US EARLY MORNING: US equity futures are flat as traders eye further debt ceiling talks later today

OVERNIGHT: APAC stocks were mostly positive but with price action rangebound amid cautiousness as the debt limit deadline draws closer. Aussie shares were subdued amid weakness in financials, though losses were contained amid the improving trade environment between Australia and its largest trading partner. China shares were up amid mixed commentary from the G7, where the Group said there was no legal basis for China’s expansive maritime claims in the South China Sea and that they oppose China’s militarisation activities in the region, although US President Biden expects relations with China to thaw soon. Furthermore, there were also frictions after China’s cyberspace regulator banned operators of critical information infrastructure in China from purchasing Micron Technology’s products following its review, while the PBoC provided no surprises and kept its benchmark lending rates unchanged with the 1-year LPR and 5-year LPR maintained at 3.65% and 4.30%, respectively. Our APAC wrap is here. In Europe, stocks start the week in a subdued fashion, meandering around neutral after the open as continued global angst around the US debt ceiling persists; ahead European traders will be focussing on a heavy amount of ECB speak, as well as flash consumer confidence data. Our European cash open note is here.

US PRE-MARKETS: US equity futures are trading just below flat as lawmakers in Washington failed to secure a debt ceiling deal by the weekend; House Speaker McCarthy has previously said that the House would need to vote by this week on any compromise to avoid a historic US default. But the constructive tone of President Biden is still offering hope that a near-term deal can be secured, and he is set to meet McCarthy for talks later today; we recap on the latest debt ceiling news below. Treasuries are rallying this morning, with short-end yields outperforming amid an injection of dovish repricing into the Fed's expected course for policy ahead; market's fear of a hawkish outcome at the Fed's mid-June were mitigated after Chair Powell on Friday appeared to signal a preference to stay unchanged at the meeting, which added dovishness into market pricing for the Fed trajectory (we recap, below). The Dollar Index, however, is a touch firmer amid the cautious global risk mood, where activity currencies are lower. Crude benchmarks are in the red, having last week put in its first week of gains since mid-April. Baker Hughes weekly rig count data jolted markets again on Friday, reporting that US oil rigs were down 11 in the week, while natgas rigs were unchanged, which ING said shows that drilling activity in the US continues to slow. While recent analyst polls still see upside in crude prices this year, weekly positioning data for Brent oil shows specs remain bearish on the market, with longs liquidating in the latest reporting week. Ahead, the docket is quiet today, but the debt ceiling talks will likely be the key focus. For the rest of the week, PCE data will help colour market expectations of the Fed's trajectory, while we'll get a second look at US Q1 GDP data this week. See Day Ahead, below.

JPM REITERATES UW VALUE: JPMorgan’s strategists note that general sentiment among investors is bearish, but many still believe a downturn will be mild and not impact profits, sales, or credit significantly. However, JPM says that challenges may arise due to a trade-off between economic growth and policy decisions in the second half of the year. It argues that growth indicators have weakened, profit margins seem to have peaked, and certain labour and consumer market indicators are also softening. In terms of policy, the market expects the Fed to cut rates significantly, but if that doesn't happen, JPM warns that it could lead to a stronger USD and increased market risk. The bank thinks inflation will decline, but high inflation expectations and wage growth are potential uncertainties. Overall, the bank says that the market may face a difficult situation in the coming months. The recommendation is to underweight value stocks and have low-risk positions, while looking for better entry points in the second half of the year. JPM reiterated its UW Value style for this year, and low beta positioning, and said that overall market levels mean that a better entry point could be provided in the second half of the year.

RECAP - DEBT CEILING: President Biden and Republican House Speaker McCarthy had a positive phone call regarding the US debt ceiling, BBC reports, and the two will meet on Monday for talks. Washington Post said Republican negotiators turned down a White House proposal to cap spending on defence and vital domestic programs in debt ceiling negotiations. A failure to raise the ceiling by June could lead to a default, causing financial market chaos and higher interest rates. Treasury Secretary Yellen again warned that the US was unlikely to have enough funds to meet its obligations by mid-June, emphasising the need for a debt limit agreement with Republicans. Politico notes that progressive lawmakers have urged Biden to bypass Congress to prevent a default by use of the 14th Amendment, though the White House remains resistant, with the President's advisers fearing such a move would trigger a legal battle, undermine global faith in US creditworthiness and damage the economy.

RECAP - FED CHAIR POWELL: Fed Chair Powell on Friday signalled an inclination to pause interest-rate increases in June, stating that policy tightening has come a long way, and the stance is restrictive. Powell also said that uncertainty remains about the effects of previous tightening and recent banking stresses. His remarks were judged as dovish, and traders lowered bets on the probability of a June rate hike from around 33% to around 13% after his remarks. Powell's comments also align with other influential Fed members, NY Fed President Williams and Vice Chair Nominee Jefferson. Looking ahead, money markets are on Monday pricing in no move at the Fed's June 14th meeting (around 12% chance of a +25bps hike), while further out the year, pricing has moved dovishly, with around 46bps of rate cuts priced. 

TODAY'S AGENDA:

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  DAY AHEAD: It is a thin day for scheduled data releases, with only the EU consumer confidence flash data for May due (a small improvement to -17.0 is seen from the prior -17.5). But we can expect further commentary from ECB officials, with chief economist Lane (Dove) and Holzmann (Hawk) set to speak at an Austrian Central Bank event (no text is expected); ECB VP de Guindos (Dovish) will speak on policy proposals to reduce the climate insurance protection gap, with no text expected and the subject matter suggesting that he will avoid monetary policy and economic outlook comments; ECB's Elderson (Neutral) will speak, but again, no text is expected. ECB's Villeroy (Neutral) will speak at a BdF event, while we'll also get remarks from ECB's Vujcic (Neutral) and ECB's de Cos. From the Fed, the hawkish Bullard (non-Voter) will speak on the US economy and monetary policy; with some differences emerging in the views of Fed officials with regards to the need for further near-term hikes, Bullard's comments will be key given he is seen as a leading hawk on the Committee. Meanwhile, Fed's Barkin (2024) and Bostic (2024) will give further remarks, though both have spoken a lot recently. Our full interactive day ahead calendar can be accessed here, a pdf version can be accessed here.


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  WEEK AHEAD: The week ahead has a few key items: On Tuesday, we will get a policy announcement from the BoK, flash PMI data, US Richmond Fed. On Wednesday, FOMC minutes, an RBNZ policy announcement, UK inflation data and Germany's Ifo Survey. On Thursday, policy announcements from the CBRT and the SARB, along with German GDP, GfK Consumer Sentiment, and a second look at US GDP in Q1. Friday sees the release of Tokyo CPI data in Japan, UK retail sales, US PCE and the final University of Michigan data for the month. Our week ahead briefing can be accessed here. There are a few key earnings we are also still looking out for; this week numbers are due from ZM on Monday; LOW, INTU, PANW on Tuesday; ADI, NVDA on Wednesday; and MDT, WDAY, COST on Thursday. Our Weekly US Earnings Estimates note can be accessed here.

EQUITY NEWS:

CHINA:

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  US-China - US President Biden Sunday expressed optimism that relations with China would improve soon, following a dispute over an alleged spy balloon that strained ties. Biden anticipated a thawing of relations. Additionally, the Biden administration is considering lifting sanctions on Chinese Defence Minister Li Shangfu, with Defence Secretary Lloyd Austin seeking a meeting with him in Singapore in June, Bloomberg said.


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  Micron (MU) - Beijing orders Chinese companies to halt purchases from Micron Technology, citing cybersecurity concerns, NYT reports. The move is seen as retaliatory against US attempts to limit China's access to advanced chips. Chinese regulators said it had found that Micron's products posed "relatively serious cybersecurity problems," which could "seriously endanger the supply chain of China’s critical information infrastructure" and threaten its national security.

TECH:

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  AI Companies - Barron's says it's time to think bigger on AI, and identified eight stocks that could be the next winners: Cadence (CDNS), Datadog (DDOG), HubSpot (HUBS), Marvell (MRVL), Micron (MU), Palo Alto Networks (PANW), Snowflake (SNOW), ZScaler (ZS).


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  Alphabet (GOOG), Samsung (SSNLF), Microsoft (MSFT) - Samsung has halted its internal review to replace Google with Microsoft's Bing as the default search engine on its smartphones, WSJ reports, signalling that the switch is not happening soon. This decision maintains Google's dominance in the search-engine space.


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  Semiconductor Companies - The semiconductor industry's growth in the US, backed by substantial government investments, is facing a hurdle as there is a potential shortage of skilled workers to fill the anticipated thousands of job openings, NYT reports.


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  Uber (UBER) - Uber intends to sublease approximately 269k sqft of its San Francisco headquarters, joining other tech companies downsizing in the city, Bloomberg reports. Uber said it would not change its footprint in the city, or impact space available for employees, adding that it remains committed to its hybrid work approach.


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  Viasat (VSAT) - Viasat's proposed acquisition of Inmarsat received FCC approval. The decision leaves the European Commission's competition review as the key ongoing regulatory process in relation to the transaction. The transaction is expected to close later this month.


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  Palantir (PLTR) - CFO David Glazer sold 141,944 shares at USD 10.242/shr.

COMMUNICATIONS:

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  Manchester United (MANU) - Manchester United owners the Glazer family are considering delaying a decision about whether to sell the club until after the end of the season, ESPN reports. INEOS and Sheikh Jassim have submitted bids, while minority investment offers are also being considered. The owners are exploring strategic alternatives for the club.


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  Alphabet (GOOG), Amazon (AMZN), Netflix (NFLX) - Alphabet-owned YouTube is aiming to rival Amazon's Prime Video Channels and is undercutting Amazon's pricing by up to 10%, as big tech companies compete to offer a comprehensive streaming alternative to cable TV, The Information reports.


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  Netflix (NFLX), Amazon (AMZN) - The president of Italian football champion's Napoli suggests Serie A should stream matches directly to consumers through platforms like Netflix and Amazon Prime to combat piracy and revive interest in the sport, according to the FT.


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  Meta Platforms (META) - Meta is to receive a record fine for transferring European user data to US servers, Reuters reports. The penalty from EU regulators is expected to surpass the EUR 746mln previous highest fine imposed on Amazon. The ruling is likely to address the use of legal mechanisms to transfer EU data to the US, raising concerns about weaker privacy protections.


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  Meta Platforms (META), Twitter (private) - Instagram is developing a text-based app to rival Twitter, Bloomberg reports, and it is currently being tested with celebrities and influencers. The separate app, potentially launching in June, may allow account connections and could be compatible with other Twitter competitors like Mastodon. Separately, Meta is in talks with augmented reality start-up Magic Leap to establish a multiyear agreement, FT said. The discussions explore potential intellectual property licensing and contract manufacturing in North America to support Meta's development of mainstream augmented reality products for its metaverse vision, although it is not expected to result in a joint headset.


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  Microsoft (MSFT), Activision (ATVI) - Microsoft said China approved its plan to buy Activision Blizzard, with regulators clearing the merger without conditions, SCMP reported. The EU last week approved the USD 69bln merger, though UK regulators have challenged the deal.

FINANCIALS:

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  US Banks - During a Thursday meeting with the CEOs of large banks, Treasury Secretary Yellen reportedly told executives that more bank mergers may be necessary as the industry continues to navigate through a crisis, CNN reports. The comments provide further evidence that Biden officials are warming to the idea of bank mergers, despite concerns from progressives and the administration’s own scrutiny of corporate concentration.


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  CMBS, Blackstone (BX) - In the next few days, the commercial mortgage-backed securities market is set to receive a boost with the pricing of four new securities worth around USD 3.1bln, Bloomberg reports. Notably, Blackstone plans to sell a USD 950mln bond to refinance the Del Coronado hotel, and an USD 800mln bond to refinance data centres in Virginia.


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  Goldman Sachs (GS) - In an interview with Barron's, Goldman Sachs CEO David Solomon said he thinks markets are mistaken about the economy, and he expects inflation to persist. He also foresees consolidation in the banking sector, and emphasised the importance of GS' asset and wealth management growth.


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  JPMorgan (JPM) - JPMorgan analyst said investors on Wall Street who have high cash holdings might start looking for other investment options as the Fed nears the end of its hiking cycle. The strategist also noted that JPMorgan's clients currently have more cash than they have had in the past ten years.


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  PayPal (PYPL), Block (SQ), Apple (AAPL) - Cautious mention for PayPal and Block; Barron's notes that Apple is expanding its presence in financial services by offering a high-yield savings account, expanding into payments with Apple Pay, and venturing into BNPL services. These initiatives aim to generate additional income and keep iPhone users within the Apple ecosystem. And if Apple succeeds in building a comprehensive digital wallet, it could pose a threat to rivals like Block and PayPal by offering a convenient all-in-one solution embedded in Apple's vast installed device base.

CONSUMER:

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  Tesla (TSLA) - Tesla is providing discounts of over USD 1,300 on some Model 3 cars in the US, following similar discounts in Europe, Reuters reports. The EV maker is using incentives to clear inventory amidst economic challenges and increased competition, and plans to advertise for the first time to boost demand.


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  Automakers - Car and truck availability at dealerships is recovering faster than expected, with a wider selection of models due to improved supply chains and stable factory output, WSJ reports. However, if inventory becomes excessive, it could challenge car companies' plans to maintain constrained availability and impact the industry's high prices and profits, the report adds.


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  European Staples - Europe is facing its most intense battle between retailers and governments over soaring food costs in 50 years, FT reports. Policymakers are resorting to price controls to address the significant cost of living crisis. Bloomberg reports that French retailers will continue their efforts to offer essential food items at the lowest prices for another three months in response to high consumer inflation, Finance Minister Le Maire, said; the campaign was initially scheduled to end soon but will be extended.


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  AB InBev (BUD) - Receives a positive mention in this week's Barron's, which said that everyone was focusing on Bud Light’s transgender controversy, but they’re missing a bargain stock opportunity, and the stock is a buy.


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  Adidas (ADDYY) - The sports apparel maker said it will start selling some of the remaining inventory of Adidas Yeezy products, with an initial release at the end of May 2023; products will be existing designs that were initiated in 2022 for sale in 2023.

INDUSTRIALS:

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  General Dynamics (GD) - After initially opposing the supply of F-16 fighter jets to Ukraine in its conflict with Russia, the United States has now agreed to let allied nations send the advanced aircraft to Kyiv, WaPo reports, and Ukraine aims to have these US-made F-16s operational by autumn. Russia warned that The West’s effort to potentially send these jets to Ukraine "carries enormous risks," TASS reports.


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  American Airlines (AAL) - American Airlines pilots have reached a preliminary agreement on a new contract that includes a 21% pay increase in 2023, following prolonged negotiations with the airline, Reuters reports.


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  American Airlines (AAL), JetBlue (JBLU) - DoJ wins suit to undo JetBlue and American Airlines partnership in the Northeast after arguing that was anti-competitive, CNBC reports. The report notes that undoing the partnership would be difficult, especially during the peak summer travel season.

MATERIALS:

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  CRH Plc (CRH) - Positive mention in Barron's, which said the stock was a buy as the stock costs half as much as its peers.

HEALTH CARE:

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  Intercept (ICPT) - FDA Advisory Committee Meeting to review NDA for obeticholic acid for the treatment of pre-cirrhotic fibrosis saw 12 of 16 members vote "no" (two abstentions) on the question of whether the benefits of OCA 25mg outweigh the risks, while 15 of the 16 voted to defer approval until clinical outcome data from trial 747-303 are submitted and reviewed. Intercept said it was disappointed in outcome.

22 May 2023 - 09:01- Research Sheet- Source: Newsquawk