China keeps rallying

The U.S. equity markets ended last week mixed but on a positive trajectory overall, extending their weekly win streak to three. The S&P 500 slipped slightly, dragged by tech sector weakness, while the Dow hit a new all-time high. Semiconductor shares saw volatility, with Nvidia facing pressure from China market concerns. In Europe, luxury goods equities rallied on China's stimulus, while technology shares gained, but banking and oil sectors lagged. Both regions saw broad optimism from declining inflation and expectations of lower interest rates.

Summary for 30.09.2024

Asian equity markets were mixed on Monday. China's stimulus measures boosted the CSI300 by 3.0% and the Shanghai Composite by 4.4%, building on last week's strong gains. However, geopolitical tensions in the Middle East created uncertainty, while Japan's Nikkei fell 4.1% amid concerns over potential interest rate normalisation by the new prime minister. MSCI's Asia-Pacific index outside Japan rose 0.3%.

Oil prices edged higher this morning on increasing concerns of potential supply disruptions from the Middle East producing region after Israel stepped up attacks on Iranian-backed forces. Still, prices remain under pressure as OPEC and its allies, plan to raise output by 180,000 barrels per day in December and oil exports from Libya are also expected back.

The European and US equity markets are expected to open flat to slightly positive. Investors are waiting for data and speeches from central bank officials this week. In the US, a host of Fed speakers will have their say, led by Chair Jerome Powell later on Monday.

China's factory activity contracted for the fifth consecutive month in September, while services slowed significantly. The manufacturing PMI rose slightly to 49.8, still below the growth threshold. The government introduced aggressive stimulus, including mortgage rate cuts and a 1 trillion yuan bond issuance. Despite challenges in property and demand, leaders aim to meet the 2024 growth target.

Friday's Personal Consumption Expenditures (PCE) data showed inflation easing, with headline PCE rising 2.2% year-over-year, the lowest since February 2021. Core PCE increased by 2.7%, with a monthly gain of 0.1%. Goods prices fell 0.2%, while services rose 0.2%, driven by housing inflation. The data aligns with the Federal Reserve's focus on employment as inflation nears target levels.

Apple has exited negotiations to join OpenAI's upcoming $6.5 billion funding round, according to the Wall Street Journal. Other companies, including Microsoft and Nvidia, remain in talks, with Microsoft expected to invest $1 billion after already contributing $13 billion. OpenAI's new fundraising could value the company at over $100 billion, driven by its pivotal role in the AI arms race.

Shares in Moncler rose 10.9% on Friday after French rival LVMH invested in the Italian outerwear specialist, fuelling speculation about the long-term intentions of LVMH. The deal amounts to an around 1.6% stake for LVMH in Moncler with the potential to grow it to 4% over the next 18 months analysts said.

Volkswagen lowered its annual outlook for the second time in three months, citing disappointing performance in its passenger car division amid a challenging market. The company now expects a profit margin of 5.6% in 2024 and a decline in sales to €320 billion. Global delivery forecasts are also reduced to around 9 million vehicles, reflecting weaker demand, particularly from China.

French car part supplier Forvia cut its annual sales and profit forecasts again due to weak auto demand in Europe and North America, and delays in China. They expect sales of €26.8-27.2 billion and operating margin of 5.0-5.3%. The company will accelerate job cuts in Europe, aiming to complete over 90% by end-2027.

Siemens' CFO Ralf Thomas indicated that the company expects lower full-year sales growth, revising its forecast from 4-8% to around 3%. Despite economic challenges, particularly in China and Europe, profitability remains stable, and a dividend increase is likely. Siemens plans to focus more on the growing U.S. market as it faces ongoing difficulties in factory automation demand.

Nvidia's shares dropped over 2% on Friday as Beijing pressures Chinese companies to purchase domestically produced AI chips instead of Nvidia's, aiming to strengthen its semiconductor industry amid U.S. restrictions. While Chinese regulators are discouraging the purchase of Nvidia's H20 chips used for AI development, this is not an outright ban, as they seek to support local startups and manage U.S. relations.

Bristol-Myers Squibb's shares rose 1.6% after the FDA approved COBENFY, a new schizophrenia treatment combining xanomeline and trospium chloride, marking a breakthrough in the field. Analysts project peak sales of $4.2 billion, exceeding previous estimates. The drug's favourable safety profile and potential expansion into Alzheimer's-related psychosis bolster its market potential, validating the company's acquisition of Karuna.

Mizuho analysts have shifted their preference from TSMC to ASML, citing ASML's underperformance despite a compelling risk-reward opportunity. While TSMC shares rose 16% in September, ASML only increased by 0.8%. The analysts view ASML as a strong long-term investment, expecting stable Q3 results and a potential valuation rebound to a 30-32 forward P/E range amid limited downside risks.

Wedbush analysts raised their price target for Salesforce.com from $315 to $325, citing positive customer feedback and the company's expanding role in AI. Their upgrade reflects Salesforce's strong performance, particularly with its updated Agentforce platform, now called Atlas, which shows improved accuracy and reduced AI errors. The analysts see significant AI monetization potential, estimating an annual revenue boost of over $4 billion by 2025.

Deutsche Bank has resumed coverage of Dell Technologies with a Buy rating and a price target of $144, indicating a 20% upside. Analysts expect double-digit top and bottom-line growth driven by strong performance in servers and AI. Dell’s capital allocation focuses on returning free cash flow to shareholders, with a current dividend yield of 1.5% and share buyback plans.

BofA sees strong growth potential in Inditex due to its efficient business model and strategic realignment. They expect Inditex to achieve 9% revenue growth and a 12% EPS growth over next 3 years. Inditex is investing heavily to improve its infrastructure and expand in the US market. This expansion is crucial as the US market, while still relatively small compared to Inditex's global presence, offers significant growth opportunities.

Citi analysts expect PepsiCo's share price to drop due to lower than expected sales growth. They forecast a +1.5% organic sales growth, versus the consensus of +3.5%. This might lead PepsiCo to cut its 2024 guidance of 4% growth. Citi believes PepsiCo might need to lower prices to boost demand, impacting 2025 EPS. Despite these challenges, Citi maintains a Buy rating due to the equity's current valuation already reflecting some of these risks.

This week will see the start of Q4 which will likely be volatile due to the upcoming US election. Investors will be looking at the US jobs report to see if the Fed will continue cutting rates aggressively. The ADP data and JOLTS report will provide insights into the labour market health. Eurozone inflation data will be released and a rate cut is on the table for ECB. Oil prices will depend on the balance between increasing supply and potential supply disruptions in the Middle East.

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