US EARLY MORNING: US equity futures start the week around flat; quiet start to a busy week ahead

US PRE-MARKETS: US equity futures are flat; the day ahead is thin for data and earnings, and there were no major news catalysts out over the weekend. Treasury yields slightly wider, though not too far off unchanged levels; the 2s sector is seeing stability after Friday's upside following University of Michigan data, where consumers’ near-term inflation expectations rose in July, after data earlier in the week showed a cooling in June, and reminding traders about the risks that inflation could reaccelerate ahead. Fed officials are now on blackout ahead of their July 26th confab where they are expected to lift rates by 25bps. Treasury Secretary Yellen will be doing the media rounds today as G20 finance ministers and central bank officials meet; over the weekend, Yellen said the US should seek ways to reduce tensions with China over time, but it was premature to remove the tariffs imposed by the previous administration. The Dollar Index is around flat. Crude futures are softer following mixed China activity data overnight, but also as Libyan production levels normalise after protests. The week ahead is packed for key earnings releases (see Week Ahead, below), but the docket is thin on Monday, with only the NY Fed’s manufacturing gauge for July due.

NASDAQ REBALANCING ON JULY 24TH: The Nasdaq 100 index is to undergo a "special rebalance" to reduce the concentration of heavyweight companies that make up a significant portion of the index's weight after concerns that these few names are distorting the overall Index. The changes will be implemented before the market open on July 24th. The seven largest stocks in the index will have their weights reduced by 12ppts, bringing their combined weight down from 56% to 44%. Apple (AAPL) and Microsoft (MSFT) will remain the largest constituents, but their index weights will be reduced to 11.5% and 9.8%, respectively, from their current weights of 12.1% and 12.8%. The weight of Broadcom (AVGO), on the other hand, will increase by 0.6ppts to 3%. Goldman Sachs thinks that the rebalancing is unlikely to address the issue of high market concentration, arguing that the index will remain too concentrated to be considered a diversified fund actively managed by the market. The weight of the Information Technology sector, which currently accounts for about half of the Nasdaq, will decline slightly from 51% to 49%, with no other sector experiencing a significant change in weight, the bank notes. GS thinks the changes will likely have only a limited impact on the affected stocks, based on the previous special rebalancing in 2011. The bank thinks that returns for the Nasdaq and its largest stocks in the next six months will be driven by factors such as earnings growth, valuation, and the macroeconomic environment. Goldman also notes that only a small amount of active mutual fund assets, around USD 10bln, are benchmarked to the Nasdaq, compared to USD 805bln for the Russell 1000 Growth, and USD 2tln for the S&P 500, highlighting the relatively limited influence of the Nasdaq as a benchmark for active fund managers. 

H2 OUTLOOK: Looking ahead to the second half of the year, Goldman Sachs suggests maintaining a neutral asset allocation, with a focus on cash and commodities, while being cautious about equities and credit. The bank expects equities to remain stagnant, with limited potential for returns, and believes credit offers lower returns vs cash. However, it sees an improved opportunity to add duration amid higher yields in bonds as inflation normalises, supported by a likely slower pace of central bank tightening. Goldman Sachs believes that the recent increase in equity and bond correlations are unlikely to continue, as inflation normalises and economic growth remains resilient. It sees a "Goldilocks" scenario, with supportive conditions for equities and diversified portfolios in H2. However, the bank also acknowledged the risk of a market decline if inflation remains stubborn or central banks tighten policies more aggressively. GS downgraded commodities for the short-term, but remains positive in the longer-term. On the US, while the economy is expected to have a soft landing, GS notes global growth has been mixed, with disappointing data from China and spillover effects on the Eurozone, and the bank highlights the risk of global manufacturing impacting earnings revisions as inflation normalises. Meanwhile, the recent decrease in volatility across assets presents hedging opportunities, and GS suggests put spreads on European indices, as well as calls on gold and puts on EURUSD as risk-off hedges. It also recommends upside hedges such as 6-month calls on FTSE 100 and longer-dated calls on Nikkei 225, with the potential to finance them using US 2yr yields.

TODAY’S AGENDA:

• Our interactive calendar can be accessed here; a pdf version can be downloaded here.


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  EUROPEAN DAY AHEAD: Final Italy consumer prices data for June are expected to be unrevised. On the speaker's slate, ECB President Lagarde will deliver pre-recorded comments covering geopolitics, ECB Chief Economist Lane will speak on macroeconomic policy challenges amid a changing geopolitical landscape, ECB's Panetta will appear at the G20 meetings, and ECB's Elderson will speak on longer-term structural themes.


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  NORTH AMERICA DAY AHEAD: The NY Fed data for July will set the tone for regional manufacturing surveys in the month. Treasury secretary Yellen will be doing the media rounds today; over the weekend, Yellen said the US should seek ways to reduce tensions with China over time, but it was premature to remove the tariffs imposed by the previous administration. The earnings slate is quiet today, but this week includes BAC, MS, LMT, PLD, SCHW on Tuesday; ASML, GS, NFLX, TSLA, IBM on Wednesday; BX, TSM, JNJ, PM, ABT, ISRG on Thursday; AXP on Friday; our full weekly earnings estimates can be accessed here. The Fed is on blackout ahead of its July 26th confab, when it is expected to deliver a 25bps rate rise.


• 
  WEEK AHEAD: Highlights include PBoC LPR; US retail sales; UK, NZ, Canada and Japan CPI; RBA minutes, Aussie jobs. Our week ahead note can be accessed here.


• 
  RECAP - CHINA ACTIVITY DATA: China's economy grew +6.3% Y/Y in Q2 (exp. 7.3%, prev. 4.5%), and at a rate of 0.8% Q/Q (exp. 0.5%, prev. 2.2%); Pantheon Macroeconomics said the data showed China's reopening rebound has faltered. "The domestic demand revival is losing steam after the initial release of pent-up demand built during the zero-Covid policy era, while exports are falling amid ebbing global demand." PM notes that the acceleration of annualised GDP growth in Q2 is distorted by base effects, given the strict Covid lockdowns in Q2 2022. China's Industrial Output was up 4.4% Y/Y in June (exp. 2.7%, prev. 3.5%); the data was underpinned by infrastructure and manufacturing investment as China pushes for energy security, and invests in electricity grid upgrades, and investment in solar, wind and coal-fired power stations. Retail Sales sales growth pared to 3.1% Y/Y in June (exp. 3.2%, prev. 12.7%), with the data highlighting the sluggish consumer recovery. Once again, the Y/Y rate is distorted by base effects, and PM points to the the broad services index and the services PMIs report that even the services sector recovery is starting to fade. Looking at the data in aggregate, Pantheon argues that Chinese policymakers are concerned about the weakening domestic demand and are considering a stimulus package to achieve their annual GDP growth target. They aim for high-quality growth amid uncertainties, and may implement limited measures to boost infrastructure investment and ease home purchase restrictions.

EQUITY NEWS:

COMMUNICATION:

• 
  Activision (ATVI), Microsoft (MSFT), Sony (SONY) - A US appeals court Friday rejected the FTC's attempt to halt Microsoft's acquisition of Activision Blizzard, paving the way for the deal to proceed, pending a hearing in the UK. Additionally, Microsoft and Sony reached an agreement that will allow "Call of Duty" to remain available on PlayStation even after Microsoft's purchase of Activision Blizzard, resolving Sony's concern about Microsoft gaining exclusive control over the game.


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  Paramount (PARA) - Paramount parent National Amusements, the holding company owned by Shari Redstone, is negotiating with creditors to restructure its debt after facing financial risks, WSJ reports. Separately, Paramount's "Mission: Impossible - Dead Reckoning Part One" performed below expectations at the weekend box office, Variety reported, earning USD 56.2mln domestically, short of the anticipated goal of surpassing USD 60mln.


• 
  Netflix (NFLX) - Positive mention in Barron's; the newspaper highlights the changing landscape of the entertainment industry, with traditional TV and film production companies facing challenges while streaming services like Netflix continue to thrive. Despite ongoing strikes and the decline of cable and satellite TV, Netflix is positioned as a leader in the streaming space, which suggests it may benefit from these shifts in the industry.


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  Baidu (BIDU) - Baidu has been upgraded to a Conviction Buy by Goldman Sachs. GS believes Baidu is well-positioned in the AI sector and expects a recovery in search advertising.


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  Disney (DIS) - Disney requested a judge dismiss a lawsuit filed by a state oversight board, as part of their ongoing dispute with Governor Ron DeSantis regarding development around the company's theme parks.


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  Universal Music Group (UNVGY) - Universal Music Group has asked for help from the US Congress to address copyright infringement related to AI technology. It calls for a federal "right of publicity" and the labelling of AI-generated content.


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  Frontier Communications (FYBR) - Positive mention in Barron's; said Frontier's stock is expected to benefit greatly from its expansion into high-speed internet through fibre optic connections.


• 
  Roblox (RBLX) - Chief Business Officer Craig Donato will be leaving the company at the end of the summer, Reuters reports.

TECH:

• 
  US-China - US Treasury Secretary Yellen said the US should seek ways to reduce tensions with China over time, but it was premature to remove the tariffs imposed by the previous administration.


• 
  Intel (INTC), Qualcomm (QCOM) - The CEOs of Intel and Qualcomm are reportedly this week to visit Washington, and will discuss China policy and other business matters with US officials, Reuters reports. Other semiconductor CEOs may also be present, and comes amid reports that the US is moving to tighten export rules on high performing computer chips.


• 
  Taiwan Semiconductor Manufacturing Company (TSM) - TSMC may cut its FY23 guidance – to a decline of 10% Y/Y from a previous view for low-to-mid-single digit decline Y/Y – citing weaker than expected demand for traditional servers, high chip inventories and slow demand for non-Apple (AAPL) smartphones, according to a report.


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  Western Digital (WDC) - Western Digital and Kioxia are aiming to reach a merger agreement by August, Bloomberg reports. The deal would involve a tax-free spinoff of Western Digital's flash business, with Western Digital shareholders owning slightly over 50% of the merged entity.


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  Apple (AAPL) - Russian authorities have prohibited thousands of officials and state employees from using iPhones and other Apple products due to concerns about espionage by US intelligence agencies, FT reports.

CONSUMER:

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  Richemont (CFRUY) - Q1 revenue +14% in the quarter at CHF 5.3bln, where Asia recovery offset Americas weakness; Europe sales CHF 1.13bln (prev. 1.03bln), APAC sales CHF 2.2bln (prev. 1.7bln). Q1 retail sales CHF 3.6bln (prev. 3.05bln), online retail sales CHF 0.29bln (prev. 0.3bln). Shares slipped in European trade.


• 
  Tesla (TSLA) - Tesla has finally begun production of its electric pickup truck, the Cybertruck, an after nearly four years since its initial prototype was revealed, Bloomberg reports.


• 
  Amazon (AMZN) - Workers at an Amazon delivery station in Michigan went on strike, along with Amazon delivery drivers from California, as part of a nationwide movement demanding changes and protesting against the company's violations of federal labour law.


• 
  Lennar (LEN) - Lennar Co-CEO and Co-President Rick Beckwitt is retiring after 17 years with the company. Stuart Miller will remain as Executive Chairman and become Co-CEO alongside Jon Jaffe, who is also Co-CEO and President.


• 
  Carlsberg (CABGY), Danone (DANOY) - The Russian government has taken control of Danone's Russian subsidiary and Carlsberg's stake in a local brewer, Reuters reports citing a decree signed by Russia President Putin. The stakes are now under the management of a government agency.


• 
  Tesco (TSCDY) - UK supermarket Tesco is urging suppliers to pass on cost savings as it aims to cut prices more aggressively than its competitors.

FINANCIALS:

• 
  Visa (V), MasterCard (MA) - Positive mention in Barron's, which said both operate highly profitable businesses in the payment processing industry and their stocks present buying opportunities with strong business momentum.


• 
  Crypto - Crypto exchange Binance is laying off employees due to an ongoing Justice Department probe, CNBC reports. The cuts could affect 1,500-3,000 employees, as the company faces potential legal consequences that may reshape its operations.

HEALTHCARE:

• 
  Pfizer (PFE), Seagen (SGEN) - The FTC has requested additional information regarding Pfizer's USD 43bln acquisition of Seagen, Reuters reports. The scrutiny follows recent concerns raised over antitrust issues in the pharmaceutical industry. Separately, The EU will investigate the acquisition as the bloc continues to closely examine major biotechnology deals, Bloomberg reports; EU approval is required for the deal to be finalised.


• 
  Biogen (BIIB), Roche (RHHBY) - Roche files suit vs Biogen over patents infringements on a planned biosimilar to Actemra.

ENERGY:

• 
  Libya Production - Production at Sharara and El Feel oilfields has resumed, Al Jazeera reported, with the two oilfields operating on Saturday evening following protests, and production at Sharara returning to normal on Sunday morning.


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  Oil Prices - Oil prices are surging above USD 80/bbl as global fuel demand recovers and production cuts by Saudi Arabia and OPEC+ drain storage tanks. Analysts expect a tightening market and potential price increases in the coming months, according to a report by Bloomberg.


• 
  Tullow Oil (TUWOY) - Jubilee field producing over 100k BOPD, both fields performing in line with expectations and have increased production rates by C.50% compared to first half of the year.

INDUSTRIALS:

• 
  Toshiba (TOSYY), General Electric (GE) - Toshiba plans to create a supply chain for offshore wind turbines in Japan, aiming to partner with General Electric and enlist 100 local suppliers, Nikkei reports. Toshiba seeks to rebuild the industrial base and achieve a 60% domestic procurement rate by 2040.


• 
  United Airlines (UAL) - United Airlines and its pilot union have reached an agreement on a contract that will increase pilot pay by up to 40% over four years, AP reports. The deal comes after years of negotiations and reflects the strong recovery in the airline industry.


• 
  United Parcel Service (UPS) - The Teamsters union representing UPS workers is open to further negotiations with the company despite rejecting its latest contract offer, a representative said on Friday.

MATERIALS:

• 
  Teck Resources (TECK) - India's largest steel producer JSW Steel mulls bid for up to a 20% stake in Teck Resources' steelmaking coal business, Bloomberg reports. The potential acquisition is estimated to be around USD 2bln. Talks are still at an early stage.


• 
  Rio Tinto (RIO) -  Rio to take 15% stake in Australia's Sovereign Metals, with USD 27.6mln investment.

17 Jul 2023 - 09:01- Research Sheet- Source: Newsquawk