stocks, relative to historical bear markets, given that the so-called Fed put has a much lower strike than in the past as the central bank tackles high inflation. However, the team at BMO do not think the Fed will sit idly by if stocks were to tank, say 50% (vs levels around 20%) at the moment. But their strategists say that if they were to resume protecting the market, they would be unlikely to relent on the current course of hikes, given how bad price pressures are; instead, they could begin to talk down the eventual terminal rate, or even dial back on rhetoric around larger increments of rate hikes. For now, there has been no sign officials are set to move towards this pivot, but traders will be watching for this commentary if the downside continues. For the day ahead, traders will be watching geopolitical developments today amid the EU/US tech and trade meetings in Paris. NATO claims Russia’s war is not going to plan, while some Ukraine officials have been noting that the tide is turning in Ukraine’s favour; elsewhere, Turkish President Erdogan's top adviser said the country was not closing its door to NATO membership bids by Finland or Sweden. The EU will publish economic projections, which will likely show the inflationary impact from the Ukraine-Russia war. The US day sees the release of the Empire Fed Manufacturing report. The speaker's slate features ECB chief economist Lane, and from the Fed, NY Fed's Williams will again deliver remarks today to a mortgage forum. From the UK, BoE's Bailey will testify at the Treasury today, joined by hawkish peers Ramsden, Haskel and Saunders. Full Day Ahead here.

KEY US EQUITY LEVELS (via Credit Suisse):

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  SPX: 3844, 3855/54, 3889/87, 3920/10, 3966, 3990, 4006, 4025, 4049, 4069.


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  NDX: 11624, 11714, 11768, 11878, 12136/58, 12470, 12538/42, 12717, 12805/55, 12927/82.


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  RUT: 1671/70, 1697, 1717/13, 1744, 1752, 1773, 1792/98, 1821, 1839/41, 1852.

US:

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  US Growth - Goldman Sachs lowered its estimate of US growth for this year and next year; now sees US growing 2.4% in 2022 (prev. 2.6%), and 1.6% in 2023 (prev. 2.2%). Still, GS said that it assumes that through the course of this year, investors will gain confidence about decelerating inflation, the path of Fed tightening, and recession risk, and equities will rise modestly driven by EPS growth.


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  US Economy - The Atlantic magazine on the weekend ran a negative piece asking whether the US is destined to have a recession this year. IT said that the American economy was not looking great, with GDP shrinking in Q1, while inflation is high, markets are down, wages and savings rates are showing “some troubling statistical signals”.


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  US Inflation, Amazon (AMZN) - Amazon founder Jeff Bezos accused US President Biden of misdirecting Americans on inflation. Biden had suggested that inflation could be managed if taxes on large corporations was raised. Bezos retorted that “raising corp taxes is fine to discuss. Taming inflation is critical to discuss. Mushing them together is just misdirection.”


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  US Fuel Prices - Former Democrat Treasury Secretary Summers dismissed moves by Democratic lawmakers to counter alleged price gouging by companies with legislation as “dangerous nonsense,” Bloomberg reported. Congress will vote on legislation barring “excessive” or “exploitative” fuel prices this week. Summers said “there is no material prospect that... gouging legislation can have any substantial effect on inflationary pressure,” adding that “it can cause and contrive all kinds of shortages” while undermining companies’ moves to boost supply in reaction to higher prices.


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  US Stocks - FactSet data cited by the WSJ showed the S&P was trading at a forward P/E multiple of 16.8x this week, still above the average of 15.7x over the last 20 years (from the 24.1x in September 2020), which suggests stocks are still expensive. WSJ also reports that individual investors’ options trading is fading, the latest sign that the stock market’s speculative fever has broken.


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  US Stocks - After the recent route, Barron’s urged readers not to panic, arguing that it was “time to be bold and buy stocks”. The newspaper argued that investors needed to reset expectations about the length of time that stocks can bounce back, given the weakening of the Fed’s put as it tries to manage inflation, but investors should not flee. It argues that inflation is backwards looking, and the Fed has tools to bring it lower, while market gauges of inflation were showing lower price pressures ahead. the article, citing research by UBS, suggests putting an emphasis on quality names. Barron’s also argued that US 10yr Treasury yields may have peaked, and that makes stocks more attractive.


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  US Stocks - Goldman Sachs raised its S&P 500 EPS growth estimates (to +8% from +5%), but lowered its year-end 2022 target to 4,300 (from 4,700) on rate risk and growth fears. The bank maintained its 2023 growth estimate of +6%. The bank said its new baseline forecasts assumes no economic recession, and implied P/E ratios will end the year unchanged at 17x; in its scenario analysis, however, it warned that a recession could see the S&P 500 fall to 3,600 and the P/E multiple fall to 15x. GS highlights two price dislocations in equity markets today: Dividends and High vs. low margin growth stocks. On the former, the bank notes that dividend futures are pricing a recession (implies dividend growth of -6% in 2023, -1% in 2024); "During the past 60 years, last twelve months dividend per share has never declined outside of recession," GS writes, "Even in 2020, S&P 500 DPS fell just -3% from peak to trough, because healthy corporate balance sheets would be tapped and buyback programs would be cut before dividends would be reduced, dividend futures market pricing is too pessimistic." The bank told its clients to focus on high vs. low margin growth stocks, noting that growth stocks have de-rated sharply this year as financial condition tighten, but "growth stocks with high margins currently trade at the same 5x EV/sales multiple as low margin peers," and it expects "the multiples will diverge as investors prioritise profitability."

CHINA:

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  China COVID - China’s SCMP newspaper reported that Shanghai was retiring five of its large makeshift quarantine hospitals after daily COVID cases resumed a declining trend, a week before a deadline to wipe out community infections. Accordingly, Shanghai has begun to gradually reopen businesses from today after weeks of strict lockdowns. Beijing is still battling a small outbreak, but and Beijing’s COVID wave was unlikely to grow into mass outbreak. China CDC’s top epidemiologist said cases will soon be under control through joint efforts, while still noting that there were risks, and preventive efforts cannot be relaxed.


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  China Data - China activity data for the month was soured by the impact of Beijing’s zero COVID policy which dragged activity to the worst levels since the pandemic began. The data showed industrial output falling to a rate of -2.9% Y/Y in April (exp. 0.4%, prev. 5.0%), while retail sales for the month printed -11.1% Y/Y (exp. -6.1%, prev. -3.5%). “The April data were even weaker than expected and are consistent with a sharp contraction in economic activity,” Capital Economics said, “provided that the virus situation continues to improve, the economy should begin to rebound this month, but the recovery is likely to be tepid.”


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  China Property - China lowered mortgage rates for first-time homebuyers to revive property market, SCMP reported. An analyst said the announcement suggests Beijing was commitment to reversing the recent slump in the property market, but regulators reiterated commentary that ‘houses were for living in, not for speculating on’.

GEOPOLITICS:

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  NATO - Turkish President Erdogan’s top adviser said the country was not closing its door to NATO membership bids by Finland or Sweden.

ENERGY:

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  Saudi Aramco - Net profits rose by more than 80% to USD 39.5bln (vs 21.7bln Y/Y), surpassing analyst expectations, as oil and gas prices surged. Exec said during Q1, strategic downstream expansion progressed further in both Asia and Europe, and it continues to develop opportunities. Exec also said energy security was vital, and it was investing for the long term, expanding its oil and gas production capacity to meet anticipated demand growth. Exec added that against the backdrop of increased volatility in global markets, it remains focused on helping meet the world’s demand for energy that is reliable, affordable and increasingly sustainable.


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  EU Sanctions - EU has drafted a plan to allow the purchase of Russian gas without violating sanctions. Bloomberg said that the EU will that companies should make a clear statement that they consider their obligations fulfilled once they pay in euros or dollars, in line with existing contracts - this guidance would not prevent companies from opening an account at Gazprombank, and would allow them to purchase gas in accordance with EU sanctions.


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  Eni (ENI IM) - Will begin the process of opening a Rouble account for Russia gas.


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  Shell plc (SHEL) - Positive mention in Barron’s; newspaper argued that it appeared like a bargain.

TECH:

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  Meta Platforms (FB), Twitter (TWTR) - After the recent rout in share prices, tech companies are reacting by cutting costs, reducing cash burn and focusing on the fundamentals, FT reported. WSJ reported that Facebook and Twitter were pulling back on hiring, and asked if other tech giants will follow, as they change their approach to adding workers after years of rapid growth.


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  Micron Technology (MU), Western Digital Corporation (WDC) - Positive mention in Barron’s; newspaper argued that it was time to go bargain-hunting, and MU and WDC appear “impossibly cheap”.


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  ManTech International Corporation (MANT), Carlyle Group (CG) - Carlyle is in advanced talks to buy ManTech International, with a deal valued around USD 4bln, Bloomberg reported; a transaction could be announced this week.


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  Zebra Technologies (ZBRA) - CEO told CNBC that freight costs had come down, but shortages of semiconductor chips will continue to cause issues. “Over the past two years, we’ve seen kind of a migration of some of the issues. Now, it started off with freight being the issue that we talked about, the cost that we incurred, that has moderated.”

COMMUNICATIONS

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  Vodafone (VOD) - Emirates Telecommunications Group Company PJSC purchased a 9.8% stake for in Vodafone for around USD 4.4bln (around 130p/shr), a premium of approx. 10% vs Friday’s closing price. The purchase makes Emirates Telecommunications Group Vodafone’s largest single shareholder. The company has no plans to make an offer for rest of Vodafone, Bloomberg said.


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  Twitter (TWTR) - Elon Musk said Twitter had accused him of violating an NDA by revealing that the sample size for the social media platform’s checks on automated users was 100. Musk added that he was yet to see evidence that Twitter has fake accounts less than 5% of its user base, and that there was some chance it might even be over 90% of daily active users.


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  Netflix (NFLX) - Tells staff that they must be prepared to work on content they may not agree with, and if they did not like that, they can quit, WSJ reported.


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  Telecom Italia (TIIAY) - Fibercorp and Open Fiber sign commercial agreement to accelerate Italy’s digitisation, where Telecom Italia will make Open Fiber VHCN available to at least 500k customers areas.


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  Telefonica (TEF) - Expects the first round of non-binding bids for 45% fibre optic subsidiary on May 19th.

FINANCIALS:

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  US Equities - US-focussed hedge funds are cutting back exposure after the longest stretch of sustained selling in more than a decade left many managers nursing stiff losses, FT reported. The S&P 500 index has fallen for six weeks in a row in a tumultuous stretch that on Thursday left Wall Street’s benchmark share barometer down by almost a fifth from the peak it reached at the start of 2022, before a dramatic swing higher on Friday. Goldman Sachs estimates that long-short equity funds had lost over 18% YTD through last Wednesday.


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  HSBC (HSBC), Goldman Sachs (GS) - HSBC has hired Goldman Sachs and Robey Warshaw as it prepares to defend calls by key shareholder Ping An’s to break-up the bank, FT reported.


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  Citigroup (C), UniCredit (UNCRY) - Citigroup and UniCredit examine asset swaps with Russian financial institutions as western banks exiting the country seek to avoid significant write downs on their operations, FT reported.


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  Santander (SAN) - Has kicked off the search for a successor to CEO Alvarez, according to Bloomberg.


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  Credit Suisse (CS) - Said to weigh the exit of CEO Thomas Gottstein as soon as the year, Bloomberg reported. Separately, Credit Suisse and the Governor of West Virginia nearing a settlement over the USD 690mln owed to the Swiss bank by the politician’s mining firm Bluestone Resources, FT reported.


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  Citizens Financial Group (CFG) - Positive mention in Barron’s; newspaper argued that the bank was growing, and its stock could see 29% upside.


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  KKR & Co. (KKR) - KKR-backed Crosby Group will launch a tender offer for all of Japanese hoists and cranes maker Kito Corp for JPY 56.48bln, CNA reported.

INDUSTRIALS:

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  Boeing (BA) - FAA told Boeing that documentation it submitted to win approval to resume 787 deliveries was incomplete, according to Reuters. FAA identified a number of omissions.


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  Airlines - After last week’s CPI data showed airfares rising 18.6% M/M and 33.3% Y/Y, airlines will raise ticket prices further as Americans shrug off the fastest rise in domestic airfares for decades in their determination to travel, FT reported.


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  Spirit Airlines (SAVE), JetBlue (JBLU) - JetBlue is to launch a USD 30/shr offer for Spirit and urges shareholders to vote against the Frontier deal, WSJ reported citing sources.


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  Alaska Air Group (ALK) - Says flight cancellations to continue through May, but ease in June, according to the Seattle Times.


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  Tesla (TSLA) - Tesla has delayed plans to restore Shanghai output to pre-lockdown levels, according to Reuters. The automaker had intended to raise output in Shanghai to 2,600/day this week, but will this week stick to a rate of 1,200/day; now aims to raise output from May 23rd.


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  General Motors Co (GM), Ford Motor (F), Stellantis (STLA) - Detroit's big three automakers to reinstate masks mandates in southeastern Michigan amid high levels of COVID in the region.


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  Renault (RNLSY) - Confirms it will divest Renault Russia alongside its interest in Avtovaz; terms not disclosed. Reaffirms its FY outlook.


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  XPO Logistics (XPO) - Mulls sale of its freight-forwarding unit, could be valued at between USD 400-600mln, Bloomberg said.


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  Thyssenkrupp (TKAMY) - Thyssenkrupp’s Marine Systems wants to play a leading role in sector consolidation, according to Welt am Sonntag.


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  Atlantia (ATASY), Blackstone (BX) - Bennettons and Blackstone notified Italian government of their takeover offer for Atlantia to secure a green light. Separately, Atlantia is ready to consider any sales process of airports, can finance acquisitions via capital hikes in the medium term.

CONSUMER STAPLES:

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  Wheat - Prices are jumping after India temporarily banned exports of wheat after heatwaves hit its wheat crops, BBC reported.


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  Reliance (RIGD), Unilever (UL) – India’s Reliance plans to build a portfolio of 50-60 grocery, household and personal care brands within six months as it targets building its own USD 6.5bln consumer goods business to challenge foreign giants like Unilever, Reuters reported.


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  Casino (CGUSY) - Confirms it has started the sale process for GreenYellow, with a view of a potential transaction by year-end. No binding offers have been received yet.

CONSUMER CYCLICALS:

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  Michelin (ML FP) - Announces a four-for-one stock split will take place on June 16th.

HEALTH CARE:

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  Valneva (VALN) - Received a notice from the European Commission of intent to terminate the advance purchase agreement for Valneva’s inactivated whole-virus COVID-19 vaccine candidate VLA2001.


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  Perrigo Company plc (PRGO) - Warns that it is expecting shortages and heightened demand for baby formulas for the rest of the year.


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  AstraZeneca (AZN) - MANDALA Phase III trial results showed PT027 demonstrated a statistically significant reduction in the risk of a severe exacerbation versus albuterol rescue in patients with moderate to severe asthma.


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  Sanofi (SNY) - Phase 3 IKEMA trial results demonstrate the longest median progression free survival (mPFS) on a proteasome inhibitor backbone in patients who relapsed after a prior therapy.

UTILITIES:

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  National Grid (NGG) - Has cut some LNG shipments amid fears of low storage, Telegraph reported.


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  Enel (ENEL IM) - Aims to sell up to 50% of its grid services business, Il Sole reported.

MATERIALS:

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  Holcim (HCMLY) - India’s Adani Group has acquired a controlling stake in Holcim’s Indian cement businesses for USD 10.5bln.

16 May 2022 - 09:46- EquitiesData- Source: Newsquawk