Wall Street had a nice session yesterday, with gains of over 1% across the board. Banking and real estate stocks took the lead, with semiconductors as a guest star, thanks to the favorable prospects announced by US group Micron and its German peer Infineon.
 
The continued rebound in financial stocks reflects the fact that investors are increasingly betting on financial stability versus price stability. In other words, they are betting on a more accommodating attitude of central banks towards their interest rate policies, calculating that they will prefer to put the fight against inflation on hold in order to avoid jeopardizing the great financial balance. This is what the Nasdaq technology index tells us, which we will discuss now. A numerical anecdote to illustrate this radical change in perception. Bloomberg last night highlighted the significant gain on a position that was totally out of the money not long ago. "Out of the money" means that the product in question was so far from the scenario giving it value that it should have died a natural death on the floor. Basically, an investor bet in January, via options, that the Fed would lower its key rate to 1.5% by the end of the year. Needless to say, the prediction was only realized at the end of February. But the bank failures in March completely upset the market's baseline scenario, so options largely shifted higher. Not to the extent of making a bet of 1.5% in nine months’ time the new norm, but enough for the investor in question to pocket $10m for a $3.75m bet. For the record, the December 2023 options now suggest a Fed Funds rate of just over 4% at the end of the year, up from 5.5% at the start of the month. This is a long way from 1.5%, but the trend is clearly downwards. Currently, US policy rates are in the "4.75 to 5%" range and the Fed has guided on another 25-basis point hike.
 
This allowed indices to accelerate yesterday in the US, sending the Nasdaq 100 into a "bull market", meaning a gain of at least 20% from its last low, which was in December. The US technology index gained 1.9% to 12,846 points, while the largely inbred but more generalist S&P500 gained 1.4% to 4,028 points. It should be noted that the Nasdaq Composite, which includes many more stocks than the Nasdaq 100, gained less. The reason? Investors have certainly shifted to tech stocks, which traditionally benefit from a more favorable interest rate environment, but they have favored stocks offering good guarantees, and therefore often large players. Apple has recovered more than 20% since the beginning of the year, Tesla 53% and Meta Platforms 66%. Nvidia has made the biggest recovery of the year with 80%.
 
So basically, stocks are rising because bank risk is falling because investors think the Fed is going to have to cut rates. In a sense, they're still "fighting the Fed", even though the adage is that they shouldn't. The US central bank is clearly in a delicate situation, because it has to reconcile several interests that aren't exactly convergent at first glance, including the fight against inflation, the stability of the financial system, economic dynamics and investor confidence, to name but a few. The market has made up its mind: interest rate policy will have to adapt to financial-recessionary tensions.
 
In today's news, the FDIC, the organization that guarantees deposits in the United States, has planned to call on the major Wall Street banks to fill the $23 billion hole inherited from the latest bankruptcies. This will strengthen the $128bn insurance fund by shifting the burden to the top tier, to ease the pressure on smaller institutions. Several dozen artificial intelligence experts yesterday called for a pause in the AI development frenzy to address a number of major issues, including ethical ones. Elon Musk himself is a signatory to the moratorium request, which is a bit comical given the way he has handled the issue at the carmaker.
 
German inflation data came in slightly higher than expected this morning, with March CPI rising by 7.8% year-on-year, while 7.5% was expected. Meanwhile, the third reading on US fourth quarter GDP came in at +2.6%, versus +2.7% expected. In premarket trading, the main Wall Street indexes were all up by about 0.6%.

 

Economic highlights of the day:

German preliminary inflation for March is due at 14:00, just before, in the US, the weekly jobless claims and the latest estimate of Q4 2022 GDP. All the agenda is here.

The dollar is down 0.4% against the euro to EUR 0.9183 and down 0.3% against the pound to GBP 0.8095. Gold is stabilizing at around USD 1970. Oil remains firm, with North Sea Brent at USD 78.05 per barrel and US WTI light crude at USD 73.59. The yield on US 10-year debt stands at 3.58%. Bitcoin is trading around USD 28,600.

 

In corporate news:

  • Faraday Future has begun production of its first luxury electric car, the FF 91 Futurist, at its California plant, the Los Angeles-based electric vehicle group said Wednesday, after it raised doubts last November about its ability to continue operations and the delivery schedule for the FF 91. The stock is up 10% in premarket trading.
  • Roku is up 3% in premarket trading after the streaming platform announced it would cut about 200 jobs.
  • Manchester United said Thursday it returned to profit in the second quarter thanks to higher commercial revenues and lower wages. The club reported a net profit of 6.3 million pounds (7.15 million euros) in the quarter, compared with a loss of 1.4 million pounds a year earlier.
  • Charles Schwab is down 2% in premarket trading after Morgan Stanley lowered its recommendation from "overweight" to "weight in line", saying it was awaiting clarification on liquidity and citing "limited visibility on multiple variables".
  • Alphabet, Microsoft - Google Cloud, the cloud computing arm of Google, accused Microsoft of anti-competitive cloud practices and criticised impending deals with European cloud providers, saying they did not resolve problems with its licensing terms.
  • Google Cloud vice president Amit Zavery said the company had raised the issue with European competition authorities.
  • Alibaba said Thursday it is considering divesting non-strategic assets and giving up control of some businesses as the Chinese technology giant embarks on a major restructuring.
  • Meta - Facebook's parent company executives are discussing a group-wide ban on political advertising in Europe amid concerns that Facebook and Instagram will not be able to comply with stricter Brussels rules targeting online political campaigns to combat misinformation, the Financial Times reported Thursday.
  • Ford has joined PT Vale Indonesia and China's Zhejiang Huayou Cobalt Group as a new partner in a $4.5 billion nickel processing plant in Indonesia, underscoring automakers' growing appetite for raw materials used in the production of electric vehicle (EV) batteries.
  • Electronic Arts, the company behind the "FIFA" football video game franchise, announced Wednesday that it will lay off about 6 percent of its workforce and reduce its office space, making it the latest major video game publisher to announce job cuts.
  • Starbucks - Shareholders of the U.S. giant, facing a wave of newly unionized employees, have approved a proposal for the chain to conduct an independent assessment of its labor practices.
  • Concentrix will buy Paris-based Webhelp Group, which specializes in sales, marketing and payment services, in a $4.8 billion deal, the business services provider said Wednesday.

 

Analyst recommendations:

  • Anglo American: Morgan Stanley upgrades from Underweight to Overweight, targeting GBp 2,710.
  • Charles Schwab: Morgan Stanley downgrades to equal-weight from overweight. PT up 23% to $68.
  • CMC Markets: Jefferies downgrades from buy to hold targeting GBp 190.
  • Lululemon: Deutsche Bank adjusts price target to $465 from $422, maintains Buy rating
  • Philip Morris: J.P. Morgan upgrades to overweight from neutral. PT up 22% to $116.
  • PVH Corp: Deutsche Bank adjusts PT to $94 from $77, maintains Hold rating
  • McCormick & Company: Deutsche Bank adjusts PT to $75 from $69, maintains Hold rating