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.

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17 Jul 2023 - 09:01- EquitiesData- Source: Newsquawk

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