Shares take a breather after Fed-fuelled record run

Last Friday, the US markets ended a record-breaking week on a muted note. The S&P 500 fell 0.19%, the Nasdaq dropped 0.36%, and the Dow Jones gained 0.09%. Despite mixed earnings reports from FedEx and Intel, the indices posted weekly gains of over 1%. The 10-year Treasury yield slipped to 3.73%. European markets also experienced modest growth, buoyed by the Federal Reserve’s 50-basis-point rate cut aimed at controlling inflation.

Summary for 23.09.2024

• Asian equities rose slightly on Monday, driven by optimism over lower interest rates. Chinese markets gained after the People’s Bank of China cut a short-term lending rate, while Australia’s ASX 200 lagged due to sharp declines in major retailers facing an antitrust lawsuit. Trading volumes were lighter with Japan on holiday. 

• European and U.S. equity markets are expected to open steady, with investors closely watching upcoming Federal Reserve signals and inflation data for further direction. 

• Oil prices rose this morning, supported by increased Middle East tensions and hopes for stronger demand following a U.S. Federal Reserve rate cut. Supply disruptions from Hurricane Francine also contributed to a tighter market outlook. Traders attached a risk premium to oil amid ongoing conflict in Gaza and Lebanon, raising concerns of further supply disruptions from the oil-rich region. 

• Qualcomm has approached Intel about a potential acquisition, led by Qualcomm CEO Cristiano Amon. Talks are in early stages, with no formal offer made. Intel, struggling with a 60% share drop this year, could face regulatory hurdles if a deal proceeds. Qualcomm may need to divest parts of Intel to gain approvals. Financing the acquisition remains uncertain. 

• Shares of Constellation Energy surged over 22% on Friday after announcing a landmark power purchase agreement with Microsoft to relaunch Three Mile Island Unit 1. This deal will provide carbon-free energy from the newly renamed Crane Clean Energy Center, adding 835 megawatts to the grid and creating 3,400 jobs. Set to be operational by 2028, it supports both environmental and economic goals. 

• Australia’s consumer watchdog sued supermarket giants Woolworths and Coles, accusing them of misleading shoppers by hiking prices and then advertising false discounts. The alleged deceptive practices, affecting millions of products, come amid a cost-of-living crisis. The Australian Competition and Consumer Commission seeks significant penalties, with potential fines of up to A$50 million.  

• Germany’s Finance Agency announced it will not sell more shares in Commerzbank, emphasising the bank’s strategy for independence. This follows UniCredit’s surprise acquisition of a 9% stake, which sparked opposition from labour unions and prompted Commerzbank’s defence strategy. Despite UniCredit CEO Andrea Orcel’s merger ambitions, political and regulatory challenges make a takeover unlikely in the near term. 

• Mercedes-Benz has lowered its full-year profit margin target for the second time in two months, citing a weakening Chinese car market. Shares fell 6.8% on Friday to their lowest level in nearly two years. The company now expects a 2024 return on sales of 7.5% to 8.5%, down from 10% to 11%. This downturn reflects broader challenges affecting other automakers like BMW and Volkswagen. 

• Novo Nordisk’s shares dropped nearly 5% on Friday after Phase 2a trial results for its obesity pill, monlunabant, fell short of expectations, achieving only 6.5% weight loss instead of the anticipated 15%. Despite the disappointing outcome, the company plans to initiate a larger Phase 2b trial next year. Analysts express concern over increasing competition in the obesity treatment market. 

• Nike’s new CEO, Elliott Hill, is expected to shift the company’s focus back to repairing retailer relationships and enhancing sales, reversing outgoing CEO John Donahoe’s direct-to-consumer strategy. Following a quarter drop in share value, Nike’s shares rose 8% after Hill’s appointment. Analysts anticipate a renewed emphasis on product innovation and plans to attract price-sensitive customers, especially ahead of the Olympics. 

• Evercore ISI raised its price target for Amazon shares from $225 to $240, citing a strong focus on Prime Video as a growth driver. The analysts emphasised enhanced content offerings and advertising potential, projecting that Prime Video could generate $3.0 billion to $5.9 billion in revenue by 2025. This growth may boost Amazon’s advertising revenue by 20% and support operating margin expansion. 

• MercadoLibre’s equity has gained momentum, with Morgan Stanley and Bank of America raising their price targets to $2,500, signaling over 18% upside. Key growth drivers include strong GMV growth in Brazil, expansion in advertising and credit services, and positive developments in Argentina despite economic challenges. Analysts highlight significant earnings potential across various segments, supporting a bullish outlook. 

• Morgan Stanley downgraded earnings estimates for ASML, following other firms like UBS and Deutsche Bank, due to weakness in the memory chip market and concerns about demand from Chinese chipmakers and Intel. Despite this, Citi remains optimistic, naming ASML their top tech pick in Europe, anticipating a strong order influx when the company reports earnings on October 16. 

• Morgan Stanley maintains an “overweight” rating on Infineon but has cut its target price from €45 to €37 due to challenging market conditions, including a prolonged downturn in the Eurnd Gopean PMI. Analysts anticipate weak growth in automotive semiconductors but expect a recovery by FY25, driven by high-end microcontrollers and power semiconductors, alongside opportunities in AI servers and GaN technology. 

• Morgan Stanley expects Kering’s underperformance to continue as Gucci’s turnaround is projected to take another 2-3 years. The luxury conglomerate reported an 11% sales drop in Q2, with Gucci’s revenue down 20% in the first half of 2024. Analysts cut 2024 and 2025 EPS estimates and lowered the 12-month target price for Kering to €265 from €310, maintaining an “equal-weight” rating. 

• Morgan Stanley downgraded PepsiCo from Overweight to Equal-weight, maintaining a $185 price target, due to ongoing challenges with topline growth and market share losses. The firm reduced its organic sales growth and earnings-per-share estimates, citing persistent weakness in the Frito-Lay segment and declining beverage market share. Despite recent equity gains, Morgan Stanley sees limited upside and warns of potential downside risks for future performance. 

• BMO Capital has raised its S&P 500 price target to 6,100, a 9% increase from 5,600, citing historical patterns that suggest strong fourth-quarter performance following gains in the first three quarters. The firm notes improved market participation beyond major tech shares and anticipates continued upward momentum, despite a high P/E ratio, reminiscent of the mid-1990s market conditions. 

• BCA Research advises investors to de-risk their portfolios ahead of the 2024 U.S. elections, citing economic slowdown, geopolitical tensions, and potential market volatility. A looming recession, rising unemployment, and geopolitical risks with Russia and China could trigger sharp market corrections. BCA arecommends favouring U.S. bonds, defensive equity sectors, and preparing for heightened fluctuations, regardless of election outcomes. 

• Citi analysts advise against hastily selling U.S. equities despite elevated valuations as the S&P 500 reaches new highs. They attribute recent gains to a Fed rate cut that boosted market sentiment. While traditional metrics show valuation pressures, Citi’s macro-driven analysis suggests a neutral outlook, encouraging investors to seek specific opportunities in Mid Cap Growth, Quality, Tech, and certain sectors like Consumer Discretionary and Financials. 

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