US EARLY MORNING: Risk off amid Middle East conflict; little on today's docket, should keep focus on geopolitcs today, before attention returns to inflation, central banks, earnings later this week

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  US PRE-MARKETS: US equity futures are trading lower, with the Russell leading losses, as global geopolitical tensions keep traders in risk off mood following a surprise multi-front attack by Hamas on Israel resulted in at least 700 Israeli deaths and prompted Israel to declare war on Hamas. Crude futures have seen gains of more than 5% after the attack on Israel, which Iranian officials reportedly helped to plan (see below for analysis). US cash bonds are closed today for Colombus Day, but futures trading is still open, and equities will also have a cash session today; T-Note futures are currently trading up over 13 ticks, while European peers are also rallying (Bund yields are lower by over 5bps this morning). The Dollar Index is supported, as are other haven currencies (the latter to a lesser extent, though gold is rallying solidly). The docket is thin for today, which will leave the geopolitical tensions on focus, and traders will assess how these impact the broader narrative; later in the week, the focus will begin to recentre on inflation releases (US and China, while the EZ has an ECB inflation expectations survey) as well as central banks (Fed and ECB minutes this week), before banks start reporting at the end of the week as Q3 earnings season gets underway (see Day Ahead section, below).


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  ANALYSIS - MIDDLE EAST CONFLICT: Palestinian militant group Hamas launched a surprise multi-front attack on Israel over the weekend in which militants stormed Israeli towns and claimed to have launched up to 5,000 rockets with the initial attack. Israeli news reports stated that at least 700 Israelis were killed with more than 2,000 wounded and dozens taken captive. Israeli PM Netanyahu said Israel is now at war with Hamas and that their enemy will pay a price it has never known before. It was separately reported that 232 Palestinians were killed in Israeli air strikes in Gaza, while Israel’s Foreign Ministry said two Israeli tourists and their Egyptian guide were killed in a shooting attack in Alexandria, Egypt. Add to that, Israel and Lebanon’s armed group Hezbollah also exchanged rocket fire over the weekend. US Defence Secretary Austin said they have directed the movement of the USS Gerald R. Ford carrier strike group to the eastern Mediterranean and the US will be providing Israel's defence forces with additional equipment and resources including munitions, according to Reuters. Iranian security officials reportedly helped plan Hamas’s surprise attack on Israel and gave the green light for the assault at a meeting in Beirut last Monday, according to senior Hamas and Hezbollah members cited by WSJ. However, CNN reported the US is still seeking to determine Iran's connection to the attack. Full Newsquawk analysis here.


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  GS ON THE ATTACK ON ISRAEL: Goldman Sachs said the attacks were unlikely to have an immediate large near-term effect on supply-demand balance and near-term oil inventories, and continues to see Brent rising to USD 100/bbl by June 2024. The bank added that there is a reduced likelihood of near-term normalisation in Saudi-Israel relations after the attacks, and continues to assume that Saudi Arabia will only gradually unwind its 1mln BPD production cut by Q1 2025, and still expects Saudi production to remain flat through Q1 2024, before picking up afterwards. The bank added that with the possibility of broader regional tensions re-escalating, risks to Iranian production projections are now tilted to the downside.


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  EARNINGS SEASON: Ahead of Q3 earnings season, which gets underway this week, the consensus view looks for revenue to rise +2% Y/Y, and sees 55bps of margin contraction (to 11.2%), while EPS is seen flat Y/Y. Excluding the Energy sector, S&P 500 earnings are seen growing by 5%, however. Goldman Sachs maintains its S&P 500 EPS estimate of USD 224/shr for 2023 (which represents +1% growth), as well as for 2024 (where it sees 5% Y/Y growth to USD 237), and forecasts S&P 500 EPS will grow +5% Y/Y in 2025 to USD 250. The bank says "near-trend economic growth and moderating inflation pressures will support modest sales growth and slim margin improvement," but adds that "substantial margin expansion is unlikely given the 'higher for longer' interest rate regime, resilient wage growth, and AI investments among some tech firms."

TODAY’S AGENDA:

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  DAY AHEAD: There is very little by way of scheduled events on today’s docket. Sentix sentiment indicators are out in the European morning, while the September US Employment Trends report is out in the afternoon. On the speakers’ slate, ECB VP de Guindos, Enria, Knot are to deliver remarks, while from the Fed, voters Barr, Vice Chair Jefferson and Logan are due to speak. Our full Day Ahead calendar is here; a PDF version is here.


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  WEEK AHEAD: There is an inflation feel to the major releases this week: NY Fed consumer expectations survey (Tue), ECB inflation expectations survey (Wed), US PPI (Wed), US CPI (Thu), China’s inflation data (Fri), Prelim University of Michigan sentiment (Fri). There are also the FOMC meeting minutes (Wed) and ECB minutes (Thu). Earnings season will get underway this week, with Big Banks set to start reporting towards the end of the week. But before then, PepsiCo (PEP) and LVMH (LVMUY) will report on Tuesday; Delta (DAL), Dominos (DPZ), Fastenal (FAST), Infineon (INFY) and Walgreens (WBA) are to report on Thursday; and BlackRock (BLK), Citi (C), JPMorgan (JPM), Wells Fargo (WFC), as well as UnitedHealth (UNH) will report on Friday. Our week ahead briefing can be found here; our weekly earnings expectations note can be found here.

EQUITY NEWS:

TECH:

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  Apple (AAPL) - Barclays analyst said Apple's supplier data indicates that September's revenue was 4% lower than usual, and the September-quarter production was also below expectations. However, the App Store's growth was up 9%, suggesting slight improvement.


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  Nvidia (NVDA) - Following reports that OpenAI is considering building its own AI accelerator and diversifying suppliers beyond Nvidia, Citi believes this is reasonable due to the growing need for AI infrastructure and predicts Nvidia will still maintain a 90% share in the AI GPU market for the next few years.


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  Microsoft (MSFT), Nvidia (NVDA) - Microsoft is set to reveal its first AI chip at an upcoming conference, The Information reports, and it could reduce its reliance on Nvidia's AI chips, which have been in high demand. MSFT's chip is being designed for data centres, like Nvidia's, to power large language models and AI features.


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  Micron (MU) - Following an increased Q4 DRAM price forecast, driven by Samsung's production cuts, Citi believes the DRAM upturn is just beginning and reaffirms Micron as its top pick.

CONSUMER:

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  Automakers (F, GM, STLA) - The UAW Friday said it will not expand strikes against Detroit's automakers after GM made a significant concession regarding unionising electric vehicle battery plants, AP reports. The breakthrough ensures that workers at these plants will be represented by the UAW, union president said.


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  Tesla (TSLA) - Tesla September sales of electric vehicles made in China totalled 74,073 (-10.9% Y/Y), CPCA said. Separately, Tesla is leasing space in Shanghai to open its largest sales and service centre in China, Reuters reports. The store will be located in Shanghai's Pudong district and is expected to open in mid-2024.


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  Volvo (VLVLY) - Union workers at Mack Trucks, owned by Volvo Group, rejected a proposed five-year contract and will strike on Monday. Around 73% of the 4,000 workers voted against the deal, according to the United Auto Workers.


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  Booking Holdings (BKNG) - Positive mention in Barron's; said BKNG was a strong investment in the travel industry, outperforming airlines, hotels, and Expedia (EXPE). Its success is due to the travel market's strength and its ability to turn it into profits, especially in Europe, which should lead to more success ahead.


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  Birkenstock (BIRK) - German footwear company Birkenstock has received enough commitments from investors to price its US IPO at the top end of its range, potentially giving it a valuation of USD 10bln, Reuters reports. Final pricing for the IPO will be set on Tuesday ahead of its shares debuting on NYSE Wednesday.


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  Tyson Foods (TSN) - Tyson Foods and other meat processors are shutting down plants due to lower consumer demand and high costs, WSJ reports. This affects small towns where these plants are major employers, impacting local farmers, truckers, and tax revenue. Tyson alone has a significant economic impact in the communities it operates in.

HEALTHCARE:

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  Healthcare Stocks - Barron's makes positive mention, says that in addition to weight-loss treatments, there are other significant opportunities in the healthcare sector. Mentioned Apellis (APLS), AstraZeneca (AZN), Boston Scientific (BSX), HCA Healthcare (HCA), Humana (HUM), Immunocore (IMCR), McKesson (MCK), Merck (MRK), Prothena (PRTA), Regeneron (REGN), Sarepta (SRPT), Vertex (VRTX).


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  Bristol Myers Squibb (BMY), Mirati Therapeutics (MRTX) - Bristol Myers is acquiring Mirati Therapeutics for USD 4.8bln, (USD 58/shr in cash). Mirati shareholders will also get a Contingent Value Right potentially worth USD 1bln. The deal adds lung cancer medicine KRAZATI to Bristol Myers Squibb's portfolio and is expected to close in the first half of 2024.


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  Walgreens (WBA) - Some Walgreens pharmacy employees are planning walkouts between October 9-11th, with support from others in more than 500 Walgreens stores across the country, CNN reports.

ENERGY:

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  Energy M&A - The US oil industry may see big mergers, like Exxon and Pioneer teaming up. This could push other companies like Chevron (CVX) to consider similar deals (Chevron is apparently looking for a big deal, WSJ says, and considered buying Occidental (OXY) though it has now moved on to smaller targets), potentially leading to fewer independent shale fracking companies, while ConocoPhillips (COP) is reportedly scouring the shale industry for M&A targets.


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  ExxonMobil (XOM), Pioneer (PXD) - Talks between Exxon and PXD were fluid, WSJ reported on Friday, adding that people were cautioning that the deal might not happen. Separately, Reuters reports that Exxon proceeded with the deal, the administration would struggle to block it on antitrust grounds.

INDUSTRIALS:

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  Turbine Makers - Brussels may investigate China's subsidies for its wind turbine makers, even though China was upset about a previous probe into electric cars. The concern is that cheap Chinese imports could harm European businesses.


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  FedEx (FDX), UPS (UPS) - UPS and FedEx are giving discounts to customers due to challenges in the supply chain during the holiday season, WSJ reports, noting that demand for goods, like clothing and electronics, has dropped, as people spend more on travel and services.


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  Southwest Airlines (LUV) - Southwest Airlines' material specialists, represented by the International Brotherhood of Teamsters, have approved a new collective bargaining agreement. It includes over 480 employees and is effective until April 2026. Eight union-represented workgroups have ratified new agreements since October 2022.

MATERIALS:

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  Newmont Mining (NEW) - Newmont has a preliminary agreement with a Mexican union to end a strike at Minera Penasquito. The agreement needs formalisation and approval, with operations expected to resume soon.

FINANCIALS:

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  Yields - Wall Street is uncertain about handling Washington's bonds, WSJ reports. Investors used to ignore US deficits, but a flood of Treasury bonds is straining the bond market. The recent bond turmoil questions the belief that the US government can't sell too many Treasurys, the Journal writes.


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  Italy Yields - Italy's departing central bank governor, Ignazio Visco, has advised the Prime Minister to calm investor concerns by reducing the country's budget deficit and implementing growth-boosting reforms, FT reports. He's concerned about rising borrowing costs and wants to see fiscal discipline.


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  Leveraged Lending - Large banks like Bank of America (BAC) and Barclays (BCS) are cautious about financing riskier buyouts in 2023, FT reports. The banks had trouble finding investors for loans related to deals in 2022, so they are hesitant to take on similar risks this year.


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  Intercontinental Exchange (ICE) - The owner of the NYSE has invested USD 23bln to improve the mortgage market's plumbing, WSJ reports, and the exchange is now a major player in the huge US home loan market.


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  Metro Bank (MTRO) - Metro Bank rejected a secret takeover offer from rival lender Shawbrook last month, Sky News reports. The revelation comes the bank seeks over GBP 500mln to strengthen its finances and considers various options, including a potential sale. FT reports that JPMorgan (JPM) and HSBC (HSBC) both mulled bids for Metro Bank, but decided not to proceed.

09 Oct 2023 - 09:30- EquitiesResearch Sheet- Source: Newsquawk