US EARLY MORNING: US index futures are flat, Treasuries slightly higher; caution ahead of a big week for macro and earnings

US PREMARKETS: US index futures are flat, and Treasury yields are lower across the curve by a couple of basis points. The Dollar Index is slightly above neutral, gaining some traction after soft European PMI data, which have disappointed expectations in Germany and France, and were attached with commentary warning of a growth slowdown while prices are facing a resurgence. Ahead of a busy week, the US PMIs are the only notable economic release on today’s slate, and the consensus is looking for little change to the headline manufacturing and services gauges. It is also worth noting that the US will be selling 2yr notes today, in a front-loaded supply schedule ahead of the FOMC midweek. The week also contains advanced Q2 GDP metrics, which will help shape expectations of the terminal rate; the Fed’s preferred gauge of inflation – PCE prices – is due for release at the end of the week. The corporate reporting slate is also heavy this week, with a number of megacaps due to report (see week ahead, below).

JPM SEES OPPORTUNITIES TO ENTER CHEAP DEFENSIVES: JPMorgan's equity strategists once again highlight concerns about the increasing concentration of market cap in a few mega-cap companies, leading to narrow leadership. These megacaps have been driving a significant portion of the market's performance. Such concentration has historically reversed, with equal weighted indexes outperforming market cap weighted ones. Its analysts suggest that the current setup may present an attractive entry point into cheaper defensive stocks as investors may become more cautious about the economy in the future. JPM also points out that crowding in the forward growth factor is at a high level, similar to levels seen during the TMT bubble, which indicates potential risk for a sharp reversal in market trends. Events like an inflation shock or a contraction in global central bank assets could trigger a significant market reversal, and the bank is sceptical about the Fed's ability to inject liquidity – as it has done in the past – given the different inflation psychology compared to previous decades.

GS SAYS VALUATION EXPANSION IS REASONABLE: Goldman Sachs notes that since April, the S&P 500 P/E ratio has increased from 18x to 20x, even as the real 10yr US yields rose by 34bps. The bank says this is different vs 2022, when the P/E contracted by 20% despite a significant rise in real yields. GS believes that the recent valuation expansion is reasonable due to the long-term relationship between interest rates and equities, an improvement in expected growth, and the market concentration in stocks benefiting from optimism about AI. Its baseline forecast suggests a slight contraction in the S&P 500 P/E multiple to 19x by the end of the year. However, they also point out that there are risks tilted to the upside for valuations if the P/E ratios of currently underperforming stocks "catch up" with the market leaders or if yields fall.

TODAY’S AGENDA:

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


• Flash PMI data are the only notable item on a quiet calendar. On the supply front, the US will sell USD 42bln of 2yr notes, in a front-loaded supply schedule this week, ahead of Wednesday’s FOMC (2s today, 5s Tuesday, 7s Wednesday). Before the market open, earnings are due from DPZ; after the bell, NXPI, CDNS, WHR, FFIV, ARE, PKG, and BRO are due; our Daily US Earnings Estimates can be accessed here.


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  WEEK AHEAD: It’s a key week ahead for macro updates, with the FOMC meeting (+25bps expected – and looking for clues as to whether we have hit terminal), US advanced GDP for Q2 (will help guide terminal expectations ahead), PCE (Fed’s preferred inflation gauge); elsewhere, policy meetings from the ECB and BoJ. Our week ahead briefing can be accessed here. It's also a busy week for corporate earnings; highlights include: DHR, GE, RTX, NEE, VZ, TXN, GOOGL, MSFT, V on Tuesday; TMO, T, KO, BA, UNP, META, NOW on Wednesday; HON, BMY, CMCSA, MCD, SPGI, ABBV, MA, TMUS, INTC, MDLZ on Thursday; and AZN, CVX, XOM, PG on Friday. Our Weekly US Earnings Estimates note can be accessed here.


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  EUROPE OPEN (MON):  European equities started the week on a note of caution ahead of flash PMI data, and before this week's key risk events. Over the weekend, Spaniards went to the polls to vote in a snap election, which was won by the conservative Popular Party (PP), but it didn't get a majority; PP will need to enter talks with other parties to form a coalition government, while left-wing parties may team up with regional parties to try and form their own government. The outcome leaves the political future uncertain and dependent on coalition negotiations, BBC said. July's flash PMI data out of Germany and France have disappointed expectations, with Germany's composite measure slipping into contraction, with manufacturing driving the weakness; the report also noted that hopes for a rapid slowdown in inflation have taken a hit given the surge of input and output prices in the services sector gathered pace in the month. The survey compiler said the French data signalled a noticeable cooldown of the economy, showing the sharpest reduction of business activity since November 2020, which preceded a contraction in GDP, while prices continued to increase. (Newsquawk)


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  APAC WRAP (OVERNIGHT): Stocks in the Asia-Pacific region had mostly positive movements, but gains were limited. US equity futures were uncertain before key events like FOMC, ECB, and BoJ meetings, and big tech earnings results. The ASX 200 remained flat due to mixed performances in the energy and mining sectors, and Australia's flash PMIs showed contraction. The Nikkei 225 rose, still supported by dovish BoJ sources story ahead of this week's policy meeting. The KOSPI ignored North Korea's missile firing. Hang Seng declined due to weakness in property and tech, while Shanghai Comp. was undecided amid mixed economic signals in China. (Newsquawk)


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  WALL STREET WRAP (FRI): Stocks had a mixed and choppy week, with utilities performing well and tech stocks lagging. Despite some uncertainty, the S&P 500 ended the week with gains. Treasury yields slightly declined, with traders focusing on the upcoming FOMC meeting where a rate hike is expected. Treasuries overall had a lower week due to mixed data and uncertainty about the Fed's future actions. The Japanese Yen weakened against the US Dollar after dovish reports about the BoJ's upcoming meeting. Next week, the focus will be on central bank meetings (FOMC, BoJ, and ECB) and heavy corporate earnings reports. (Newsquawk)

EQUITY NEWS:

ECONOMY:

• 
  Labour Strikes - Politico notes that several labour groups are involved in contract negotiations and potential strikes. UAW's non-endorsement of Biden is a concern, and strikes at UPS and Hollywood are looming. The outcome of these disputes could impact industries like automotive and parcel shipments, potentially causing disruptions to the economy.


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  Government Shutdown - Democrat Senator Coons warned on Friday that a government shutdown appears likely, as Congress faces down a September deadline to pass its annual spending bills, The Hill reports.

COMMUNICATIONS:

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  Warner Bros. Discovery (WBD), Comcast (CMCSA) - WBD's "Barbie" and CMCSA's "Oppenheimer" saw a record-breaking weekend, with USD 155mln domestic debut for the former (vs exp. USD 90-100mln), and USD 80.5mln for the latter (exp. USD 50mln), marking the biggest non-franchise weekend since the pandemic began.


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  Disney (DIS) - Disney's ESPN is considering bringing professional sports leagues like the NFL, NBA, and MLB on board as minority investors through new partnerships and investment structures, CNBC reported on Friday. Talks are still in the early stages.


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  Spotify (SPOT) - Spotify plans to raise its US subscription price for the ad-free premium plan from USD 9.99 to USD 10.99 per month. It aims to improve profitability and follows other streaming services' price hikes.


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  AMC Entertainment (AMC) - AMC surged afterhours on Friday after a court rejected a settlement that would have allowed the company to sell more shares. The court ruled the deal was unfair to preferred shareholders, blocking any future legal claims.


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  AT&T (T), Verizon (VZ) - Cautious mention in WSJ; the newspaper says telecom companies like AT&T and Verizon are facing challenges due to concerns about lead-lined cables and heavy debt. The uncertainties have led to a decline in their stock performance despite the overall market surge.

TECH:

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  AI Stocks - Senate Judiciary Committee to hold a hearing on "Oversight of AI: Principles for Regulation" on July 25th at 15:00EDT.


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  Microsoft (MSFT) - Positive mention in Barron's which notes that as corporations prioritise AI projects, Microsoft's Azure cloud service and new paid software features could benefit. CIOs intend to use more of Microsoft's cloud services for AI, and the company's AI-enabled Microsoft 365 Copilot software received enthusiastic investor response, while other hardware vendors may face budget pressures.


• 
  Verint (VRNT) - CEO Dan Bodner sold 29,230 shares on July 20th at USD 38.33/shr.

CONSUMER:

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  Alibaba (BABA) - Alibaba won't sell any of its one-third stake in Ant Group during the fintech company's share buyback, Bloomberg reports. Ant's value has dropped significantly since its canceled IPO, leading to questions about the repurchase valuation.


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  Amazon (AMZN) - Amazon will require some corporate employees to relocate to the office three days a week, BBG reports. The decision will be made at the department level, affecting remote workers hired or moved during the pandemic.

ENERGY:

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  Chevron (CVX) - Q2 adj. EPS USD 3.08 (exp. 2.99), Q2 earnings of USD 6bln, adj. earnings USD 5.8bln. Says PDC Energy (PDCE) acquisition to close in August 2023. Chevron's production levels in the Permian Basin soared to a record high, producing 772k BOEPD in the Permian Basin. CEO Mike Wirth had his mandatory retirement age waived, and he will continue as Chairman and CEO past the usual retirement age of 65 due to a "turbulent time" in the markets; appoints Eimear Bonner as new CFO.


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  Oilfield Services - Oilfield services providers in the US shale patch are experiencing a slowdown as companies reduce oil and gas drilling, FT reports. Major oilfield services groups reported a decline in North American revenues. The slowdown is due to reduced fracking activity and weak commodity prices, but international and offshore demand may help offset the decline.

INDUSTRIALS:

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  American Airlines (AAL), United Airlines (UAL) - American Airlines increased its contract offer to pilots by over USD 1bln to match United Airlines' deal, totalling USD 9bln over four years, to ensure ratification, Reuters reports. The pilots will vote on the deal on Monday.


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  General Electric (GE) - Positive mention in WSJ; the newspaper notes GE's shares have more than doubled in the past year as the company simplifies its operations by splitting into three publicly traded companies, and investors are encouraged by the cleaner, more efficient structure and higher earnings estimates.


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  United Parcel Service (UPS) - UPS and the Teamsters union will restart labour negotiations on Tuesday to avoid a potential strike that could disrupt supply chains and the economy, Reuters reports. The current labour agreement expires on July 31st.


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  Boeing (BA) - Ireland's Ryanair (RYA ID) reported Q1 profits that beat estimates, but cautioned that delays from new Boeing aircraft will weigh on traffic growth in the coming year, Bloomberg reported. Separately, Boeing was awarded a USD 393.1mln Army contract modification for Apache AH-64E aircraft, supporting services, and equipment.


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  Booz Allen (BAH) - Booz Allen settles a US investigation over cost accounting and practices for USD 377.5mln, without admitting liability, to avoid prolonged litigation.


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  Cummins (CMI) - Cummins awarded a USD 347.4mln Army contract for the procurement of new commercial, remanufactured and remanufactured conversion V903 Cummins series 600 and 675 horsepower diesel engines.

FINANCIALS:

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  Bank of America (BAC) - President of Regional Banking Dean Athanasia sold 77,806 shares on July 20th at USD 31.485/shr.


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  CME Group (CME) - CME is to cut about 100 jobs (3% of its workforce) and plans to reallocate most positions to new technology roles focused on cloud computing, Reuters reports. The overall headcount will remain the same.


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  Crypto - The SEC wants a federal judge to disregard parts of a recent ruling in the Ripple Labs case, arguing that it doesn't align with existing securities laws, Bloomberg reports. The SEC may consider appealing the decision in the Ripple case.


• 
  Arthur J. Gallagher (AJG) - Positive mention in Barron's; the newspaper says insurance broker has consistently outperformed the market since going public in 1984, and is expected to achieve record profits ahead. Also notes a reasonable valuation, and favourable market conditions.

HEALTHCARE:

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  Gilead (GILD) - NYT says that internal documents reveal that Gilead delayed the release of a new version of an HIV drug to extend patent life and maximize profits. Patients are suing Gilead, claiming they were exposed to kidney and bone problems unnecessarily. Gilead denies the allegations.


• 
  Gilead (GILD) - Gilead Sciences stops Phase 3 ENHANCE study of magrolimab and azacitidine for myelodysplastic syndromes due to lack of effectiveness. Patients are advised to discontinue magrolimab treatment for MDS.


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  Pfizer (PFE) - The FDA and Pfizer are assessing the damage at a North Carolina facility. They don't expect immediate supply issues, but are preparing mitigation steps to avoid shortages. Pfizer is strictly allocating products to ensure fair distribution.


• 
  Exelixis (EXEL), Teva Pharmaceutical (TEVA) - Exelixis settles patent dispute with Teva regarding CABOMETYX tablets. Teva will get a license to sell its generic version in the US from January 1st 2031, subject to FDA approval. Ongoing litigation will be terminated. The details are confidential and subject to review by federal authorities.


• 
  Becton Dickinson (BDX) - Becton Dickinson's updated BD Alaris Infusion System receives FDA clearance, with improved hardware and software features, enhanced cybersecurity, and better interoperability for efficient and connected healthcare.


• 
  Horizon Therapeutics (HZNP) - Horizon Therapeutics' daxdilimab trial for SLE treatment didn't show significant improvement compared to placebo on the main measure of disease response. Some other endpoints showed slight differences, and the treatment was considered safe.


• 
  Moderna (MRNA) - Director Noubar Afeyan sold 15K shares on July 19th for a total USD 1.88mln.


• 
  UnitedHealth (UNH) - CEO Andrew Witty sold 4,000 shares on July 19th at USD 506.19/shr.

CONSUMER:

• 
  Constellation Brands (STZ) - Constructive mention in Barron's; the newspaper said notes that it has attracted activist investor Elliott Management, due to past errors like a write-down on its cannabis company stake, and with Elliott's involvement, STZ's valuation discount may narrow, appealing to investors concerned about prior capital allocation issues.


• 
  Mattel (MAT) - Positive mention in Barron's; the newspaper notes that the Barbie movie is generating marketing hype. Mattel aims to replicate its success with 14 other films. The film's success could be a game-changer for the toy maker.

24 Jul 2023 - 09:30- EquitiesData- Source: Newsquawk