US EQUITY OPEN: Indices open in the red; Energy leads losses amid lower oil prices
Analysis details (14:57)
SNAPSHOT: US equities have opened in the red, following the leads in Europe and Asia, after risk-off themes developed overnight; China announced a security law that could allow it to bypass lawmakers in Hong Kong. In the pre-market, some positive commentary from the NIH’s Fauci saw futures pare losses, though sentiment still remains fragile. Most sectors open in the red, although Real Estate is positive while defensives, Staples and Utilities, are flat; as is Technology. Energy underperforms amid a fall in oil prices, and Financials are also lower. Treasuries are bull-flattening, the dollar is up for a second day, putting pressure on EMFX and risk sensitive currencies, and even oil is taking its cues from the risk complex today despite bullish inventory data over the last two weeks. The ECB minutes saw little new information; reiterated its pledge to increase the size and adjust the composition of its PEPP if required. Ahead, the NY Fed will announce next week's asset purchase schedule at 1400 EDT/1900 BST (preview); we expect liquidity conditions to tail-off in the afternoon as US and UK players eye a long-weekend.
NOTICE: Due to the upcoming UK bank holiday and US Memorial Day holiday on Monday 25th May, the desk will be running a reduced service alongside the subsequent market closures. See full details of service schedule and market closures here.
NVIDIA: Nvidia (NVDA) overall saw a solid report, beating on top and bottom line, authorizing a USD 7.24bln share repurchase programme while maintaining its dividend commitment. Data Center revenue also topped estimates. Its gaming revenue also beat, although was still down Q/Q & Y/Y; perhaps disappointing some given the large increase in other gaming names. GM was slightly lower than expected. NVDA saw choppy trade after its release but trade higher as the market recovers from overnight lows. Overall a solid report, although analysts suggest given the run NVDA has seen recently perhaps the figures were not enough to continue the trend further. UBS raised its PT on the name to USD 400 from USD 330 noting how the how the relationship of its GPU and CPU performance overall is becoming decoupled, which the desk suggests “NVDA can bring more flexible computing solutions to customers on a massive scale”.
EARNINGS: Deere (DE) beat on EPS and revenue but it expects global equipment sales to fall 30-40% this year. Foot Locker (FL) missed on EPS and revenue while SSS also fared worse and it temporarily suspended its dividend. Alibaba (BABA) beat on EPS and revenue driven by an increase in online purchases during lockdown, while MAU’s rose to 846mln and annual active users rose to 726mln. BABA is keeping a close eye on the US Senator Bill on Chinese Co.’s. Hewlett Packard (HPE) missed on EPS and revenue; announced a cost cutting plan to save USD 1bln by 2022. Intuit (INTU) missed on EPS and revenue after the IRS tax filing deadline hampered its business as it caused millions of filings to shift to later in the season.
STOCK SPECIFICS: US doctors and others are calling for the data that convinced health regulators to authorise emergency use of Gilead’s (GILD) remdesivir to be released. Amazon (AMZN) plans to hire 50k workers in India. IBM (IBM) is reportedly set to cut an unspecified number of jobs, the first reduction of workers under its new CEO. Lululemon (LULU) announced it has reopened over 150 retail locations and plans to open 200 more over the next two weeks while stores will have new safety/cleansing guidelines. BestBuy (BBY) announced it plans to reopen roughly 600 stores to the public by June 13th. KKR (KKR) took a stake in US Foods (USFD).
ES LEVELS: 3,135 (78.6% Feb hi-Mar lo), 2,998 (200dma), 2,976.25 (May hi), 2,950-53 (volume profile), 2,947-50 (FY 20 and FY 21 exp EPS and p/e implied valuations), 2,940 (5dma), 2,930 (61.8% Feb hi-Mar lo), 2,917-2,923, 2,900-10 (volume profile), 2,900 (8dma), 2,894 (13dma), 2,850 (this week lo).
FUND FLOWS: Bank of America’s weekly fund flow analysis of EPFR data reveals that investor cash stockpiling see during the COVID outbreak has peaked, with cash focussed funds seeing outflows of USD 5.9bln in the week, the first outflows since mid-February; equity funds saw outflows of USD 7.6bln, BofA says, the first decline in 12-weeks, and bond funds saw the largest inflows in 13-weeks, while gold funds saw inflows of USD 3.5bln, a record.
GROWTH, MOMENTUM STILL PREFERRED: US equities have this week printed fresh May highs earlier in the week, and then slumped in the latter part as US/China risk sentiment deteriorated. Nomura's quants think the improvement in sentiment will not take a breather, although points out that technically foreseeable risk-off phases tend to not last too long: "Bearish investors that had been counting on a stock market double dip already appear to be backing out of the trades they had made on that assumption, and it seems that few investors are attempting to chase the market down," the bank says, "it may make sense for now to buy whatever dips come along and wait to see what happens." Nomura says that CTAs seem reticent to tweak positions much, and NDX futures are the only US equity futures where CTAs have already gone back to accumulating longs. "Given that the NASDAQ 100 is the only US stock market index in a clear uptrend, we soon expect to see CTAs plainly building up their net long position again, perhaps even next week although possibly not until 5 June." Growth and momentum appear to be the preferred strategies, the quants say, given that 10-year yields are beneath what it calls the 'trigger line' of 0.84% and US economic surprises are not yet improving, investors seem to be sticking with momentum for a lack of better alternatives. Nomura sees global macro hedge funds actively staking out new positions, premised on a main scenario in which the US-China stand-off intensifies. "This leaves hedge funds fairly neutrally positioned with regard to US-China risk; a flare-up in the stand-off still stands as a tail risk, however, and should this risk materialise, these hedge funds could end up taking a punch that is difficult to roll with." Meanwhile, CTA exposure to China-related equity futures (total for China, Hong Kong, and Taiwan) is essentially flat, Nomura says, and it sees no increase in technically driven downside trades. "However, if we look at the relative performance of cyclicals over defensives in cash equity markets, we find that the pick-up in the performance of cyclicals has been weak in Asia, and what this suggests to us that that the market thinks the US economy will recover more quickly than the economies of Asia."
CHINA NATIONAL SECURITY LAW: The security law, which weighed on sentiment, could allow China to bypass lawmakers in Hong Kong thus still having some control of the country which goes against the “one country, two systems” principle, which has in the past led to widespread protests. The law has also faced criticism from the US where President Trump stated the US would have a very strong reaction, while the Senate introduced a bill that would sanction Chinese officials and entities who enforce the new national security laws.
22 May 2020 - 14:57- Research Sheet- Source: Newsquawk
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