>>> What to look at today - 14th of July 2022

US equity futures fell Thursday and the dollar climbed after high US inflation hardened expectations for more aggressive Federal Reserve monetary tightening that could trigger a recession. S&P 500 and Nasdaq 100 contracts retreated while European futures wavered. An Asian share index dropped for the third time in four days.  Traders have shifted toward expectations of an historic one percentage-point Fed interest-rate hike later this month after the US consumer-price gauge clocked a 9.1% annual climb. Fed Bank of Atlanta President Raphael Bostic said “everything is in play” to combat price pressures. The dollar pushed higher, hovering around the highest level in over two years. Treasury two-year yields, sensitive to imminent Fed moves, climbed while longer-maturity rates were more stable. The inversion between two-year and 10-year yields -- a potential recession indicator -- is the deepest since 2000. The euro fell back toward $1 after briefly dipping below it Wednesday. The yen sank. Oil hovered at $96 a barrel. Bitcoin rallied past $20,000, weathering the bankruptcy filing of crypto lender Celsius Network.
In Singapore, the city state’s currency strengthened on an unexpected tightening of monetary settings, part of a global wave of steps to curb the cost of living. Australian bond yields surged on a strong jobs report, which boosted the case for a further increase in borrowing costs there too. The big question for markets is whether the latest US inflation print marks the peak. Commodity prices, pushed up this year in part by supply disruptions related to Russia’s war in Ukraine, have moderated somewhat of late. But if higher costs prove to be persistent and come alongside a global economy buckling under rate hikes, that could be toxic for a range of assets already nursing heavy losses in 2022. The earnings season is the next test for markets, kicked off in the US by JPMorgan Chase & Co. and Morgan Stanley on Thursday. US After Hours TBPH +25.7% and INVA +9.6% jump on deal to sell Trelegy assets; AZTA -11% falls on weak guidance; NVAX -0.9% vaccine gets approved

Nikkei +0.62% Hang Seng -0.71% CSI -0.01% Shanghai -0.10% Shenzen +0.80%

Eur$ 1.0022 CNH 6.7397 CNY 6.7313 JPY 138.59 GBP 1.1848 CHF 0.9827 RUB 60.4049 TRY 14.4575 WTI$ 96.18 -0.16% Golds 1,724.30 -0.63% BTC 19,927 +1.40% ETH 1,095.37 +1.83%

S&P -0.47% Nasdaq -0.54% EuroStoxx -0.20% FTSE -0.09% Dax -0.14% SMI -0.22%

Macro :
- Fed’s Beige Book Shows Housing Stays Costly, Demand Softens
- JPMorgan Says Bitcoin Cost of Production May Be Down to $13,000
- Millennium’s East53 Capital Closing After Twitter, Citrix Bets
- Convertibles Evaporate at Fastest Pace Since 2011: ECM Watch
- Permira Hits $16 Billion Milestone for New Flagship Buyout Fund
- UK Defense Firms to Benefit From Tory Leadership Contest: Citi

Keep an eye on :
- AF FP : Apollo to Invest EU500m in Air France Affiliate
- ALLN SW : Allreal CEO Roger Herzog to Step Down in Spring 2023
- ASHM LN : Ashmore 4Q Net Outflows $6.6B
- ATO FP : Atos Sees Limited Impacts From Credit Rating Cut
- AZA SS : Avanza 2Q Operating Income Misses Estimates
- BAYN GY : Bayer to Sell Men’s Health Product Nebido for up to EU500m
- DPH LN : Dechra Pharmaceuticals Places EUR50M 7yr, EU100M 10yr Notes
- DTE GY : Deutsche Telekom Sells Towers to Brookfield-DigitalBridge
- FME GY : DOJ Files Medicare Fraud Claim Against Fresenius; Shares Fall
- GOOGL US : Italy’s Competition Authority Starts Probe Against Google
- BOSS GY :Hugo Boss Boosts FY Sales Forecast, Beats Estimates
- MYCR SS : Mycronic 2Q Ebit SEK224M Vs. SEK241M Y/y
- RWI LN : Renewi 1Q Trading in Line With Expectations
- SSE LN : Worley Consortium Gets Contract From SSE Thermal
- SVT LN : Severn Trent Sees at Least £50M Customer ODI Payments in FY ’23
- TSLA US : Inverse Tesla Bet Is Among First Single-Stock ETFs to Hit US
- WALB SS : Wallenstam 2Q Rental Income Meets Estimates

>>> Europe : Brokers Upgrades & Downgrades - 14th of July 2022

>>> Up
* DNB Bank Raised to Overweight at JPMorgan; PT 235 kroner
* Nel Raised to Buy at HSBC; PT 17 kroner

>>> Down
* Arkema Cut to Sell at UBS
* BASF Cut to Sell at UBS; PT 37 euros
* Clariant Cut to Sell at UBS
* Evonik Cut to Neutral at UBS
* Givaudan Cut to Sell at UBS
* Mediclinic Cut to Hold at HSBC; PT 497 pence
* Software AG Cut to Underweight at Morgan Stanley; PT 30 euros
* UCB Cut to Neutral at JPMorgan; PT 120 euros
* Wacker Chemie Cut to Neutral at UBS

>>> Initiation
* Accsys Tech Rated New Buy at Canaccord; PT 190 pence
* Oxford Biomedica Rated New Hold at Stifel; PT 525 pence
* Tonies Rated New Hold at Hauck & Aufhaeuser; PT 4 euros

>>> Call
* Hunting Weakness a Buying Opportunity, Berenberg Upgrades to Buy
* Morgan Stanley Strategists See European Profit Cuts Accelerating
* UK Defense Firms to Benefit From Tory Leadership Contest: Citi

>>> Stoxx 600 Pre-Market Indications

  • Hugo Boss (BOSS TH) +1.6%
    • Hugo Boss 2Q Beat Shows Strategy Is Paying Off: Street Wrap
  • ASML (ASME TH) +0.7%
  • Novo Nordisk (NOVC TH) +0.6%
    • Novo Poised to Beat; Ozempic Stars, Eyes on Wegovy: 2Q Preview
  • Rheinmetall (RHM TH) -0.7%
  • Freenet (FNTN TH) -1.1%
  • Wacker Chemie (WCH TH) -1.3%
  • BASF (BAS TH) -1.5%
  • Nemetschek (NEM TH) -1.5%
    • Nemetschek Raised, Software AG Cut, MS Positions For Tough Macro
  • Intesa Sanpaolo (IES TH) -1.6%
  • Evonik (EVK TH) -2%
  • Bollore (BOP TH) -2.3%
  • Kone (KC4 TH) -5%
    • Kone Cuts Outlook, Reports Prelim 2Q Adjusted Ebit EU209.3M (1)
  • Ericsson (ERCB TH) -5.4%
    • Ericsson 2Q Adjusted Operating Profit Misses Estimates

>>> TradeGate Pre-Market Indications

DAX:
  • BASF (BAS TH) -1.5%
MDAX:
  • Hugo Boss (BOSS TH) +1.7%
    • Hugo Boss Boosts FY Sales Forecast, Beats Estimates
    • Hugo Boss 2Q Beat Shows Strategy Is Paying Off: Street Wrap
  • Evotec SE (EVT TH) +1.1%
  • Nemetschek (NEM TH) -1.4%
    • Nemetschek Raised, Software AG Cut, MS Positions For Tough Macro
SDAX:
  • Heidelberger Druck (HDD TH) -1.1%

>>> US After Hours Summary: TBPH +25.7% and INVA +9.6% jump on deal to sell Trel

After Hours Summary: TBPH +25.7% and INVA +9.6% jump on deal to sell Trelegy assets; AZTA -11% falls on weak guidance; NVAX -0.9% vaccine gets approved

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: None

Companies trading higher in after hours in reaction to news: TBPH +25.7% (TBPH to sell all of its units in Theravance Respiratory to RPRX for over $1.5 bln), INVA +9.6% (INVA sells its 15% economic stake in Theravance to RPRX for $282 mln), GRBK +7.7% (to join S&P SmallCap 600), VCTR +2.8% (reports June AUM), HASI +2.5% (responds to Muddy Waters shor report), ANGI +2% (report June performance metrics), HTA +1.9% (to join S&P MIdCap 400 following its acquisition of HR), HIVE +1.9% (expects to complete its annual filings on or before July 18), EGO +1.7% (announces Q2 preliminary gold production), RC +1.2% (forms new JV to originate circa €300m of new commercial real estate loans), ESTC +0.5% (announces enhancements to its cross-cluster search and replication capabilities), WBA +0.2% (increases dividend), MN +0.1% (reports June AUM)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: AZTA -11% (lowers guidance for JunQ revs), HMN -4.8% (trims its FY22 earnings guidance), WELL -0.2%, WAFD -0.1%

Companies trading lower in after hours in reaction to news: CFRX -77.2% (independent DSMB recommends Exebacase Phase 3 DISRUPT Study be stopped), BLU -6.5% (stock offering), COKE -2.5% (to move to S&P MidCap 400 from SmallCap 600), FLYW -1.8% (acquires Cohort Go), NVAX -0.9% (FDA authorizes NVAX's COVID-19 vaccine for adults), RPRX -0.8% (TBPH to sell all of its units in Theravance Respiratory to RPRX for over $1.5 bln; also INVA sells its 15% economic stake in Theravance to RPRX for $282 mln), BRDG -0.5% (expands into solar energy via partnership with Lumen Energy), TSLA -0.5% (Tesla Autopilot exec to step down), WDAY -0.3% (achieves FedRAMP authorized status at the Moderate level), MOH -0.3% (to acquire My Choice Wisconsin for $150 mln)

>>> Fed Model Shows S&P 500 Is Cheap, It May Get Cheaper

Fed Model Shows S&P 500 Is Cheap, It May Get Cheaper

The selloff in US stocks this year means that they are now more attractive relative to bonds, according to the Fed Model. Still, the S&P 500 Index may get even cheaper if slowing growth and burning inflation mean corporate earnings trend lower while the Fed keeps raising rates.
The estimated earnings yield on the S&P 500 is about 5.95%, meaning that investors in stocks get to earn some 300 basis points more than what they get from 10-year Treasuries
Given that spread, the Fed Model would posit that stocks are undervalued. However, as the chart shows, the gap widened far more emphatically in the aftermath of the recession triggered by the financial crisis, and the current spread is less than the average of 380 basis points since then.
The Fed Model fails to address the premium that investors require to hold riskier equities rather than Treasuries that are, to all intents and purposes, free from default risk.
In fact, given the current macroeconomic backdrop, investors may decide that a more demanding risk premium may be appropriate.
The estimated earnings per share on the aggregate of the S&P 500 is around $241 in the four quarters that began in July, which may be at risk of being lowered should fears about a slowing economy prove well-founded.
Even such a scenario is unlikely to deter the Fed from continuing to raise rates and run off its balance sheet given how much higher inflation is running above its target. In other words, the discount rate used to assess the intrinsic value of stocks is likely to trend higher.
A downward revision in earnings and an upward revision in the discount rate will pose a double-whammy to stocks.
How far could we plumb lower though?
Based on current projections of earnings and interest rates, the S&P is likely to trend toward 3,581, implying a further decline of about 7% from Monday’s closing level. For the Nasdaq 100, my calculations suggest a drop of about 10% toward 10,572.
Even with this year’s decline, the aggregate market capitalization of the universe of US stocks to gross domestic product is elevated at 1.60. While that’s a far cry from extremely lofty levels that prevailed earlier this year, they are still elevated, which may make value investors shudder.
What could go wrong with my view? A deeper-than-forecast economic downturn that causes the Fed to pause or abandon its hiking campaign would lower the discount rate applicable to stocks and buoy them from current levels, but as things stand, that prospect looks like a tail risk rather than the base-case scenario.
The S&P has already slumped almost 20% this year and the Nasdaq 100 some 27%, bringing them closer to fair value than they have been in years. Still, the correction has room to run, suggesting that investors should brace for further declines in the months to come.