Markets price a 50-50 chance of a Fed`s 50bps cut

On Wednesday, US equities struggled again following Tuesday's sell-off, despite new hints of a slowing labour market boosting expectations for a significant Federal Reserve rate cut. The JOLTS report showed fewer job openings than anticipated, leading to a nearly 50% chance of a 50-basis-point rate cut in September. Major indices fell for the second consecutive day, with the S&P 500 down slightly, while the Dow Jones rose modestly, and the Nasdaq declined. In Europe, markets were mixed, with cautious trading amid economic uncertainties and regional data.

Summary for 05.09.2024

Asian markets attempted a recovery after recent losses on Thursday. Japan's Nikkei fell 0.5% to a three-week low, while tech-heavy Taiwan and South Korea gained 1%, lifting MSCI's Asia-Pacific index by 0.6% after a three-day slump. Investors are closely watching U.S. economic data, with Friday's nonfarm payroll report expected to provide key insights for global market direction.

European and US equity markets are expected to remain cautious, with the US grappling with recession fears and market volatility, while European markets may also experience subdued trading amid global economic uncertainties.

Oil prices steadied on Thursday after a sharp sell-off, with Brent crude and US West Texas Intermediate both showing slight gains. OPEC+ is considering delaying its planned October output increase due to weak demand, particularly from China. US crude inventories fell significantly last week, and traders are awaiting further data from the Energy Information Administration.

The Federal Reserve’s Beige Book reported a slowdown in economic activity across more districts, with weaker consumer spending and manufacturing. Nine districts reported flat or declining activity, up from five previously. Employment remained steady, but firms were cautious with hiring. Inflation rose modestly, with expectations of stabilising prices, though future growth faced uncertainty due to elections and geopolitical conflict.

San Francisco Fed President Mary Daly emphasised the need for interest rate cuts to maintain a healthy labour market, but the decision depends on forthcoming economic data. While the labour market has softened, it remains strong. Daly cautioned against over-tightening as inflation falls and supports a careful, data-driven approach ahead of the Fed's September meeting, where a quarter-point rate cut is expected.

President Joe Biden is expected to block Nippon Steel's $14.9 billion acquisition of US Steel over national security concerns, according to sources. The potential decision faces bipartisan opposition, with concerns over job losses and US Steel potentially relocating its headquarters. Both companies maintain the deal poses no security risks, but the outcome could impact U.S.-Japan relations.

ASML CEO Christophe Fouquet has criticised the US-led export restrictions on the company’s technology to China, arguing they are increasingly driven by economic motives rather than national security. Speaking at a Citi conference, he anticipated increased push-back against these measures and called for clarity and stability for businesses. Despite uneven chip market recovery, demand for AI chips remains strong. ASML’s major customer is TSMC, which supplies Nvidia and Apple.

Nvidia has stated it has not received a subpoena from the US Department of Justice, despite reports from Bloomberg News suggesting otherwise. The Justice Department has been probing Nvidia’s business practices, including hardware bundling and its recent $700 million acquisition of Israeli firm Run. The investigation aims to assess whether these actions strengthen Nvidia’s dominance in the AI computing market.

Intel’s CFO David Zinsner announced at an investor conference that the company expects to start generating significant revenue from its contract chip manufacturing business by 2027. Intel is focusing on its advanced 18A manufacturing process and is negotiating with 12 potential customers for revenue starting in 2026. The company is also undergoing a major turnaround, including staff cuts and business divestments, and anticipates limited impact from the US CHIPS Act until year-end.

Dollar Tree cut its annual forecasts and saw its shares drop over 22% after missing quarterly estimates. The company is struggling to attract price-sensitive shoppers amid rising competition from rivals like Walmart, Target, and PDD Holdings' Temu. Dollar Tree's revised forecast includes lower sales and earnings expectations for the year. It is also restructuring and closing stores, including a potential sale or spinoff of Family Dollar.

Shares of Super Micro Computer fell more than 4% on Wednesday after Barclays downgraded the shares, citing concerns over declining gross margins, customer losses, and internal control issues. The downgrade reflects worries about reduced market share and profitability amid competitive pressures and supply chain constraints. Barclays set a new price target of $438 and suggested Flex as a more attractive alternative investment.

Jefferies downgraded Booking Holdings to “hold” from “buy” due to concerns over slowing room night growth and increased market risks. The firm projects global room night growth will decelerate from 11% in 2023 to 3.6% by 2026. Jefferies lowered its price target to $4,200, reflecting a cautious outlook amid intensified competition and moderating online penetration.

Wells Fargo analysts have added Microsoft and Adobe to their "Signature Picks" portfolio. They allocated 4% to Microsoft, praising its AI and cloud leadership, especially in Azure. Adobe received a 2% allocation, with analysts highlighting its strong position in generative AI-driven design and dismissing investor concerns about competition as overstated.

Goldman Sachs predicts US economic growth would benefit most if Democrats, led by Kamala Harris, win the White House and Congress, thanks to increased spending and tax credits. Conversely, a Republican sweep or a divided government under Donald Trump could hurt growth due to higher tariffs and tighter immigration policies, potentially reducing GDP by 0.5% in late 2025. Job growth would be stronger under a Democrat administration.

UBS analysts anticipate ongoing equity volatility in the near term but expect shares to rise over the next 6-12 months. They noted recent declines in US shares, influenced by weaker manufacturing data and the historical trend of September dips. UBS highlighted that September often sees declines in the S&P 500 and suggested that a disappointing jobs report could intensify recession fears and impact Federal Reserve actions.

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