US EARLY MORNING: US equity futures are around flat ahead of ISM data, holiday closures

US PRE-MARKETS: US equity futures are mixed, though not too far off neutral; Treasury yields are higher, with the short-end underperforming as the curve continues to bear-flatten. The dollar Index is gaining. Asia shares were generally higher as the BoJ Tankan survey showed a turnaround, while the China Caixin manufacturing data eased but remained in expansion (reviews of both are below). The European day started slightly better than flat; final June manufacturing PMI data showed French Manufacturing PMI revised up to 46.0 from the flash 45.5; the German was revised lower to 40.6 from 41.0; the aggregated Eurozone release saw the headline revised down to 43.4 from 43.6. There has been a thin feel to trading, with shortened hours today on account of the Independence Day holiday on Tuesday. Although the week starts off on a subdued note, there are still key events to note this week: Later today, the manufacturing ISM data will be released, where little change is expected to the headline (see below), Fed minutes are due midweek, before the jobs data for June on Friday. 

WHAT’S NEXT FOR GLOBAL MACRO: Morgan Stanley says that higher interest rates and slow economic growth will increase borrowing costs for lower-quality borrowers, potentially leading to debt management challenges. Higher-quality borrowers are expected to fare better. Refinancing needs may result in adverse credit outcomes. Investment-grade credit may generate positive returns, while high-yield and leveraged loans face modest widening and negative excess returns. MS has also recently reiterated its bearish view for US stocks, arguing that headwinds will outweigh tailwinds, and it sees risks of a near-term drawdown. The bank cites four main reasons: 1) Earnings Forecast: MS has a below-consensus forecast for earnings in 2023, with a base case estimate of USD 185 EPS for the S&P 500. This is lower than the bottom-up consensus estimate of USD 220 and other forecasts in the range of USD 210-215. MS anticipates deteriorating pricing and top-line disappointment to contribute to earnings misses. 2) Liquidity Deterioration: MS says that the liquidity picture is deteriorating due to record levels of Treasury issuance and Quantitative Tightening. The contraction of bank reserves by USD 500-800bln over the next six months is expected to negatively impact equity valuations. 3) Fiscal Support Peak: Fiscal support has been higher than most investors appreciate over the last year, but it is expected to peak and reverse in the coming month, potentially creating a 6ppts headwind to nominal GDP over the next 12 months. 4) Technicals: MS says there is a poor technical picture with recent breadth improvement failing, adding that if its view on earnings is incorrect, breadth should be improving. MS sees the S&P 500 index at 3,900 for Q4 2023 and 4,200 for by Q2 2024, and adds that the equal weighted S&P 500 is expected to outperform the market cap weighted S&P 500, and value stocks may experience relative outperformance compared to growth stocks.

GS RULE OF 10 SCREEN: Goldman Sachs reminds us that YTD stock performance is being driven by a small group of stocks. The seven largest tech stocks have gained 58% this year, while the remaining 493 stocks have only gained 5%. Although this narrow market rally is significant, it's not uncommon for a few top-performing stocks to dominate yearly returns, the bank says, noting that typically, the top 10 contributors typically make up 32% of the S&P 500 return in an average year since 1995. Excluding these top contributors, the S&P 500 would have still delivered an 8% average annual return since 1990. In the current year, the top 10 contributors account for 12 percentage points of the S&P 500's 15% return. Goldman has updated its ‘Rule of 10’ stock screen, which identifies stocks with actual and projected annual sales growth exceeding 10% between 2021 and 2025. The stocks with the highest expected sales compound annual growth rate for the period from 2022 to 2025, based on consensus estimates, are Enphase Energy (ENPH), Tesla (TSLA), SolarEdge Technologies (SEDG), Palo Alto Networks (PANW), and ServiceNow (NOW). Additionally, Goldman Sachs presents a similar screen based on net income growth, and says there are eight stocks that appear in both screens: ServiceNow NOW, Paycom Software (PAYC), Fortinet (FTNT), Insulet (PODD), Chipotle (CMG), Intuit (INTU), Cadence Design (CDNS), and Aptiv (APTV).

NOTE: Early closures could impact liquidity conditions ahead of the July 4th Independence Day market holiday; the Newsquawk desk schedule can be accessed here. 

TODAY’S AGENDA:

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  Early closures could impact liquidity conditions ahead of the July 4th Independence Day market holiday; the Newsquawk desk schedule can be accessed here. 
  


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


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  EUROPEAN DATA: Final manufacturing PMI data for June is expected to be unrevised for the Eurozone, Germany, France and the UK. Germany will sell EUR 6bln of 6-month and 12-month T-Bills; France will sell EUR 5.2-6.4bln of 3-, 6- and 12-month T-Bills, while the UK will conduct a Short-term Gilt Auction.


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  US DATA: Early closures could impact liquidity conditions ahead of the July 4th Independence Day market holiday; the Newsquawk desk schedule can be accessed here. Despite the thin market conditions, and likelihood that many traders will be away today, there is key US data. The highlight is the ISM manufacturing gauge for June, which is expected to tick up a touch (see below for preview); the S&P Global final manufacturing PMI for June will be released 15 minutes before the ISM, providing a convenient preview. Elsewhere, May’s construction spending data is see rising 0.5% M/M, but analysts will be cognizant of the upside surprises in many housing reports of late.


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  PREVIEW – ISM MANUFACTURING (15:00BST/10:00EDT): The manufacturing gauge is expected to rise to 47.0 in June from the 46.9 level in May. However, looking at the S&P Global PMI series for a comparison, manufacturing companies experienced a contraction in production in the month, with output declining at the steepest rate since January. New orders for manufacturers also saw a sharp drop, reflecting weak customer confidence and destocking by clients, S&P said. The outlook for manufacturers is clouded by concerns over inflation and lower sales, reflected in confidence falling to a six- month low within the S&P PMI data.


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  WEEK AHEAD: Highlights include FOMC Minutes, US ISMs, RBA, BoJ Tankan, US and Canada jobs reports; our week ahead preview can be accessed here.


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  REVIEW - BOJ TANKAN: Japan BoJ Tankan Large Manufacturing Index rises to 5.0 in Q2 (exp. 3.0, prev. 1.0). The latest Tankan survey reveals a positive turnaround in the manufacturing sector, with large manufacturers and non-manufacturers experiencing improved conditions. Business conditions across all industries also saw an increase. Despite this, Capital Economics says the outlook remains conservative, aligning with subdued data from April and May. Capital spending projections for large enterprises in FY2023 have been revised upwards, but it still anticipates a more modest increase in business investment. Inflation, excluding fresh food and energy, is expected to continue falling in the coming months.


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  REVIEW - CHINA CAIXIN MANUFACTURING PMI: China's Caixin Manufacturing PMI eased to 50.5 in June, according to the final data (exp. 50.2, prev. 50.9). The report highlights that sluggish market conditions, including an entrenched property downturn, high youth unemployment, and deflationary pressures, have made it challenging for China to sustain the post-COVID recovery experienced earlier this year. Employment in the manufacturing sector fell for the fourth consecutive month, indicating a cautious approach by factory owners due to muted sales growth. Additionally, input costs decreased sharply, putting downward pressure on prices. New export orders showed little change, reflecting a weaker global economic climate that dampened demand for consumer and investment goods. However, there was an increase in demand for intermediate goods.


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  REVIEW - SWISS CPI: Swiss CPI rose +0.1% M/M in June (exp. 0.2%, prev. 0.3%), and eased to 1.7% Y/Y in June (exp. 1.8%, prev. 2.2%), resulting in modest CHF weakness. The slowdown is in sync with the SNB's recent projections for Q3 2023. Analysts are more interested in when it begins to tick up towards Q4 2023 and Q1 2024 as the SNB expects second-round effects to start impacting around then.


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  APAC RECAP (OVERNIGHT): Asian-Pacific stocks started the month on a positive note, buoyed by Wall Street's rally and encouraging economic data. The ASX 200 rose, supported by gains in commodity sectors and a surge in Building Approvals. The Nikkei 225 was boosted by the Bank of Japan's Tankan survey, showing improved sentiment among large manufacturers (see below). The Hang Seng and Shanghai Composite followed suit, with the Chinese Caixin Manufacturing PMI surpassing expectations for the second month in a row (see below). Treasury Secretary Yellen's upcoming visit to China was confirmed, although no major breakthroughs were anticipated. China's Defence Minister and the Russian Navy Commander-in-Chief met in Beijing; expressed their desire to improve communication between the two countries at all levels, and also hope to arrange regular joint exercises and patrols.


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  WALL ST RECAP (FRIDAY): Stocks rallied on the last day of June, with the Nasdaq outperforming. The rally was driven by cooler-than-expected Core PCE data and a cooling in housing prices, although goods prices accelerated. UoM sentiment was revised higher, but inflation expectations remained unchanged. Treasuries saw a bull flattening, while crude prices rose due to soft PCE data and a weaker dollar. Nike tumbled after a weak earnings report, while Apple became the first company with a market cap above USD 3 trillion.

EQUITY NEWS:

COMMUNICATIONS:

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  Walt Disney (DIS) - Disney's “Indiana Jones and the Dial of Destiny” tops with weekend box office. Deadline said that even though the movie hit the bottom rung of its tracking projection, “there’s no question this is a disastrous result for the finale to a historically beloved franchise film.” Separately, a lawsuit alleges that Disney has underpaid women by an average of 2% compared to men in equivalent positions, resulting in over USD 150mln in lost wages since 2015, the Guardian reports.


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  Netflix (NFLX) - Netflix plans to develop more targeted advertising formats to attract marketers and increase revenue for its ad-supported service, FT reports. These formats may include sequential ads that are related to the content being watched, preventing viewers from seeing the same ad repeatedly.


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  Spotify (SPOT) - Spotify is exploring the addition of full-length music videos to its app to better compete with YouTube and TikTok, Bloomberg reports. The company has started discussions with partners about this new feature.


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  Activision (ATVI), Microsoft (MSFT) - Barron's article is cautious on Activision; says its Microsoft saga is almost over, and it may be time to sell the stock. Barron's says Microsoft's acquisition of the company is still uncertain, and if the deal doesn't go through, Activision's stock could be negatively impacted.


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  AMC Entertainment (AMC) - Citi puts AMC on 'negative catalyst watch' due to upcoming conversion ruling. Citi believes that a court ruling in favour of AMC Entertainment will allow the company to convert its APE units into common units, causing the value of the two units to become similar. This convergence is expected to put downward pressure on AMC's shares, which currently trade at a higher price than the APE units. Citi has a negative outlook on AMC's stock and a target price of USD 1.65.

TECH:

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  Apple (AAPL) - Apple has been forced to reduce production forecasts for its mixed-reality Vision Pro headset due to complex design and production difficulties, FT reports. The headset won't be available until early next year, mainly due to supply chain issues rather than app development. Plans for a cheaper version of the headset have also been delayed.


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  Nokia (NOK), Apple (AAPL) - Nokia has signed a new long-term patent license agreement with Apple, covering 5G and other technologies. The agreement will generate revenue for Nokia starting in January 2024.


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  Amazon (AMZN), Alphabet (GOOG) - Amazon is aiming to attract more advertising dollars from marketers by promoting the enhanced features of its automated advertising platform, which can deliver targeted ads on Amazon's platforms and other websites, Business Insider reports.

FINANCIALS:

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  Bank Dividends - BNY Mellon (BK) to raise dividend from 0.37/shr to 0.42/shr. Capital One (COF) announced Stress Capital Buffer Requirement of 4.8%. Citi (C) announced Stress Capital Buffer of 4.3%, to raise dividend +2c to 0.53/shr. Citizens Financial (CFG) announced preliminary Stress Capital Buffer of 4.0%. Goldman (GS) announced Stress Capital Buffer of 5.5%, to raise dividend +25c to USD 2.75/shr. JPMorgan (JPM) raises dividend +5c to USD 1.05/shr. Morgan Stanley (MS) lifts dividend from 0.775/shr to 0.85/shr, and reauthorised USD 20bln stock repurchases. State Street (STT) announced stress capital buffer at 2.5%, will raise dividend +10% to 0.69/shr. Truist (TFC) announced stress capital buffer requirement is 2.9%, to maintain current quarterly dividend at USD 0.52/shr. US Bancorp (USB) announced preliminary stress capital buffer of 2.5%; said stock repurchases remain suspended. Wells Fargo (WFC) announced stress capital buffer falls to 2.9%, to increase dividend to 0.35/shr from 0.30/shr.


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  Goldman Sachs (GS), Apple (AAPL), American Express (AXP) - Goldman Sachs is in talks with American Express to end its partnership with Apple, including taking over the Apple credit card, WSJ reports. The move would effectively end Goldman's consumer-lending business. Talks are ongoing, and a deal is not yet imminent.

INDUSTRIALS:

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  Boeing (BA) - Boeing awarded USD 793.4mln Army contract for aircraft.


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  Raytheon Technologies (RTX) - Raytheon awarded USD 5.5bln Air Force contract modification for the F117 Engine Sustainment Support contract.


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  Rockwell Automation (ROK) - Positive mention in Barron's; says Rockwell is a leader in the automation and digital transformation of manufacturing processes. As industrial activity recovers and manufacturing returns to the US, Rockwell's growth is expected to continue. Additionally, as investors recognise Rockwell as a tech company, its valuation is likely to increase, the newspaper writes.


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  United Continental Holdings (UAL) - United Airlines will make changes, such as reducing flights at its Newark hub, to prevent future disruptions like the recent week-long travel chaos caused by storms, WSJ reports. The disruptions led to flight cancellations and logistical issues across United's network.

CONSUMER:

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  Tesla (TSLA) - EV charger manufacturers and operators are opposing Texas' plan to mandate Tesla technology in charging stations, deeming it premature, Reuters reports. Texas wants companies to include both Tesla's North American Charging Standard (NACS) and the rival Combined Charging Standard (CCS) to receive state funding for highway electrification.


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  Tesla (TSLA) - Tesla produced 479,700 vehicles in Q2, and delivered 466,140 (exp. 445,000). Analysts were looking at the data in the context of Tesla recent price cuts to boost demand for its EVs. Citi sees positive reaction for Tesla shares after the company beats Q2 delivery expectations. The strong deliveries put Tesla on track for over 1.8mln units this year, Citi said, but pricing pressure in Q3 remains a concern. Citi has a Neutral rating with a USD 215 price target.


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  Li Auto (LI), XPeng (XPEV), and NIO (NIO) - The Chinese EV trio delivered 51,902 vehicles in June, a record for any month and up from 41,280 delivered in June 2022, Barron's reports, adding that the data showed that EV demand in China has been growing.


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  Nike (NKE) - Morgan Stanley lowers Nike price target to USD 127/shr from USD 130/shr, maintains Overweight rating after Q4 results. The bank argues that the ongoing debate over NKE's wholesale strategy may deter cautious buyers in the short term.


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  Lucid Group (LCID) - Citi resumes coverage with a Neutral rating, and an USD 8 Price Target. Citi sees potential in Lucid's advanced technology and cost advantage. The focus is now on demand for the Lucid Air, gross margin improvement, and the release of the Gravity SUV. Citi believes that optimism about Lucid's stock requires confidence in the second-half volume increase and margin growth.


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  Tyson Foods (TSN) - Tyson Foods will reintroduce certain antibiotics to its chicken supply chain, specifically ionophores that are not important for human health, WSJ reports. The move is to control a poultry disease and will result in the removal of the “No Antibiotics Ever” label from affected products.


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  Walmart (WMT) - Executive Vice President John Furner sold 4,375 shares at USD 154.73/shr.

HEALTHCARE:

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  Abbvie (ABBV) - Organon and Samsung Bioepis have launched a cheaper version of AbbVie's arthritis drug Humira called Hadlima, priced at USD 1,038/month, an 85% discount compared to Humira's current price, Reuters reports.


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  Biogen (BIIB) - Biogen presented new data on spinal muscular atrophy treatment SPINRAZA. The data showed improvements in motor function for most participants, and no new safety concerns were identified.

REAL ESTATE:

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  REITs - Positive mention in Barron's; says bargains are abound in the Commercial Real Estate sector; a steep slide in commercial real estate has put the sector on sale. Barron's says the broader real estate investment trust (REIT) sector is not as troubled, and there may be some bargains to be found in the market. Article mentions AvalonBay Communities (AVB), Cousins Properties (CUZ), Digital Realty Trust (DLR), Equinix (EQIX), Equity Residential (EQR), First Industrial Realty First (FR), Healthpeak Properties (PEAK), Highwoods Properties (HIW), Kimco Realty (KIM), Simon Property Group (SPG).

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