Jobs data boost equities but lower rate cut hopes

On Friday, US equities rallied on stronger-than-expected September job gains, with the S&P 500 rising 0.9%, the Dow Jones up 0.81%, and the Nasdaq climbing 1.22%. For the week, the S&P 500 increased by 0.22%, the Dow gained 0.09%, and the Nasdaq rose 0.1%. This optimism also lifted European markets, where the STOXX 50 gained 0.7%, driven by hopes that the Federal Reserve could achieve a "soft landing." Financial equities like UniCredit and BBVA led the gains, but the STOXX 50 ended the week down 2.8% due to escalating Middle East tensions and fading enthusiasm over China’s stimulus.

Summary for 07.10.2024

Asian equities rose on Monday, with Japanese shares leading gains as strong U.S. payroll data eased concerns over an economic slowdown. Hopes of further stimulus in China also boosted sentiment. Japanese markets, driven by a weakening yen, saw the Nikkei 225 and TOPIX rise up to 2%. Hong Kong’s Hang Seng gained 0.6%, while South Korea’s KOSPI and Australia’s ASX 200 also advanced. Trading volumes were limited by China's Golden Week holiday, but strong gains are anticipated when Chinese markets reopen on Tuesday.

European equity markets are expected to open mixed on Monday, with Germany's DAX set for modest gains, while other major indices, such as the FTSE 100 and CAC 40, may experience slight losses. Meanwhile, U.S. equity index futures are fractionally in the red, signalling a cautious start for Wall Street. Investors remain focused on potential interest rate signals from the Fed and the start of the corporate earnings season, which could influence market sentiment later on this week.

Oil prices dipped in Asian trade this morning after a strong rally last week, driven by Middle East tensions and robust U.S. payroll data. The Israel-Hamas conflict heightened concerns over supply disruptions, but profit-taking and limited trading volumes due to China’s Golden Week holiday saw prices ease. Focus remains on potential supply risks and upcoming U.S. inflation data.

In September, nonfarm payrolls increased by 254,000, significantly above the 140,000 estimate and the 12-month average of 203,000. Revisions for July and August added 77,000 more jobs. Unemployment dipped to 4.1%, and hourly earnings grew 4.0% year-on-year, outpacing expectations. These robust figures indicate a resilient labour market that is gradually cooling, supporting the soft-landing narrative for the economy.

The EU will impose tariffs of up to 45% on China-made electric vehicles, despite opposition from Germany. The tariffs aim to counter Chinese subsidies but risk sparking retaliatory measures from Beijing. While the decision is seen as a win for the EU Commission, it highlights divisions within the bloc over trade relations with China, potentially increasing EV prices and impacting EU carbon goals.

Activist investor Starboard Value has taken a $1 billion stake in Pfizer, urging changes to revive its performance. Former Pfizer CEO Ian Read and ex-CFO Frank D’Amelio may support Starboard's efforts. Pfizer has faced declining sales for its COVID-19 products, a weak RSV vaccine launch, and acquisition-related issues. Investors have criticised its $70 billion spending spree since 2020 amid falling share price.

Tencent and Ubisoft's founding Guillemot family are exploring options, including a potential buyout to boost Ubisoft's value, Bloomberg reports. Discussions include possibly taking the French game maker private. Ubisoft's shares surged nearly 30% after the news, though they've fallen over 50% this year due to underperforming releases. Tencent holds nearly 10% of Ubisoft, while the Guillemot family owns 15%.

Rio Tinto is in talks to acquire lithium miner Arcadium, potentially valuing the company between $4 billion and $6 billion. The deal would make Rio the third-largest producer of lithium, crucial for electric vehicle batteries. Amid falling lithium prices, Arcadium's shares surged 36%. The acquisition would give Rio access to lithium resources globally, benefiting from Arcadium's expertise in direct lithium extraction.

Ferrovial's shares fell 4.4% on Friday after Ontario Premier Doug Ford hinted at a potential buyback of the 407 Express Toll Route (ETR) to reduce Toronto’s traffic congestion. The 407 ETR, which makes up around 40% of Ferrovial's valuation, has caused investor concern. Although any buyback would require fair market compensation, the speculation has unsettled the market.

Jefferies downgraded BHP to "hold" from "buy," citing risks from the company's capital expenditure plans, potential M&A activities, and share price performance. While they maintain a positive long-term outlook, concerns include increased capex for copper and potash projects, and limited shareholder returns due to price-based royalties in metallurgical coal. Jefferies prefers other companies in the metals and mining sector, including Glencore and Freeport-McMoRan.

Mizuho analysts view Apple shares as a long-term opportunity, despite current negative sentiment over iPhone unit declines. They expect iPhone sales to stabilise by fiscal 2025, with growth driven by the iPhone 17's AI integration and a new SE model. A rebound is projected after a challenging period, with further developments including in-house modems by 2025 and a foldable iPhone by 2027.

JPMorgan added Abercombie & Fitch to its Positive Catalyst Watch list, citing strong momentum at both its Abercrombie and Hollister brands during the back-to-school season. Analysts praised favourable promotional activity, strong performance across demographics, and effective supply chain management. JPMorgan raised its December 2025 price target to $195, maintaining an "Overweight" rating.

HSBC upgraded Equinix and Digital Realty, citing strong AI-driven demand and limited supply in major markets. Equinix was upgraded to "Buy" with a price target of $1,000 (up from $865), driven by improved utilisation and AI opportunities. Digital Realty was upgraded to "Hold" with a price target of $160 (up from $124), reflecting stronger pricing in the ">1MW" segment.

HSBC downgraded GE Vernova to "Hold" from "Buy," citing concerns over its offshore wind segment, which could impact its wind business due to higher-than-expected costs and delays. While the power and grid unit may benefit from growing gas turbine demand, analysts see limited upside due to the shares’ high valuation and challenges in delivering its $3 billion offshore wind backlog.

TD Cowen upgraded CVS Health to "Buy" from "Hold" and set a price target of $86, following changes to its 2025 Medicare Advantage plans. Analysts noted reductions in over-the-counter medication and dental benefits, along with improved plan star ratings. They see 2024 as a low point for shares, forecasting double-digit earnings growth in 2025. CVS also announced 2,900 layoffs to reduce costs.

Morgan Stanley updated its US All Cap Growth Portfolio, adding DoorDash and GE Vernova while removing Adobe and UnitedHealth Group. DoorDash was chosen for its market leadership and growth potential, rated Overweight with a $150 price target. GE Vernova, also rated Overweight, is added for its position in electric power generation. Adobe was trimmed for diversification, and UnitedHealth was removed due to slower growth prospects.

RBC Capital Markets analysts view the setup for Adidas AG ahead of its Q3 2024 report as "attractive," projecting strong revenue growth and improved gross margins. They raised FY24 EBIT estimates by 12% and increased the price target to €260. RBC expects Q3 revenues of €6.40 billion, driven by double-digit growth in several regions, while Adidas trades at appealing valuation multiples compared to peers.

Yardeni Research predicts significant growth for the S&P 500 and Dow Jones Industrial Average by 2030, with the DJIA potentially reaching 60,000 and the S&P 500 surpassing 8,000. This growth is driven by rising earnings per share, projected to double by the decade's end. Yardeni emphasises that geopolitical crises often present buying opportunities and notes that the equity market tends to rise regardless of political leadership.

Bank of America remains cautious about European shares despite recent Chinese stimulus measures, which include interest rate cuts and funding initiatives. While these measures have boosted equities, particularly in China-exposed sectors like luxury goods, BofA projects a 15% decline for the Stoxx 600 by mid-2024 due to uncertain growth and weaker eurozone activity. The firm recommends underweighting cyclical sectors such as banks and capital goods while favouring defensives like food and beverages.

BCA Research advised clients to short Indian equities and go long on Chinese equities, citing India's weakening corporate profits, credit contraction, and fiscal tightening. High valuations and tight monetary policies were expected to weigh on India's market. Meanwhile, China benefited from government stimulus and lower valuations, offering better growth prospects for investors seeking emerging market opportunities.

BCA Research predicts a US recession by late 2024 or early 2025, after resisting earlier forecasts of an imminent downturn. They recommend underweighting equities and overweighting government bonds, expecting the S&P 500 to fall to 3800. BCA also anticipates lower Treasury yields and a modestly weaker US dollar before strengthening during the recession, favouring the yen for 2025.

BCA Research advises caution on the recent rally in the real estate sector, despite its strong performance in the S&P 500. They warn that REITs may struggle if economic growth slows, even with falling interest rates. BCA recommends underweighting Industrial, Residential, and Office REITs, while favouring Specialized REITs linked to the digital economy. The overall real estate outlook remains mixed.

This week, quarterly corporate results return, starting with PepsiCo on Tuesday, followed by JPMorgan Chase and Wells Fargo on Friday. Mainland Chinese markets are closed today for the final day of Golden Week. On Wednesday, the Fed releases its last meeting minutes. Key US data, including consumer prices (Thursday), producer prices, and consumer confidence (Friday), will also be published.

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