Market 07/31: Threat from Japan's intervention in the interest rate market

Bank of Japan urgently buys 2 billion USD of Japanese bonds to curb the rise in yields

Every time the Bank of Japan expands intervention in the yield curve (Yield Curve Control), this is not optimistic for the US stock market because:

• If Japan intervenes to increase Japanese bond yields, investors will be attracted to buy Japanese bonds and sell US bonds, pushing UST yields higher

• If Japan intervenes to decrease Japanese bond yields, Japan will have to buy Japanese bonds with proceeds from selling US bonds, sucking liquidity out of the US market and pushing US bond yields higher.

Hedge funds are short bonds at the highest level in history:

• If hedge funds are right, yields will surge again and have an extremely negative impact on the market

• If hedge funds are wrong, a short squeeze could occur, pushing bond prices higher and yields continue to be suppressed

Public debt burden continues to weigh heavily on the US government

Before this increase, the US owed about 6 trillion USD and to date, this figure has reached 31.5 trillion.

For the first time in history, US interest costs are about to hit 1 trillion USD, soon to account for more than 20% of total government revenue.

Just in June alone, the government spent over 70 billion USD on interest costs, expected to soon exceed the defense budget.

Projected by 2053, interest costs will account for up to 35% of government spending, 3 times higher than R&D, infrastructure, and education combined, marking a record high spending level and ever-growing deficits.

Fed's soft landing efforts

After some signs of slowdown, the Fed is combating inflation by focusing on raising the benchmark overnight interest rate to a sufficiently high level to achieve inflation control targets, while acting swiftly to maintain public confidence.

US housing prices are the most expensive in history

The average price of a home in the US is around 500 thousand USD, 560 times the average household income, causing the homeownership rate to decline rapidly.

EU CPI index up +5.3% YoY, core CPI index up +5.5% YoY

Year-over-year, EU CPI hits 5.3%, matching the forecast.

EU core CPI slightly down -0.1% MoM but still strongly up YoY at +5.5%, higher than the expected 5.4%.

EU GDP index slightly up +0.6% YoY, +0.3% QoQ but still faces many challenges amid recession pressures.

Chinese market starts to turn optimistic after a series of government supports

CSI 300 up +4.5%, marking the highest gain since November. Increasing evidence of support shows that Chinese authorities are not just paying lip service to their commitments.

Chinese currency also up +1.5% after months of decline.

Housing Minister also strives to revive the ailing real estate sector. China's real estate index also recorded a 3% increase on Monday, marking over 20% growth from the low on July 24.

Manufacturing PMI index also slightly up in July to 49.3, higher than expected 48.9.

Some other news:

• Singapore's sovereign wealth fund Temasek ignites hope for positive signals from the US market.

• Loews' profits more than doubled thanks to surging investment income, offsetting losses from insurance costs.

• Elon Musk sparks controversy over giant X logo in San Francisco, affecting the city landscape and displeasing residents.

Upgrades

• ADBE: Morgan Stanley Upgrades to Overweight from Equalweight - PT $660 (from $510)

• BPMC: Wells Fargo Upgrades to Overweight from Equal Weight - PT $82 (from $55)

• CNOB: Raymond James Upgrades to Strong Buy from Market Perform - PT $26

• CRSR: Wedbush Upgrades to Outperform from Neutral

• CVX: Goldman Sachs Upgrades to Buy from Neutral - PT $187

• GDRX: TD Cowen Upgrades to Outperform from Market Perform - PT $12 (from $6.50)

• HAS: BofA Securities Upgrades to Buy from Neutral - PT $85 (from $68)

• IONS: Citi Upgrades to Buy from Neutral - PT $60 (from $36)

• NVCR: Evercore ISI Upgrades to In Line from Underperform - PT $33

• NYCB: Deutsche Bank Upgrades to Buy from Hold - PT $16 (from $10)

• R: Baird Upgrades to Outperform from Neutral - PT $118

• SG: Piper Sandler Upgrades to Overweight from Neutral - PT $19 (from $13)

• SIRI: Seaport Research Upgrades to Neutral from Sell

• SMBK: Raymond James Upgrades to Strong Buy from Market Perform - PT $30

• TCOM: JPMorgan Upgrades to Overweight from Neutral - PT $50 (from $39)

• VRRM: Deutsche Bank Upgrades to Buy from Hold - PT $26 (from $21)

• W: Piper Sandler Upgrades to Overweight from Neutral - PT $97 (from $35)

• XPEV: JPMorgan Upgrades to Neutral from Underweight

Downgrades

A: Evercore ISI Downgrades to In Line from Outperform - PT $124 (from $126)

• A: Barclays Downgrades to Underweight from Equalweight - PT $115

• ABR: Piper Sandler Downgrades to Underweight from Overweight - PT $16

• ARCB: Credit Suisse Downgrades to Neutral from Outperform - PT $127 (from $104)

• AVTR: William Blair Downgrades to Market Perform from Outperform

• AVTR: Evercore Downgrades to In Line from Outperform - PT $21 (from $22)

• CPRI: JPMorgan Downgrades to Neutral from Overweight - PT $47 (from $42)

• CRM: Morgan Stanley Downgrades to Equalweight from Overweight - PT $278 (from $251)

• CSX: RBC Capital Downgrades to Sector Perform from Outperform - PT $35

• CVNA: Jefferies Downgrades to Underperform from Hold - PT $30 (from $55)

• FBNC: Raymond James Downgrades to Market Perform from Outperform

• F: Jefferies Downgrades to Hold from Buy - PT $15 (from $17)

• GE: Oppenheimer Downgrades to Perform from Outperform

• LUV: Bernstein Downgrades to Market Perform from Outperform

• OTLY: RBC Capital Downgrades to Sector Perform from Outperform - PT $1.80 (from $7)

• PAG: JPMorgan Downgrades to Underweight from Neutral - PT $140 (from $150)

• RETA: Jefferies Downgrades to Hold from Buy - PT $172.50 (from $104)

• RETA: Ladenburg Thalmann Downgrades to Neutral from Buy

• TME: Citi Downgrades to Neutral from Buy - PT $7.50 (from $9.70)

• UPS: Credit Suisse Downgrades to Neutral from Outperform - PT $204 (from $200)

• WAT: Evercore ISI Downgrades to In Line from Outperform - PT $270 (from $285)

• WAT: Barclays Downgrades to Equalweight from Overweight - PT $275

• XPEV: UBS Downgrades to Neutral from Buy - PT $23 (from $12)

• XPO: Credit Suisse Downgrades to Neutral from Outperform - PT $78 (from $55)

Coverage Initiated

• AIV: Wolfe Research initiates at Peerperform

• AMAM: RBC Capital initiates at Outperform - PT $29

• CVM: ThinkEquity initiates at Buy - PT $10

• GEHC: BofA Securities initiates at Neutral - PT $82

• KROS: Wedbush initiates at Outperform - PT $86

• NYXH: H.C. Wainwright initiates at Buy - PT $15

• ONON: BTIG initiates at Neutral

• PRME: Guggenheim initiates at Buy - PT $24

• SKWD: BMO Capital initiates at Market Perform - PT $27