US EARLY MORNING: US index futures are flattish; no debt ceiling breakthrough, though sides optimistic, talks continue; PMI data, earnings from LOW ahead

OVERNIGHT: President Biden and House Speaker McCarthy had a "productive" meeting on preventing a US debt default, but no deal was reached (see below). APAC stocks initially rose to two-week highs but then relinquished early gains amid caution over the US debt ceiling impasse, while traders were also awaiting today's PMI releases in Europe and the US. Aussie shares were capped by weakness in the consumer sectors and after Australia’s flash manufacturing PMI remained at a contraction. Japanese stocks climbed to the highest levels since 1990 before slumping in afternoon trade. China stocks were subdued following Hong Kong’s failure to sustain the early tech-led momentum after China approved 86 domestic online games in May, while the mainland was pressured after press reports speculated that the PBoC's benchmark lending rates will remain unchanged for some time, and as the US denied it was planning to lift sanctions on China's defence minister. Our APAC wrap is here. European indices started the day around flat (our European opening note is here). The focus has been on PMI data releases, which have been mixed: French manufacturing rose in line with expectations (46.1 vs exp. 46.0 from a prior 45.6), though services disappointed (52.8 vs exp. 54.0 from a previous 54.6), leaving the composite index at 51.4 in May (exp. 52.0, prev. 52.4). In Germany, services performance surprised to the upside, printing 57.8 in May (exp. 55.3, prev. 56.0), but manufacturing disappointed at 42.9 (exp. 45.0, prev. 44.5), though the composite still managed to rise a touch (54.3 vs exp. 53.5 from a prior 54.2). For the Eurozone aggregate data, the services PMI eased to 55.9 (exp. 55.6 from 56.2), Manufacturing eased to 44.6 (exp. 46.0 from 45.8), and the composite fell to 53.3 (exp. 53.5 from 54.1).

US PRE-MARKETS: US equity futures are trading around flat, Treasury yields are mixed, with the short-end higher by around 4bps, while the long-end is slightly lower. The Dollar Index is a little better than flat. Crude benchmarks are also around neutral. The debt ceiling talks did not yield any breakthrough, but sides are still expressing optimism that a deal can be done (see our recap below). Axios reports that during his 12:30EDT/17:30BST meeting with the coalition in the House today, Fed Chair Powell is expected to discuss the debt ceiling as well as high inflation and rising interest rates, a source said. If recent remarks are anything to go by, the Fed boss will likely emphasise that the central bank cannot shield the US economy from the consequences of not raising the debt ceiling, and will urge lawmakers to come to a resolution, stressing that the government should always be able to meet its financial obligations. Traders will also be looking to flash PMI readings for May; there will be close attention on whether the US manufacturing PMI can hold ground above the 50.0 mark, which separates contraction and expansion; it stood at 50.2 in April, and is expected to come in at 50.0 in May. Meanwhile, the services gauge is seen slipping by a full point to 52.6.

DEBT CEILING: President Biden and House Speaker McCarthy met to discuss preventing the US from defaulting on its debt. Biden described the meeting as "productive" and emphasised the importance of reaching a bipartisan agreement in good faith, and again said that sides agreed that a US default was off the table. Still, no deal was reached during the meeting. McCarthy confirmed that nothing was agreed to, but said everything was being talked about, adding that the tone of the meeting was better than previous discussions, and he thinks a deal can get done. The deadline to reach an agreement is June 1st, and McCarthy expressed his intention to communicate with Biden daily until an agreement is reached. Treasury Secretary Yellen again reiterated her warnings to McCarthy that without a raise or suspension of the debt limit by early June, it was highly likely that the US will be unable to meet all government obligations by mid-June, but potentially as soon as June 1st.

JPM WARNING ON DEBT CEILING: Writing on Monday, JPMorgan's strategists continue to be cautiously optimistic that discussions between President Biden and House Speaker McCarthy will yield at least a partial deal to raise or suspend the debt ceiling. But the bank says that there is a growing risk that as the x-date nears, this time could be different, with a non-zero probability of technical default. "A combination of a challenging political backdrop, sooner than expected early June x-date, lack of alternatives if Congress fails to act and sanguine equity positioning suggests an elevated risk of significant equity repricing if the x-date is crossed without a debt ceiling resolution," JPM said, adding that "in contrast to Equities, Treasury securities and CDS have been far more responsive to these mounting risks, with CDS implying around a 4% probability of technical default (vs around 6% at the peak in 2011)". While stocks have perked up, breaking out above the April/May range on hopes that a deal is likely, JPM draws attention to the episode in 2011, which it says should serve as a cautionary tale of how the equity market disregards and then quickly re-pricing the risk of a US default; in 2011, that saw the S&P 500 fall by 17% in two weeks. "Our base case remains that the debt ceiling ultimately does get lifted/suspended though the journey to that end could be at the eleventh hour and drive significantly higher market instability than appreciated by the market currently," JPM says, "we expect a temporary or comprehensive deal on the debt ceiling to negatively impact federal spending and for a likely contentious budget negotiation process later this year," and given the potential short-term nature of a debt ceiling raise, JPM says "there remains a risk of revisiting the debt ceiling issue sometime in 2024 with a largely unchanged political setup, but increased market sensitivity given implications for the 2024 Presidential Election."

CITI ON EQUITY FLOWS: Citi's Equity Markets Positioning Model showed bullish flows returned for US equities, as investors once again add risk to US equity positions. Citi said that in the past week, investors added USD 21bln in new long positions on S&P 500, and positioning in both S&P and Nasdaq are now the most bullish.

TODAY’S AGENDA:

• Our full interactive day ahead calendar can be accessed here, a pdf version can be accessed here.


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  US DATA/SPEAKERS: Axios reports that during his 12:30EDT/17:30BST meeting with the coalition in the House, Fed Chair Powell is expected to discuss the debt ceiling as well as high inflation and rising interest rates, a source said. Traders will be looking to flash PMI readings for May; there will be close attention on whether the US manufacturing PMI can hold ground above the 50.0 mark, which separates contraction and expansion; it stood at 50.2 in April, and is expected to come in at 50.0 in May. Meanwhile, the services gauge is seen slipping by a full point to 52.6. The data will also help shape expectations of what the ISM report (released early June) will look like; thus far, regional Fed manufacturing services have been mixed. The Richmond Fed will be released today too. The New Home Sales data for April will be eyed after the March data spiked by over 9%, with the consensus expecting a slight decline (we'll also be watching the months' supply, after it fell to 7.6 months’ worth from 8.4 previously). On the supply front, the US will sell USD 42bln of 2yr notes, ahead of a sale of USD 43bln of 5yr notes on May 24th, and USD 35bln of 7yr notes on May 25th; all will settle on May 31st. Fed's Logan (a 2023 voter) will deliver remarks today; she triggered a market reaction last week with hawkish commentary, although after Chair Powell's comments on Friday, analysts say that the bar to price in further hawkishness is higher as Powell has all but endorsed an unchanged outcome at the June FOMC.


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  CORPORATE EARNINGS: Consumer discretionary giant Lowe's Companies (LOW) will report numbers in the premarket, and follows a mixed showing in the retail space; Autozone (AZO) will also be out before the open. Afterhours, Intuit (INTU) will be in focus amid some recent reports that the government will let the IRS allow people to prepare and file taxes electronically, and for free. PANW is also out AMC. Our Daily US Earnings Estimates sheet can be accessed here.


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  ENERGY: Ahead of the DoE weekly inventory data, due Wednesday, the API will report its gauge of stock changes; the street this week looks for crude stocks to build 0.5mln, distillate stocks to build 0.5mln, while gasoline inventories are seen drawing 1.1mln. Elsewhere, the Saudi Energy Minister, Iraq Oil Minister, and QatarEnergy CEO will speak at the Qatar Economic Forum.

EQUITY NEWS:

CHINA RELATED:

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  Micron (MU) - The State Department expressed "serious concerns" regarding China's restriction on the sale of Micron's products, and is engaged in direct communication with the Chinese government on the matter, Bloomberg reports. Officials emphasised that China's actions contradict its claim of being open for business and committed to transparency.


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  Microvast Holdings (MVST) - US Energy Department has reportedly decided not to grant Microvast Holdings a USD 200mln grant due to concerns about its alleged connections to the Chinese government, Reuters reports. The grant was intended to support the construction of a plant in Tennessee under the bipartisan infrastructure law.


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  ByteDance (private) - TikTok has filed a lawsuit against Montana for its ban on the Chinese-owned app, claiming it violates First Amendment rights and federal law, Reuters reports.

TECH:

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  Apple (AAPL) - The EU is seeking to re-impose a EUR 14.3bln tax demand on Apple, and will today try to overturn a court decision that rejected the order, FT reports. The case revolves around whether Apple's core design and development happened in Ireland, and the outcome could impact future tax cases. A ruling by the European Court of Justice is expected only late this year or next.


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  Zoom Video Communications (ZM) - Q1 adj. EPS 1.16 (exp. 0.99), Q1 revenue USD 1.11bln (exp. 1.08bln). Reports 3,580 customers contributing more than USD 100k, with online average monthly churn of 3.1%. The percentage of total Online MRR from Online customers with a continual term of service of at least 16 months was 72.0%, +700bps Y/Y. Reports approximately 215.9k Enterprise customers, +9% Y/Y. Said Zoom Phone surpassed 10% of revenue in Q1. APAC decline was due to the strength of the USD. Exec said solid start to the year enabled it to raise outlook for FY24 while continuing to invest in innovations. For Q2, sees adj. EPS between 1.04-1.06 (exp. 1.05), and revenue between USD 1.110bln-1.115bln (exp. 1.11bln). Raised FY revenue outlook to USD 4.47bln-4.49bln (exp. 4.45bln) from 4.44bln-4.46bln; sees FY Adj. EPS USD 4.25-4.31 (exp. 4.22). Sees FY24 EPS between USD 4.25-4.31 (exp. 4.22), and sees FY24 revenue between USD 4.47-4.49bln (exp. 4.45bln).


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  Nvidia (NVDA) - EVP of Operations Debora Shoquist sold 23.1K shares of common stock on May 18th for a total USD 7.04mln. Nvidia is due to publish its latest earnings report on Wednesday after the US close.


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  Samsung Electronics (SSNGY), SK Hynix (HXSCL) - Samsung Electronics' DRAM shipment is expected to increase by 15-20% in Q2, rebounding from a 10% decline in Q1, and SK Hynix shipments are expected up between 30-50% in Q2 as South Korea's semiconductor industry is recovering from last year's economic downturn, with major chip makers and smartphone/server manufacturers cutting production and reducing inventories, South Korea's Pulse News reports.


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  Skyworks (SWKS) - CEO tells CNBC that he is observing a slowdown at the moment, but that is embedded in the company's current guidance. CEO expects to come out of this cycle stronger than before. Expects AI will be great for Skyworks. Adds that the company has strong cash generation.


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  Toast (TOST) - CEO Christopher Comparato sold 162.3K shares on May 19th for a total USD 3.36mln.

COMMUNICATIONS:

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  Walt Disney (DIS) - Disney is undergoing its third wave of layoffs, with over 2,500 employees expected to be affected, CNN reports. The specific divisions impacted by these cuts are currently unknown. The first two waves of layoffs took place in March and April, eliminating roughly 4,000 jobs, including at ESPN, Disney’s entertainment division, Disney Parks, and its Experiences and Product division.


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  Yelp (YELP) - Activist investor TCS Capital Management has acquired over 4% of Yelp's common stock and is urging the company to explore strategic alternatives, including a potential sale, WSJ reports. TCS Capital believes that Yelp could be sold for at least USD 70/shr, more than double the current stock price.


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  AT&T (T) - CEO spoke at a JPMorgan conference; he reiterated his confidence in the company's ability to deliver free cash flow of USD 16bln+ for FY23; continues to prioritise adding high-quality durable customer relationships; network expansion remains on track, expects to deploy midband spectrum to 200mln people by end-2023, and to pass 30mln+ customer and business locations in its traditional service area with fibre by the end of 2025.


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  TEGNA (TGNA) - Tegna ended its USD 8.6bln merger agreement with Standard General due to regulatory obstacles after the deal faced criticism from lawmakers over concerns of increased TV prices and job losses. Tegna is entitled to receive a termination fee of USD 136mln from Standard General. Tegna announced USD 300M ASR programme and boosted quarterly dividend by 20%.


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  Meta Platforms (META) - Users of WhatsApp can now edit sent messages on the chat platform within 15 minutes of the original message being sent. The feature is rolling out globally and will be available to all users in the coming weeks.

CONSUMER:

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  British American Tobacco (BTI) - Top investors urge the new CEO to restart its share buyback programme to boost shareholder returns and the company's stock price, FT reports. Investors note BAT has been slow in transitioning to vapes and heated tobacco products, which only contribute to around 10% of their revenues, whereas rival Philip Morris generates over a third of its sales from these products.


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  General Motors (GM) - CFO Paul Jacobson purchased 31K shares of common stock on May 19th for a total USD 1.01mln.

FINANCIALS:

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  UBS Group (UBS), Credit Suisse (CS) - UBS has suspended its application for a wholly owned mutual fund company in China as it focuses on completing the acquisition of Credit Suisse and addressing regulatory concerns arising from the deal, Nikkei reports. The rushed takeover of Credit Suisse complicated UBS' plans to expand its fund management operations in China, leading them to put the mutual fund application on hold for now.


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  American International Group (AIG), RenaissanceRe Holdings (RNR) - AIG will sell most of its reinsurance business to RenaissanceRe Holdings for approximately USD 3bln, freeing up USD 400mln in capital as part of CEO Peter Zaffino's streamlining efforts, Bloomberg reports.


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  Brown & Brown (BRO) - Brown & Brown to acquire London-based insurer Kentro Capital, which manages over GBP 500mln of gross written premiums, and has a team of more than 350 insurance professionals operating globally. No terms were disclosed. The transaction is expected to close in Q4 2023, pending regulatory approvals.


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  Ryan Specialty Holdings (RYAN) - Announced the commencement of an underwritten public offering of 9mln shares of Class A common stock on behalf of Onex Corporation and another selling stockholder. Ryan Specialty is not selling any shares in the offering, and will not receive any proceeds from the offering.

INDUSTRIALS:

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  CSX (CSX) - CSX Corporation has reached a tentative agreement with SMART-TD CSRA to provide paid sick leave benefits for its union-represented employees.


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  General Dynamics (GD) - Awarded USD 736.2mln Navy contract modification to previously awarded contract for the option for the detail design and construction of T-AO 213.


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  Nordson (NDSN) - Q2 EPS 2.26 (exp. 2.11), Q2 revenue USD 650mln (exp. 638.7mln). Exec said backlog entering H2 remains strong at USD 950mln, continues to be heavily weighted toward systems and medical interventional solutions. Order entry has been steady throughout the quarter. Narrows FY23 EPS outlook to USD 8.90-9.30 (exp. 9.02) from 8.75-9.50.


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  HEICO Corporation (HEI) - Q2 EPS 0.76 (exp. 0.73), Q2 revenue USD 687.8mln (exp. 677mln).

23 May 2023 - 09:02- EquitiesData- Source: Newsquawk