Rumours swirl around Credit Suisse, and Morgan Stanley's top materials picks

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead. 

MARKETS WRAP

• S&P 500 - 3586 (-1.51%)
• NASDAQ - 10575 (-1.51%)
• CBOE VIX - 31.62
• USD INDEX - 112.17
• US 10YR - 3.829%
• FTSE 100 - 6894 (+0.18%)
• STOXX 600 - 387.85 (+1.3%)
• UK 10YR - 4.149%
• GOLD - US$1672/oz
• WTI CRUDE - US$79.49/bbl
• DALIAN IRON ORE - US$98.31/T

MAJOR HEADLINES

There has been plenty of movement around Credit Suisse over the weekend. On Friday, CEO Ulrich Koerner sent around a memo saying that the bank had a "strong capital base and liquidity position", whilst senior executives spent their weekend doing their best to reassure large clients, counterparties and investors, according to the Financial Times. 

The memo from the CEO also noted that the bank was at a "critical moment" as it prepares for a restructuring, the details of which are the be revealed on October 27. Expectations are that some 5000 jobs could be cut, with assets sold off. Some analysts are saying it won't be enough, however. According to a Bloomberg report, Credit Suisse is estimated to need a further $4 billion Swiss francs even after asset sales, to fund the restructuring, with a capital raise touted as the most likely option.  

Meanwhile, spreads on Credit Suisse credit default swaps (CDS) rose sharply on Friday. These CDS offer protection against Credit Suisse defaulting. Credit Suisse's five-year credit default swaps (CDS) jumped 6 basis point to close to 247 bps on Friday, the highest level in at least 10 years. Credit Suisse CDS began the year at 57 bps.

Watch this space. 

THE CALENDAR

The RBA decision on Tuesday and US employment data are the big data points this week. 

THE CHART

Today's chart comes courtesy of Citi and their recent Global Macro update. The reason why this chart is important is that earnings revisions from analysts typically lead earnings-per-share (EPS) trends, and EPS trends typically lead share prices. It makes sense when you think it through. Analysts see earnings contracting and lower their EPS forecasts, earnings per share ultimately contract in the economic environment, and share prices tank as the end result. Pretty clear line of site. The Citi research notes that if the global economy is reaching stall speed, as many expects that it is, then EPS expectations must fall and signal contraction in 2023. The problem as Citi see it? Currently EPS expectations sit at +11% for 2022 and +6% for 2023.... i.e. they can come down a lot further, which would put even more pressure on equities. 

STOCKS TO WATCH

Morgan Stanley have run the ruler over the miners, in light of what's going on in China. First and foremost they note that Aguust growth numbers were an improvement, but still sub par. Property activity was weak, whilst commodities data showed a sequential increase in imports and a decrease in exports. In that context, here is how MS is seeing some local materials plays;

• Whitehaven (ASX: WHC) - Overweight - MS' top pick as they anticipate thermal coal which stay higher for longer, leading to capital returns - dividends and buybacks. Growth optionality is a positive. 
• South32 (ASX: S32) - Overweight - Aluminium is the MS commodity team's top pick and 46% of S32's valuation and 33% of its revenues comes from the metal. 
• Rio Tinto (ASX: RIO) - Overweight - Makes the top three also for its exposure to aluminium (25% of CY23 revenue) and high quality iron ore (49% of CY23 revenue). 
• MS also likes some of the gold plays, being overweight Newcrest (ASX: NCM) and Northern Star (ASX: NST). 

Chris Conway wrote today's report. Hans is on leave.

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