Equities give back most of Friday`s gains

Surging oil prices, rising Treasury yields, and inflation concerns significantly impacted US markets on Monday, with the S&P 500, Dow Jones, and Nasdaq all declining by around 1%, particularly in cyclical sectors like tech and consumer discretionary. Increased volatility, a stronger dollar, and Middle East tensions dampened risk sentiment. In contrast, European shares saw slight gains, with the Stoxx 50 rising less than 0.3%, buoyed by a 1% increase in household goods.

Summary for 08.10.2024

Asian equity markets experienced mixed performances on Tuesday. Mainland China's CSI 300 surged over 10% initially but later trimmed gains to 5% as stimulus optimism faded. Hong Kong's Hang Seng dropped over 6%, while Japan's Nikkei and Topix both fell around 1% following weaker household spending data. South Korea's Kospi declined 0.72%, weighed down by disappointing Samsung guidance, and Australia's ASX 200 slipped marginally.

European markets are expected to open cautiously later today, influenced by concerns over rising U.S. interest rates and escalating tensions in the Middle East. U.S. share index futures were flat in evening trade on Monday, with Wall Street facing pressure from reduced Federal Reserve rate cut expectations following a strong payrolls report. Key inflation data and Fed minutes due later this week are also in focus.

Oil prices dipped in Asian trade this morning after strong gains last week, driven by profit-taking and a stronger U.S. dollar. Despite ongoing concerns over Middle East tensions and potential disruptions from Hurricane Milton, further gains were limited. Traders are closely watching for the impact of the hurricane on U.S. oil production and potential supply disruptions in the Gulf of Mexico.

The US dollar remained near seven-week highs on Tuesday, supported by strong jobs data and a shift in market expectations for smaller Federal Reserve rate cuts. Investors are no longer fully pricing in a November rate cut, with only 50 basis points expected by December. Escalating Middle East tensions also boosted the dollar, which strengthened against the euro, sterling, and yen.

The chairman of China’s National Development and Reform Commission outlined plans to support the economy, including expedited special bond issuance to local governments and a 100 billion yuan investment plan for next year. However, no new major stimulus measures were announced, which disappointed investors amid ongoing economic challenges and declining consumer demand.

Foxconn is constructing the world’s largest manufacturing facility for Nvidia’s GB200 chips, a senior executive revealed on Tuesday. Speaking at the company’s annual tech day in Taipei, Benjamin Ting, Foxconn's senior vice president for cloud enterprise solutions, stated, “We’re building the biggest GB200 production site globally, though I can’t disclose the location just yet.”

Samsung Electronics warned that its third-quarter profit would fall below market expectations, citing delays in its AI chip business and increasing competition from Chinese chipmakers. The company’s semiconductor earnings declined, and it lags behind SK Hynix in supplying high-bandwidth memory chips to Nvidia. Samsung's share price dropped 1.6% following the announcement, with analysts warning of ongoing challenges in the competitive chip market.

Super Micro Computer announced it is shipping over 100,000 graphics processors per quarter and introduced a new range of liquid cooling products, boosting its shares by approximately 14%. The surge in demand for AI hardware, particularly from Nvidia chips, has benefitted the company, which is poised to increase its market value by over $3 billion if gains persist. Despite recent challenges, shares remain up over 66% this year.

Jefferies downgraded Apple from Buy to Hold, setting a price target of $212.92, which contributed to a 2.25% decline in the shares. Analysts expressed concerns over overestimated expectations for the iPhone 16 and 17 models, predicting flat growth and emphasising the company's heavy reliance on iPhone sales, which constituted 52% of its revenue in fiscal year 2023. Despite these near-term challenges, Jefferies remains optimistic about Apple's long-term AI capabilities, anticipating significant growth in AI-capable iPhones by fiscal year 2027.

Shell reported a nearly 30% drop in refining profit margins for Q3, with indicative margins falling to $5.5 per barrel from $7.7, reflecting weakened global demand and new refinery openings. The company expects lower trading earnings in its chemicals and oil products division. However, it raised its LNG production guidance to 7.3-7.7 million metric tons, anticipating stable trading results.

Wells Fargo downgraded Amazon to Equal Weight from Overweight, reducing its price target to $183 from $225 due to multiple challenges likely to hinder earnings growth. The bank highlighted factors such as investments in Project Kuiper, pressure from Fulfillment by Amazon fees, and increased competition from Walmart's cheaper fulfillment services. It anticipates limited visibility into Amazon's earnings recovery until at least mid-2025.

Piper Sandler upgraded Netflix to Overweight, raising its price target to $800, citing strong growth potential in its non-ad-supported business and the expected return of regular price increases. Conversely, Barclays downgraded the equity to Underweight, warning of slower revenue growth and unrealistic long-term targets due to initiatives like paid subscription sharing, stressing the need for significant advertising revenue growth, which may affect engagement.

Citi analysts express optimism for Chinese equities, citing significant upside potential despite recent gains. Following the government's economic stimulus announcement, they foresee further support, including a proposed RMB3 trillion consumption package. The analysts have raised their end-June 2025 targets for major indices by over 20%, predicting continued market growth and upward revisions in earnings forecasts during the upcoming results season.

Morgan Stanley analysts recommend a shift to cyclical shares, citing resilient US labour market data and expectations for quarter-point interest rate cuts by the Federal Reserve. They upgraded cyclical shares to "Overweight," particularly in sectors like financials, while downgrading healthcare and staples. The latest jobs report showed stronger-than-expected job growth and a dip in the unemployment rate, reinforcing confidence in a "soft landing" for the economy.

Goldman Sachs has raised its year-end target for the S&P 500 to 6,000 from 5,600, and its 12-month forecast to 6,300 from 6,000, citing expectations of higher corporate margin growth and a stable macroeconomic outlook through 2025. The brokerage also increased its 2025 earnings per share estimate to $268, reflecting an 11% annual increase, supported by strong consumer spending and a recovering semiconductor sector.

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