Closing Stock Market SummaryThe stock market closed out this quarterly options expiration day on a downbeat note, but losses were still relatively slim when considering the big move up recently. The major indices spent most of the session oscillating around their flat lines before finding some downside momentum in the afternoon trade. Ultimately, they settled near their lows of the day. The S&P 500 for its part was able to maintain a posture above 4,400 on a closing basis.
Treasuries also settled with losses despite the preliminary University of Michigan Consumer Sentiment Index for June revealing a sharp drop in year-ahead inflation expectations to 3.3% from 4.2% -- the lowest since March 2021. The 2-yr note yield rose seven basis points to 4.71%. The 10-yr note yield rose four basis points to 3.77%. The move up in yields acted as a headwind for mega caps and other growth stocks.
Mega caps had an outsized influence on index losses, but many other stocks also contributed. The Vanguard Mega Cap Growth ETF (MGK) fell 0.6% and the market-cap weighted S&P 500 fell 0.4%.
Decliners led advancers by a roughly 5-to-3 margin at both the NYSE and at the Nasdaq.
Pleasing earnings and guidance from Adobe (ADBE 495.18, +4.27, +0.9%), along with Morgan Stanley naming NVIDIA (NVDA 426.92, +0.39, +0.1%) its top pick in AI and raising its price target to $500 from $450, continued to drive an AI buzz. That buzz, however, was not enough to offset underlying weakness in the market, which still managed to record its fifth straight winning week.
Only three of the 11 S&P 500 sectors logged gains. Utilities (+0.5%), materials (+0.1%), and consumer staples (+0.1%) led the pack. Meanwhile, lagging mega cap components drove the communication services (-1.0%) and information technology (-0.8%) sectors to the bottom of the pack.
Small cap stocks lagged their larger peers today after outperforming so far this month. The Russell 2000 fell 0.7% today, but it's still up 7.2% for the month.
Trading volume today was extremely heavy due to the options expiration and the S&P quarterly rebalancing.
As a reminder, bond and equity markets are closed on Monday in observance of Juneteenth.
- Nasdaq Composite: +30.8% YTD
- S&P 500: +14.9% YTD
- Russell 2000: +6.5% YTD
- S&P Midcap 400: +6.2% YTD
- Dow Jones Industrial Average: +3.5% YTD
Today's economic data was limited to the preliminary University of Michigan Consumer Sentiment Index for June, which checked in at 63.9 (consensus 60.2) versus the final reading of 59.2 for May. In the same period a year ago, the index stood at 50.0.
- The key takeaway from the report is that an easing in year-ahead inflation expectations underpinned a pickup in consumer sentiment; however, the report notes that a majority of consumers still expect difficult times for the economy over the next year.
Looking ahead to Tuesday, economic data is limited to May Housing Starts (prior 1.401 million) and Building Permits (prior 1.416 million) at 8:30 a.m. ET.
France and Germany spar over future of EU budget rules
Gentiloni calls on EU capitals to build bridges and not ‘dig trenches’ on revamped fiscal compact
Germany and France have clashed over how strict the EU’s revamped budget rules should be, as the member states struggle to bridge their differences over the future of the region’s fiscal framework.
Bruno Le Maire, France’s finance minister, said the imposition of automatic, uniform debt-reduction rules would be an economic and political error as he arrived for talks between finance ministers in Luxembourg on Friday.
Shortly afterwards, his German counterpart Christian Lindner brushed those concerns aside. Lindner reiterated his demands for heavily indebted countries to cut public debt by 1 percentage point of their gross domestic product a year. He told reporters outside the Ecofin meeting that he wanted safeguards that “guarantee” falls in indebtedness.
The public differences underscore the depth of the divide over reform of the EU’s Stability and Growth Pact, which Brussels wants to overhaul in a bid to better tailor the rules to individual member states’ economic circumstances. Paolo Gentiloni, the EU’s economics commissioner, on Thursday pleaded with member states to build bridges rather than “dig trenches”.
“We’ve already tried to impose automatic and uniform rules in the past: it leads to recession,” Le Maire said to reporters. Such a regime would hurt European production and growth, he added, while ignoring the sovereignty of individual member states.
The European Commission this spring tabled draft legislation that would rewrite aspects of the EU’s fiscal rules in the hope of making them easier to enforce and to offer better incentives for investments by member states. Under the reforms, the commission would strike individual debt-reduction plans with each EU capital, granting extra time to improve their public finances in return for reform and investment pledges.
Berlin is wary of giving the commission too much discretion in bilateral negotiations, however. Commission officials share France’s scepticism about Berlin’s approach — which would also force less heavily indebted countries to lower their debt-to-GDP ratios by 0.5 percentage points a year — as too harsh.
Lindner insisted on Friday his demands were not “overambitious”, adding that automatic rules were “needed”. He has been seeking to corral support from other hawkish member states for a stricter regime than the one proposed by the commission, although his allies have not coalesced around Berlin’s specific debt-reduction rules.
“Germany is not alone in its concerns and ideas,” Lindner said. Lindner also rejected calls from Brussels for extra resources to shore up the EU’s long-term budget.
Work on the reforms has been progressing slowly under the Swedish presidency, which is preparing to hand over the six-month rotating post to Spain.
Prime Minister Pedro Sánchez’s decision to call early elections in July has cast further uncertainty over the prospects for the reforms, as well as the goal of landing an agreed position between member states by the end of the year.
Enforcement of the Stability and Growth Pact has been suspended since early in the Covid-19 crisis, but it is due to be reimposed at the start of 2024.
China’s Stimulus Pivot Is Prompted by Fears Slowing Growth Could Worsen
Senior leaders, taking economic pulse in recent weeks, decide they can’t risk waiting for growth to resume
A few months ago, Chinese leaders were basking in signs that the world’s second-largest economy was rebounding sharply after three years of tough Covid-19 controls.
By April and May, however, disturbing reports were trickling in. Teams sent to conduct surveys of local-government finances returned to Beijing with news that officials were struggling to repay debts, people familiar with the matter said. Government meetings with regional business leaders revealed that confidence remained weak, even after the unexpected lifting of Covid restrictions late last year.
Official data painted an increasingly bleak picture of an economy losing steam. The weakened property market showed signs of renewed stress, and youth unemployment hit a record high. Many people in China were saying privately that they no longer believed Beijing cared about promoting economic growth.
All those concerns helped prompt a rethink in Beijing during the past few weeks, people familiar with the discussions said. Senior officials abruptly committed to do more to stimulate growth, even though doing so risks encouraging speculative behavior in the economy that Chinese leaders have been at pains to eliminate.
The country’s central bank cut three policy rates this week to help spur lending. In addition, The Wall Street Journal reported this week, the central government is considering issuing special treasury bonds worth roughly 1 trillion yuan, equivalent to $140 billion, to help fund new infrastructure—a tried-and-true tactic to stimulate growth that economists say is likely to yield diminishing returns while increasing debt.
Authorities are also considering looser rules to encourage people to buy more than one residence, despite repeated warnings by leaders in recent years that “houses are for living in, not for speculation.”
On Friday, Chinese Premier Li Qiang said in a State Council meeting that the government is studying a package of policy measures to promote sustained economic growth, state TV reported. “The external environment is becoming more complex and severe, and the slowdown in global trade and investment will directly affect the recovery process of our country’s economy,” Li said.
Economists say Beijing had little choice but to act, as more ordinary Chinese appear to be losing faith in the economy.
College students who are graduating this summer into a weak job market have been posting viral pictures online showing themselves throwing their degree certificates into garbage bins, or lying face down on the ground, to express their feelings of dejection.
If confidence isn’t restored, some analysts say, it could lock the economy in a downward spiral and render further monetary easing and other stimulus ineffective.
“The real barrier to a growth recovery is a lack of confidence,” wrote Ting Lu, chief China economist from Nomura in a note this week. He added that China’s situation is becoming increasingly similar to Japan in the 1990s, when weakened confidence after a real estate bust contributed to decades of weak growth and declining prices.
Nomura lowered its forecasts for gross-domestic-product growth in China to 5.1% and 3.9% in 2023 and 2024, respectively, from 5.5% and 4.2% previously.
Some investors have compared Beijing’s pivot to stimulus to its abrupt decision last year to lift its zero-Covid policy. Beijing had repeatedly said it wouldn’t abandon the policy, which included lockdowns and travel restrictions, even as other countries had relaxed their rules.
But Chinese leaders eventually decided the economic costs were too high, especially after protests against the policy broke out in some cities.
Economists from Morgan Stanley believe Beijing’s stimulus efforts will help China’s growth pick up again in the third quarter, and resume what it calls an “organic consumption recovery.” China’s rising dominance in the renewable-energy supply chain will help further boost growth, they added.
Others think Beijing will need to go further, with steps such as offering cash handouts to households.
“In order to restore confidence, the government needs to do more,” said Keyu Jin, an associate professor of economics at the London School of Economics and author of the book “The New China Playbook.”
“The size and the scale and efficiency of the stimulus has been lacking,” she added.
One challenge for Beijing is that it doesn’t have a lot of good options beyond throwing more money into big-ticket projects like bridges and subways, and promoting real-estate sales.
Regulatory crackdowns on China’s technology and education sectors in recent years have made many entrepreneurs wary about launching new investments. Many prospective home buyers fear it could take years before property prices rise again in a sustained way, due to an oversupply of vacant units. Some consumers are unwilling to burn cash in part because China has never developed a sufficient social safety net to make them more confident about spending.
In February, hundreds of senior citizens protested in the central city of Wuhan after the government cut back on medical insurance programs amid mounting debt pressures.
Zhao Zhao, a Beijing homemaker with two children, said her husband, who works at a state-owned company, hasn’t received a raise in the past three years, while education expenses for her children have kept rising. As a result, she is cautious about spending.
“The economy is not doing as well as people anticipated,” said Zhao. “I instinctively want to save more until things get better.”
Chu Ding, who has a restaurant in the central city of Wuhan, said she isn’t very optimistic about the future. Dine-in and takeaway orders at her restaurant picked up this February, but the recovery plateaued soon after, with daily turnover slightly less than before the pandemic.
Even with Covid restrictions now gone, “it takes time for the economy to recover, as well as business and consumer confidence,” she said.
As recently as a few months ago, economists were marking up their forecasts for growth this year. Chinese consumers, thrilled to be released from draconian Covid-19 lockdowns, were filling up restaurants and swarming domestic tourist sites.
The initial excitement proved to be short-lived. Retail sales growth slowed to 12.7% in May from a year earlier, from 18.4% in April. New orders at factories contracted in April and May.
An official gauge of consumer confidence, at 94.7 in March, is slightly better than its record low of 85.5 last November. But confidence is still depressed compared with where it was in March 2019, when it hit 124.1.
Deterred by uncertain economic conditions, more young people are holding off on having children. Last year, only 6.83 million couples in China married, the lowest since records began in 1986.
Much of the weak sentiment reflects the fact that many households and companies are deeply indebted, and need to repair their balance sheets before making new investments or spending freely.
Urban disposable income grew by around 8% each year between 2015 and 2019. It then slowed to around 6% between 2020 and 2022, with lower-income groups suffering the biggest slowdowns, according to research by Bank of China International.
“People are taking note that there is not only no additional new support, their benefits have been reduced,” said Houze Song, a research fellow at the Paulson Institute.
In addition, the perception that Chinese leaders are de-emphasizing high growth targets in pursuit of other priorities such as self-sufficiency and technological advances has dampened confidence and could alter people’s behavior for years to come, he added.
Carbon trading: a slow burn for investors
But is this asset class good for the environment or just speculation?
If you’re an investor in the carbon market, are you helping the planet? Or are you just a ruthless speculator?
Since 2021, it’s been possible for UK retail investors to buy exchange traded funds that track the price of carbon in the EU’s emissions trading system. By requiring polluters to hold an emissions allowance (EUA) to emit a tonne of carbon dioxide, the idea is that as the price rises, companies will be incentivised to cut emissions, for example by investing more in renewable energy. Companies that don’t need their permits — ideally because they are emitting less — are free to sell them on the open market.
There are two main products available to UK-based retail investors: the WisdomTree Carbon ETC and the SparkChange Physical Carbon EUA ETC. (A third, also from WisdomTree, was set up in April this year and tracks the much smaller carbon market in California.)
The investment case for buying a fund linked to the price of carbon is that it is expected to go up. The EU plans to release fewer EUAs in the coming years with the intention of raising the price to the point where it affects capital expenditure decisions by power companies and other polluters — and cutting the number of free allowances it has handed out to placate industry. It also plans to extend the scheme to cover more sectors. At the moment, it mainly applies to power companies and energy-intensive industries.
Having hit €100 in February — a price that could focus the mind on changing behaviour — the price is now at €95 after a steep climb in the past two weeks. Performance of the exchange traded commodities (ETCs) was muted in the 12 months to early June, according to Morningstar data. At 4 to 5 per cent, this significantly underperforms the major stock markets.
Nonetheless, analysts predict the price will rise well beyond its present levels in the coming years. By 2030, they expect it will hit €144 on average, according to a poll by Carbon Pulse, though they forecast only €102 by 2025 — not far off the level reached in February this year.
Volatility is high — a SparkChange fund fact sheet shows that while EUA prices rose by 28.5 per cent in 2020, for example, volatility was more than 51 per cent. The previous year, volatility was still 41 per cent but the rise in price was just 1 per cent. That compares with volatility levels for equity indices that tend to be in the mid-teens.
The price of EUAs is closely tied to the gas price, which this month saw a huge rise of more than 100 per cent, leading to a corresponding surge in carbon prices from €78 to €95. Mark Lewis, head of climate research at Andurand Capital Management, a hedge fund, says this “has been one of the most volatile periods we’ve seen since last summer”.
For some wealth managers, these swings take the products off the table for retail investors. “These products are kind of speculative, we don’t really know what will happen with them, and they’re new,” says Peter Sleep, a senior portfolio manager at 7IM.
But is either of these ETCs a sustainable investment?
SparkChange argues that as a physically-backed fund, its product has a greater environmental impact than a futures-based product, because the fund actually holds the EUA, taking it off the market and restricting supply for polluters. Handelsbanken, for example, holds the ETC in its sustainable portfolio for investors on these grounds.
The case for the sustainability of the WisdomTree ETC is a bit different. The fact sheet focuses on the potential for returns linked to the case for carbon increasing in price, saying that the fund is “designed to provide investors with a total return exposure to carbon futures contracts”.
Where it can contribute sustainably is by introducing more liquidity into the market, WisdomTree argues: a more liquid market will in theory lead to better, more efficient prices. “The social cost of an underpriced carbon emission allowances futures contract is the overproduction of carbon,” it says in its investment case for the fund.
Billal Ismail, head of sales at SparkChange, says most of the investors in its ETC are institutions including wealth managers and pension funds, which are holding it for the longer term. He argues that the volatility in the carbon price — driven partly by weather fluctuations, partly by the fact that utility companies are the biggest buyers of EUAs and are price agnostic — means that for longer term investors the dips are buying opportunities.
Carbon markets also do their own thing: they have a low level of correlation with other asset classes, so may appeal to investors looking to balance their portfolio. Cormac Nevin, a fund manager at You Asset Management, says this is one key reason why he holds the fund across various multi-asset portfolios including a cautious one.
Still, Tara Clee, a sustainable analyst at Hargreaves Lansdown, says both ETCs are held in very small quantities by clients on the trading platform. “Until the price of carbon rises substantially, and most sectors are included in ETS, the effectiveness of the scheme in sustainability terms is up for debate,” she says, but adds: “These products would be good for clients who want exposure to decarbonisation, and it’s clear that global regulatory tailwinds will only increase the use case for these ETFs.”
Investing in carbon markets will probably not appeal to sustainability purists in the same way that buying shares in Shell, in the hopes of pressurising it to cut emissions faster, also does not appeal. Some investors prefer not to be tainted at all by oil and gas companies. Others may take the view that engaging with the carbon market can help to expand it.
Others still see it as an energy transition play: you don’t have to value sustainability to see that there is a good investment case in this area. But with the price still linked to regulatory decisions and the market relatively illiquid and volatile, only brave retail investors should dare to enter.
Revolut Investor Cuts Firm’s Valuation by 40%
The European venture capital firm Molten Ventures wrote down its stake in Revolut by 40%, from around $115 million in March 2022 to around $70 million this March, according to its annual report. Molten is the third Revolut investor to mark down its investment in the UK based fintech this year, following Triplepoint Capital and Schroders, which cut their valuations of Revolut in February and April, respectively.
Fintech valuations have been hit hard across the board in recent months, though Revolut has had a particularly rocky year. The Bank of England has indicated that it plans to reject Revolut’s application for a UK banking license, Revolut’s auditor has said it couldn’t verify the company’s 2021 revenue and the fintech firm has lost its CFO and head of UK banking. In an interview with City A.M., Molten Ventures CEO Martin Davis suggested uncertainty around Revolut’s path to profitability and its efforts to acquire a UK banking license contributed to the valuation cut.
Research Calls
- Upgrades:
- Abcam (ABCM) upgraded to Buy from Neutral at BofA Securities; tgt $25
- AutoZone (AZO) upgraded to Buy from Neutral at UBS; tgt raised to $2900
- MorphoSys (MOR) upgraded to Overweight from Underweight at JP Morgan; tgt raised to $10
- West Pharm (WST) upgraded to Buy from Neutral at BofA Securities; tgt raised to $405
- Downgrades:
- Bausch Health (BHC) downgraded to Market Perform from Outperform at TD Cowen
- Evotec SE (EVO) downgraded to Neutral from Buy at BofA Securities; tgt $13
- Mersana Therapeutics (MRSN) downgraded to Neutral from Overweight and removed from Focus List at JP Morgan; tgt lowered to $5
- NexTier Oilfield (NEX) downgraded to Neutral from Buy at Citigroup; tgt raised to $9.75
- RPC (RES) downgraded to Sell from Neutral at Citigroup; tgt lowered to $7
- SoFi Technologies (SOFI) downgraded to Neutral from Buy at BofA Securities; tgt raised to $10
- SoFi Technologies (SOFI) downgraded to Neutral from Overweight at Piper Sandler; tgt raised to $8
- Others:
- Alliant Energy (LNT) initiated with a Neutral at Ladenburg Thalmann; tgt $52.50
- Atlanticus (ATLC) initiated with a Buy at Jefferies; tgt $50
- Bio-Rad Labs (BIO) initiated with an Overweight at Wells Fargo; tgt $550
- Elastic (ESTC) initiated with a Neutral at DA Davidson; tgt $60
- GigaCloud Technology Inc. (GCT) initiated with a Buy at ROTH MKM; tgt $13
- Guess? (GES) initiated with a Neutral at UBS; tgt $22
- Hagerty (HGTY) initiated with a Hold at Truist; tgt $11
- Lending Club (LC) initiated with a Buy at Jefferies; tgt $13.
- Lightspeed (LSPD) assumed with a Buy at BTIG Research; tgt $20
- MorphoSys (MOR) initiated with an Overweight at Wells Fargo; tgt $17
- Neogen (NEOG) initiated with an Overweight at Wells Fargo
- Olo Inc. (OLO) initiated with a Neutral at BTIG Research
- Oxford Industries (OXM) initiated with a Neutral at UBS; tgt $110
- Pacific City Financial (PCB) assumed with a Neutral at Piper Sandler; tgt $17
- PAR Technology (PAR) assumed with a Neutral at BTIG Research
- Shift4 Payments (FOUR) initiated with a Buy at BTIG Research; tgt $83
- Toast (TOST) initiated with a Neutral at BTIG Research
Gapping down
In reaction to earnings/guidance:
- CBT -5.9% (withdraws FY23 EPS outlook; provides update on demand landscape), HUM -0.6% (reaffirms FY23 guidance)
Other news:
- VSTM -9.1% (prices offering of common stock and warrants)
- CWAN -6.4% (prices secondary offering of 10.0 mln shares of common stock at $16.05 per share)
- TIGO -5.6% (TIGO discussions with APO re potential acquisition have been terminated)
- CHMI -5% (lowered dividend to $0.15 per share on common stock for the second quarter of 2023 prior $0.27 per share)
- GT -1% (radial tire to be one of the approved fitments for the new Airbus A321XLR)
- CANO -0.8% (following results of Annual Stockholders' Meeting)
- MNMD -0.8% (FCM last night denounced MindMed's "manipulation of corporate machinery to protect incumbent Board of Directors")
Gapping up
In reaction to earnings/guidance:
- ADBE +4.7%, NUE +0.4% (guides Q2 earnings above consensus)
Other news:
- SPCE +39.7% (starts commercial spaceline operations; first spaceflight to occur this month)
- NETI +13.2% (Eneti and Cadeler A/S sign business combination agreement to create a leading offshore wind turbine and foundation installation company)
- ENVX +9.3% (achieves Q2 forecast for units made at Fab1 location)
- OTLY +4.1% (files for 22424755 ADSs by selling shareholders)
- SQSP +4% (SQSP to acquire assets associated with GOOG Domains business)
- AUTL +3.5% (presents positive results from AUTO4 in relapsed/refractory TRBC1-positive peripheral t-cell lymphoma)
- DLO +3% (says it had positive talks with Argentine govt)
- TSP +3% (becomes first to successfully operate driver out fully autonomous semi-truck on open public roads in China)
- LXRX +2.7% (FDA approves INPEFA)
- COIN +2.2% (BLK iShares unit files for the formation of a spot Bitcoin ETF)
- IPHA +2.1% (Highlights Increased Lacutamab Clinical Activity From Interim Results of Phase 2 TELLOMAK Study With Updated Olsen Criteria)
- XAIR +1.8% (licenses commercial rights to nNOS Inhibitors)
- RETA +1.8% (receives FDA Filing Acceptance of SKYCLARYS NDA prior approval supplement)
- NVAX +1.7% (to Deliver Protein-based Monovalent XBB COVID Vaccine)
- SSRM +1.5% (announces new normal course issuer bid)
- QGEN +1.3% (publication of review highlighting value of its TB testing technology)
- STLA +1% (will offer EVs at under €25000 early next year according to Bloomberg)
Analyst comments:
- ABCM +3.4% (upgraded to Buy from Neutral at BofA Securities)
- WST +1% (upgraded to Buy from Neutral at BofA Securities)
Early premarket gappers
- Gapping up:
- SPCE +38.7%, NETI +10.9%, LXRX +8.6%, ENVX +7%, SQSP +5.6%, TSP +5.6%, IPHA +3.4%, ADBE +3.2%, DLO +3%, NVAX +3%, COIN +2.4%, XAIR +1.8%, MARA +1.4%, QGEN +1.3%, WPC +1.1%, STLA +0.9%, NUE +0.9%, SSRM +0.7%, ORCL +0.6%, PFE +0.5%, GSK +0.5%
- Gapping down:
- VSTM -9.4%, CBT -6.9%, TIGO -6.8%, CWAN -5.1%, CANO -3.1%, GT -1%, DIS -0.7%, GOOG -0.6%, APO -0.5%, RETA -0.5%