US EARLY MORNING: US equity futures are slightly higher, Treasury yields wider; geopolitics in focus amid concerns Middle East conflict could spill over into other parts of the region

US PRE-MARKETS: US equity futures are seeing modest gains at the start of the week, although the focus seems to be on fixed income and energy markets. Fears that the conflict between Israel and Hamas could spill over into other parts of the Middle East was stoking crude futures higher in APAC trade, although the complex saw some downside on loose reports of a ceasefire in southern Gaza, coinciding with although Hamas said that it has no information about the humanitarian truce that was agreed upon, and an Israeli official said there was currently no truce and humanitarian aid in Gaza in exchange for getting foreigners out. Yields are higher along the Treasury curve; some analysts have suggested that central banks may be able to look through any temporary upside in crude prices, but any drawn out conflict would need to be factored into policy reactions, and while it might not necessarily lead to any further rate hikes, it could strengthen the higher-for-longer narrative, which may partly explain why global bond yields have been drifting higher in early trade. Equity futures, meanwhile will have more earnings to contend with this week; the corporate earnings slate picks up this week, and includes global bellwethers (TSM, TSLA, NFLX), as well as other key financials (GS, MS, AXP), and consumer names (PM, PG). In terms of data, key highlights this week include US retail sales, China activity data, inflation from NZ, Japan, UK and Canada. 

GEOPOLITCS' IMPACT ON MARKETS: Morgan Stanley says recent geopolitical events in the Middle East have had significant implications for financial markets, and is leading to increased security investments, higher risk premiums for Middle East sovereign credit, and the possibility of rising oil prices, though it notes that the link between oil prices and interest rates is not straightforward. MS says markets are likely to experience unforeseen consequences as these events continue to unfold. MS says that there is a possibility of rising oil prices due to potential supply disruptions in the Middle East, but we should not assume that this will lead to higher interest rates, noting that historically, higher oil prices have had a limited and temporary impact on inflation and have not necessarily prompted central banks to adopt a more aggressive stance.

MS SEES LOWER CHANCE OF Q4 RALLY: Morgan Stanley's equity strategists say weakening breadth and cautious internals are lowering the probability of a Q4 rally. Technicians are noting that the S&P 500 price action is focussed between its 50- and 200-day moving averages, but MS thinks it is more useful for investors to look beneath the surface at equal weight relative performance across sectors and styles. "Here, the signals are weaker and suggest key tactical support is vulnerable," the bank writes, "high FCF, low leverage and low volatility factors continue to lead, corroborating a cautious tone under the surface of the market," and the bank continues to recommend a barbell of defensive growth and late cycle cyclicals on the long side. MS says consumer confidence is fading amid high prices and rising rates, pointing to the University of Michigan's Sentiment Index falling by the largest M/M decline since June of 2022, and specifically, the decline in consumers' assessment of personal finances, while the rise in geopolitical tensions could pressure consumer and corporate confidence further. With regards to earnings, MS observes that earnings revisions breadth for the overall S&P 500 has fallen sharply over the last couple of weeks as we enter Q3 earnings season; Q4 and calendar FY24 EPS estimates have been quite sticky over the past 5-6 months, which MS says continues to imply a meaningful inflection in annualised growth for both periods. "We're now at the point in the calendar year when we look for company guidance to provide more clarity on Q4 expectations, which should in turn set the tone for the 2024 revisions," adding that "the seasonality alone suggests we should see an upward inflection in earnings revisions breadth into year end from here; if we do see that play out, it will be an indication that the recent decline in revisions breadth was largely normal seasonal weakness post conference season and into the quarter." But on the other hand, if revisions underperform seasonality over the coming weeks and continue to decline, MS says it would be a sign that other risks including macro headwinds are driving the earnings revisions backdrop.

GS 2024 US EQUITY SUPPLY/DEMAND: Goldman Sachs introduced its 2024 US equity supply and demand forecasts. The bank said that the recent volatility in the Treasury market had driven increased investor concern over the fiscal position of the US and the supply/demand mismatch for Treasury securities. "Our rates strategists believe increased Treasury supply will not catalyse further upside in yields," it said, "however, the attractive level of yields will continue to entice households to purchase yield-bearing assets rather than equities."  GS notes that similarly, higher rates have improved the funding level of US pension funds, incentivising them to continue selling stocks. GS says corporations will remain the largest source of equity demand in 2024, alongside a rebound in buybacks and cash M&A. It expects foreign investors will also continue net buying US stocks next year.

TODAY'S AGENDA:

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  DAY AHEAD: The European data slate is quiet, with final Italian inflation data for September expected to be unrevised. Eurozone trade data will also be out. The US Day will see the first of the monthly regional Fed surveys for October released, with the NY Fed’s gauge seen falling to -1.5 from +1.9. The BoC will release its Q3 Business Outlook Survey, and its Survey of Consumer Expectations. On the speaker's slate, ECB President Lagarde and ECB's Panetta will participate in the Eurogroup meeting, while ECB’s de Cos will also speak. BoE Chief Economist Pill will deliver remarks. Fed's Harker (2023 voter) will speak at two functions today; on Friday, he said that the Fed was likely done with rate hikes, adding that he supports a higher for longer interest rate stance, but cannot say for how long. Our interactive calendar is available here; a pdf version can be downloaded here. Today’s corporate earnings slate includes SCHW; our Daily US Earnings Estimates can be accessed here.


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  WEEK AHEAD: This week’s key events include US retail sales, China activity data, PBoC, inflation from NZ, Japan, UK and Canada; our week ahead briefing can be accessed here. This week, earnings reports are due from SCHW on Monday; JNJ, BAC, GS, LMT, PLD on Tuesday; ASML, ELV, PG, MS, ABT, NFLX, TSLA on Wednesday; TSM, BX, T, PM, UNP on Thursday; AXP on Friday; our Weekly US Earnings Estimates sheet can be accessed here.


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  PRIMER - ITALY BUDGET: European traders will be on the lookout on Monday for details regarding the Italian budget. The government will hold a press conference after a cabinet meeting. Bloomberg notes that the government has earmarked EUR 20bln to come from privatisations over the next three years. Looser deficit forecasts last month showed the Italian budget deficit would not drop below the EU 3% limit until 2026, a year later than previously planned. Traders will also be looking for details on planned tax cuts on wages, and a reduction of tax brackets, while the law will include a renewal of contracts for state employees, and measures for aimed at encouraging parenthood, sources said. For reference, the Bank of Italy last month forecast GDP to rise +0.7% this year, 0.8% in 2024, 1% in 2025.

EQUITY NEWS:

INDEX:

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  S&P 500 (SPX) - Lululemon (LULU) to replace Activision Blizzard (ATVI) in S&P 500 at open on October 18th; follows Microsoft's (MSFT) completing its acquisition of ATVI. Hubbell (HUBB) to replace Organon (OGN) in S&P 500 at open on October 18th.

HEALTHCARE:

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  Pfizer (PFE) - Pfizer cuts FY23 adj. EPS outlook to between USD 1.45-1.65 (prev. saw 3.25-3.45; exp. 3.30), and cuts its FY23 revenue outlook to between USD 58-61bln (exp. 66bln, prev. saw 67-70bln). Lowering outlook follows changing its deal with the US for Paxlovid, taking back any unsold pills by the end of 2023, and returning the money earned. The US government will stop giving out Paxlovid under emergency use by the end of 2023. Pfizer will start selling a new version in 2024. Pfizer will take a charge of USD 5.5bln. PFE to also cut costs by USD 3.5bln over a few years, but it will cost about USD 3bln to do so.


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  CVS Health Corporation (CVS) - Aetna's 4+ Star plans will increase to 87% in 2024, from 21% in 2023, in the Centres for Medicare & Medicaid Services' 2024 Star Ratings, boosting future revenues. A decline in 4+ Star plans for CVS in 2024 will result in a revenue decrease, but it expects to recover it in 2025 with bonus payments. It won't affect 2023 and 2024 guidance.


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  Humana (HUM) - Nearly 94% of Humana's Medicare Advantage members are in 4-star or higher plans for 2024. Four contracts achieved a 5-star rating, doubling the 5-star plan members from 2023. Over 61% of members have 4.5-star rated plans, available across all 50 states and Puerto Rico. Around 97.5% of retirees in Group Medicare Advantage plans are in 4-star or higher contracts.


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  Merck (MRK) - Merck is to open a GBP 1bln London research centre, and pleaded for the UK government support the industry, praising the country's scientific expertise, but adding that the UK must address conflicts in areas such as drug pricing.


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  Bristol Myers Squibb (BMY) - Wins FDA approval for Opdivo for treatment of patients 12yrs+ with fully removed stage IIB or IIC melanoma.


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  AstraZeneca (AZN) - Ascentage Pharma (6855 HK) and AstraZeneca entered into a clinical collaboration on the registrational Phase III Study of Bcl-2 Inhibitor Lisaftoclax in combination with BTK Inhibitor Acalabrutinib in treatment-naive patients with first-line chronic lymphocytic leukaemia/small lymphocytic lymphoma.


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  GSK Plc (GSK) - Received positive CHMP opinion recommending approval of Jemperli plus chemotherapy. Decision on EU marketing authorisation expected by year-end.


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  McKesson (MCK) - Positive mention in Barron's, which suggests that McKesson is often overlooked by investors. Despite its significant role in delivering medicines, and a 22% stock price increase this year, it deserves more attention due to its size and potential; said the stock was looking like a buy.


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  Rite Aid (RAD) - The pharmacy chain filed for bankruptcy due to declining sales and legal issues related to the opioid crisis, AFP reports. It has reached agreements with creditors for debt restructuring, and secured USD 3.45bln in new financing to continue operating.


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  MoonLake Immunotherapeutics (MLTX) - Reported positive results from its 24-week Phase 2 MIRA trial for sonelokimab, will progress to Phase 3 development.

TECH:

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  Chipmakers - US to prevent American chipmakers from selling products to China that circumvent government restrictions, an official said, as part of the Biden administration's upcoming actions to block more AI chip exports, Reuters reports. The New rules will further restrict the export of advanced chips and chipmaking equipment to China, including some AI chips that don't meet current specifications.


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  Analog Devices (ADI) - Appoints James Mollica interim CFO, starting October 29th, until a permanent replacement is found. Mollica has been with the company for 35 years, with various financial roles, and was most recently Vice President, Finance, Global Customer Office.


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  Apple (AAPL), TSMC (TSM) - Barron's reports that global geopolitical conflict has led to a surprising plan to make Apple chips in an Arizona desert, with Taiwan Semiconductor investing heavily. This move aims to secure chip supplies amidst geopolitical tensions and trade disruptions.


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  TSMC (TSM) - TSMC's founder Morris Chang warns of tougher competition in the semiconductor industry as governments prioritise national security, Nikkei reports. He points to Intel (INTC) as a major rival making strides in chip manufacturing.

COMMUNICATIONS:

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  News Corporation (NWSA) - Activist hedge fund Starboard Value has acquired shares in News Corp, raising the potential for changes within Rupert Murdoch's media empire, Reuters reports. The size of the stake and specific plans remain confidential. News Corp's shares initially rose 1% in response to this news, However, Reuters says that the Murdoch family's control of voting shares may pose challenges for any major changes.


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  Manchester United (MANU) - Sir Jim Ratcliffe is close to buying a 25% stake in the world's greatest football club, Manchester United, after Sheikh Jassim bin Hamad al Thani withdrew his bid to purchase the entire club for over GBP 5bln, Sky News reports. The Glazers did not find Sheikh Jassim's offer sufficient, so are considering Sir Jim's proposal to buy a quarter of the club.


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  Paramount (PARA) - Saudi-backed Professional Fighters League is in talks to acquire rival Bellator from Paramount, aiming to compete with the dominant TKO Group-owned UFC, FT reports. PFL's investment is part of Saudi Arabia's broader sports push.

FINANCIALS:

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  Crypto, Ferrari (RACE) - Ferrari now accepts cryptocurrency payments for its cars in the US, and plans to expand to Europe, Reuters reports. This decision was in response to customer requests. Cryptocurrency payment processor BitPay will handle the transactions, and vehicle prices will remain the same, with no additional fees.


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  Crypto - The SEC won't appeal a court decision to block Grayscale's Bitcoin Trust conversion into an ETF, Coindesk reported; may pave the way for the first Bitcoin ETF in the US.


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  Insurance Stocks - Positive mention in Barron's, which said that insurance stocks were attractive today, and next year could bring further upside; mentions Arch Capital (ACGL), Chubb (CB), Everest Group (EG), W.R. Berkley (WRB), Metlife (MET), and Arthur J. Gallagher (AJG).

INDUSTRIALS:

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  Honeywell (HON) - Honeywell's Global Business Aviation Outlook predicts strong demand for new business jets over the next decade, with about 8,500 deliveries expected by 2033. The increase is partly due to a surge in private aviation during the COVID-19 pandemic. Reuters said its forecasts were consistent with its rolling 10yr projection provided last year, but the value of jets expected to be delivered had increased by USD 4bln to USD 278bln.


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  RTX Corporation (RTX) - RTX awarded USD 156.2mln Army contract for Patriot ground support equipment, spares and component procurement.


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  General Dynamics (GD) - Awarded a USD 216.5mln Navy contract for long lead time material associated with the Virginia Class Submarines SSN 814 and SSN 815.

ENERGY:

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  Chevron (CVX) - Negotiations between Chevron and unions regarding pay and conditions at their Australian LNG facilities have made progress, but some issues still need resolution to end months of labour disputes, Reuters reports. Further talks are planned for Monday. Workers will resume strike action at the Gorgon and Wheatstone facilities on Thursday if talks do not progress further.

MATERIALS:

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  Copper Prices - Citi predicted that more turbulence in metals prices could be seen ahead due to declining global demand, and the bank sees copper prices falling to USD 7,500/tonne in three-months, with risks tilted to the downside.


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  Albemarle (ALB) - Albemarle has abandoned its USD 4.2bln takeover of Liontown Resources due to challenges posed by investor Gina Rinehart, who acquired a significant stake, Bloomberg reports. Liontown now needs alternative funding for its Kathleen Valley project. Rinehart may consider collaboration for downstream processing. Albemarle will seek other targets in the lithium sector, including resources, technology, and recycling.


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  Eldorado Gold (EGO) - Eldorado Gold faces tax changes in Turkey due to the weakening TRY; expects a USD 3mln reduction in income taxes for Q3, but retroactive tax charges of about USD 6.2mln for Q1 and Q2, and a deferred tax expense of USD 19-20mln for Q3.

CONSUMER:

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  Tesla (TSLA) - Tesla is contesting a USD 230mln legal fee requested by shareholder attorneys who secured a settlement over director pay.


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  EV Automakers - Car makers are struggling to increase sales of electric vehicles in the US, as there's limited consumer willingness to pay more for these models, despite the industry's efforts, WSJ reports.


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  Ford Motors (F) - Ford is considering cutting shift at its F-150 Lightning pickup plant, according to a UAW memo cited by the WSJ. Sales of the electric truck have dropped in recent months after strong start.

16 Oct 2023 - 09:30- MetalsData- Source: Newsquawk