US EARLY MORNING: US equity futures are seeing only slight gains at the start of the week following last week's solid rally

US PRE-MARKETS: US equity futures are trading with slight gains after last week's solid rally, which was underpinned by declining bond yields amid hopes that global central banks are close to concluding policy tightening, and rate cut bets for next year being boosted. The rally has given rise to debate whether this is an end-of-cycle rally, or the start of a sustained upswing. While the lower yield dynamics have supported equities, many are concerned that slowing growth dynamics ahead could end up offsetting the accommodation provided by looser yields. The problem, some argue, is that the data is giving both the bulls and bears fodder (see below). This week, the data slate is thin, so we are unlikely to see any resolution to the debate. Fed Chair Powell is due to speak on a couple of occasions, but is expected to reiterate the post-FOMC messaging (recap in our central bank weekly note here).

MIXED MACRO MESSAGES: Morgan Stanley's analysts note that US economic data has much for both the bulls and the bears: GDP has been solid, though the ISM has remained sub-50, while gauges of consumer and business confidence have been adrift. The October jobs reports surprised to the downside, though the three-month average remains elevated. "The data can support any view of the economy," MS writes, "we have maintained our view that the US economy avoids recession but slows as monetary policy restrains demand, and yet so far you have to squint to see the slowing," adding that "the rates selloff since the summer shows that the market has moved away from a recession narrative, but we think another shift in expectations could be under way, and a soft landing will always bring contradictory data – a slowdown but no recession." In terms of the impact on how equities will trade ahead, MS observes that the S&P rallied through July, even as its strategists highlighted rate pressures compounded by earnings that will slump with a slowdown. "As the market moves from Q3 earnings to Q4 expectations, we have seen the index sell off by about 10% as earnings revisions breadth has rolled over into negative territory," and MS' Chief Global Economist Seth Carpenter does not expect the Fed to save a market that it has pushed down; "To get a soft landing, the Fed needs the economy to slow to a pace below its potential and is engineering that slowdown through higher interest rates. But for decades, slower growth brought sharply lower rates, instead of higher rates causing the slowing." Carpenter says that the economy and the market are facing crosscurrents; "We think the economy is set up to weather the storm, but investors need to be prepared for a slew of mixed messages." MS' equity strats, meanwhile, say that the rally seen last week looks more like a bear market rally rather than the start of a sustained upswing, particularly in light of weaker earnings revisions and macro data. "The leading macro data suggests that we're in a late cycle market environment as do the internals of the equity market," MS Equity Strat Michael Wilson said, "this is historically a supportive performance backdrop for (1) traditional defensives (Healthcare, Staples and Utilities), (2) select growth opportunities (lower volatility growth, in particular, along with stocks levered to secular themes that can outweigh cyclical risks), and (3) late cycle cyclicals (Industrials and Energy)."

TODAY’S AGENDA:

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  DAY AHEAD: Our interactive daily calendar is here; a PDF version can be downloaded here. The European morning will see the release of final composite and services PMI data for October. BoE chief economist Pill is scheduled to make remarks after the European close. The North American calendar sees the release of the Fed’s Senior Loan Officer Survey, US Employment Trends data for October, the BoC’s Market Participants’ Survey, and the Ivey PMI for October. Today’s US corporate earnings slate includes BNTX, ES, DISH, FANG, VRTX, O, CTRA, NXPI, CE, IFF, COHR; our full Daily US Earnings Estimates note for today can be accessed here. Of note for AI stocks, OpenAI is hosting its first developer conference today, and is expected to announce product enhancements, cheaper and more functional AI models.


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  WEEK AHEAD: Highlights include China trade and inflation, RBA, BoC minutes, Banxico, Norway CPI, UK GDP. Our week ahead preview can be accessed here. The week will also include addressed from Fed Chair Powell (you can recap on the recent Fed meeting in our central bank weekly note here). Our full weekly scheduled can be accessed here.

EQUITY NEWS:

TECH:

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  AI Stocks - Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOG), are increasing capital spending to expand cloud computing capacity for generative artificial intelligence, FT notes. They've invested USD 42bln in infrastructure in Q3 (+20% Y/Y). This spending is crucial for staying competitive in the cloud market and providing advanced AI services to attract and retain customers, FT added.


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  AI Stocks - Elon Musk's AI startup xAI unveiled a "sassy" chatbot called Grok, closely tied to X, FT reports. Grok has real-time access to X's data, making it unique, and it's designed with sarcasm and humor to differentiate itself in the competitive AI chatbot market.


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  AI Stocks - OpenAI is hosting its first developer conference on Monday, and will announce product enhancements, making AI models cheaper and more functional, Reuters reports. The focus is on reducing costs for developers, introducing vision capabilities, and fine-tuning advanced AI models to encourage the development of AI-powered applications.


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  Foxconn (HNHPF), Apple (AAPL) - Apple supplier Foxconn is sticking to its strong year-end holiday sales outlook, noting robust customer demand in China and the US, Reuters reports. Despite some recent fluctuations in revenue, it anticipates significant growth in Q4, particularly in smart consumer electronics products like smartphones. Foxconn's next earnings report will be published on November 14th.


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  PC Manufacturers, Dell Technologies (DELL), HP Inc. (HPQ) - Positive mention in Barron's, which said Dell and HP were a buy as PC makers are turning to AI to boost sales as the pandemic-led PC sales surge slowed down in 2022, adding that AI could make PCs more appealing and bring back customers.

CONSUMER:

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  US Retailers - US retailers are concerned about a century-old trade rule ("de minimis") that lets companies send packages worth less than USD 800 to the US without paying import duties, NYT reports. Critics claim this gives an unfair advantage to Chinese-founded e-commerce companies like Shein and Temu, and there are also concerns that this rule allows goods possibly made by forced labour to enter the US without scrutiny.


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  LVMH (LVMUY) - LVMH is to acquire Los Angeles-based eyewear maker Barton Perreira for around USD 80mln, WSJ reports. The move is part of its strategy to expand into products with broader consumer appeal and create their own eyewear rather than relying on third-party manufacturers.


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  Tesla (TSLA) - Tesla is giving German factory workers higher pay as unions push for more rights, WSJ reports. CEO Elon Musk visited the Berlin Gigafactory and announced wage increases. The factory will also make a new vehicle. Similar efforts are expected in the US, the report adds. Reuters reports that Tesla will construct a EUR 25k EV at the Gruenheide plant in Germany.


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  Lucid (LCID) - Lucid Group has reduced the prices of its luxury electric sedans temporarily to boost sales in the face of stiff competition and slowing demand for electric vehicles, Reuters reports. Lucid's price reductions include the Air Touring model to USD 87,500, the Grand Touring by USD 10,000 to USD 115,600, and the all-wheel drive Air Pure to USD 74,900.


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  Altria (MO), British American Tobacco (BTI) - Cautious mention in WSJ, which notes that the US cigarette market is changing, and the decline in smoking habits is impacting expensive cigarette brands. Tobacco companies used to increase profits by raising prices, even as smoking declined, allowing them to pay dividends to shareholders, though big tobacco can now no longer "name its price."


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  Tyson Foods (TSN) - Tyson Foods is recalling 30,000 pounds of chicken nuggets due to reports of small metal pieces found in some packages, CNN reports. One minor oral injury has been reported so far.

FINANCIALS:

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  Berkshire Hathaway (BRK) - Reported a +40.6% increase in Q3 operating earnings to USD 10.76bln (exp. 8.95bln), or around USD 4.96/shr per Class B share (exp. 4.42), and around USD 7,442 for each Class A share (exp. 6,625). Q3 revenue USD 93.2bln (exp. 88.1bln); Q3 insurance underwriting operating income USD 2.422bln (vs USD 1.247bln Q/Q), Q3 insurance investment income USD 2.47bln (vs 2.369bln Q/Q). Ended the quarter with USD 157.2bln of cash. Executed USD 1.1bln of share repurchases in Q3 (vs USD 1.4bln in Q2). Its outlook acknowledges challenges like the pandemic's impact, geopolitical risks, and inflation pressures.


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  BNY Mellon (BK) - BNY Mellon's investment arm is looking for investors to support its entry into the multi-manager hedge fund sector, competing with major players like Citadel and Millennium, FT reports. It aims to offer a cost-effective alternative for investors seeking consistent returns.


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  Capital One (COF) - Capital One is seeking to sell more New York commercial real estate debt as property values fall, Bloomberg said.


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  Non-Bank Financials - US regulators are increasing oversight of asset managers, hedge funds, and other non-banks seen as financial risks, Reuters reports. The FSOC is reviving a stricter regime that was previously halted under former President Trump and adopting a more transparent risk identification framework.

ENERGY:

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  Chevron (CVX) - Positive mention in Barron's; said Chevron stock was a buy, arguing that it has been punished enough for earnings and the Hess deal, but shares look attractive after the recent selloff.


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  Shell (SHEL) - Shell's CEO aims to streamline the company and be more strategic in its investments in the energy transition, FT reports. CEO plans to focus on maintaining oil production, expanding the gas business, and cutting less profitable parts of the low-carbon portfolio.


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  Origin Energy (OGFGY) - EIG Partners' CEO believes the Brookfield-EIG consortium can secure approval for its USD 10.5bln bid for Origin Energy, even though major shareholder AustralianSuper opposes the offer, citing its undervaluation of the company.

MATERIALS:

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  BHP (BHP) - BHP's VP for legal affairs said the miner intends to come to an agreement with authorities in Brazil regarding the 2015 dam collapse at the Samarco iron ore facility. Negotiations are regarded as advanced, and there is potential for a deal to be struck by the end of the year, FT reports.

INDUSTRIALS:

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  Vestis (VSTS), Cintas (CTAS) - Vestis received a positive mention in Barron's; said that the stock was a buy after it spun out from Aramark, and the company now looks poised to compete with industry leader Cintas.


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  Kohler Co. (not listed), Platinum Equity (not listed) - Platinum Equity is in advanced talks to buy Kohler's generators division for more than USD 3bln, Bloomberg reports. A deal could be announced in the coming days, but no final decision has been made.

HEALTHCARE:

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  Vertex (VRTX) - Vertex received a positive mention in Barron's; said its new pain pill, which is in trials now, could replace opioids, giving an opportunity for investors to make their bets soon.

COMMUNICATIONS:

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  Telecom Italia (TIIAY), KKR (KKR), Vivendi (VIVHY) - Telecom Italia approves deal to sell its land-line network to KKR for EUR 22bln, with support from the Italian government, and despite opposition from its largest shareholder Vivendi. The move is expected to help Telecom Italia reduce its debt by EUR 14bln, and is set to close by the summer 2024.

06 Nov 2023 - 09:30- EquitiesData- Source: Newsquawk