Equities, bonds rally as Fed leans towards the market

US equities soared to record highs as the Federal Reserve maintained benchmark rates and hinted at a potential 75 basis point rate cut in 2024 to address easing inflation. The Dow Jones Industrial Average hit a peak, with the S&P 500 and Nasdaq Composite reaching two-year highs, reflecting optimism that the Fed sees a possible “soft landing” for the economy. Financial shares surged on expectations of improved profit margins with lower interest rates, and the Russell 2000 Index outpaced its larger counterparts. Treasury yields declined sharply, with the 10-year note hitting a four-month low above 4%. In contrast European shares closed marginally lower after early gains, reflecting subdued risk sentiment ahead of key central bank decisions. Disappointing Eurozone economic data added pressure, and individual share movements varied, with BASF rising on a UBS upgrade, and LVMH stagnating after a JPMorgan downgrade. 

• Most Asian stocks surged as the Federal Reserve signalled a halt to interest rate hikes and potential cuts in 2024. Australia’s ASX 200 and South Korea’s KOSPI gained, with Hong Kong’s Hang Seng adding despite mainland weakness. The prospect of lower interest rates, positive cues from Wall Street, and optimism over the Indian economy boosted regional markets. However, Japan’s Nikkei 225 fell due to profit-taking, while Chinese stocks lagged amid caution about economic indicators and ongoing deflationary concerns. 
• European shares are poised to rally as signals of potential rate cuts by the Federal Reserve boost market sentiment. US equity futures also edge higher overnight following a record-setting session on Wall Street, with the Dow, S&P 500, and Nasdaq all marking their fifth consecutive day of gains. 
• The Federal Reserve, in its final 2023 meeting, maintained the fed funds rate target at 5.25%–5.5%. Updated projections revealed a lower median estimate for the 2024 fed funds rate at 4.6%, suggesting potential future rate cuts. Core PCE inflation projections for 2024 also decreased. Fed Chair Powell indicated the Fed may be near the peak of its rate-hiking cycle, aligning with the view that rate cuts could commence in the latter part of 2024. 
• The November producer price index inflation in the US was lower than expected, with a 0.9% year-over-year increase, falling below the anticipated 1%. Core PPI, excluding food and energy, rose by 2%, a decline from the previous 2.3% and the lowest since January 2021. This subdued PPI aligns with the recent trend of declining consumer price index and personal consumption expenditures inflation, suggesting potential support for future inflation as producer costs moderate. 
• US Treasury Secretary Janet Yellen stated that inflation has significantly decreased, expressing confidence it will reach the Fed’s 2% target by the end of 2024. Yellen expects a soft landing for the U.S. economy, with a reasonable chance of continued growth in 2024. She highlighted improving consumer confidence and real earnings, noting a gradual improvement in economic sentiment. Yellen trusts the Federal Reserve to manage monetary policy. 
• Germany’s three-way coalition, led by Chancellor Olaf Scholz, reached an agreement on the 2024 draft budget, resolving a funding gap through spending cuts and a temporary return to new net borrowing limits. Economists express mixed views, with concerns about relying on reserves and potential negative impacts on economic growth, while acknowledging efforts to balance budgets. The agreement emphasizes avoiding a constitutional review but leaves questions regarding the balance between investments and budgetary constraints. 
• Argentina’s president, Javier Milei, allowed a 50% peso devaluation to 801 per dollar, unveiling economic reforms to address fiscal challenges. Economy Minister Luis Caputo announced spending cuts, subsidy reductions, and other measures to stabilize the economy. Markets responded cautiously, with bonds and shares fluctuating. The IMF praised the “bold” changes, but concerns persist about inflation and recession risks. 
• BMW Group has secured a test license for level 3 autonomous driving on high-speed roads in Shanghai, a significant step toward introducing driverless cars in China. The German automaker plans to launch products with L3 self-driving functionality in compliance with Chinese laws. This move aligns with China’s efforts to expedite the widespread adoption of autonomous driving technologies, evidenced by recent safety guidelines issued for autonomous vehicles in public transport. 
• Berkshire Hathaway acquired around 10.5 million shares of Occidental Petroleum for approximately $588.7 million this week, bringing its stake in the company to about 27%. Berkshire also holds preferred shares and warrants for an additional 83.8 million Occidental shares, potentially increasing its ownership to 33%, as part of a deal aiding Occidental’s 2019 acquisition of Anadarko Petroleum. If exercised, the warrants would cost $56.62 per share. Occidental closed at $57.22 on Wednesday. 
• Adobe faces FTC scrutiny over subscription practices, with ongoing talks on a potential settlement. The UK regulator is probing Adobe’s $20 billion acquisition of Figma. Q1 2024 revenue forecast of $5.10B to $5.15B missed estimates, reflecting economic challenges. Fiscal 2024 revenue projection of $21.30B to $21.50B also fell short amid inflation concerns, higher interest rates, and price hikes. 
• UBS Group AG is reportedly making efforts to recoup a portion of the 1.2 billion Swiss francs ($1.38 billion) in cash bonuses that Credit Suisse paid to retain dealmakers before its collapse. UBS has contacted hundreds of bankers, offering some multi-year payment plans, aiming to recover less than 651 million Swiss francs. 
• Pfizer faced a stock downturn, hitting a 10-year low, as it adjusted its 2024 sales forecast to potentially $5 billion below Wall Street expectations. The revision reflects a more conservative approach to its COVID-19 business, with projected revenues from its COVID-19 vaccine and treatment expected to fall to $8 billion in 2024. Despite acquisitions and a new RSV vaccine, Pfizer’s shares have declined 44% this year amid concerns about post-pandemic growth and generic competition for existing drugs. 
• Southwest Airlines shares fell nearly 4% yesterday as the company updated its Q4/23 guidance, anticipating higher unit revenues at the upper end of previous estimates but offset by increased jet fuel costs of $3.00 to $3.10 per gallon. Goldman Sachs revised its December quarter EPS estimate for Southwest to $0.10, below the prior prediction and consensus estimate. Southwest also moderated its long-term capacity growth plans to support improving returns, aiming for low-single to mid-single-digit growth. 
• Macquarie raised Microsoft’s price target to $430.00, citing undervaluation due to AI copilot opportunities. The analysis suggests potential additional revenue of approximately $9.1 billion from Microsoft’s AI copilot portfolio, with high gross margins of 61% to 91%. In the base-case scenario, this could lead to a $0.49 increase in EPS by fiscal year 2026, reaching $2.17 in an optimistic scenario. The assessment considers adoption rates by fiscal year 2025, with significant adoption expected in 2025. 
• Farfetch shares surged 16.5% on Wednesday after reports of discussions with Apollo Global Management for emergency funding. The uncertainty about the deal’s form (debt, equity, or a mix) raises questions, given the company’s volatile stock movements. Farfetch’s shares are down 83.7% since the year began, trading at $0.72, 90.4% below the 52-week high of $7.53. 
• Oppenheimer downgraded Hertz Global to Perform, citing expected challenges in 2024, including EV initiative hurdles, higher vehicle interest expenses, and increased depreciation. The 2024 EBITDA projection is $823 million, with a rise in vehicle interest expenses to $500 million and depreciation to $300 per unit per month. Hertz shares rose 6.20% post-announcement 
• Alphabet shall make its advanced AI model, Gemini, immediately available to developers at reduced costs—now one-half to one-fourth of June prices. Developers can customize Gemini using provided tools, and two new products powered by Gemini are on the horizon. Alphabet competes with AI software like OpenAI’s ChatGPT. 
• Wells Fargo downgraded Johnson & Johnson to Equal Weight from Overweight, citing concerns about the impact of Stelara’s loss of exclusivity in mid-2024 overseas and early 2025 in the U.S. The analysts estimate Stelara contributes about 13% to JNJ’s total sales and 24% to its operating income in 2023, anticipating headwinds to earnings growth. 
• HSBC downgraded Ferrari to Hold, citing stretched 2024 consensus and limited earnings surprise potential. Porsche AG was upgraded to Buy, despite China and pricing pressures, with resilience anticipated. Ferrari outperformed YTD, while Porsche’s risks are deemed manageable with a ‘value over volume’ strategy. 
• Bank of America equity strategists emphasize the continued value in small-cap stocks despite a recent rally. The Russell 2000 forward P/E rose to 13.5x in November but remains historically inexpensive, trading at a 12% discount to its long-term average. The strategists suggest an accelerating profit cycle would favour small-cap value over growth.  
• Morgan Stanley increased Walt Disney’s price target to $110 from $105, maintaining an Overweight rating. The key takeaways include the supportive role of Parks & Experiences, anticipation of Disney reaching DTC profitability in FY24, plans for ESPN’s DTC launch, strategic options for reducing exposure in linear networks, and upcoming film IP tests. 
• Inditex, the owner of Zara, reported a robust start to Q4 with a 14% YoY increase in sales between Nov. 1 and Dec. 11, despite projecting a 4% currency impact on fiscal 2023 sales. The company raised its full-year margin guidance, now expecting a gross annual margin around 75 basis points higher than the prior year. 
• Moody’s projects a negative outlook for Latin American non-financial companies in 2024 due to persistent high interest rates, slow regional economic growth, and anticipated low commodity prices linked to China’s deceleration. The report notes that uneven growth and continued high debt costs will impact spending, investment, and employment despite improved credit conditions next year. The El Niño climate phenomenon and potential government intervention in mining pose additional challenges. 
• Country Garden Holdings, facing a debt crisis, remitted over 800 million yuan ($111.42 million) to repay onshore bondholders who exercised a put option, signaling ongoing financial challenges as the Chinese developer works on a plan to restructure its $11 billion offshore bonds after defaulting.