Equity markets trimmed their annual losses last week, after bottoming earlier in the month. The broad European Stoxx Europe 600 index recovered 3.7%, while the S&P500 gained nearly 4%. The two indexes are still down 16% and 18% respectively since January 1. Friday's session was again surprising on Wall Street, with tech stocks struggling, before starting to move forward again and staying there until the close. It's not very stable yet, but investors have undoubtedly gone from a half-empty glass to a half-full one in the last few days, when it comes to future prospects. The proof is that even the Nasdaq has soared despite the big slide of Meta Platforms, Amazon, Alphabet and Microsoft after disappointing figures. If investors can find the north when the compasses are out of whack, something is going on.

Investors feel that central banks are close to the point where they will allow themselves to talk about more pro-economic monetary policies again, making some post-recession plans possible. Still, I feel that everything is moving very fast compared to "classic" economic cycles. In the old world, it took quite a while to get rid of the big macroeconomic crashes. But those days seem to be over. The coronavirus? A flash crash (but what a flash crash!) and it's off again. Runaway inflation? A series of XXL rate hikes and it's managed. Is it the new normal?

The good thing about this fast-paced world is that investors will be able to test their fresh "pivot" theory in the Fed's strategy as early as this week. The U.S. central bank will announce its next monetary policy decision on Wednesday. Investors give an 81.3% chance of a 75-basis point rate hike. Illustrating the new wave of optimism among investors, a rate hike limited to 50 basis points received 18.7% of votes, compared to 5% a week earlier. We are still talking about a heavy-duty rate hike, to use the expression of one of my colleagues, since I remind you that until recently, central banks used to raise rates by a mere 25 basis points.

The issue on Wednesday is pretty clear. If the Fed sends the message the market is expecting, which is roughly that it remains tough for now, but could start easing its policy soon, stocks should continue to rebound. If Jerome Powell surprises investors by being very tough, the rally may be short-lived. In simpler terms, investors like low rates and plenty of cash, not high rates and tighter financial conditions.

Another development that might affect markets is that Moscow suspended the agreement allowing the export of Ukrainian grain after a drone attack on the Black Sea fleet. The Kremlin accuses the British of being involved. It has also claimed that London played a role in sabotaging the Nord Stream gas pipelines. Wheat prices are up 7% since the weekend.

Meanwhile, China's October manufacturing PMI fell to 49.2 points against a consensus of 50 points. This means it is in an economic contraction zone and Chinese purchasing managers are cautious. Rising Covid cases, a further contraction in construction, and a possible contraction in export demand mean that this weakness is likely to continue, ING economists believe.

All the three main Wall Street indexes were in the red this morning, ranging from -1.3% for the Nasdaq 100 to -0.2% for the Dow Jones.

 

Economic highlights of the day:

German Q3 GDP, European October inflation and the Chicago PMI are on the agenda. All the macro agenda is here. 

The dollar is up 0.6% to EUR 1.019 and up 0.9% to GBP 0.8704. The ounce of gold is losing ground to USD 1637. So is oil, with North Sea Brent crude at USD 92.82 a barrel and U.S. light crude WTI at USD 86.95. The yield on 10-year U.S. debt is back up to 4.03%. Bitcoin is trading at USD 20,500 per unit.

 

In corporate news:

* Apple - iPhone production could fall 30% next month at one of its supplier Foxconn's largest factories in China due to tighter Covid-19 restrictions. Apple shares are down 0.8% in pre-market trading.

* Emerson Electric announced the sale of a majority stake in its climate technology business to Blackstone in a deal that values the division at $14 billion.

* General Motors said it temporarily halted paid advertising on Twitter after Elon Musk finalized his takeover of the social network.

* Meta Platforms - The social networking group's chief executive, Mark Zuckerberg, will testify in a proceeding brought by the Federal Trade Commission (FTC), the U.S. antitrust authority, which is arguing to block Meta's takeover of virtual reality company Within Unlimited.

* Thermo Fisher announced Monday that it has acquired diagnostics company Binding Site from a consortium led by Nordic Capital in a deal worth $2.6 billion.

* Verisk Analytics said it completed the sale of its energy research and consulting subsidiary Wood Mackenzie to Veritas Capital for $3.1 billion.

 

Analyst recommendations:

  • Advanced Micro Devices: BMO Capital Markets downgrades to market perform from outperform. PT up 77% to $110.
  • Ameris Bancorp: Raymond James downgrades to Market Perform from Outperform.
  • Berkeley: Citi downgrades to neutral from buy. PT up 3.8% to 3,654 pence.
  • Caterpillar: UBS cut the recommendation to neutral from buy. PT up 4.9% to $230.
  • Chart Industries: Benchmark Company raised the target to $245 from $218. Maintains buy rating.
  • Drax: Jefferies upgrades from hold to buy targeting GBp 600.
  • Greif: BMO Capital Markets downgrades to underperform from market perform. PT down 10% to $62.
  • Genuit: Jefferies remains Buy with a price target reduced from GBp 480 to GBp 313.
  • Gilead Sciences: Barclays upgrades to equal-weight from underweight. PT down 4.1% to $76.
  • HoneyWell: Daiwa Securities downgrades to neutral from outperform. PT down 53% to $194.
  • Keurig Dr Pepper: Truist Securities downgrades to sell from hold. PT down 24% to $30.
  • LyondellBasell: Barclays downgrades to equal-weight from overweight. PT up 5.1% to $82.
  • Meta Platforms: Phillip Securities downgrades to accumulate from buy. PT up 14% to $113.
  • Paramount Global: Wells Fargo Securities cut its recommendation on Paramount Global Class B to underweight from equal-weight. PT down 32% to $13.
  • Peapack-Gladstone: Hovde Group raises PT to $45 from $39. Maintains outperform rating.
  • Principal Financial: Keefe, Bruyette & Woods downgrades to underperform from market perform. PT down 13% to $77.
  • Reckitt: Jefferies upgrades from underperform to hold, targeting GBp 5,620.
  • Reinsurance Group: J.P. Morgan downgrades to neutral from overweight. PT down 8.4% to $136.
  • ServiceNow: Capital One Securities initiated coverage with a recommendation of overweight. PT up 23% to $516.
  • Sonic Automotive: Benchmark Company LLC cut the target to $62 from $71. Maintains buy rating.
  • Sonoco: BMO Capital Markets downgrades to underperform from market perform. PT down 11% to $58.