US EARLY MORNING: US equity futures are around flat ahead of ISM data, holiday closures

US PRE-MARKETS: US equity futures are mixed, though not too far off neutral; Treasury yields are higher, with the short-end underperforming as the curve continues to bear-flatten. The dollar Index is gaining. Asia shares were generally higher as the BoJ Tankan survey showed a turnaround, while the China Caixin manufacturing data eased but remained in expansion (reviews of both are below). The European day started slightly better than flat; final June manufacturing PMI data showed French Manufacturing PMI revised up to 46.0 from the flash 45.5; the German was revised lower to 40.6 from 41.0; the aggregated Eurozone release saw the headline revised down to 43.4 from 43.6. There has been a thin feel to trading, with shortened hours today on account of the Independence Day holiday on Tuesday. Although the week starts off on a subdued note, there are still key events to note this week: Later today, the manufacturing ISM data will be released, where little change is expected to the headline (see below), Fed minutes are due midweek, before the jobs data for June on Friday. 

WHAT’S NEXT FOR GLOBAL MACRO: Morgan Stanley says that higher interest rates and slow economic growth will increase borrowing costs for lower-quality borrowers, potentially leading to debt management challenges. Higher-quality borrowers are expected to fare better. Refinancing needs may result in adverse credit outcomes. Investment-grade credit may generate positive returns, while high-yield and leveraged loans face modest widening and negative excess returns. MS has also recently reiterated its bearish view for US stocks, arguing that headwinds will outweigh tailwinds, and it sees risks of a near-term drawdown. The bank cites four main reasons: 1) Earnings Forecast: MS has a below-consensus forecast for earnings in 2023, with a base case estimate of USD 185 EPS for the S&P 500. This is lower than the bottom-up consensus estimate of USD 220 and other forecasts in the range of USD 210-215. MS anticipates deteriorating pricing and top-line disappointment to contribute to earnings misses. 2) Liquidity Deterioration: MS says that the liquidity picture is deteriorating due to record levels of Treasury issuance and Quantitative Tightening. The contraction of bank reserves by USD 500-800bln over the next six months is expected to negatively impact equity valuations. 3) Fiscal Support Peak: Fiscal support has been higher than most investors appreciate over the last year, but it is expected to peak and reverse in the coming month, potentially creating a 6ppts headwind to nominal GDP over the next 12 months. 4) Technicals: MS says there is a poor technical picture with recent breadth improvement failing, adding that if its view on earnings is incorrect, breadth should be improving. MS sees the S&P 500 index at 3,900 for Q4 2023 and 4,200 for by Q2 2024, and adds that the equal weighted S&P 500 is expected to outperform the market cap weighted S&P 500, and value stocks may experience relative outperformance compared to growth stocks.

GS RULE OF 10 SCREEN: Goldman Sachs reminds us that YTD stock performance is being driven by a small group of stocks. The seven largest tech stocks have gained 58% this year, while the remaining 493 stocks have only gained 5%. Although this narrow market rally is significant, it's not uncommon for a few top-performing stocks to dominate yearly returns, the bank says, noting that typically, the top 10 contributors typically make up 32% of the S&P 500 return in an average year since 1995. Excluding these top contributors, the S&P 500 would have still delivered an 8% average annual return since 1990. In the current year, the top 10 contributors account for 12 percentage points of the S&P 500's 15% return. Goldman has updated its ‘Rule of 10’ stock screen, which identifies stocks with actual and projected annual sales growth exceeding 10% between 2021 and 2025. The stocks with the highest expected sales compound annual growth rate for the period from 2022 to 2025, based on consensus estimates, are Enphase Energy (ENPH), Tesla (TSLA), SolarEdge Technologies (SEDG), Palo Alto Networks (PANW), and ServiceNow (NOW). Additionally, Goldman Sachs presents a similar screen based on net income growth, and says there are eight stocks that appear in both screens: ServiceNow NOW, Paycom Software (PAYC), Fortinet (FTNT), Insulet (PODD), Chipotle (CMG), Intuit (INTU), Cadence Design (CDNS), and Aptiv (APTV).

NOTE: Early closures could impact liquidity conditions ahead of the July 4th Independence Day market holiday; the Newsquawk desk schedule can be accessed here

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03 Jul 2023 - 09:30- Data- Source: Newsquawk

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