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Futures Fizzle As Walmart Warning Batters Bear Market Rally

Futures Fizzle As Walmart Warning Batters Bear Market Rally

US stock futures dropped as investors braced for Wednesday’s Federal Reserve…

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Futures Fizzle As Walmart Warning Batters Bear Market Rally

US stock futures dropped as investors braced for Wednesday’s Federal Reserve meeting, while Walmart’s surprise profit warning fueled concerns about the strength of US consumer spending. A barrage of earnings including notable misses by the likes of GM and a 3M guidance cut, did not help the mood. Contracts on the S&P 500 and the Nasdaq 100 were each down 0.4% by 7:45am in New York. European stocks rose driven by energy stocks amid a fresh surge in gas prices following Russia warnings of an imminent halving in NS1 shipments even as European Union countries reached a political agreement to cut their gas use. The dollar jumped and 10Y yields tumbled below 2.75% as a recession looks inevitable, no matter how Biden defines it.

In premarket trading, Alibaba Group jumped 5.1% after the Chinese e-commerce giant said it will seek a primary listing in Hong Kong, boosting other US-listed Chinese stocks with it. Cryptocurrency-exposed stocks were lower as Bitcoin sank to a one-week low, denting hopes for a sustained rebound. Coinbase fell 4% in premarket trading after a Bloomberg News report that the cryptocurrency company is facing a US probe into whether it improperly let Americans trade digital assets that should have been registered as securities.  Shares of US big-box retailers and e-commerce peers fell in US premarket trading on Tuesday, after Walmart again cut its quarterly and full-year profit guidance just weeks ahead of its earnings report, raising new questions about the damage from surging inflation to consumers’ spending ability. The shares slid as much as 9.8% in US premarket trading. In premarket trading, Target shares drop as much as 4.9%, Costco Wholesale -2.8%; watch Best Buy shares for later in the session
Online retailers also fall amid broader worries over the sector, Amazon -3.8%, Etsy -4.1%, EBay -0.6%, Shopify -6% after a PT cut at Citi; also watch Wayfair and Chewy. Here are some other notable pre-market movers:

  • Shopify (SHOP US) shares fall as much as 6% in US premarket trading, as Citi cuts its price target on the e- commerce platform provider amid fresh economic headwinds.
  • Cryptocurrency-exposed stocks are lower in US premarket trading as Bitcoin sank to a one-week low on Tuesday. The group is also pressured after a Bloomberg News report about the US Securities and Exchange Commission probing Coinbase over cryptocurrency listings. 
  • Alibaba (BABA US) shares jump 5.1% in US premarket trading after the Chinese e-commerce giant said it will seek a primary listing in Hong Kong, boosting other US-listed Chinese stocks higher with it.
  • F5 (FFIV US) shares rise 7.8% in premarket trading on Tuesday, after the communications equipment company forecast better-than-expected adjusted earnings for the fourth- quarter.
  • Koss Corp. (KOSS US) shares fall as much as 18% in US premarket trading, setting the headphones maker on track to trim part of the 43% surge it posted the previous session after reaching a deal with Apple in an AirPods patent infringement case.
  • NXP Semiconductors (NXPI US) shares are down 1.2% in US premarket trading even as the company issued a strong forecast for the current quarter driven by demand for components used in automobiles. Analysts note that while supply is improving, demand continues to outstrip it.
  • Aaron’s Co (AAN US) shares fell as much as 35% in postmarket trading on Monday as its revenue and earnings guidance cut shows the pressures facing the furniture and appliances retailer, with analysts anticipating that macro headwinds will continue to weigh

Meanwhile, investors are bracing for a flurry of earnings this week to gauge the ability of corporates to overcome supply constraints and soaring prices, just as the S&P 500 is on a course for its best month since October. A barrage of reports from GE, GM, 3M, RTX, MCD And UPS painted a mixed picture, with GE and 3M rising post-results while GM and UPS drop.

“There is still scope in the second half of this year, and maybe even early next year, for earnings disappointment,” said Paul Jackson, Invesco’s global head of asset allocation research, in a Bloomberg TV interview. “There’s still probably a delayed reaction for earnings, and then you have a layer on top of that, the margins squeeze that’s coming through higher raw material costs and in some sectors higher labor costs.”

Coca Cola Inc., McDonald’s Corp. and Mondelez International Inc. are among companies reporting earnings before the market open, while Texas Instruments Inc., Visa Inc., Microsoft Corp. and Alphabet Inc. will report after hours. These results “could really define an earnings season which, up until now, has been pretty resilient given the backdrop,” said Russ Mould, investment director at AJ Bell.

Tomorrow we also get the highlight of the week when the Fed is strongly expected to hike rates by 75 basis-points with many speculating that the Fed will have to inflict much more pain on the Biden economy to get inflation under control.

“For the time being, the Fed and other major central banks look much more concerned about the risk of inflation expectations becoming unanchored than high risk weighing on growth,” Valentine Ainouz, deputy head of developed markets research at Amundi, said in a Bloomberg TV interview. “Maybe in some months we will have a pivot toward growth, but this is not the mood right now, the mood now is fighting inflation.”

Markets are underestimating the risks of persisting inflation, which is likely to keep central banks hawkish for longer, according to Goldman Sachs strategists. Investors appear to be more optimistic on the central bank put, given that in past cycles the policy makers made a dovish pivot when growth slowed, strategists led by Cecilia Mariotti wrote in a note. 

“The Fed’s main enemy is inflation, and it’s desperate to prevent expectations of sustained inflation from taking hold,” said Frédéric Leroux, a member of Carmignac’s strategic investment committee. “The recession that the Fed will probably provoke by its current monetary tightening is an avatar that it can withstand. In fact, it’s not beyond the realms of possibility that the central bank wants a recession, given the bearish effects it would have on prices.”

For Katerina Simonetti, an adviser at Morgan Stanley Private Wealth Management, the litany of risks exposes the vulnerability of the 6% rebound in global shares from June lows.

“This is most likely a bear market rally and there are significant risks still facing this market,” she said on Bloomberg Television. “We’re probably going to be seeing a lot of choppiness and potentially some further declines in the market before the year end.”

European shares edged higher, led by the FTSE 100 which climbed on rising oil and metal prices. Currencies are mostly steady and yields dipped ahead of the Fed meeting tomorrow.  Euro Stoxx 50 is little changed. FTSE 100 adds 0.8%, FTSE MIB lags, dropping 0.4%. European energy and mining stocks outperform while retailers, autos and telecoms are the worst performing Stoxx 600 sectors.  Here are some of the biggest European movers today:

  • UBS shares drop as much as 7.2% after reporting 2Q results that missed expectations. Underlying pretax profit was about 10% below consensus with analysts pointing to a charge in Corporate Center.
  • Eutelsat shares fall as much as 14%, extending yesterday’s losses, after the French satellite operator and OneWeb are set to combine in an all-share deal valuing its UK rival at $3.4 billion.
  • Uniper drops for a fourth day, with shares down as much as 12.6% as a further supply reduction from Russia’s Gazprom helped send gas prices higher.
  • Kesko shares fall as much as 7.6% after the Finnish consumer retail group published its latest earnings, which included declining margins in its Building & Technical retail segment in an otherwise solid report, Kepler Cheuvreux writes.
  • Veolia shares fall as much as 4.4% as the stock was reinstated with an underweight rating at JPMorgan, with the broker bearish on the impact the French water and waste management group will face from Europe’s energy crisis.
  • European retailers slump after Walmart cut its profit outlook, raising new questions about the resilience of consumer spending with inflation at a four-decade high. Zalando declines as much as -6.9%, Ahold -3.7%, Marks & Spencer -5.2%
  • Unilever shares gain as much as 3.2% after the consumer-goods company reported 2Q sales that topped market expectations. Analysts found the sales beat reassuring, though noted the company had maintained its margin outlook for the year.
  • Energy and mining shares are among best-performing groups in the Stoxx Europe 600 index on Tuesday as oil and metals rallied amid a decline in the dollar and signs of tightness in some commodity markets. Shell gains as much as 2.7%, BP +2.4%, Equinor +5.6%; Glencore +3%, Anglo American +3.3%

Earlier in the session, Asian stocks edged higher, rebounding from Monday’s decline, helped by a rally in Alibaba Group and other Chinese tech shares. The MSCI Asia Pacific Index advanced as much as 0.4%. Alibaba was the biggest contributor to the gauge’s gains after saying it will seek a primary listing, a move that would allow it to seek inclusion in the Stock Connect link with the Shanghai and Shenzhen exchanges. Sector-wise, consumer discretionary and financials were the top performers. Stocks in China gained despite a resurgence of Covid-19 infections that could threaten the operations of industry giants including BYD and Huawei Technologies, while Hong Kong’s equity benchmark was the best performer in the region. Investors are gearing up for a week of earnings releases from some of the biggest tech companies in the US, with the Fed’s meeting also in focus for further insights on the pace and quantum of rate increases. The MSCI Asiagauge jumped 3.6% last week. 

“Despite the slew of data pointing to ongoing growth slowdown, markets seem to have been accustomed to such narrative lately, riding on expectations that growth risks have been priced to a large extent,” Jun Rong Yeap, a market strategist at IG Asia, wrote in a note. “That will clearly be put to the test to a greater extent this week with a series of big tech earnings, Fed’s policy guidance, along with key US inflation and consumer sentiment data ahead,” he wrote.

Key stock gauges in India declined ahead of the anticipated interest rate hike by the US Federal Reserve. The S&P BSE Sensex fell 0.9% to 55,268.49 in Mumbai, while the NSE Nifty 50 Index declined by a similar measure. The 30-member Sensex had 21 stocks trading lower. A gauge of information technology companies fell the most among the 19 sectoral indexes compiled by BSE Ltd., all of which declined. Software exporters Infosys and Tata Consultancy Services slipped as investors assessed global recession risks and increasing margin pressure on Indian technology companies. The Fed is expected to hike interest rates by 75 basis points on Wednesday to tame four-decade high inflation.

In FX, the dollar climbed, snapping three days of losses, as traders brace for a widely expected 75 basis points Fed rate rise on Wednesday, part of campaign to tackle inflation.The Japanese yen was little changed at 136.58 per dollar. Sterling fell, erasing gains after touching a three-week high against a broadly sluggish US dollar; still, it’s clinging on to $1.20, leading traders to watch if it can see out the month above key psychological levels.

In rates, treasuries are underpinned by rally in bunds amid concerns about European gas supply. Gains led by belly of the curve, eroding concession ahead of 5-year auction at 1pm New York time. US yields are richer by 2bp-4bp across the curve with the 10Y yield dropping to 2.75%, and a belly-led advance steepening 5s30s spread by 1.7bp; 2s5s30s fly drops 3.7bp on the day onto tightest levels since March ahead of 5- year sale. The final coupon auction cycle of May-July quarter continues with $46b 5-year note sale, following Monday’s solid 2-year auction. WI 5-year yield around 2.84% is ~43bp richer than June result, a 3.5bp tail. European peripheral spreads are mixed to Germany; Italy widens, Spain and Portugal tightens. Bunds advanced for a fifth day, the longest run since August as focus remains on gas supply concerns.

In commodities, crude futures rose for the 2nd day: WTI drifts 2.1% higher to trade near $98.74. Brent rises 1.8% near $107.07. Most base metals trade in the green; LME copper rises 2.8%. Spot gold rises roughly $4 to trade near $1,724/oz. Spot silver gains 1.1% near $19.

Todays's economic data slate includes May FHFA house price index, S&P Case-Shiller house prices (9am), July Richmond Fed manufacturing index, consumer confidence, June new home sales (10am); this week also includes durable goods orders, 2Q GDP, personal income/spending (includes PCE deflator), MNI Chicago PMI and University of Michigan sentiment.

In terms of today we have the US July Conference Board consumer confidence index, Richmond Fed manufacturing index, June new home sales, and the May FHFA house price index. As discussed above EU energy ministers meet. Earnings is in full bloom with Microsoft, Alphabet, Visa, LVMH, Coca-Cola, McDonald's, UPS, Texas Instruments, Raytheon Technologies, Unilever, Mondelez, 3M, General Electric, UBS, General Motors, ADM, Chipotle, and Deutsche Boerse all reporting. Elsewhere the IMF release their economic outlook update. Last but by no means least the FOMC start their crucial two-day meeting.

Market snapshot

  • S&P 500 futures down 0.2% to 3,960.50
  • STOXX Europe 600 up 0.1% to 426.79
  • MXAP up 0.3% to 159.28
  • MXAPJ up 0.5% to 522.24
  • Nikkei down 0.2% to 27,655.21
  • Topix little changed at 1,943.17
  • Hang Seng Index up 1.7% to 20,905.88
  • Shanghai Composite up 0.8% to 3,277.44
  • Sensex down 0.7% to 55,385.81
  • Australia S&P/ASX 200 up 0.3% to 6,807.27
  • Kospi up 0.4% to 2,412.96
  • German 10Y yield little changed at 0.98%
  • Euro little changed at $1.0215
  • Gold spot up 0.2% to $1,723.33
  • U.S. Dollar Index little changed at 106.50

Top Overnight News from Bloomberg

  • UBS Group AG’s investment bank disappointed in the second quarter as global deal activity collapsed and the trading business struggled to keep pace with Wall Street peers.
  • European natural gas prices surged to the highest level in more than four months, as the region braces for a further reduction in Russian supply that could severely dent efforts to keep the lights on and homes warm this winter.
  • Alibaba Group Holding Ltd. will seek a primary listing in Hong Kong, entrenching the financial hub’s status as an alternative to US markets and paving the way for investors in China to directly buy shares of the country’s most prominent e-commerce company for the first time.
  • Coinbase Global Inc. is facing a US probe into whether it improperly let Americans trade digital assets that should have been registered as securities, according to three people familiar with the matter.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks took their cue from Wall Street and eventually traded mostly higher, albeit some with mild gains, after seeing mixed trade in the early hours until the Chinese open. ASX 200 was supported by its energy and mining sectors as underlying oil and metals prices rose,     Nikkei 225 moved back toward the 27.5k mark to the downside amid currency dynamics whilst the KOSPI was kept afloat after Q2 GDP topped expectations. Hang Seng overlooked reports that Hong Kong may have to downgrade its annual growth forecast and surged amid a boost from Alibaba rising almost 4% as it plans for a primary listing in Hong Kong, which would make it eligible for the Stock Connect programme and allow mainland Chinese investors to trade Co. shares, in turn helping increase liquidity. Shanghai Comp posted modest gains, but the upside was capped as Shanghai added 10 high and medium-risk areas subject to lockdown.

Top Asian News

  • Shanghai adds 10 high and medium-risk areas subject to lockdown, according to Bloomberg.
  • Alibaba (9988 HK/BABA) is pursuing a primary listing on the Hong Kong exchange, expected to occur before the end of 2022; Co. will become a dual primary listed Co. on HKEX and NYSE.
  • Hong Kong may have to downgrade its annual growth forecast in August for the second time in three months, according to SCMP citing the finance chief.
  • PBoC set USD/CNY mid-point at 6.7483 vs exp. 6.7490 (prev. 6. 7543).
  • PBoC injected CNY 5bln via 7-day reverse repos with the maintained rate of 2.10% for a net drain of CNY 2bln

European bourses are under modest pressure, Euro Stoxx 50 -0.4%, in what has been a limited session of newsflow ahead of the EU energy update and US earnings; though, strength in commodities is lifting the FTSE 100 +0.5%. However, further pressure has been seen in wake of most recent Kremlin related commentary, with the Nord Stream 1 turbine yet to be installed. Stateside, US futures are dented to the tune of crica. 5/10s of a percent; but, fairly rangebound (ex-above Kremlin related moves) overall pre-earnings and Wednesday's FOMC.

Top European News

  • Porsche IPO, Software Fix: What Awaits VW’s New CEO
  • European Oil and Mining Stocks Outperform Amid Commodity Gains
  • Hedging Bond Trades Is Getting Harder in UK’s Volatile Markets
  • Rolls-Royce Names Ex-BP Executive as CEO to Succeed East
  • Beijing Denounces Truss Vow to Crack Down on China Firms in UK
  • UBS CEO Hamers Signals Worst Over for Asia Deleveraging

Central Banks

  • RBNZ Governor Orr says in addition to remit review, RBNZ will also review recent performance in conducting monetary policy; will assess inflation and employment outcomes relative to targets, via Reuters.
  • CNB's Frait says policy is already quite restrictive, won't rule out a hike now or in the near time. Temporary FX interventions are normal in situations of shock to balance of payments, via Reuters.

FX

  • Aussie fades after probing Fib resistance vs Greenback and Loonie following oil powered rise to best levels since mid-June, AUD/USD back under 0.6950 from 0.6983, USD/CAD above 1.2880 from sub-1.2820.
  • Dollar regains poise otherwise in choppy, cautious trade pre-FOMC, DXY rebounds firmly from 106.190 surpassing Monday high of 106.890 to 107.10+.
  • Yen and Franc find some traction from pronounced bounce in bonds and reversion to bull-flattening, USD/CHF and USD/JPY hold below/above 0.9650 and 136.50 respectively.
  • Euro undermined by ongoing Russian gas supply jitters ahead of Extraordinary Energy Summit, EUR/USD retreats from 1.0250 to circa 1.0140.
  • Pound pulls up after narrowly missing 1.2100 vs Buck, Cable now below 1.2000, albeit still relatively comfortably above a series of recent descending lows.

Fixed Income

  • Bonds back in bull-flattening mode as Bunds front run latest leg higher.
  • 10 year German benchmark reaches 155.90 and peaks not seen since late May, while yield breaches 1% with more conviction.
  • Gilts and T-notes lag within 117-6935 and 120-04/119-24 respective ranges ahead of the Fed tomorrow and BoE next week.
  • BTPs off lest levels and lag periphery peers amidst short term and linker supply.

Commodities

  • Dutch TTF continues to lift with the August contract in proximity to EUR 200 as Nord Stream 1 is set to be curtailed tomorrow; however, the EU has agreed on a deal to reduce gas use.
  • Crude benchmarks are bid and drawing impetus from the referenced factors and EU divisions, though the magnitude of the move is more modest in nature vs TTF.
  • EU nations agree to reduce gas use for next winter.; only Hungary voted against approval of mandatory gas rationing if Russia shuts off the taps, France24 reports. Reminder, press conferences are expected at 12:30BST/07:30ET and 15:00BST/10:00ET.
  • EU energy chief Simson says Europe has to be prepared for supply cuts from Russia at any moment, expects to have a deal today in curbing gas demand.
  • Libyan oil minister says oil production is 1.1mln BPD.
  • China is to lower retail prices of gasoline and diesel by CNY 300 and CNY 290/tonne respectively as of July 27th.
  • Spot gold is little changed overall and moving at the whim of the USD while base metals remain bid in a continuation of APAC trade.

Crypto

  • Coinbase (COIN) faces SEC probe over crypto listings, according to Bloomberg sources.
  • US House lawmakers are reportedly delaying consideration of a bipartisan bill to regulate stablecoins, according to WSJ citing sources, pushing back consideration of the measure until after Congress’ August break.

US Event Calendar

  • 09:00: May FHFA House Price Index MoM, est. 1.5%, prior 1.6%
  • 09:00: May S&P/CS 20 City MoM SA, est. 1.50%, prior 1.77%
    • 09:00: May S&P CS Composite-20 YoY, est. 20.60%, prior 21.23%
  • 10:00: July Conf. Board Consumer Confidence, est. 97.0, prior 98.7
    • Expectations, prior 66.4
    • Present Situation, prior 147.1
  • 10:00: July Richmond Fed Index, est. -14, prior -11
  • 10:00: June New Home Sales MoM, est. -5.4%, prior 10.7%
    • June New Home Sales, est. 658,000, prior 696,000

DB's Jim Reid concludes the overnight wrap

10 years ago today Draghi uttered the seminal lines "whatever it takes" when referring to keeping Europe together when ECB President. It clearly worked but a decade later, Europe is again facing testing times, still partly because of Italy but also because of inflation and an energy crisis that has flared up again over the last 24 hours.

Indeed in yesterday’s EMR we discussed how this week was all about the US (FOMC and likely technical recession confirmation) but that we needed to watch the gas flows as Putin had suggested late last week that if the turbine didn’t make it back to Russia by early this week gas flows could be cut back from 40% capacity to 20% due to works being required on another turbine. The news flow yesterday was originally more positive as documentation between Siemens and Gazprom seemed to indicate that the repaired turbine issue was getting closer to being finalised. However the day turned late in the European session as Gazprom announced that another turbine will go out of service at 7am tomorrow for maintenance and gas would indeed be cut back to 20%. We can’t say we weren’t warned I suppose. It’s a bit confusing as to whether this will be a short restriction of supply while the repaired turbine makes its way back online or whether the paperwork will never quite be resolved, and we live with only 20% supplies for a considerable time. Siemens and the German government have said that there is no reason for transportation of the repaired turbine not to start back on its final leg to Russia.

Peter Sidorov has published a review of the latest news here and what it means for the economy over winter in an overnight blog. Peter says that from reading the Russian version of the latest statement from Gazprom, they are looking for clearer guarantees on future sanctions exemptions for maintenance of NS1 and related issues. This will likely be hard to achieve and the Russians will know this. So it appears like Russian politics will be in control here for now.

As we mentioned last week, at 40% capacity Germany could make it through the winter even if some light rationing was needed. At 20% you would likely need some notable rationing unless they cut gas exports which would be a very delicate thing to do politically. Gas futures rallied around 10% on the news, closing a touch under that. EU energy minister meet today to discuss the ongoing crisis and potentially revise the rationing plans laid out by the EC last week. The potentially forced 15% reduction that all member states would have to adhere to was very unpopular amongst several members. Expect lots of carve-outs and compromises to appear if a plan that can progress is agreed upon.

The biggest market impact to yesterday’s gas move (outside of gas itself of course) was in bonds, with bunds falling -6bps into the close after an earlier sell-off in bonds. 10yr Bunds closed c.-1bps lower. There wasn’t any major move in spreads though as Italy tightened a basis point to bunds. European equities dipped on the news but mostly stayed in positive territory with the exception of the DAX (-0.33%). The Stoxx 600 closed +0.13%.

The US is certainly taking an interest in Europe’s problems at the moment (Gas and Italy) but it generally then moves on and marches to its own beat. 10yr Treasuries still climbed c.+5bps, even if they were 4bps off the days highs. This morning in Asia, yields on are around -1bps lower, trading at 2.786%, as we go to press. US equities generally held onto gains with the S&P 500 (+0.13%) but with the NASDAQ (-0.43%) dipping ahead of a huge week of tech earnings. We have Microsoft and Alphabet after the bell today followed by Meta tomorrow and Apple and Amazon on Thursday. So that’s over $7.5 trillion of market cap here alone at stake over the next couple of days although with these 5 stocks being down between around -13% (Apple) YTD to around -50% (Meta), with the other three down around -20 to -25%, this figure would have been closer to $10 trillion at the start of the year. Elsewhere in earnings land, we have GM, NXP Semiconductors, Raytheon Technologies, Coca-Cola, McDonald's, Unilever and Mondelez reporting today amongst others. So plenty to keep an eye on today and for the rest of the week on the reporting front.

Back to US equities and Energy was the main winner (+3.71%) as Oil rose c.+2% yesterday and is up another +1.25% this morning ahead of some big oil majors reporting this week. Consumer Discretionary (-0.85%) was the weakest, likely on the bubbling recession fears. After the bell Walmart cut their outlook for Q2 and FY 23 and with it their equity fell -9.94% in after hours. As a result US futures are down with contracts on the S&P 500 (-0.28%) and NASDAQ 100 (-0.40%) edging lower this morning.

Asian equity markets have been fluctuating this morning and are still mostly higher with the Hang Seng (+1.60%) leading gains after Alibaba rose as much as +4.80% as it announced that it will be applying for a primary listing on the Hong Kong Stock Exchange. If completed, Alibaba will become a dual-primary listed company in Hong Kong and New York. The move is expected to happen by year-end. Over in mainland China, the Shanghai Composite (+0.81%) and the CSI (+0.96%) are climbing, reversing their previous session declines whilst the Nikkei (-0.06%) is fractionally lower this morning. Elsewhere, the Kospi (+0.12%) is edging up as South Korea’s Q2 growth rose +0.7% q/q (v/s +0.4% expected), faster than the +0.6% growth in the first quarter.

Data yesterday wasn’t top tier but both Chicago and Dallas Fed activity indices were slightly weaker than expected. The German IFO was slightly weaker too (88.6 vs 90.1 expected) but it was hard to upstage the poor PMIs from last Friday which set the tone for a major rally in bunds at the back end of last week. Its remarkable that after an initial spike to 0.765% for 2 year Bunds after the ECB, they dipped to 0.35% a day later after first the TPI wobbles and then the weak PMIs, and to around 0.4% at the close last night.

In terms of today we have the US July Conference Board consumer confidence index, Richmond Fed manufacturing index, June new home sales, and the May FHFA house price index. As discussed above EU energy ministers meet. Earnings is in full bloom with Microsoft, Alphabet, Visa, LVMH, Coca-Cola, McDonald's, UPS, Texas Instruments, Raytheon Technologies, Unilever, Mondelez, 3M, General Electric, UBS, General Motors, ADM, Chipotle, and Deutsche Boerse all reporting. Elsewhere the IMF release their economic outlook update. Last but by no means least the FOMC start their crucial two-day meeting.

Tyler Durden Tue, 07/26/2022 - 08:09

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EY Eyes Comeback for Biopharma M&A

EY noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021. The $88 billion accounted for most of the…

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A recent trickle of mergers and acquisitions (M&A) announcements in the billion-dollar-and-up range suggests that biopharma may be ready to resume dealmaking this year—although the value and number of deals isn’t expected to return to the highs seen just before the pandemic.

2022 ended with a handful of 10- and 11-figure M&A deals, led by Amgen’s $27.8 billion buyout of Horizon Therapeutics, announced December 13. The dealmaking continued into January with three buyouts announced on the first day of the recent J.P. Morgan Healthcare Conference: AstraZeneca agreed to acquire CinCor Pharma for up to $1.8 billion, while Chiesi Farmaceutici agreed to shell out up to $1.48 billion cash for Amryt, and Ipsen Group said it will purchase Albireo Pharma for $952 million-plus.

Biopharmas generated about $88 billion in M&A deals in 2022, down 15% from $104 billion in 2021. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. The number of biopharma deals fell 17%, to 75 deals from 90. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine. [EY]
EY—the professional services firm originally known as Ernst & Young—recently noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021 [See Chart]. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. That $135 billion figure is less than half the record-high $313 billion recorded in 2019, including $261 billion in 70 biopharma deals.

The number of biopharma deals fell 17% to 75 deals from 90. EY’s numbers include only deals greater than $100 million. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine.

We expect this to be a more active year as the sentiment starts to normalize a little bit,” Subin Baral, EY Global Life Sciences Deals Leader, told GEN Edge.

Baral is not alone in foreseeing a comeback for biopharma M&A.

John Newman, PhD, an analyst with Canaccord Genuity, predicted last week in a research note that biopharma companies will pursue a growing number of smaller cash deals in the range of $1 billion to $10 billion this year. He said rising interest rates are discouraging companies from taking on larger blockbuster deals that require buyers to take on larger sums of debt.

“We look for narrowing credit spreads and lower interest rates to encourage larger M&A ($50 billion and more) deals. We do not anticipate many $50B+ deals that could move the XBI +5%,” Newman said. (XBI is the SPDR S&P Biotech Electronic Transfer Fund, one of several large ETFs whose fluctuations reflect investor enthusiasm for biopharma stock.)

Newman added: “We continue to expect a biotech swell in 2023 that may become an M&A wave if credit conditions improve.”

Foreseeing larger deals than Newman and Canaccord Genuity is PwC, which in a commentary this month predicted: “Biotech deals in the $5–15 billion range will be prevalent and will require a different set of strategies and market-leading capabilities across the M&A cycle.”

Those capabilities include leadership within a specific therapeutic category, for which companies will have to buy and sell assets: “Prepared management teams that divest businesses that are subscale while doubling down on areas where leadership position and the right to win is tangible, may be positioned to deliver superior returns,” Glenn Hunzinger, PwC’s U.S. Pharma & Life Science Leader, and colleagues asserted.

The Right deals

Rising interest and narrowing credit partially explain the drop-off in deals during 2022, EY’s Baral said. Another reason was sellers adjusting to the drop in deal valuations that resulted from the decline of the markets which started late in 2021.

Subin Baral, EY Global Life Sciences Deals Leader

“It took a little bit longer to realize the reality of the market conditions on the seller side. But on the buyer side, the deals that they were looking at were not just simply a valuation issue. They were looking at the quality of the assets. And you can see that the quality deals—the right deals, as we call them—are still getting done,” Baral said.

The right deals, according to Baral, are those in which buyers have found takeover targets with a strong, credible management team, solid clinical data, and a clear therapeutic focus.

“Rare disease and oncology assets are still dominating the deal making, particularly oncology because your addressable market continues to grow,” Baral said. “Unfortunately, what that means is the patient population is growing too, so there’s this increased unmet need for that portfolio of assets.”

Several of 2022’s largest M&A deals fit into that “right” category, Baral said—including Amgen-Horizon, Pfizer’s $11.6-billion purchase of Biohaven Pharmaceuticals and the $6.7-billion purchase of Arena Pharmaceuticals (completed in March 2022); and Bristol-Myers Squibb’s $4.1-billion buyout of Turning Point Therapeutics.

“Quality companies are still getting funded one way or the other. So, while the valuation dropped, people were all expecting a flurry of deals because they are still companies with a shorter runway of cash that will be running to do deals. But that really didn’t happen from a buyer perspective,” Baral said. “The market moved a little bit from what was a seller’s market for a long time, to what we would like to think of as the pendulum swinging towards a buyers’ market.”

Most biopharma M&A deals, he said, will be “bolt-on” acquisitions in which a buyer aims to fill a gap in its clinical pipeline or portfolio of marketed drugs through purchases that account for less than 25% of a buyer’s market capitalization.

Baral noted that a growing number of biopharma buyers are acquiring companies with which they have partnered for several years on drug discovery and/or development collaborations. Pfizer acquired BioHaven six months after agreeing to pay the company up to $1.24 billion to commercialize rimegepant outside the U.S., where the migraine drug is marketed as Nurtec® ODT.

“There were already some kind of relationships there before these deals actually happened. But that also gives an indication that there are some insights to these targets ahead of time for these companies to feel increasingly comfortable, and pay the valuation that they’re paying for them,” Baral said.

$1.4 Trillion available

Baral sees several reasons for increased M&A activity in 2023. First, the 25 biopharma giants analyzed by EY had $1.427 trillion available as of November 30, 2022, for M&A in “firepower”—which EY defines as a company’s capacity to carry out M&A deals based on the strength of its balance sheet, specifically the amount of capital available for M&A deals from sources that include cash and equivalents, existing debt, and market cap.

That firepower is up 11% from 2021, and surpasses the previous record of $1.22 trillion in 2014, the first year that EY measured the available M&A capital of large biopharmas.

Unlike recent years, Baral said, biopharma giants are more likely to deploy that capital on M&A this year to close the “growth gap” expected to occur over the next five years as numerous blockbuster drugs lose patent exclusivity and face new competition from lower-cost generic drugs and biosimilars.

“There is not enough R&D in their pipeline to replenish a lot of their revenue. And this growth gap is coming between 2024 and 2026. So, they don’t have a long runway to watch and stay on the sidelines,” Baral said.

This explains buyers’ interest in replenishing pipelines with new and innovative treatments from smaller biopharmas, he continued. Many smaller biopharmas are open to being acquired because declining valuations and limited cash runways have increased investor pressure on them to exit via M&A. The decline of the capital markets has touched off dramatic slowdowns in two avenues through which biopharmas have gone public in recent years—initial public offerings (IPOs) and special purpose acquisition companies (SPACs).

EY recorded just 17 IPOs being priced in the U.S. and Europe, down 89% from 158 a year earlier. The largest IPO of 2022 was Prime Medicine’s initial offering, which raised $180.3 million in net proceeds for the developer of a “search and replace” gene editing platform.

Another 12 biopharmas agreed to SPAC mergers with blank-check companies, according to EY, with the largest announced transaction (yet to close at deadline) being the planned $899 million merger of cancer drug developer Apollomics with Maxpro Capital Acquisition.

“For the smaller players, the target biotech companies, their alternate source of access to capital pathways such as IPOs and SPACs is shutting down on them. So how would the biotech companies continue to fund themselves? Those with quality assets are still getting funded through venture capital or other forms of capital,” Baral said. “But in general, there is not a lot of appetite for the biotech that is taking that risk.

Figures from EY show a 37% year-to-year decline in the total value of U.S. and European VC deals, to $16.88 billion in 2022 from $26.62 billion in 2021. Late-stage financing rounds accounted for just 31% of last year’s VC deals, down from 34% in 2021 and 58% in 2012. The number of VC deals in the U.S. and Europe fell 18%, to 761 last year from 930 in 2021.

The decline in VC financing helps explain why many smaller biopharmas are operating with cash “runways” of less than 12 months. “Depending on the robustness of their data, their therapeutic area, and their management, there will be a natural attrition. Some of these companies will just have to wind down,” Baral added.

M&A headwinds

Baral also acknowledged some headwinds that are likely to dampen the pace of M&A activity. In addition to rising interest rates and inflation increasing the cost of capital, valuations remain high for the most sought-after drugs, platforms, and other assets—a result of growing and continuing innovation.

Another headwind is growing regulatory scrutiny of the largest deals. Illumina’s $8 billion purchase of cancer blood test developer Grail has faced more than two years of challenges from the U.S. Federal Trade Commission and especially the European Commission—while Congress acted last year to begin curbing the price of prescription drugs and insulin through the “Inflation Reduction Act.”

Those headwinds may prompt many companies to place greater strategic priority on collaborations and partnerships instead of M&A, Baral predicted, since they offer buyers early access to newer technologies before deciding whether to invest more capital through a merger or acquisition.

“Early-stage collaboration, early minority-stake investment becomes increasingly important, and it has been a cornerstone for early access to these technologies for the industry for a long, long time, and that is not changing any time soon,” Baral said. “On the other hand, even on the therapeutic area side, early-stage development is still expensive to do in-house for the large biopharma companies because of their cost structure.

“So, it is efficient cost-wise and speed-wise to buy these assets when they reach a certain point, which is probably at Phase II onward, and then you can pull the trigger on acquisitions if needed,” he added.

The post EY Eyes Comeback for Biopharma M&A appeared first on GEN - Genetic Engineering and Biotechnology News.

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Pfizer’s Albert Bourla spells out ‘transition year’ for Covid products, with sales expected to reach a low point

On the heels of a record sales year, Pfizer is bracing for impact as it expects Covid-19 revenue to bottom out in 2023.
That’s due to lower compliance…

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On the heels of a record sales year, Pfizer is bracing for impact as it expects Covid-19 revenue to bottom out in 2023.

That’s due to lower compliance with vaccine recommendations, fewer primary vaccines being administered, and a “significant” government supply that’s expected to last throughout early this year, execs said Tuesday on the company’s Q4 earnings call.

CEO Albert Bourla anticipates $13.5 billion in Comirnaty sales this year, down 64% from 2022, and just $8 billion in Paxlovid revenue, down 58% from 2022.

“We expect 2023 to be a transition year in the US,” he said on the call, adding that the company sold more vaccine and treatment doses this year than were actually used. “This resulted in a government inventory build that we expect to be absorbed sometime in 2023 — probably the second half of the year. Around that time, we expect to start selling Comirnaty through commercial channels at commercial prices.”

Just 15.5% of eligible Americans have received bivalent booster doses, compared to 69.2% who completed their primary series, according to the CDC’s latest data. Last week, the FDA’s vaccines advisory committee voted unanimously in favor of “harmonizing” Covid vaccine compositions, meaning all new vaccine recipients would receive a bivalent shot, regardless of whether they’ve received the primary series.

Even so, only 31% of people in the US received a Covid vaccine this year, and Pfizer expects that number to dip to about 24% in 2023.

David Denton

Bourla’s expecting a similar slump in Paxlovid sales, due to existing unused government supply. According to data from ASPR updated last week, states have about 4 million unused Paxlovid courses.

The antiviral significantly underperformed this year, missing Bourla’s prior full-year projections by just over $3 billion. Comirnaty seemed to pick up the slack, however, raking in roughly $37.8 billion in global sales, or about $3.8 billion more than Bourla predicted at the end of the third quarter.

“While patient demand for our Covid products is expected to remain strong throughout 2023, much of that demand is expected to be fulfilled by products that were delivered to governments in 2022 and recorded as revenues last year,” CFO David Denton said on the call.

Angela Hwang

Commercial pricing for both Comirnaty and Paxlovid will likely kick in around the second half of this year, according to Bourla. While the pharma giant previously said it expects to charge between $110 and $130 for the BioNTech-partnered shot (almost quadrupling the price), chief commercial officer Angela Hwang said the team is still “preparing what those pricing scenarios could look like” for Paxlovid and will “share more at the right time.”

The Pfizer team is expecting Covid sales to pick back up in the next couple years — and if all goes according to plan, a successful combination shot for flu and Covid-19 would “bring the percentage of Americans receiving the Covid-19 vaccine closer to the portion of people getting flu shots, which is currently about 50%,” Bourla said. The company launched a Phase I study for an mRNA-based combo vaccine back in November.

Lower projected Covid sales led Bourla to set his full-year sales expectations in 2023 at $67 billion to $71 billion, down roughly 30% from 2022, which let down some analysts.

“PFE guidance for 2023 provided with 4Q22 results was disappointing despite the company talking down financial prospects in recent weeks,” SVB Securities analysts wrote in a note to investors on Tuesday.

However, when it comes to R&D investment, Bourla’s keeping his foot on the gas. As the CEO said back in November, “It’s all about what’s next.”

That’s why he’s earmarking around $12.4 billion to $13.4 billion for R&D this year, up nearly 9% from last year. It’s all part of his effort to make up for an expected $17 billion loss due to patent expiries between 2025 and 2030.

Last quarter, he spelled out ambitious plans to bring 19 new products or indications to market over the next year and a half. The chief executive highlighted a few of those programs on Tuesday, including potential combo shots for flu, Covid-19 and RSV, an oral GLP-1 candidate for diabetes and obesity, and potential vaccines for Lyme disease and shingles.

Other programs, however, didn’t make the cut. Pfizer also disclosed on Tuesday that it cut eight programs, including recifercept, an achondroplasia drug that was the centerpiece of Pfizer’s Therachon buyout in 2019, and two Paxlovid indications that failed their respective Phase III trials.

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Aging | Clearance of p16Ink4a+ cells: limited effects on β-cell mass and proliferation in mice

“[…] we set out to explore the effects of removing p16Ink4a+ senescent cells on the proliferative capacity and mass of β-cells […].” Credit: 2023…

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“[…] we set out to explore the effects of removing p16Ink4a+ senescent cells on the proliferative capacity and mass of β-cells […].”

Credit: 2023 Bahour et al.

“[…] we set out to explore the effects of removing p16Ink4a+ senescent cells on the proliferative capacity and mass of β-cells […].”

BUFFALO, NY- January 31, 2023 – A new research paper was published on the cover of Aging (listed as “Aging (Albany NY)” by Medline/PubMed and “Aging-US” by Web of Science) Volume 15, Issue 2, entitled, “Clearance of p16Ink4a-positive cells in a mouse transgenic model does not change β-cell mass and has limited effects on their proliferative capacity.”

Type 2 diabetes is partly characterized by decreased β-cell mass and function which have been linked to cellular senescence. Despite a low basal proliferative rate of adult β-cells, they can respond to growth stimuli, but this proliferative capacity decreases with age and correlates with increased expression of senescence effector, p16Ink4a

In a new study, researchers Nadine Bahour, Lucia Bleichmar, Cristian Abarca, Emeline Wilmann, Stephanie Sanjines, and Cristina Aguayo-Mazzucato from the Joslin Diabetes Center at Harvard Medical School hypothesized that selective deletion of p16Ink4a-positive cells would enhance the proliferative capacity of the remaining β-cells due to the elimination of the local senescence-associated secretory phenotype (SASP). 

“We aimed to investigate the effects of p16Ink4a-positive cell removal on the mass and proliferative capacity of remaining β-cells using INK-ATTAC mice as a transgenic model of senolysis.”

Clearance of p16Ink4a-positive subpopulation was tested in mice of different ages, males and females, and with two different insulin resistance models: high-fat diet (HFD) and insulin receptor antagonist (S961). Clearance of p16Ink4a-positive cells did not affect the overall β-cell mass. β-cell proliferative capacity negatively correlated with cellular senescence load and clearance of p16Ink4a positive cells in 1-year-old HFD mice improved β-cell function and increased proliferative capacity in a subset of animals. Single-cell sequencing revealed that the targeted p16Ink4a subpopulation of β-cells is non-proliferative and non-SASP producing whereas additional senescent subpopulations remained contributing to continued local SASP secretion. 

“In conclusion, deletion of p16Ink4a cells did not negatively impact beta-cell mass and blood glucose under basal and HFD conditions and proliferation was restored in a subset of HFD mice opening further therapeutic targets in the treatment of diabetes.”

 

DOI: https://doi.org/10.18632/aging.204483 

Corresponding Author: Cristina Aguayo-Mazzucato cristina.aguayo-mazzucato@joslin.harvard.edu 

Keywords: beta cells, mass, proliferation, senolysis, senescence

Sign up for free Altmetric alerts about this article:  https://aging.altmetric.com/details/email_updates?id=10.18632%2Faging.204483

 

About Aging-US:

Launched in 2009, Aging (Aging-US) publishes papers of general interest and biological significance in all fields of aging research and age-related diseases, including cancer—and now, with a special focus on COVID-19 vulnerability as an age-dependent syndrome. Topics in Aging go beyond traditional gerontology, including, but not limited to, cellular and molecular biology, human age-related diseases, pathology in model organisms, signal transduction pathways (e.g., p53, sirtuins, and PI-3K/AKT/mTOR, among others), and approaches to modulating these signaling pathways.

Please visit our website at www.Aging-US.com​​ and connect with us:

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