Morning Reads

Morning Reads





Following a wave of resignations from ministers in his government and a call from key allies to step down, U.K. Prime Minister Boris Johnson is set to resign this morning. Sterling regained some lost ground on the reports, with traders pricing in an end to the chaotic situation on Downing Street. On Wednesday, Johnson saw more resignations from his Conservative government in one day than any other prime minister in history, but was defiant and stressed his intention to stay on as leader as of late last night.

Commentary: "The U.K. political soap opera doesn’t matter much for sterling unless it opens a door to easier fiscal policy (sterling-positive) and allows a more constructive approach to trade relations," wrote Kit Juckes, chief FX strategist at Societe Generale.

Johnson has faced increasing pressure to resign after a series of scandals, including "Partygate" and allegations of misleading the public over the appointment of former deputy chief whip Chris Pincher. The momentum to oust Johnson grew with the resignations of Chancellor of the Exchequer Rishi Sunak and Health Secretary Sajid Javid on Tuesday, but quickly escalated into a full scale party mutiny. Nadhim Zahawi, who was appointed as Sunak's successor, even issued a letter this morning saying the prime minister must go following an announcement last night that he and Johnson would detail a plan to combat economic problems in the U.K.

What's next? A Tory leadership contest will now ensue, with bookmaker William Hill putting Sunak as the favorite at odds of 4-1. The new prime minister will have to contend with a troubled economy, with persistently high inflation that reached 9.1% in May. A spike in energy costs from the war in Ukraine is plaguing many industries, while the country is still dealing with the full impacts of Brexit more than two years after leaving the European Union. (58 comments)

Inflation or growth?

U.S. equity indices finished Wednesday's session with modest gains, as Wall Street reacted positively to details about the Feds strategy to contain inflation. Investors cheered signs that the central bank was committed to preventing price pressures from becoming entrenched, even if that came at a cost of slowing the U.S. economy. Seven of the 11 S&P sectors finished the session higher, but "Utilities" was the only one to post a gain of as high as 1%, as fears of recession continue to linger in the background.

The minutes: FOMC policymakers judged that an increase of 50 or 75 basis points "would likely be appropriate at the next meeting" given the current economic outlook. They also "recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist." With the potential for the firmer policy to slow growth, Fed officials also removed language from the June policy statement that "indicated an expectation that appropriate policy would result in a return of inflation to 2% and a strong labor market."

There was also discussion on steps to shrink the central bank's balance sheet, a strategy known as quantitative tightening. The FOMC projected that net income in its System Open Market Account would decline or potentially turn negative as the increased rate target range lifted interest expenses on some liabilities. "This eventually could result in a deferred asset entry" on the balance sheet, but neither unrealized losses on its existing securities portfolio or negative net income would result in changes to monetary policy implementation.

Commentary: ING expected the Fed to retain its hawkish stance, with tomorrow's nonfarm-payrolls becoming the next major data point in determining how stridently policymakers will rachet up rates at upcoming meetings. "In fact we even expect a 75 bps hike in July, barring a sharp weakening in employment indicators in this Friday's report," ING wrote in a note. "If Powell's recent remarks are anything to go by, the tone of the FOMC minutes will cause cognitive dissonance, with markets now openly questioning how far and how long the Fed can tighten policy before having to reverse course." (57 comments)


M&A hasn't been so hot recently with dealmakers and companies getting nervous about a coming recession. Kohl's (KSS) just called off its sale to Franchise Group (FRG) following months of negotiations, while Walgreens Boots Alliance (WBA) scrapped plans to sell U.K. pharmacy chain Boots. Rising borrowings haven't helped the situation by making financing more expensive, while a downturn in equity markets have hurt company valuations.

Still on the hunt: Reports suggest that Merck (MRK) is in advanced discussions to acquire Seagen (SGEN) and is hoping to finalize an agreement to buy the cancer-focused biotech in the next few weeks. A potential deal could be worth about $40B or more, though there is still uncertainty about whether the companies will reach an agreement. Shares of Seagen (SGEN) already spiked when news of the potential takeover interest from Merck (MRK) first surfaced in June, but the advanced talks boosted the stock by another 5% premarket.

A deal would broaden Merck's lineup of cancer drugs, which is currently being led by blockbuster immunotherapy Keytruda. The treatment brought in $17.2B in sales last year, but analysts see Keytruda sales approaching 40% of Merck's revenue in 2027 and losing its patent protection in late 2028. Products from Seagen could help diversify things, including Adcetris, which helps treat adults with certain lymphomas, and Padcev, a drug for urothelial cancers of the bladder and other organs.

Outlook: Even if it goes through, the transaction is expected to face heightened regulatory scrutiny, with BMO Capital and Cowen seeing "a high likelihood" of litigation from the Justice Department or Federal Trade Commission. (12 comments)

Chinese dominance

Many in the West are fearful of losing a global technology race to Chinese dominance, especially with regards to the transition to cleaner energy. The International Energy Agency was the latest to warn about the consequences in a special report on the solar sector, a key element in plans for the world to reach net zero emissions by 2050. In fact, China's share in all the manufacturing stages of solar panels currently exceeds 80%, and for key elements including polysilicon and wafers, it is set to rise to more than 95% in the coming years.

Quote: "The world will almost completely rely on China for the supply of key building blocks for solar panel production through 2025," the agency wrote in the report. "This level of concentration in any global supply chain would represent a considerable vulnerability."

It's not the only area of concern. China's BYD (OTCPK:BYDDY) just dethroned Tesla (TSLA) as the world's biggest electric vehicle maker and surpassed South Korea's LG as the planet's second-largest producer of EV batteries. The development comes as much of the West rolls out policies to convert their ICE fleets to EVs in the near future, but those initiatives will depend on raw materials processing that are highly concentrated in Asia. China's market share for battery components even climbed from 43% in 2014 to 60% in 2020 due to tight control of critical elements like lithium, nickel, cobalt and palladium.

Go deeper: The worries aren't limited to the energy landscape of the future. The war in Ukraine has seen power prices in Europe soar to record highs this week as the effects of Russia's gas supply cuts ripple through the continent. German power, the European benchmark, rose to a record of €337/MWh ($343.25), while French prices neared an all-time high of €398, triggering real fears for manufacturing and heavy industry. The U.S. is also discussing price caps on Russian oil and gas with its allies, but the concept would need to garner widespread adoption to be effective, while Vladimir Putin could cut supplies even further if he felt that Moscow was being threatened. (17 comments)

Today's Markets

In Asia, Japan +1.5%. Hong Kong +0.3%. China +0.3%. India +0.8%.
In Europe, at midday, London +1.2%. Paris +1.5%. Frankfurt +1.6%.
Futures at 6:20, Dow +0.2%. S&P +0.1%. Nasdaq +0.1%. Crude +0.7% to $99.19. Gold +0.2% to $1740.60. Bitcoin +1.7% to $20,528.
Ten-year Treasury Yield +5 bps to 2.96%

Today's Economic Calendar

7:30 Challenger Job-Cut Report
8:15 ADP Jobs Report
8:30 Initial Jobless Claims
8:30 Goods and Services Trade
10:30 EIA Natural Gas Inventory
11:00 EIA Petroleum Inventories
1:00 PM Fed's Waller: U.S. Economy and Monetary Policy
1:00 PM Fed's Bullard: U.S. Economy and Monetary Policy
4:30 PM Fed Balance Sheet

Companies reporting earnings today »

What else is happening...

U.S. job openings fall in May, but remain relatively high at 11.3M.

Intel (INTC) officially acquires land for Ohio semiconductor fab.

U.S. weighs capping Russian oil at $40-$60 to cut war financing.

Apple (AAPL) 'Lockdown Mode' will protect devices from state hackers.

BioNTech (BNTX) threatens CureVac (CVAC) with action over vaccine IP.

Meme-stock GameStop (GME) gains after setting four-for-one stock split.

Netflix (NFLX) plans 'Stranger Things' spinoff following viewing record.

Rivian Automotive (RIVN) rallies after releasing Q2 production tally.

Virgin Galactic (SPCE) partners with Boeing (BA) to build motherships.

American Air (AAL) averts cancellation crisis after glitch drops 12K flights

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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