Equity markets had a tough day yesterday in a tense climate as the 2-Day Fed meeting started. It is almost certain that the central bank will opt for a 25 basis points increase to bring the Fed Funds level into the 5-5.25% range. Inflation is still too much of a threat to ease the pressure, according to the institution. But that's not really what matters today. Investors are eager to know what strategy the Fed will deploy in the months to come. More specifically, they want to know the answer to the question: what is the best way to limit the damage when you have inflation + economic slowdown + high rates + a latent banking crisis? The ball will be in the court of the central bank head, Jerome Powell.

Yesterday, tutoring specialist Chegg raised the alarm about the impact of new conversational robots based on artificial intelligence. The stock collapsed by 48% during the session! It took with it all the players in the sector. Wall Street is keeping a close eye on the disruption caused by AI, but yesterday's concerns were elsewhere. A drop in oil prices naturally weighed on the sector, with spectacular drops in Chevron (-4.3%) and others. The black gold experienced its biggest daily fall since the beginning of January. There’s little evidence to explain this, apart from the fact that recession fears are fueling worries about demand. Another drag is regional banks after the fall of First Republic. The market is looking for the next victim in the sector. Comerica, Zions and Keycorp lost more than 9% yesterday. Pacwest is down nearly 30% and Western Alliance 15%. The banking bloodbath is also affecting larger players. Truist Financial ($42bn market cap) fell 8%. US Bancorp ($50bn market cap) was down 7%. Frankly, it is difficult to see how this bank run can be stopped without strong action from the US authorities. Stock market declines are not inevitable, but continued declines of this magnitude will push savers into larger institutions, further exacerbating the imbalances. And if the panic catches up with intermediary players and no longer just with small fishes, the shockwave will be considerable. The Fed knows this. It remains to be seen how it will react. In the meantime, the three major US indices fell by more than 1% yesterday.

The macroeconomic data released today before the Fed's decision should not change the situation. Released at 8.30 am, the ADP survey showed US firms added 296k jobs in April. This is much higher than the 150k expected by analysts. The services PMI and ISM services index are due later.

The session remains animated by earnings reports, including Costco, Qualcomm or CVS. Last night, Advanced Micro Devices disappointed investors with a weak outlook. Yesterday, the US financial microcosm was shaken by the raid launched by short seller Hindenburg on old market pirate Carl Icahn and his holding company Icahn Enterprises. The hedge fund argued that Icahn's assets were overvalued and that the company's generous dividend policy only served to pay out new money to old investors. The holding company sank by 20%. It's not a case of "the sprinkler being sprinkled", as Icahn was used to rushing into companies to disrupt their operations, but it's fair to say that fear has momentarily changed sides. However, the 87-year-old billionaire countered phlegmatically, referring to previous public statements about the strength of his model and saying that Hindenburg's main objective was to generate profits from its own short position.

In premarket trading today, all three indexes were flat as investors traded carefully.

 

Economic highlights of the day:

The ADP employment survey, the services PMI and the ISM services index are today’s main indicators, before the Fed's monetary policy decision and the conference to present the decision. All the agenda is here. 

The dollar is down 0.2% to 0.9060. Gold rebounds to 2011 dollars. Oil continues to drop, with North Sea Brent at USD 73.21 a barrel and US WTI light crude at USD 69.50. The yield on US 10-year debt falls 14 points to 3.41%. Bitcoin is trading around USD 28,500.

 

In corporate news:

  • Estee Lauder said Wednesday it expects a bigger-than-expected decline in full-year revenue and profit, due to a slower-than-expected recovery in Asia and in its biggest market, China. The stock is down about 10% in premarket trading.
  • Ford Motor reported strong first-quarter sales and profit on Tuesday, helped by strong demand for its trucks and SUVs, but issued a measured outlook for the full year due to continued losses in its electric vehicle division.
  • The automaker also said in a regulatory filing Wednesday that it expects restructuring charges of between $1.5 billion and $2 billion in 2023.
  • Tesla has resumed taking orders for the Model 3 Long Range in the United States, the company's website showed late Tuesday, after a temporary halt last year due to delivery delays.
  • Apollo - The U.S. private equity group is considering seeking approval from Swedish and Danish authorities to take a majority stake in SAS AB as part of the Scandinavian airline's rescue plan, a source close to the matter said.
  • Eli Lilly - An experimental Alzheimer's drug developed by the pharmaceutical company slowed cognitive decline by 35 percent in a late-stage trial, the company said Wednesday. The stock gained 5.6 percent in premarket trading.
  • Kraft Heinz raised its full-year profit forecast after beating expectations for its first quarter on Wednesday, as price increases and strong demand helped the group cushion rising raw material costs. The stock is up 2.6 percent in premarket trading.
  • Yum! Brands, the owner of fast-food chain Taco Bell, on Wednesday reported a first-quarter profit that fell short of expectations as the company doubled down on promotions to lure consumers. The stock is down 4% in premarket trading.
  • Bunge - The agricultural commodities trader reported first-quarter profit above estimates, helped by strong crushing margins in North America and Brazil and strong demand for food, feed and biofuels.
  • CVS Health reported first-quarter earnings and sales above expectations as a steady recovery in medical procedures boosted prescription drug sales, which helped its pharmaceutical business.
  • Advanced Micro Devices - The chipmaker forecast lower-than-expected quarterly sales for the current quarter due to weakness in the PC market.
  • Starbucks beat estimates for quarterly profit on Tuesday, helped by a strong rebound in China, while leaving its 2023 forecast unchanged.
  • Alphabet – Microsoft - The chief executives of Google, Microsoft, OpenAI and Anthropic will meet Thursday with U.S. Vice President Kamala Harris and senior administration officials to discuss key issues related to artificial intelligence (AI), a White House official said.

 

Analyst recommendations:

  • Ashtead: Societe Generale initiated coverage with a recommendation of buy. PT set to 6,700 pence.
  • Bunzl: Societe Generale initiated coverage with a recommendation of buy. PT set to 3,600 pence.
  • Molson Coors: J.P. Morgan upgrades Molson Coors Beverage Co. Class B to neutral from underweight. PT down 1.7% to $64.
  • Premier: Baird downgrades to neutral from outperform. PT up 11% to $30.
  • Prosperity Bancshares: Wolfe Research upgrades to outperform from underperform. PT up 15% to $68.
  • Roper: Bernstein upgrades to outperform. PT up 14% to $525.
  • Stryker Corporation: Deutsche Bank lowers PT to $292 From $260, Maintains Hold rating.
  • Weatherford: Raymond James initiated coverage with a recommendation of outperform. PT set to $100.