Souring yields sour sentiment

On Tuesday, the S&P 500 closed flat while the Dow plummeted 216 points due to surging US treasury yields and Federal Reserve comments, sparking a bond selloff. The Nasdaq 100 gained 0.3% on Nvidia's 7.1% surge fueled by xAI's use of their H100 GPUs. Eurozone's Stoxx 50 fell 0.6%, hitting a three-week low, amid concerns over a hawkish Fed and ECB's policy outlook, led by declines in heavyweights like LVMH, Hermes, and Inditex, alongside consumer cyclicals and healthcare sectors.

Summary for 29.05.2024

Asian equity markets were mixed on Wednesday, with Australia, Japan, South Korea, and Hong Kong witnessing declines amid concerns over rising bond yields and Fed's hawkish signals. However, Chinese equities rose after the IMF upgraded China's growth forecast to 5%, citing strong Q1 data and supportive policies.

European markets are expected to open flat to lower this morning while US equity futures indicate a stable market open, influenced by mixed sentiment from the Nasdaq's record high, American Airlines' sales outlook cut, and Robinhood's share repurchase program announcement.

Oil futures remained buoyant, backed by prospects of OPEC+ extending output cuts into the third quarter. Geopolitical tensions in the Middle East and anticipated heightened summer demand in the US also contributed to price support. Market attention turned to upcoming US inflation data for potential impacts on Federal Reserve policy.

Australia's Consumer Price Inflation exceeded expectations, growing 3.6% year-on-year in April, fuelling concerns over prolonged high interest rates by the Reserve Bank. Core CPI remained steady at 4.1%, indicating persistent underlying price pressures. The RBA anticipates inflation returning to its target range by end-2024, potentially prolonging high interest rates.

Minneapolis Fed President Kashkari emphasised that the Federal Reserve should refrain from cutting interest rates until significant progress on inflation is evident, cautioning against hasty rate adjustments. Recent statements by FOMC members aligned with this sentiment, maintaining the Fed's stance amidst high inflation and strong growth, with the first rate cut anticipated in December by most investors.

American Airlines slashed its second-quarter profit forecast due to weaker pricing, leading to a 6.2% drop in shares in afterhours. Chief Commercial Officer Vasu Raja's departure accompanied this downturn. Despite record summer travel projections, the airline anticipates a 5-6% decline in revenue per available seat mile, contrasting with United Airlines' reaffirmed earnings forecast. Analysts expressed scepticism over American's strategy shift and its impact on revenue.

Robinhood Markets initiates its first-ever $1 billion share buyback plan, signalling maturity and investor confidence. Despite shares rising 61% this year, they remain below 2021 peaks. The company expanded its offerings with a credit card and retirement account, anticipating futures and index options trading, while core trading business rebounded amid economic optimism.

Apple's smartphone shipments in China surged 52% in April, extending March's rebound. The increase follows a weak performance earlier in the year due to heightened competition from local rivals like Huawei.

Elon Musk's involvement in artificial intelligence is driving excitement. Nvidia's shares soared following reports that Musk's AI venture, xAI, secured $6 billion from investors. Musk plans to use Nvidia's H100 GPUs to build an xAI supercomputer. Ark Investment Management, led by Cathie Wood, has also invested in xAI, betting on AI's transformative potential.

Siemens Gamesa, the wind turbine division of Siemens Energy, plans to cut 4,100 jobs, around 15% of its workforce, due to lower business volumes and market challenges. The company aims to maintain overall workforce stability by shifting roles and hiring in other areas. CEO Jochen Eickholt emphasised the division's future prospects.

Elliott Investment Management disclosed a $2.5 billion stake in Texas Instruments and urged the chipmaker to boost its free cash flow, proposing a dynamic capacity-management strategy. Texas Instruments' free cash flow fell 77% in 2023. The company plans significant capital spending despite analysts projecting lower revenue than targeted capacity.

Volkswagen plans to develop affordable electric vehicles priced at around €20,000 to compete with Chinese rivals in Europe. The project, ID.1, aims for high localisation to reduce emissions and production costs. Volkswagen emphasises the need for political support and competitive conditions for the success of European electromobility.

Banco de Sabadell reassured retail shareholders of its excellent prospects as it tries to delay a decision on BBVA's hostile takeover bid until possibly 2025. BBVA, aiming for a 50.01% approval threshold, is facing resistance from Sabadell's retail investors. Sabadell's chairman cited improved profitability and share price performance, while BBVA remained confident in the benefits of the merger.

T-Mobile announced a $4.4 billion deal to acquire most of US Cellular's wireless operations, including customers and stores. US Cellular will retain 70% of its spectrum and towers. The transaction, aiming to enhance coverage, involves cash, debt assumption, and yields $1 billion in cost synergies. Expected to close in mid-2025 pending regulatory approvals.

Novelis Inc., a subsidiary of Hindalco Industries Limited, is launching an initial public offering of 45,000,000 common shares, with an option for underwriters to purchase additional shares. The expected price range is between $18.00 and $21.00 per share, and the shares will trade on the NYSE under the symbol "NVL."

Wedbush upgraded Airbnb to Outperform with a new price target of $165, citing a period of relative weakness and potential upside to near-term estimates. They believe Airbnb's long-term growth prospects remain strong, emphasising its leading competitive position and potential for expansion into new areas. Resilient travel demand is expected in the near term.

Bernstein analysts upgraded Hermès to "Outperform," citing its structural competitive advantage and brand momentum despite a high valuation. They raised growth expectations based on strong first-quarter earnings, highlighting the company's resilience amid economic challenges. Hermès is seen as a high-quality business offering stability amid market uncertainties.

Oppenheimer analysts raised the utilities sector rating due to positive earnings growth, upgrading it to Perform and increasing suggested weighting to 2.7%. Real estate rating was downgraded to Underperform, maintaining a suggested allocation of 2%. With most S&P 500 sectors showing earnings growth, economic data suggests prolonged Fed monetary policy pause.

UBS Global Research upgraded its year-end target for the S&P 500 to 5,600 points, reflecting a 5.6% upside from its previous forecast and marking the highest forecast among major brokerage firms. The revision is supported by stronger earnings projections and an optimistic economic outlook, aligning with predictions from other major brokerages like Deutsche Bank and BMO Capital Markets.

Disclaimer: The article is issued by Calamatta Cuschieri Investment Services Ltd, which is licensed to conduct investment services business under the Investments Services Act by the MFSA. For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning investments or investment decisions, or tax or legal advice.