Chinese shares extend decline as stimulus rally fades

U.S. equities rebounded on Tuesday, with the S&P 500 rising nearly 1%, driven by falling oil prices and easing Treasury yields. Nvidia's gains amid growing AI chip demand also supported the market. In contrast, European markets declined, with the Stoxx 50 falling 0.2% as optimism over China’s stimulus measures faded. Mining shares plunged 4.26%, while luxury brands and beverage makers, including LVMH, Pernod Ricard, and Diageo, also fell following China's anti-dumping measures on European brandy imports.

Summary for 09.10.2024

Most Asian shares rose on Wednesday, driven by gains in technology shares following a positive lead from Wall Street. However, Chinese markets fell sharply, with the Shanghai Shenzhen CSI 300 and Shanghai Composite indexes dropping over 4% due to disappointment over a lack of detailed stimulus measures. Hong Kong's Hang Seng index also declined, while Japan's Nikkei 225 and Australia's ASX 200 saw modest gains.

U.S. and European equity futures showed little movement early Wednesday morning as investors awaited key signals on interest rates from the Federal Reserve and upcoming U.S. inflation data. Futures remained steady following a tech-driven rally on Wall Street, but broader market sentiment was cautious, with tensions in the Middle East and fading optimism over China's stimulus measures keeping investors on edge.

Oil prices rose slightly in Asian trade this morning, recovering from steep losses after reports of Hezbollah seeking a ceasefire with Israel, which hinted at potential de-escalation in the Middle East. However, gains were limited due to a large build in U.S. oil inventories, raising concerns over cooling fuel demand, especially amid hurricanes impacting parts of the U.S.

The U.S. Department of Justice is considering recommending Alphabet Inc.'s Google sell some units to address its alleged monopoly in the online search market, Bloomberg reported. Potential remedies include selling the Android and Chrome units or stopping payments to make its search engine the default. Smaller rivals like Yelp and DuckDuckGo have also called for such measures.

Boeing has withdrawn its offer to the International Association of Machinists and Aerospace Workers and suspended negotiations after a nearly month-long strike, citing "non-negotiable" union demands. The strike, Boeing's first major one in 16 years, has impacted its Washington operations and strained its finances. Boeing is reportedly considering selling $10 billion in shares and faces potential credit rating downgrades from S&P and Moody’s.

PepsiCo lowered its annual sales growth forecast as North American consumers cut back on sodas and snacks, opting for cheaper alternatives. The company now expects low single-digit organic sales growth for 2024, down from 4%. Despite a surprise drop in third-quarter revenue, including a 13% decline at Quaker Foods, PepsiCo maintained its profit target through price increases and cost controls.

Roblox has been accused by Hindenburg Research of inflating key user metrics by 25-42% and overstating engagement hours by over 100%. The report criticises Roblox for $1.07 billion in losses over the past year and for its high valuation, with shares trading at 8.6 times sales. Hindenburg also raises safety concerns, alleging inadequate moderation exposes children to inappropriate content. The firm has started a short position, and Roblox shares fell over 3% following the report.

Shares of French spirits companies Remy Cointreau and Pernod Ricard fell after China announced temporary anti-dumping measures on European brandy imports, with declines of 8.3% and 4.1%, respectively. The measures, which require importers to pay security deposits of 34.8% to 39.0%, come in response to the EU's recent tariffs on Chinese electric vehicles. This move particularly affects French exports, which constituted 99% of China's brandy imports last year.

Renault shares rose nearly 3% after a positive pre-close call ahead of its 3Q24 revenue report. The automaker reaffirmed its 2024 guidance, boosting investor confidence. Despite a volume decline in 3Q, new vehicle launches are expected to improve 4Q results. Renault's strong inventory management, product mix improvements, and Mobilise's growth were highlighted, with HSBC maintaining a Buy rating and a €58 target price.

Continental announced that it anticipates global production of passenger cars and light trucks to decline by over 3% in the third quarter compared to the second, while Chinese output is projected to grow by around 4%, driven by increased market share for Chinese automakers. Despite lower sales, Continental expects its profitability to improve during the quarter.

As of September 30, Goldman Sachs holds derivative positions in UniCredit equivalent to a 6.7% stake in the Italian bank, primarily through swaps, futures, and call options. This position would elevate Goldman to a major investor, trailing only BlackRock. Additionally, Barclays has a 5.3% stake in Monte dei Paschi di Siena, with 0.92% as a voting stake and 4.2% in long positions.

Shares of Imperial Brands rose 3.9% to £2,231 after the company’s pre-close trading update confirmed it was on track to meet full-year guidance and announced increased capital returns for FY25. The tobacco giant reported growth in its traditional tobacco and next-generation products, with net revenue expected to grow by 20-30%. A £1.25 billion share buyback and a 4.5% dividend increase reflect the company's strong financial performance, despite some foreign exchange headwinds.

U.S. power consumption is expected to hit record highs in 2024 and 2025, driven by increased demand from AI, data centres, and growing electricity use for heating and transport, according to the U.S. Energy Information Administration (EIA). Natural gas will remain the dominant power source in 2024 but will decline as renewable energy rises from 21% in 2023 to 25% in 2025.

Oppenheimer downgraded Microsoft from Outperform to Perform, citing concerns over high consensus estimates and potential losses from its AI partner, OpenAI, which is expected to lose $5 billion this year. Slow enterprise AI adoption, rising capital expenditures, and increased depreciation costs are seen as risks. Oppenheimer expects weaker earnings growth and guidance for 2025, with Microsoft's shares likely to trend toward the lower end of its P/E range.

After downgrading Amazon, Wells Fargo is increasing its position in Microsoft, emphasising its strong momentum in cloud and AI services as part of its "Signature Picks" portfolio. While Amazon's future visibility is limited, Microsoft’s Azure platform shows promising demand and is expected to achieve 33% year-over-year growth in Q1. Wells Fargo set a price target of $515 for Microsoft, citing its robust long-term growth potential.

Goldman Sachs has initiated coverage of Barclays plc with a "buy" rating, forecasting strong earnings growth nearly double the sector average. Barclays shares, up over 40% this year, trade at a discount relative to historical performance. Goldman sets a price target of 290 pence, suggesting a 27% upside. Despite potential risks in US consumer banking and the UK environment, Barclays' diversified portfolio is seen as a stabilising factor.

HSBC analysts noted improved risk appetite for Chinese equities following the announcement of new stimulus measures, raising year-end targets for major Chinese equity indices by around 20%. This includes significant interest rate cuts and funding support from the People's Bank of China. However, expectations for additional fiscal stimulus were tempered after a press conference from China's National Development and Reform Commission failed to confirm new measures.

Citi analysts believe the Federal Reserve is unlikely to skip rate cuts in November, despite recent labour market data affecting market expectations. While weak labour data had previously led to predictions of multiple rate cuts, stronger-than-expected inflation complicates the outlook. Citi anticipates a minimum 25 basis point cut in November, citing subdued inflation and a potential weakening job market in upcoming reports.

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