YOUR QUIVER | January 4, 2023

Today's Rundown

CIO | Nadine Terman @SolsteinCapital details what she's seeing in global financial markets.

Upgrades and Downgrades

UBS is out with a slew of downgrades: $MSFT because of slowing Azure growth (px target to $250 down from $300), plus industrials $EMR and $HON, and $CHRW. WF downgraded $TGT to hold from buy, given deceleration (px target $142 from $170). CS downgraded $DLR after data center checks. BofA upgraded $MRK to buy from neutral….kind of late, no? CS updated $GLW to Outperform, GS upgraded $BK, and Needham upgraded $ETSY.

Positioning

Our PBs’ derivatives desks had a quiet trading day yesterday. Investors appear to be waiting for direction and cautious about adding risk. One PB notes that US composite beta positioning 2022 at YTD highs, risk control exposure at 51% (the 47th percentile vs 3 year), CTAs were slightly short (with sell triggers around 3730 for the SPY) and corporates quiet during their blackout periods. Between the JPM Healthcare Conference and earnings season right around the corner, folks want to see more data, it appears. But large institutions bought yesterday, in typical beginning-month and beginning-year purchases. Plus, there is a lot of cash on the sidelines that could drag stocks up, but again—the timing of this cash deployment is unknown. The VIX <23.00 reads apathy.

De-Risked

EU nat gas prices are down due to warm weather, demand suppression, and efficiencies. EU gas storage ended Dec at >80% versus just above 50% a year ago Dec. This de-risks the winter forecast, but given low gas supply globally and potential reopening demand pressures, analysts are looking at a floor at current prices (unless someone like Russia decided to unleash supply). Investors have dinged commodity-dependent names like Equinor. Also power prices are down. Glencore is down due to its coal exposure. Euro equities have outperformed US equities by 5% in the last 3 days, given soft inflation prints and lower energy prices. Interestingly, China is considering to resume imports of Australian coal after a 2+ year ban. Sounds like they are trying to expand their friend circle away from Putin.

Data Watch

French CPI was soft like German CPI yesterday, hence the bond tightening as we near Eurozone CPI on Friday. Today we get JOLTS openings data—which surprised to the upside (400k above expectations). Plus folks focused on US ISM manufacturing and FOMC minutes. We’ll read why they think high inflation will be persistent (they raised 2023-end est levels to 3.1% vs 2.8% in their prior forecast), and understand what they’re focused on in the labor market. The ISM data just came out. It showed contraction for a 2nd month. The ISM purchasing managers index fell to 48.4 in Dec, and PMI, new orders and production declined to the lowest level since May 2020. So, the switch away from goods to services continues, and on one good note—input costs were down to their lowest print since April 2020. Seems like companies, while in a tougher economic period, are hoarding labor.

Auto Sales

A lot of automakers report their Dec and CY sales today, so expect the data to dominate the news cycle. Total is expected to increase by >1mm in 2023 to 15mm units as semiconductor shortages lessen, but the total figure is below pre-pandemic levels of 16-17mm, when we weren’t headed into a recession.

Chunky Chips

US chipmakers rose after news about China pausing massive chip spending that would have enabled greater competition. Instead of subsidies, China may lower the cost of semi materials.

McCarthy McCouldn't

Conservatives in the Republican party think McCarthy is too moderate, and they blocked 3 votes for the potential House Speaker. To get things done in gov, parties need a Speaker, so we’ll see if this is an anomaly or par for the course in 2023. Little things like gov shutdowns and passing bills are affected by a lack of cohesiveness (and leadership).

Fourth Time

The BOJ announced a fourth day of unscheduled gov bond buying. Japanese credit spreads rose to the highest level in 2.5 years.

The Blame Game

The Russian gov blamed unauthorized use of cell phones by Russian soldiers for the deadly weekend attack. Critics point to housing soldiers next to an ammunition storage facility as a key cause of the extent of the casualties. We don’t expect a curtailment of wartime activities anytime soon, but these events add up—and there will be less appetite for continued casualties as we go further into 2023.

The Second Blame Game

A BBG piece covers studies that found that capital managed by boards with gov officials and elected reps of public employees underperform. The piece talks about pensions that sought greater returns and turned to riskier investments with higher costs as they used expensive outside advisers and noted that the San Diego County Employees Retirement Assoc uses external managers for its $15 bn portfolios, paying 80% of its $60mm in investment expenses to alts managers investing only 17% of its assets.

Add It To the List

Salesforce recognized it over-hired during the pandemic and is laying off 10% of its staff and closing some offices via a restructuring.