Supportive China data should fuel further gains

After a significant rally in the Dow Jones on Wednesday, markets sustained their positive momentum on Thursday. The Russell 2000 outperformed the S&P 500, and the 10-year Treasury yield continued to decrease. Improved inflation trends, a cautious Federal Reserve outlook, and lower rates supported robust performance in both equities and bonds. The Dow achieved another record high, driven by optimism about inflation, the economy, and expectations of Fed rate cuts in 2024. Investors, confident that interest rates have peaked, shifted towards rate-sensitive sectors. The Stoxx 50 index in Europe rose 0.3% to a 23-year peak of 4,542, driven by rate-sensitive luxury brands in Paris, with LVMH and Kering among the day’s top gainers. 

Summary for 15.12.2023 

• Asian stocks soared on Friday, propelled by dovish signals from the Federal Reserve and positive Chinese economic data. Technology-heavy indices led gains as US interest rate cut expectations drove down Treasury yields. Hong Kong’s Hang Seng surged 3.5%, and broader Chinese markets rose. Other Asian markets extended their rally on improving global liquidity, with Japan’s Nikkei up 1.1%, Australia’s ASX 200 gaining 1%, and India’s Nifty 50 hitting a record high amid optimism over the country’s economic growth and political stability. 
• European equity markets are poised to open higher on Friday, riding the wave of a global rally fuelled by optimism around potential US Federal Reserve interest rate cuts, while US equity futures remain steady following a sixth consecutive day of gains, with Dow closing at a record high and positive corporate developments, including Moderna’s cancer treatment trials and AT&T’s electric vehicle purchase agreement with Rivian. 
• Oil prices gained, set for the first weekly rise in two months, supported by a positive 2024 oil demand forecast from the International Energy Agency (IEA) and a weaker dollar. The US Federal Reserve’s mid-week announcement of likely rate cuts and a softer dollar, making oil more affordable for foreign buyers, contributed to the upswing. The IEA predicted a 1.1 million barrels per day increase in global oil consumption for 2024. 
• China’s industrial production in November surpassed expectations, growing by 6.6% year-on-year, indicating resilience in manufacturing despite weakening domestic and global demand. The stronger reading is attributed in part to a low basis for comparison due to COVID-era challenges in late 2022. However, concerns persist as other economic indicators, including retail sales missing expectations at 10.1% growth, highlight ongoing weaknesses.  
• The European Central Bank has kept its deposit rate steady at a record 4% for the second consecutive meeting, aligning with economists’ expectations. Despite stable rates, the ECB announced an accelerated wind-down of the Pandemic Emergency Purchase Programme (PEPP), signalling a shift toward policy tightening. ECB President Lagarde highlighted a balanced inflation outlook and economic growth risks, contrasting with other central banks. Investors adjusted future rate cut expectations, anticipating 155 basis points of easing. 
• The Bank of England maintained its benchmark interest rate at 5.25% with a 6-3 majority vote during its December meeting, emphasizing the need for a prolonged period of restrictive monetary policy to address inflation, while some policymakers advocated for a 25 bps rate hike due to tight labor markets and ongoing inflationary pressures. 
• Contrary to consensus, major financial players like Fidelity International, JPMorgan Chase & Co., and HSBC Holdings Plc predict the US dollar will strengthen next year, fuelled by a robust US economy. This perspective challenges the prevailing belief that lower interest rates, as indicated by the Federal Reserve, would lead to a weaker dollar. 
• In November 2023, US retail sales unexpectedly rose by 0.3% MoM, rebounding from a revised 0.2% fall in October. The data indicated a robust start to the holiday shopping season, with significant increases in sales at food services, nonstore retailers, health and personal care, and furniture stores. 
• Lennar Corp, the second-largest U.S. homebuilder, exceeded quarterly revenue estimates, delivering 23,795 homes in Q4, a 19% increase year-over-year. Despite high mortgage rates, the tight supply of homes supported demand. The “rate-lock in” effect, where homeowners stay put due to favourable fixed rates, benefited homebuilders. However, Lennar’s gross home sales margin fell to 24.2%, impacted by price reductions. Net earnings stood at $1.36 billion. 
• Costco reported fiscal Q3 earnings of $3.58 per diluted share on revenue of $57.80 billion, exceeding Wall Street estimates of $3.40 EPS and $57.73 billion in revenue. Comparable sales rose by 3.9%, with US and Canada growing 2.6% and 8.2%, and international sales increasing by 7.1%. The company declared a special dividend of $15 per share. 
• Activist investor Nelson Peltz of Trian Fund Management is seeking two board seats in a proxy battle against Disney, citing lagging share prices and streaming challenges. Disney defends its efforts, emphasizing cost-cutting and streaming plans. The outcome will influence Disney’s strategic direction amid growing activist investor influence. 
• BTIG upgraded TripAdvisor to Buy from Neutral, citing the company’s transformation under new management, reduced dependence on metasearch, and the growth of its tours and activities booking engine. The positive outlook anticipates low-double-digit topline growth and high-teens EBITDA growth, with an appealing valuation at 6x the 2024 EBITDA estimate. 
• JPMorgan analysts raised Alcoa’s stock price target to $30 from $26, maintaining a Neutral rating. They noted potential downside to 4Q consensus estimates but highlighted that the Western Australia government’s decision to allow bauxite mining provides clarity and may remove a key overhang. Despite poor bauxite grades, JPMorgan sees a possible entry point ahead of improving fundamentals, possibly in 2H24. Alcoa’s shares rose over 15% yesterday and closed near $30. 
• Deutsche Bank reiterated a Buy rating on Tesla but reduced its 12-month price target to $260 from $275 ahead of the 4Q earnings and delivery reports. While expecting 4Q23 deliveries to meet estimates, analysts anticipate downside risk to 2024 consensus due to limited volume growth next year. The current model projects 4Q revenue at $24.7 billion and an auto gross margin of 16.2%. Despite potential earnings risks, Tesla shares rose 4.9% in Thursday’s trading session. 
• Foot Locker shares surged yesterday after Piper Sandler upgraded its rating from “neutral” to “overweight.” Analysts foresee over 180 points of operating margin expansion in 2024, anticipating improved margins after facing pressure in 2023 due to higher promotions. The introduction of new products is expected to help sell more items at full price, offsetting headwinds from the FLX membership rewards program rollout. 
• Wedbush raised Palo Alto Networks’ price target to $350, maintaining an Outperform rating. Analysts note strong cyber tailwinds, increasing cloud deal momentum, and robust field checks, positioning the company well for market share gains. The recent SEC guidelines are seen as a potential game-changer, benefiting Palo Alto in 2024, with considerable strength in major expansions within its installed base amid the cloud shift. 
• Bank of America analysts raised Microsoft’s price target to $430 from $415, reiterating a Buy rating. Following meetings with Microsoft’s business unit CFOs, analysts express higher conviction in the durability of growth in core Office and Azure franchises. They anticipate potential acceleration in commercial office growth, driven by the new M365 copilot. Factors such as Azure business, OpenAI’s ongoing ramp, and improving public cloud workload migration are expected to drive upside to mid-20s growth estimates. 
• A media report revealed the German government’s intention to fund Deutsche Bahn’s restructuring through the sale of shares in Deutsche Telekom and DHL. This initially led to a 4% decline in Deutsche Telekom shares and a more than 6% drop in DHL shares from the day’s peak. The government plans to maintain a strategic 25% stake plus one share in Telekom, while considering further divestment of DHL shares.