US EARLY MORNING: Stocks see upside as government shut-down averted for now; ISM ahead

US PRE-MARKETS: US equity futures are on the front foot after weekend news that US lawmakers have averted a government shutdown with a stop-gap spending bill keeping the government open through at least November 17th, and while the measure merely kicks the can for a few weeks, it does imply that this week’s key US jobs data will be released as scheduled on Friday. Treasury yields are widening by 3-6bps, with the belly underperforming in early trading. The Dollar Index is slightly sub-neutral; Japanese policymakers have again sounded the warnings as USDJPY approached 150.00. Crude benchmarks continue their recent upside ahead of this week's JMMC meeting, with analysts noting that the market is backed by solid fundamentals.

JPM EQUITY STRAT: JPM notes that despite some recent weakness, where the S&P 500's RSI turned technically oversold, the bank believes that the equity risk-reward remains challenging. "Divergences between softer activity momentum and the elevated equity prices, as well as market internals, that opened up in the summer, are starting to close, but there is more to go," it writes, "the PMI rebound that many were hoping for, the call that the weakness in manufacturing will end and join the more resilient services, remains elusive." It adds that this comes amid real rates rising, which is putting pressure on earnings multiples. JPM says the rally in Brent and the USD should also be seen as a concern for stocks. "Most of Brent upmove is supply driven, and could lead to weaker final demand," it says, "corporates might struggle to pass on rising input costs this time, in contrast to 2021-2022." The bank reminds us that historically, a strengthening USD was almost always met with risk-off in equities; "we do not think that bond yields will be able to keep moving up for too much longer, and will likely ultimately fall, and that is precisely because of the 'higher for longer' narrative by the Fed," adding that "Q4 could end up a very good time to lock in the long duration trade for the next 12 months."

LATE CYCLE: Morgan Stanley's equity strat Michael Wilson notes that since mid-July, stocks looked over extended. In Q2, when companies reported earnings, stock prices didn't go up as expected due to many companies making less profits Y/Y, while equity valuations were already very high. Now, stock prices are even higher, and the difference between what you earn from stocks and what you could earn from safer investments is smaller. Wilson says that investors are becoming worried about this dynamic, especially since interest rates are rising, and he adds that the equity market is starting to react to these concerns, with some types of stocks doing better than others. While the outlook for stocks is not clear, the market seems to be in a late-cycle phase, Wilson argues, which means it might not do as well as it did in the earlier stages of the economic cycle. Sectors like those related to consumer spending and housing might not perform as well in this environment, but large, stable companies in defensive sectors and some late-cycle sectors like Energy and Industrials could do better, MS believes. Wilson reiterates that investors should be cautious and consider a mix of safe and late-cycle stocks.

TODAY'S AGENDA:

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  DAY AHEAD: Final manufacturing PMI data will be released in the morning, where the Eurozone-wide measure is seen unrevised. Eurozone August unemployment is seen unchanged at 6.4%. ECB Vice President de Guindos is due to deliver remarks today. The US Day sees the release of the September ISM manufacturing data, where the headline is expected to be little changed. Fed Chair Powell and Fed's Harker (voter) will have a discussion on efforts to redevelop and grow the local economy, while Fed's Williams (voter) will speak on climate risks. Our daily calendar can be accessed here; a pdf version can be downloaded here.


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  WEEK AHEAD: Highlights include US NFP, RBA, RBNZ, PMI data, BoJ SoO and OPEC+ JMMC. Our week ahead briefing can be accessed here.

EQUITY NEWS:

TECH:

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  AI Stocks, Nvidia (NVDA) - European regulators reportedly initiate operations against anti-competitive practices in AI industry, Digitimes reports. Amid rising demands for AI chips, France's competition authority announced it had raided a company in the graphics cards sector, implying a potential regulatory scrutiny faced by Nvidia.


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  Apple (AAPL) - Apple is releasing a software update to fix overheating issues in the new iPhone 15 models, CNBC reports. The problem was caused by iOS 17 bugs, app issues, and initial setup processes that generated extra heat.


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  Apple (AAPL) - Apple mulls USD 2bln annual offer for exclusive streaming rights to Formula 1 coverage on Apple TV+, Apple Insider reports. This deal, which is reportedly double what Formula 1 currently gets for global TV rights, would start with 25% streaming rights and potentially become 100% in five years as existing contracts expire.

COMMUNICATIONS:

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  AMC Entertainment (AMC) - A film based on Beyonce's Renaissance World Tour is in talks to be distributed directly to AMC Theatres, Variety reports. The project aims for a wide release on December 1st, with the tour expected to earn around USD 560mln in ticket sales.


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  Meta Platforms (META) - Positive mention in Barron's; said renaming Facebook to Meta for the metaverse was seen as a bad idea, but the company's focus on AI for platform improvement is promising for investors.


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  Electronic Arts (EA) - CEO and Board Chair Andrew Wilson sold 5,000 shares on September 28th at USD 120/shr.


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  CommScope (COMM) - CommScope Holding is considering selling its Ruckus Wireless and access network solutions units to reduce its substantial debt load of over USD 9bln, with a significant portion due in 2025 and 2026. These businesses may fetch USD 4bln.


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  Twitter (Not listed) - Investor Bill Ackman is considering using his newly approved investment vehicle to take a private company public, including the possibility of a transaction involving X, WSJ reports.

HEALTHCARE:

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  Kaiser Permanente (Not listed) - Over 75,000 Kaiser Permanente healthcare workers may strike soon due to disputes over pay, outsourcing, and staffing. It could potentially be the largest strike in US healthcare history, and could affect patients across California, Oregon, Colorado, Virginia, Washington state, and the District of Columbia, WaPo reports. While there's still a chance for an agreement, tensions persist.


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  Biogen's (BIIB) - The FDA approved Biogen's TOFIDENCE, a medication like ACTEMRA, for treating certain types of arthritis in children and adults.


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  Medtronic (MDT), Carlyle Group (CG) - Carlyle Group is in exclusive talks to buy a majority stake in two of Medtronic's medical device businesses for over USD 7bln, Reuters reports. Follows Medtronic's year-long review of these businesses, which it had considered spinning off as a separate company.


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  Clorox (CLX) - Clorox said that is has all of its factories working again after August cyberattack, and is now increasing production to refill stocks after the attack.


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  SmileDirectClub (SDC) - SmileDirectClub filed for bankruptcy, around four years after its 2019 IPO. Its founders plan to invest USD 20mln to reorganise the company due to declining revenues and patent disputes.

CONSUMER:

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  Kroger (KR), Albertsons (ACI) - FTC is likely to oppose the merger between Kroger and Albertsons, Axios reports. FTC Chair Lina Khan has expressed concerns about the deal, citing past mergers that didn't fulfil commitments.


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  Gaming Names, MGM Resorts (MGM) - Detroit casino workers have authorised a strike if MGM Grand Detroit, Hollywood at Greektown, and MotorCity casinos don't provide fair contracts by October 16th, Teamsters Union said.


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  Tesla (TSLA) - Introduced an updated Model Y in China with minor changes to its appearance and interior. The starting price remains the same at 263,900 yuan (USD 36,146). Separately, WSJ snipes that for Tesla’s Cybertruck, another sales launch date comes and goes; CEO Musk had suggested Tesla would hold a delivery event for its electric pickup truck in the Q3, but customers are still waiting


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  Volvo (VLVLY) - Around 4,000 workers, part of the United Auto Workers (UAW), struck a temporary agreement deal with Mack Trucks, which is owned by Volvo Group.


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  Rivian (RIVN) - Rivian changed its deal with Georgia to build an electric car factory; the automaker must now create jobs and invest money until 2047. And if it falls short by 80% in a year, it must return some state incentives. Rivian can also get loans and might end the deal if they don't get site exceptions by April 2024.


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  Nio (NIO) - September 2023 Deliveries +43.8% Y/Y at 15,641 vehicles; Q3 deliveries +75.4% Y/Y at 55,432 vehicles.


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  Xpeng (XPEV) - September 2023 Deliveries +12% Y/Y at 15,310 vehicles; Q3 EV deliveries +72.0% Y/Y at 40,008 vehicles.


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  Li Auto (LI) - September 2023 Deliveries +212.7% Y/Y at 36,060 vehicles; Q3 deliveries +296.3% Y/Y at 105,108 vehicles.


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  Vuori (not listed), SoftBank (SFTBY), Lululemon (LULU) - Activewear brand Vuori is considering an IPO around mid-2024, aiming to surpass its USD 4bln valuation from a 2021 funding round led by SoftBank's Vision Fund 2. The company is seen as a competitor for LULU.

FINANCIALS:

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  IPOs - VCs are advising tech start-ups to delay their plans to go public in the US until interest rates stabilise, FT reports. The advice comes after the underwhelming stock market debuts of companies like Instacart, Arm, and Klaviyo. The Federal Reserve's indication of more interest rate hikes and fewer cuts in 2024 added to the turbulent trading conditions in September, frustrating hopes of a wave of tech IPOs. But Reuters reports that bankers and investors are feeling more positive about the IPO market after a busy September with several major market debuts. This year has seen USD 423bln in equity capital market transactions, up 5% Y/Y, although it's still below the record levels of 2021. The performance of recent high-profile IPOs is being watched as an indicator of investor interest in new offerings, with 25 companies going public in the past month, hinting at a potential market recovery after a slow period for new listings.


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  Global Shadow Banks - Global financial regulators are taking action to regulate "shadow banking," which includes hedge funds, private equity firms, pensions, and insurers, FT reports. These non-bank entities collectively represent 50% of global financial services assets. Concerns have grown about the risks these entities pose, especially as interest rates rise. Worldwide, efforts to limit leverage and increase transparency in hedge funds are underway, with some facing legal challenges.


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  Discover Financial Services (DFS) - Discover received a consent order from the FDIC to address compliance system issues related to consumer protection laws. They're committed to improving their systems, but there are no fines involved. The order doesn't cover a card product issue, which is still under regulatory review. Additional actions may occur.


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  Robinhood (HOOD) - Robinhood disclosed that it sees expenses of USD 100mln in Q3 to address legal and regulatory issues previously disclosed.

INDUSTRIALS:

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  JetBlue (JBLU), Spirit (LUV) - JetBlue is increasing flight attendant pay by 5% next year and making other improvements in return for union support for its planned acquisition of budget airline Spirit, CNBC reports.


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  Lockheed Martin (LMT) - Lockheed was awarded a USD 1.2bln Navy contract modification for missile production and deployed systems support. Additionally, Sikorsky Aircraft was awarded a USD 650mln US Air Force contract for the development of long-term capability upgrades for the HH-60W Combat Rescue Helicopter. Elsewhere, LMT was also awarded a UDS 746.3mln contract for Switzerland's F-35 Joint Strike Fighter programme.


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  Norfolk Southern (NSC) - Norfolk Southern had a technology outage affecting rail operations but resolved it safely. Believes it was due to a vendor product defect, not a cybersecurity issue. The impact on operations may last a few weeks, it added, and it is reviewing its systems to prevent future outages.


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  General Dynamics (GD) - Positive mention in Barron's; the newspaper reports that the defenCe stock was a buy, noting it was cheap, and a potential government shutdown is unlikely to hurt it for too long.

ENERGY:

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  BP (BP) - BP's US head Dave Lawler is leaving the company shortly after the CEO's resignation. Adds pressure on BP's chairman and board as they work to maintain stability after the CEO's departure due to undisclosed past relationships with colleagues, Reuters said.


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  NatGas - Russian gas production in the first half of 2023 has dropped significantly to levels not seen since the 1970s, Newsweek reports. Gazprom reported a 24.7% decrease in production and a 26.5% drop in gas supplies. The decline is due to sanctions imposed on Russia after the invasion of Ukraine in February 2022.

02 Oct 2023 - 09:30- EquitiesExclusive- Source: Newsquawk