Equities ease as dashed rate cut hopes push yields higher

Monday saw US equities retreat, with the S&P 500 slipping 0.3% and the Dow dipping 0.7% from last week’s record highs. Treasury yields surged, nearing 4.166%, as robust economic data reshaped expectations for Fed rate cuts. Federal Reserve Chair Powell’s cautious stance on rate adjustments further buoyed yields. Materials and real estate sectors lagged, while semiconductors advanced. The US Dollar Index strengthened amid expectations of prolonged elevated interest rates.  In the Euro Area, the Stoxx 50 Index slipped by 0.3% yesterday, with notable individual equity movements including Unicredit surging by 8% and Renault rising by 1.1%. 

Summary for 06.02.2024 

• Asian shares mostly declined on Tuesday as markets recalibrated expectations for US interest rate cuts, spurred by strong economic data and hawkish remarks from Fed Chair Powell. Chinese markets bucked the trend, surging on reports of increased buying by a sovereign fund.  Meantime, the Reserve Bank of Australia kept interest rates unchanged, extending a pause for the fourth straight month. 
• European shares look set to gain on Fed outlook and China’s market support, while US futures stabilise after previous session’s slide driven by Treasury yield surge and Powell’s cautious rate cut remarks. 
• Oil prices climbed in Asian trade this morning, extending gains amid rising tensions in the Middle East following US strikes on Iran-backed militias. Concerns over supply disruptions persisted despite efforts to avoid broader conflict. Last week’s losses were attributed to easing Israel-Hamas tensions and worries over Fed rate cuts and China’s economic recovery. 
• The Reserve Bank of Australia held interest rates steady at 4.35%, citing persistent high inflation despite recent easing. The bank warned of potential further rate hikes if inflation remains elevated. Australian economic data indicated cooling under the weight of high rates and inflation, with retail sales declining unexpectedly. 
• In January, the US ISM Services PMI rose to 53.4, surpassing December’s 50.5 and expectations of 52, indicating the strongest sector growth in four months. Key drivers included increased new orders, employment, and supplier deliveries, with backlogs rebounding. However, inflation concerns and geopolitical conflicts temper optimism. 
• Novartis AG announced its acquisition of German biotech firm MorphoSys AG for €2.7 billion, adding the promising cancer treatment candidate pelabresib to its portfolio. Novartis will pay €68.00 per share in cash, taking MorphoSys private, pending regulatory approvals. MorphoSys’ management boards intend to recommend the offer to shareholders. 
• Novo Nordisk’s parent company is acquiring Catalent for $16.5 billion to bolster Wegovy production. Novo Holdings will buy Catalent’s shares and sell three fill-finish sites to Novo Nordisk. The move aims to meet rising demand for Wegovy amid competition from Eli Lilly’s Zepbound, anticipating a $100 billion market by 2030. 
• Stellantis Chairman John Elkann dismissed merger rumours with Renault, emphasizing the company’s commitment to its long-term strategy. With a market capitalization exceeding €67 billion, comparable to Volkswagen’s €64 billion, Stellantis remains focused on its diverse 14-brand portfolio, including Peugeot and Fiat Chrysler. Despite Renault’s financial improvement, its market valuation remains relatively low at just over €10 billion, prompting speculation of potential consolidation, which Elkann refuted. 
• Shares of Santander and Lloyds fell on Monday following a Financial Times report alleging that Iran used accounts held at these UK banks to evade sanctions. Santander dropped up to 6.1%, losing around €3 billion in value, while Lloyds declined 0.5%. Both banks stated they believed they were not in breach of sanctions. 
• Estée Lauder shares surged 12% after exceeding analysts’ EPS expectations and outperforming on operating margin in Q2. Despite missed earnings forecast for the next quarter and full-year guidance, the company anticipates double-digit organic net sales growth in H2 2024. A restructuring plan aiming for profit recovery includes a 3-5% headcount reduction. EL’s less volatile nature suggests the market perceived this news as significantly impactful. 
• Caterpillar’s shares soared to a record high after beating estimates with a double-digit increase in operating profit, fuelled by robust mining equipment sales and higher prices. Despite a slowdown in global economic growth, commercial construction is expected to bolster margins. The company’s profit margins and backlog remain strong. 
• McDonald’s Q4 FY2023 results showed revenue slightly below analysts’ estimates, with EPS beating expectations. Same-store sales growth decelerated, but the company maintained steady store expansion. Despite a 3.7% decline in its share price post-reporting, McDonald’s remains a globally recognized brand with the potential for continued growth and customer loyalty. 
• Vodafone exceeded Q3 sales expectations despite challenges in Germany and Italy. Organic service revenue grew by 4.7%, with strong performance in the UK and Vodacom. European markets showed mixed results, but overall EU service revenue slightly declined. Vodafone anticipates surpassing adjusted EBITDA and free cash flow projections for the year. 
• Tesla’s shares dropped nearly 4% on Monday, following reports that Germany’s SAP had abandoned plans to purchase electric cars from the company. Additionally, Piper Sandler revised its delivery expectations for this year, projecting 1.93 million deliveries, well below Musk’s long-term annual target of 50% set about three years ago.  
• Shares of DocuSign Inc. dropped over 8% following reports that private equity firms Bain Capital and Hellman & Friedman have paused their pursuit of the company due to disagreements over acquisition terms. The potential deal, one of 2024’s largest leveraged buyouts, stalled after weeks of negotiations.  
• Nvidia’s shares surged over 4% on Monday as Goldman Sachs raised its price target to $800, citing anticipated earnings growth from the AI boom. Despite already trading at 31.4 times forward earnings, Goldman sees further upside due to Nvidia’s industry-leading innovations. Analysts expect robust Q4 results on 21^st February. 
• Bank of America analysts reiterate their buy rating on Apple after testing the Vision Pro handset, praising its spatial computing feature. While acknowledging typical first-generation challenges like weight and battery life, they foresee significant EPS contributions, estimating up to 89 cents per share over five years. Major content providers show no immediate plans for specialised apps. 
• Evercore ISI upgraded Tapestry Inc. from In Line to Outperform, raising the price target to $50. The upgrade is fuelled by Coach’s North American growth, potential conservative guidance for China, and improved conditions for brands under Capri Holdings. Concerns about Tapestry’s balance sheet have been alleviated by strong projected cash flow. 

• Argus reaffirmed its BUY rating on Alphabet Inc. with a $170 price target, citing the company’s solid financials despite slightly missing market expectations in advertising revenue. They highlight Alphabet’s robust performance in ventures like YouTube and Google Cloud, alongside investments in AI, positioning it well against industry peers. 
• Citi Research maintains a neutral stance on Stellantis with a $18.00 price target. Despite positive FY23 execution, concerns arise due to declining market share in the US and Europe, particularly in smaller volume models. Analysts expect FY23 results to show a 12.5% adjusted EBIT margin, with cautious outlook for FY24. 
• Bernstein reaffirmed Renault’s ‘Outperform’ rating, adjusting the price target to €45. Despite anticipated challenges, Bernstein highlights Renault’s overlooked benefits from its “Renaulution” strategy and management’s commitment to shareholders. Rising cash flow, dividends, and an expected credit rating improvement contribute to Bernstein’s bullish outlook on Renault’s growth prospects. 
• Following AbbVie’s strong Q4 2023 results, Goldman Sachs lifted the price target to $180, reiterating a Buy rating. Meanwhile, Bank of America raised the target to $167, maintaining a Neutral stance. Both firms cite promising Immunology performance and growth prospects but differ in cautiousness regarding long-term uncertainties beyond Humira’s dominance. 
• Bernstein adjusted Baidu’s price target to $140, down from $150, maintaining an Outperform rating. The move reflects a more conservative outlook for 2024 despite optimism in Baidu’s innovation potential in Search and AI Cloud businesses. Baidu’s financial health and market performance suggest long-term growth potential despite recent price declines. 
• Snap announced it would cut 528 employees, constituting 10% of its global workforce, amid ongoing challenges in revenue growth. The move reflects broader tech industry layoffs, including those at Amazon and Alphabet, with Snap attributing the decision to restructure to prioritise business objectives and investment capacity. 
• Ark Investment Management’s US-listed exchange-traded funds, known for volatile tech share investments, incurred the highest total losses of $14.3 billion over a decade, according to Morningstar. This stands in stark contrast to the broader market, where most ETFs experienced gains or relatively minor losses during the same period.