Yesterday, the main three Wall Street indices ended slightly in the green, after gains of about 6-7% last week. It was time to take a break. Following their plunge, bond yields rebounded, but without coming close to their recent peaks. Since the Fed's latest policy announcements on Wednesday, investors believe that the rate hike cycle in the US is over. Hence the acceleration in equities and bonds (which rise when yields fall). Minneapolis Fed President Neel Kashkari dampened the mood a little yesterday by stressing that rate hikes are not necessarily over. Having said that, we're still in the expected pattern: the market thinks the Fed won't raise rates again, but the Fed keeps on making people believe it's possible. That way, if inflation hits a snag in the coming weeks, the Fed can say that it had warned everyone before raising rates. A question of credibility. And given the surge in equities over the past few days, it's not in its interest to let go of the reins completely, otherwise investors will lose all discernment and re-create the bubbles they're so good at.
Aside from the presumed good news from the Fed, and in spite of Kashkari's downbeat attitude, the macroeconomic news calls for caution. In China, the latest statistics are rather weak and somewhat divergent. Nothing surprising, some might say. October exports were down -6.4% year-on-year (-3.3% expected), but imports rebounded by +3% (consensus -4.8%). The basic interpretation is that China is still struggling to remain the preferred trading partner of other countries, at least outside oligopolistic areas, while its domestic market is regaining some color. No reason to get carried away. The other big news overnight was the Bank of Australia's decision to raise its main policy rate from 4.10% to 4.35%. The announcement was in line with expectations, but was accompanied by a slightly less offensive stance than expected on the risks ahead. As a result, the Australian dollar and local yields tended to ease. I suppose we could call it a "dovish rise", which I had compared a while back to a good big slap followed by a caress, a bit like the ECB did in September. Whereas last week, the Fed was more like a "hawkish pause", i.e. a caress but with the other hand raised in preparation for a good slap. Other Federal Reserve bankers are due to give speeches today: it remains to be seen whether investors will prefer to listen to the hawks or the doves. I have my suspicions.
Earnings releases continue to roll in. Gilead and Uber are on the agenda today. Meanwhile, WeWork - the company that wanted to transform work into something with cool couches, game consoles, table soccer and young, beautiful people – filed for bankruptcy. This megalomaniac project was already bailed out to the tune of billions, but ultimately failed because an attractive idea on paper doesn't always make a good business model. WeWork has filed for bankruptcy at a time when its capitalization is almost exactly 1000 times lower than its crazy valuation four years ago. The company should be able to restart after signing agreements with its creditors, because US bankruptcy law is calibrated to offer a fresh start, but the scope will be far removed from its initial ambitions. As a result, its best hope of staying on the radar would probably be to become a meme stock.
Wall Street futures were in the red this morning, so it looks like there will be a further pause in sight today.
Economic highlights of the day:
German industrial production, Eurozone PPI, US trade balance and consumer credit are on the agenda.
The dollar is up about 0.4% against the euro and the pound to EUR 0.9369 and GBP 0.8132. The ounce of gold is trading at USD 1966. Oil remains under pressure, with North Sea Brent at USD 83.59 a barrel and US light crude WTI at USD 79.33. The yield on 10-year US debt has risen to 4.64%. Bitcoin hovers around USD 35,000.
In corporate news:
- International Flavors & Fragrances - The chemicals company is up 5.6% in electronic trading, after reporting sales of $2.82 billion against consensus expectations of $2.77 billion.
- Coterra Energy - On Monday, the oil and gas producer reported a third-quarter profit ahead of analysts' estimates. On an adjusted basis, the company earned 50 cents per share, against a consensus of 44 cents.
- Diamondback Energy beat Wall Street expectations with its third-quarter earnings on Monday, as the shale oil producer benefited from sustained demand amid tight supply. On an adjusted basis, the company earned $5.49 per share, against a consensus of $5.01.
- WeWork filed for bankruptcy protection on Monday. A WeWork spokesman said that around 92% of creditors had agreed to convert their secured debt into equity as part of a restructuring agreement, wiping out around $3 billion in debt.
- Airbnb - An Italian judge has ordered the seizure of 779.5 million euros from the group's European headquarters in Ireland for alleged tax evasion, the Milan public prosecutor's office said Monday.
- Baidu, China's leading search engine, ordered artificial intelligence (AI) chips from Huawei this year, two sources close to the matter reported, to the detriment of NVIDIA.
- NXP Semiconductors - The Nasdaq-listed shares of the Netherlands-based chipmaker were up 0.7% after the close, as the group forecast fourth-quarter adjusted earnings per share of between $3.44 and $3.86, against an average estimate of $3.61.
- DR Horton - The homebuilder posted a decline in quarterly earnings, as demand for housing slowed with mortgage rates at their highest in over 20 years. Net income attributable to the company for the fourth quarter declined to $1.5 billion from $1.6 billion a year earlier.
- Danaher - Abcam shareholders on Monday approved the medical device supplier's proposal to acquire all Abcam shares for $24 per share in cash. Danaher proposed to buy Abcam in September as part of a $5.7 billion deal.
- General Dynamics - The United Auto Workers (UAW) union announced Monday that employees at the military vehicle manufacturer's plants had voted to ratify a new tentative agreement providing for a 14% wage increase.
- General Motors paused production of its fully autonomous Origin van, Forbes reported Monday.
- Intel was up 0.7% before the opening, with the WSJ reporting that the company leads the way in defense chip production.
- TripAdvisor rose 9% after the close after reporting adjusted earnings per share of 0.52 cents and third-quarter sales of $533 million, up 16%.
Analyst recommendations:
- Albemarle : BMO Capital Markets maintains its outperform rating and reduces the target price from USD 265 to USD 180.
- American tower : JP Morgan maintains its overweight recommendation with a target price raised from USD 218 to USD 236.
- Anglo american: DZ Bank AG Research maintains its sell recommendation with a price target reduced from GBP 19.50 to GBP 19.
- Barclays: BNP Paribas Exane maintains its neutral recommendation with a price target reduced from GBX 190 to GBX 180.
- Best buy: Citi maintains its sell recommendation with a price target reduced from USD 70 to USD 60.
- Canadian national railway company: Bernstein maintains its outperform rating with a price target reduced from CAD 171 to CAD 165.
- Chewy: Citi maintains its neutral recommendation with a price target reduced from USD 30 to USD 23.
- Constellation energy: Morgan Stanley maintains its overweight rating and raises the target price from USD 117 to USD 129.
- Cvs health: Cowen maintains its outperform rating and reduces the target price from USD 109 to USD 102.
- Diageo: Deutsche Bank maintains its sell recommendation with a price target reduced from GBX 2950 to GBX 2750.
- Eli lilly: DZ Bank AG Research maintains its buy recommendation and raises the target price from USD 590 to USD 639.
- Estee lauder: Daiwa Securities maintains its neutral recommendation with a price target reduced from USD 158 to USD 115.
- Eversource energy: Evercore ISI downgrades to in-line from outperform with a price target reduced from USD 84 to USD 65.
- Hca healthcare, inc.: Wolfe Research maintains its outperform rating and reduces the target price from USD 270 to USD 250.
- Hp inc.: Edward Jones upgrades to buy from hold.
- Icon public limited company: Wells Fargo maintains its equalweight recommendation and raises the target price from USD 220 to USD 245.
- International Flavors & Fragrances: Stifel maintains its hold recommendation with a price target raised from USD 77 to USD 87.
- Live nation entertainment: Oppenheimer maintains its outperform recommendation and reduces the target price from USD 115 to USD 105.
- Lloyds banking group: BNP Paribas Exane maintains its neutral recommendation with a price target raised from GBX 51 to GBX 53.
- Lowe's companies: Citi maintains its neutral recommendation with a price target reduced from USD 250 to USD 199.
- Progressive corporation: Goldman Sachs maintains its neutral recommendation with a price target raised from USD 140 to USD 160.
- Prudential plc: Mediobanca maintains its neutral recommendation with a price target reduced from GBX 1306 to GBX 1293.
- Qualcomm: CICC initiates its outperform recommendation with a target price of USD 136.
- Realty income corporation: Stifel maintains its buy recommendation with a price target reduced from USD 69.50 to USD 67.50.
- Shell plc: Berenberg maintains its buy recommendation and raises the target price from GBX 2850 to GBX 3000.
- Sirius xm holdings: Barrington Research maintains its outperform rating and reduces the target price from USD 5.50 to USD 5.
- The allstate corporation: Goldman Sachs maintains its buy recommendation and raises the target price from USD 128 to USD 141.
- The home depot: Citi maintains its buy recommendation with a price target reduced from USD 375 to USD 333.
- Vertex pharmaceuticals incorporated: Barclays maintains its overweight recommendation and raises the target price from USD 399 to USD 408.
- Vodafone group: Berenberg maintains its hold recommendation and reduces the target price from GBP 0.85 to GBP 0.80.
- Walmart: Oppenheimer maintains its outperform rating and raises the target price from USD 175 to USD 185.