US EARLY MORNING: Equities are lower after sentiment was knocked following PMI data from China and Europe; FOMC minutes ahead

US PRE-MARKETS: US equity futures are lower, Treasury yields are lower along the front-end of the curve but unchanged further out, the dollar Index is flat. Crude futures are mixed. Global sentiment has been knocked after China services activity data released overnight, which fell short of expectations, while the trade frictions between China and the West have been exacerbated after the world’s second largest economy slapped export restrictions on some metals used in the manufacture of semiconductors. The tone of final PMI data out of the Eurozone has also been on the soft side, with the aggregated Eurozone metrics seeing the composite index for the month slip into contraction. Traders will note the FOMC meeting minutes due later today, while traders will also keep an ear on OPEC’s energy summit, which will feature commentary from the Saudi and UAE ministers. 

PREVIEW - FOMC MEETING MINUTES (19:00BST/14:00EDT): The Federal Reserve held rates steady in June, as expected, but surprised markets by raising its rate projections for 2023 and beyond. The forecasted rates for 2023 were increased by 50bps, indicating two further 25bps rate rises ahead. The more hawkish forecasts were driven by an improved view of GDP growth, higher inflation expectations, and a lower projected unemployment rate. Despite the upward revisions, the long-term “neutral” rate remained unchanged. Fed Chair Powell acknowledged the progress made, but emphasised that the impact of tightening policy was yet to be fully realized. While most policymakers anticipate further rate hikes, they expect subdued growth to persist. Powell noted signs of improvement in the labour market’s supply and demand balance, although demand still exceeded the available workforce. Inflation remains above the 2% target, but has moderated; Powell cautioned that reducing inflation may require below-trend growth and labour market adjustments. During his Q&A, he made a reference to the decision not to hike rates as a “skip,” hinting at a possible rate increase in July. He emphasised the need for a more moderate pace of tightening. Powell said that a rate cut was unlikely and expressed limited concerns about the banking turmoil’s impact. He discussed potential challenges in commercial real estate and projected a fall in the RRP and reserves during the TGA rebuild. Since the meeting, Chair Powell has reiterated that it would be appropriate to lift rates at least a couple of times (in keeping with the Fed’s forecasts), stating that incoming data will be the influencing factor; he also has said that a majority of Fed officials support a couple of further rate hikes.

RECAP - ISM MANUFACTURING (MON): The headline printed 46.0 in June (exp. 47.0, prev. 46.9), prices paid fell to 41.8 (exp. 44.0, prev. 44.2), while the forward-looking new orders index rose to 45.6 from 42.6. Analysts at Capital Economics said the data indicates a weakening manufacturing sector, and raises concerns about a possible recession. The decline in the index, along with falling production and employment indices, suggests a potential decrease in manufacturing jobs and output. While new orders did improve slightly, it remains historically weak. The survey, however, also suggests that core goods prices may soon start to fall, as supplier deliveries, orders backlogs, and prices paid indicate a trend towards lower inflation.

TODAY’S AGENDA:

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


• 
  EUROPEAN DAY AHEAD: The European morning will see the release of final services and composite PMI data for June, where little changes are expected relative to the flash estimates. Producer prices data for May will garner attention, though it is worth noting that the data is unlikely to change the calculus for the ECB’s July meeting, where a 25bps rate rise in expected. On the supply front, Germany will sell EUR 1.0bln of 2033 Bunds, while the UK will sell GBP 4bln of 2025 debt.


• 
  NORTH AMERICAN DAY AHEAD: FOMC meeting minutes from its June confab, and a speech by NY Fed President Williams are the highlights as traders return from the Independence Day holiday (see above for Fed preview). Factory orders for May, and Durable Goods revisions are due in the premarket. As a reminder, the ISM manufacturing data released Monday saw the headline come in below expectations (a review can be found in the section above). The services ISM is due on Thursday ahead of the June jobs report due on Friday – both events are previewed in our week ahead note, which can be accessed here.


• 
  PREVIEW - FOMC MEETING MINUTES (19:00BST/14:00EDT): The Federal Reserve held rates steady in June, as expected, but surprised markets by raising its rate projections for 2023 and beyond. The forecasted rates for 2023 were increased by 50bps, indicating two further 25bps rate rises ahead. The more hawkish forecasts were driven by an improved view of GDP growth, higher inflation expectations, and a lower projected unemployment rate. Despite the upward revisions, the long-term “neutral” rate remained unchanged. Fed Chair Powell acknowledged the progress made, but emphasised that the impact of tightening policy was yet to be fully realized. While most policymakers anticipate further rate hikes, they expect subdued growth to persist. Powell noted signs of improvement in the labour market’s supply and demand balance, although demand still exceeded the available workforce. Inflation remains above the 2% target, but has moderated; Powell cautioned that reducing inflation may require below-trend growth and labour market adjustments. During his Q&A, he made a reference to the decision not to hike rates as a “skip,” hinting at a possible rate increase in July. He emphasised the need for a more moderate pace of tightening. Powell said that a rate cut was unlikely and expressed limited concerns about the banking turmoil’s impact. He discussed potential challenges in commercial real estate and projected a fall in the RRP and reserves during the TGA rebuild. Since the meeting, Chair Powell has reiterated that it would be appropriate to lift rates at least a couple of times (in keeping with the Fed’s forecasts), stating that incoming data will be the influencing factor; he also has said that a majority of Fed officials support a couple of further rate hikes.


• 
  ENERGY: An OPEC Seminar takes place today, and will feature remarks from Saudi Arabia’s Minister of Energy, as well as the UAE’s Minister of Energy, who will speak on market stability and energy security. Reports from earlier in the week said Saudi Arabia will extend its voluntary output cuts of 1mln BPD through August (traders will be looking for clues over whether this will be extended again beyond August), while Russia will reduce oil exports by 500k in August, and could cut production as well. After the bell, API will report its gauge of weekly energy inventories; this week, the street expects crude stocks to draw down by 1.8mln, distillates are seen building by 0.5mln, while gasoline stocks are expected to ease by 1.1mln.


• 
  RECAP - APAC TRADE: Asian stocks were mostly down as investors digested Chinese economic data and geopolitical tensions. The ASX 200 and Nikkei 225 experienced slight declines, while the Hang Seng and Shanghai Composite were subdued due to trade-related frictions and weaker-than-expected Chinese services PMI data. Caixin's gauge of services activity fell by more than expected in June, printing 53.9 (exp. 56.2) from 57.1. The composite PMI slipped to 52.5 from 55.6. The survey said employment contracted, deflationary pressure mounted, and optimism waned, and although the services sector continued its post-COVID rebound, the recovery is losing steam.


• RECAP - EUROPEAN OPEN:

EQUITY NEWS:

We below recap on US equity news that was released since after Friday’s close.

MATERIALS:

• 
  Rare Earths - China’s restrictions on exporting gallium and germanium metals crucial for semiconductors and electric vehicles have companies scrambling to secure supplies. Concerns have also arisen about potential curbs on rare earth exports, further disrupting global supply chains. Analysts view this as a response to US efforts to limit China’s technological progress. Some fear China could follow with new restrictions on rare earth exports. Chinese officials will meet with major producers of the metals on Thursday to discuss the export restrictions, Reuters reports. The move by China could prompt North American and European governments to establish supply chain alternatives. The industry expects disruption, but semiconductor companies may explore alternative materials if prices rise due to supply shortages, Reuters said, adding that the risk of escalating tension between the US and China remains significant.

TECH:

• 
  Cloud Computing - The Biden administration plans to limit Chinese companies’ access to US cloud-computing services, potentially requiring permission for advanced AI chip-based cloud services to be provided to Chinese customers, WSJ reports, adding to ongoing technology-related tensions between the two nations.


• 
  Big Tech - EU Internal Market Commissioner Breton said that Alphabet’s (GOOGL) Google, Amazon (AMZN), Apple (AAPL), Meta (META) and Microsoft (MSFT) have told the European Commission that they qualify as gatekeepers under new EU tech rules. Samsung and ByteDance also claim to meet the EU thresholds.


• 
  Microsoft (MSFT) - Microsoft is expected to undergo an antitrust investigation by the European Union after discussions to resolve antitrust probe have stalled, Reuters reports. Microsoft recently offered to cut the price of its Office product without its Teams app, but the EU has been seeking a deeper price cut than that MSFT has offered, the report said.


• 
  Apple (AAPL) - Apple lost an appeal in a London court, confirming patent infringement on iPhones and iPads. The patents, claimed by Optis Cellular Technology, are considered essential to 4G technology standards. Apple’s ongoing legal battle with Optis has seen multiple trials and hearings, and the iPhone maker has been granted permission to appeal this ruling as well.


• 
  Fidelity National Information Services (FIS) - Private equity firm GTCR is close to acquiring a majority stake in Fidelity National Information Services’ merchant business in a deal worth USD 15-20bln, Reuters reports. This would help FIS recover from its troubled acquisition of Worldpay in 2019.

COMMUNICATIONS:

• 
  Meta Platforms (META) - Meta’s Twitter service rival, known as Instagram Threads, is set to launch on July 6th, The Verge reports citing an App Store listing. An Android listing also briefly appeared on Google Play, suggesting an imminent release, the website said. Separately, Meta-owned Facebook lost an EU court battle over a German antitrust order related to its data tracking practices. The ruling sets a precedent for regulating Silicon Valley’s use of user data to prevent market dominance. The judgment will have far-reaching effects on the business models of the data economy, the head of Germany’s Federal Cartel Office said.


• 
  Booking Holdings (BKNG) - Booking.com remains in discussions with the European Commission about the Digital Markets Act. Due to the negative effects of COVID-19, the company currently doesn’t meet the criteria for regulation. However, it anticipates meeting the requirements by the end of 2023.

CONSUMER CYCLICAL:

• 
  Alibaba (BABA) - Alibaba is exploring options for its video entertainment assets, including integrating them into Alibaba Pictures Group, as part of a larger restructuring effort aimed at driving growth and creating independent leaders in various business sectors, Bloomberg reports.


• 
  Amazon (AMZN), Rivian (RIVN) - Amazon is introducing custom electric vans from Rivian in Europe, starting with Germany. Over 300 electric delivery vans will be deployed in cities like Munich, Berlin, and Dusseldorf, expanding its existing fleet of thousands of electric vans in Europe.


• 
  Tesla (TSLA) - China PCA says the automaker delivered 93.68k units in June (prev. 77.7k in May), according to prelim data. Separately, Morgan Stanley reiterates Equal Weight rating on Tesla with USD 250 price target after the automaker’s Q2 delivery beat, adding that slow entry of rival EVs suggests Tesla will surpass market expectations for 2023. MS said contrary to expectations, Tesla doesn’t have to give up its share of the electric vehicle market, instead, traditional carmakers are slowly releasing their EVs, and while the overall growth of EVs will be slower, Tesla will still have a bigger piece of the market than anticipated.


• 
  SeaWorld (SEAS) - Chief Transformation Officer Chelle Adams to retire to pursue personal opportunities, effective August 4th.


• 
  BorgWarner (BWA), PHINIA (PHIN) - BorgWarner announced the successful completion of the spin-off of its fuel systems and aftermarket segments into a separate, publicly traded company PHINIA.


• CONSUMER STAPLES:


• 
  Mondelez (MDLZ) - Mondelez’s belVita Breakfast Sandwich biscuits in the US have been recalled due to potential undeclared peanut content. Cross-contact on the manufacturing line may have caused the issue, but no other belVita products or markets are affected.

FINANCIALS:

• 
  Bank of America (BAC), Citigroup (C) - Bank of America and Citi are in talks with the Fed to understand the discrepancies between their own stress test results and those of the central bank, Reuters reports. Unlike its rivals, Bank of America is yet to announce a possible dividend increase.


• 
  Coinbase (COIN) - Coinbase shares surged on Monday as asset managers showed interest in spot bitcoin exchange-traded funds and recognised Coinbase’s potential role in them.


• 
  Bank OZK (OZK) - Raises quarterly dividend by 0.01/shr to 0.36/shr.


• 
  US Banks in the UK - BoE mulls clampdown on foreign bank branches, is looking at plans to force more international banks to set up subsidiaries in the UK, FT reports.

HEALTHCARE:

• 
  AstraZeneca (AZN) - Berenberg said that the recent drop in AstraZeneca’s stock price due to lung cancer data is excessive. The pharma company released positive data about Dato-DXd in lung cancer, but investors were disappointed by the absence of “clinically meaningful” language as well as on some adverse events. Berenberg also notes the pharma’s strong pipeline.


• 
  Pfizer (PFE) - Pfizer has partnered with Samsung Biologics in two deals worth USD 897mln. Samsung will manufacture biosimilar products for Pfizer, including those related to oncology and immunotherapy, in South Korea.


• 
  Protagonist Therapeutics (PTGX), Johnson & Johnson (JNJ) - Protagonist Therapeutics shared positive results from a clinical trial testing JNJ-2113, a treatment for moderate-to-severe plaque psoriasis. The trial met all goals and showed better outcomes compared to a placebo. These results support moving forward to Phase 3 development.


• 
  Amneal Pharmaceuticals (AMRX) - The FDA has rejected Amneal Pharmaceuticals’ drug for Parkinson’s disease due to insufficient safety data regarding one of its ingredients. The decision is a setback for the company’s plans and may delay the drug’s launch until at least the first half of 2024.

INDUSTRIALS:

• 
  KBR (KBR) - KBR settles lawsuit with the US for over USD 140mln over procurement practices in Iraq. KBR denies wrongdoing but agrees to pay damages and attorney’s fees to resolve the case.

05 Jul 2023 - 09:30- Research Sheet- Source: Newsquawk