Last week, US equities experienced a mixed performance. Strong job gains fuelled economic optimism, yet higher-than-expected wage growth sparked inflation concerns. The 10-year Treasury yield exceeded 4%, affecting rate-sensitive sectors. Despite a modest Friday gain, major indices concluded the week lower, ending a nine-week winning streak. Investors reevaluated expectations for Fed rate cuts, with signs pointing to a potential cut as early as March. Technology shares, notably Apple, faced pressure, while financial shares strengthened. Small-cap stocks, as represented by the Russell 2000, concluded the week with a 3.7% decline. The Stoxx 50 closed 0.25% lower on Friday, influenced by a softer-than-expected ISM services PMI in the US, raising bets of a Federal Reserve rate cut by March, and concerns over Eurozone inflation rebounding to 2.9% in December.

Summary for 08.01.2024

Most Asian equities fell this morning after stronger-than-expected US nonfarm payrolls data reduced expectations of early interest rate cuts. China's indices fell, reflecting ongoing economic concerns, while Hong Kong's Hang Seng slid 1.1%. Inflation reports from major Asian economies and US consumer price index data are anticipated this week.

European shares are poised for a stable opening, mirroring the steadiness in US equity futures, with a focus on upcoming inflation figures and major bank earnings.

Oil prices dipped on Monday as Saudi Arabia announced key crude price cuts for February due to softened demand. Concerns over a potential market surplus grew with increased output from OPEC and rising US oil drilling rigs. Geopolitical tensions in the Middle East supported prices, with warnings of the Gaza conflict spreading and vows to continue the war until Hamas is eliminated.

US congressional leaders, Schumer and Johnson, agreed on a $1.59 trillion spending cap for FY24, reducing government shutdown risks. Despite bipartisan support, challenges from conservative opposition and policy disagreements linger. Biden backs the compromise, emphasising funding for essential priorities while maintaining fiscal discipline. Challenges highlight the delicate balance in negotiations.

Friday's job report revealed robust job market performance, with the economy adding 216,000 jobs in December, surpassing expectations. However, revisions lowered job growth for the prior two months by 71,000. Despite a slight increase in wage growth, the unemployment rate held steady at 3.7%. The data suggested a healthy labour market but reduced expectations for aggressive Fed rate cuts, leading to a decline in March rate cut projections from 90% to 60%.

In December, the ISM Services PMI unexpectedly dropped to 50.6, a seven-month low, with slowing new orders and contracting employment and inventories, while production growth accelerated and price pressures eased, reflecting concerns over economic uncertainty, geopolitical events, and labour constraints, according to Anthony Nieves, Chair of the Institute for Supply Management Services Business Survey Committee.

Euro Area inflation rose to 2.9% YoY in December, up from November's 2.4%, driven by energy-related factors. Energy prices declined, contributing to the first uptick since April. Services inflation remained stable, while food and non-energy industrial goods saw moderated price increases. The core rate dropped to 3.4%, reaching its lowest since March 2022. Monthly, consumer prices increased by 0.2% after a 0.6% drop in November.

US regulators temporarily grounded 171 Boeing 737 MAX 9 jets after a cabin panel blowout on an Alaska Airlines flight prompted an emergency landing. The FAA ordered immediate inspections before the planes can fly again. The incident is a setback for Boeing as it faces safety and pandemic-related challenges. Alaska and United Airlines suspended MAX 9 use for checks. The global grounding comes five years after two crashes that killed nearly 350 people. Boeing shares were indicated down 7% this morning in Germany.

Some major BP shareholders are reportedly urging the company to consider BAE Systems CEO Charles Woodburn as a candidate for the role of BP's next chief executive. It is unclear whether formal discussions have taken place. BP is currently in the process of selecting a new CEO following the resignation of Bernard Looney in September. The company's board is considering both internal and external candidates for the position.

Chesapeake Energy and Southwestern Energy are reportedly nearing a merger that could create a nearly $17 billion company, overtaking EQT as the largest US natural gas-focused exploration and production firm by market value. The deal, if finalised next week, comes amid a trend of consolidation in the energy sector as shale companies seek scale and efficiencies. Both companies are currently neighbours, operating in Appalachia's shale formations and the Haynesville basin.

CVS Health reaffirmed its fiscal year 2023 outlook, expressing confidence in achieving adjusted earnings per share between $8.50 and $8.70. The optimism is driven by successful sales and retention strategies, anticipating increased Medicare Advantage plan enrollments for 2024. CVS Health also aims for operational cash flow between $12.5 billion and $13.5 billion.

Oppenheimer downgraded McDonald’s to a Perform rating from Outperform, removing the 12-month price target. Despite being a top pick in 2023 with a 7% rise in shares, analysts see no clear catalysts for further impact on earnings forecasts or valuation. The forecast indicates stable same-store sales in 2024, potentially influenced by pricing challenges and difficulties in gaining market share.

RBC Capital initiated coverage on Snowflake Inc. with an Outperform rating and a 12-month price target of $230. Analysts express bullishness on Snowflake's long-term growth potential, citing strong execution capabilities and the ability to draw and retain top talent. They believe Snowflake's GenAI approach will play a crucial role in achieving their target of $10 billion in product revenue by fiscal year 2029.

Wells Fargo upgraded Carnival Corp. to Overweight, citing higher FY24 EBITDA growth for quicker deleveraging, while downgrading Norwegian Cruise Line to Equal-Weight, citing a balanced risk/reward. Wells Fargo sees Carnival's improved fundamentals and management execution, maintaining a $22 price target. For Norwegian, they acknowledge the 2024 bull case but view valuation as fair, maintaining an $18 price target, anticipating conservative FY24 guidance.

Bank of America analysts maintained a Buy rating and a $700 per share price target on NVIDIA, stating that the company's generative AI dominance could potentially generate around $100 billion of incremental free cash flow over the next two years. They believe this solid free cash flow generation provides optionality for NVDA to address concerns and potentially expand its trading multiple.

Jefferies downgraded Palantir to Underperform, expressing concerns that the equity has rallied to unsustainable valuation levels primarily driven by AI euphoria and retail trading momentum with no clear monetisation strategy. Despite acknowledging Palantir's unique data asset and technology moat, analysts see more risk than reward at current levels.

PayPal received a second analyst downgrade last week as BTIG shifted its rating from Buy to Neutral, citing "too much uncertainty" and expressing concerns about lower transaction margins in unbranded TPV growth. This follows a previous cut by Oppenheimer, reflecting worries about profitability pressures and the need for positive trends before becoming more constructive on the company.

Maersk is diverting all container vessels from Red Sea routes around Africa's Cape of Good Hope due to increased attacks by Houthi militants in the Gulf region. Shippers are avoiding the Red Sea, opting for the longer route, impacting journey times and increasing costs. Maersk and Hapag Lloyd have incurred significant expenses from diverting ships. This move, prompted by security risks, deepens concerns about global disruptions to goods delivery. The Suez Canal, used by one-third of global container ship cargo, is being bypassed, potentially adding $1 million in fuel costs per round trip.

Bank of America investment strategists warn that European equities are priced for macro perfection, having risen 10% since October and 24% from their Q4 2022 trough. The rally is attributed to a compression in risk premia, leaving the market close to macro perfection, particularly evident in the US high-yield credit spread nearing an all-time low. Bank of America expects growth momentum to weaken by mid-year, maintaining a negative outlook on European equities and cyclicals versus defensives.

In the upcoming week, the US will focus on December inflation, foreign trade, and producer prices, along with speeches by Fed officials. China will report on consumer and producer inflation, foreign trade, and new yuan loans. Germany releases data on factory orders, industrial production, and trade. The UK showcases November GDP growth and industrial production, while unemployment rates are monitored in the Euro Area and Italy. Major bank earnings, including Bank of America, Citigroup, JPMorgan and Wells Fargo, are also anticipated.

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