Equities hit by shifting interest rate outlook

US equities finished lower on Tuesday amid financial services earnings reports and Fed commentary. Cyclicals, including energy and industrials, lagged, while information technology rose. The New York Fed manufacturing index hit its lowest since May 2020, signalling challenges in the sector. Bond yields increased, with the 10-year at 4.05%, following comments by Fed Governor Waller on the deliberate approach to rate cuts. Equities tumbled, with the Dow Jones near a four-week low, while the 10-year Treasury yield spiked above 4%. The S&P 500 fell 0.4%, the Dow Jones lost 0.6%, and Nasdaq declined 0.2%. Meantime, the Euro Stoxx 50 index also faced a decline of around 0.3% yesterday, influenced by ECB policymakers’ comments at Davos, resisting expectations of imminent interest rate cuts and emphasising persistently high inflation levels. 

Summary for 17.01.2024 

• Most Asian equities declined this morning as Federal Reserve officials tempered expectations for early rate cuts, with Japanese shares rising briefly to new 34-year highs. Chinese equities fell due to Q4 GDP missing expectations at 5.2%, reflecting ongoing economic challenges. Asian tech equities, particularly in South Korea and Hong Kong, were hit hardest after Fed’s Waller downplayed early rate-cut hopes. Japanese equities, buoyed by hopes of a dovish BOJ, were the sole gainers, with the Nikkei up 0.4%. 
• Global oil prices faced downward pressure as the US dollar strengthened amid reduced expectations of a March interest rate cut, making dollar-denominated oil costlier for non-dollar buyers. Despite concerns about heightened tensions in the Middle East disrupting Red Sea shipping routes, the prevailing impact on oil prices was tempered. Tankers, avoiding the affected region, opted for longer routes around southern Africa. The upcoming OPEC monthly report is awaited for comprehensive insights into the broader oil market outlook. 
• European equities are expected to open with a soft tone, mirroring a subdued start for US stock futures, as investors react to Tuesday’s losses on Wall Street, influenced by concerns over rising yields and cautious comments from central bankers. 
• China’s Q4 GDP grew 5.2%, slightly below the expected 5.3%, reflecting persistent economic challenges. The annual GDP for 2023 reached 5.2%, surpassing Beijing’s 5% target, but the stronger figure was influenced by a lower base from the previous year’s pandemic impact. Economic struggles persisted, marked by slowing consumer spending, a property market downturn, and limited government support. The December data indicated continued economic weakness into early 2024, with deflation, subpar industrial production, and higher unemployment. 
• Federal Reserve Governor Christopher Waller indicated a cautious approach to potential interest rate cuts later this year, diverging from market expectations of more aggressive measures. His emphasis on a methodical and data-dependent strategy reflects a departure from the Fed’s past rapid responses to economic shocks, aligning with current conditions of gradually declining inflation amidst robust economic activity. Waller’s comments influenced a swift reaction in bond yields, signalling a market shift in expectations. 
• European Central Bank Governing Council member Gediminas Simkus said investors are too hopeful when it comes to the prospect of lowering interest rates imminently. Similar sentiment from fellow Governing Council member Robert Holzmann earlier in the week weighed on bond prices. ECB president Christine Lagarde speaks later on Wednesday in Davos. 
• Fourth-quarter earnings continued yesterday, with Morgan Stanley and Goldman Sachs both reporting. Takeaways were mixed, with Goldman Sachs exceeding consensus earnings estimates, aided by strong performance in its Asset & Wealth Management Segment, while Morgan Stanley missed consensus EPS estimates, largely due to the impact of one-time regulatory charges. Goldman’s shares climbed 0.7%, while Morgan Stanley tumbled by over 4.0%. 
• Shares of Nvidia and Advanced Micro Devices surged yesterday as Wall Street analysts raised price targets on the semiconductor giants due to increased optimism over the demand for artificial intelligence (AI)-powered chips. Nvidia’s dominant position in advanced AI chips faces competition from AMD, expected to gain market share in 2024. Nvidia’s stock rose 3% to hit a record high, while AMD surged 7.5% to its highest level in over two years. Analysts from Barclays and KeyBanc raised their price targets for both companies.  
• Boeing shares tumbled over 8% as the Federal Aviation Administration (FAA) extended the grounding of the company’s 737 MAX 9 airplanes indefinitely for safety checks on Boeing’s entire production line. The FAA cited “multiple production-related issues” as the reason for the extension. Wells Fargo downgraded Boeing shares due to increased production/delivery risks. Reports also suggest new deliveries of Boeing’s 737 MAX 9s to China face additional delays as China Southern Airlines plans extra safety inspections. 
• A US federal judge blocked JetBlue Airways’ $3.8 billion acquisition of Spirit Airlines, stating it would harm consumers and violate antitrust law. The ruling supports the Biden administration’s efforts to prevent further airline industry consolidation. JetBlue and Spirit are evaluating their next steps, while the decision raises questions about the viability of other proposed deals, such as Alaska Air’s acquisition of Hawaiian Airlines. Spirit’s shares plummeted 47%, and JetBlue’s rose about 5%. 
• Hertz Corporation is selling 20,000 electric vehicles (EVs), including Tesla models, citing high repair costs and weak demand. This move raises concerns about used EV affordability and reliability, potentially impacting consumer sentiment and the broader EV market. Hertz’s discounted sale may depress used EV values, but the Inflation Reduction Act’s tax credit could offset the impact. The incident reflects challenges in EV repair costs, infrastructure, and the overall slowdown in EV sales growth. Experts believe improvements in infrastructure will eventually mitigate challenges in the EV market. 
• Morgan Stanley analysts upgraded several retail and automotive companies, citing achievable 2024 estimates and stronger 2025 EPS growth. Target, Dollar General, Walmart, and Valvoline were upgraded, while Tractor Supply and Driven Brands Holdings were downgraded. The analysts highlighted a more favourable outlook driven by lower rates, bottoming durables, and a late 2024/early 2025 housing inflection. They anticipate sales-weighted same-store sales growth and raised the price target for Target. 
• Citi has added Verizon to its Positive Catalyst Watch list ahead of the 4Q earnings season, anticipating a stable wireless competitive landscape. The move reflects optimism about Verizon’s performance and potential positive developments in earnings and market positioning. Citi analysts emphasize Verizon’s capability to execute on core wireless operations, differentiate with network quality, and accelerate revenue from emerging 5G applications. The new price target is set at $45 per share. 
• Shares in PayPal declined after Mizuho analysts downgraded the company to “neutral” from “buy,” expressing concerns about market share erosion due to stiff competition from Apple’s mobile payment platform. The analysts highlighted a shift in consumer checkout habits, driven by the prevalence of iPhones and the popularity of Apple Pay, posing a significant threat to PayPal’s branded products. Additionally, worries were raised about PayPal’s engagement with the emerging age demographic, where younger consumers are favouring newer payment methods like “buy now, pay later” services. 
• Morgan Stanley upgraded DocuSign to an Equal-Weight rating from Underweight and increased the 12-month price target to $64.00 from $49.00. The decision came after heightened investor interest following a Wall Street Journal report suggesting a potential private equity deal for the software company. Morgan Stanley cited a positive outlook driven by expectations of better days ahead after challenging COVID contract renewals, a stable-to-declining interest rate environment, and advancements in self-service go-to-market investments.  
• Hugo Boss shares fell 11% as its Q4 operating profit of €121 million missed estimates, though sales increased by 13% to €1.18 billion. The company faced challenges amid rising wages and high interest rates, impacting profit margins. Analysts noted a general deceleration in the luxury and apparel sector. Despite the setback, Hugo Boss aims for a 2023 operating profit margin of 9.8%, up from 9.2% in 2022, and targets a margin of at least 12% by 2025, along with €5 billion in revenue. 
• Stellantis has entered a multi-billion euro agreement with SIXT SE to sell up to 250,000 vehicles in Europe and North America over the next three years. The deal encompasses a range of Stellantis vehicles, including electric ones, with deliveries starting in Q1 2024. The agreement may also lead to collaboration on Stellantis’ data as a service business, exploring further cooperation opportunities. 
• Piper Sandler upgraded Home Depot from Neutral to Overweight, raising the price target to $400 from $311. The move is driven by optimism about home improvement, particularly in large remodel projects, with an uptick in home equity extraction activities. The analysts believe HD is well-positioned to outperform the market and competitors like Lowe’s and Floor & Decor Holdings. They highlight HD’s higher exposure to professional customers and recent Pro capabilities as factors contributing to healthy comparable sales growth. 
• Restaurant Brands International (QSR), the owner of Burger King, has announced a $1.0 billion all-cash deal to acquire full control of Carrols, the largest US franchisee of Burger King. The deal, expected to be completed in Q2 2024, offers a 13.4% premium to Carrols’ closing stock price. RBI plans to boost sales growth and franchisee profitability, including remodelling Carrols-operated Burger King locations. This move aligns with RBI’s strategy to enhance its brands and expand its footprint in the competitive fast-food market.