Monday Market Rundown (6/10 - 6/14)

Welcome to your Monday Market Rundown! This week, we're focusing on key earnings from companies like Cosan S.A. (CSAN), Oracle Corp. (ORCL), and Adobe Inc. (ADBE), alongside crucial economic reports such as the FOMC Rate Decision, CPI, and Jobless Claims. In our spotlight, Maersk has raised its profit outlook due to rising freight rates and port congestion, demonstrating the shipping industry's resilience despite operational challenges. Continue reading for more insights. Hope you have a good start to your week.

Earnings Reports:

Monday: Cosan S.A (CSAN)

Tuesday: Oracle Corp. (ORCL), Woodside Energy Group Limited (WDS), GameStop (GME),?

Wednesday: Broadcom Inc. (AVGO), Dave & Buster's Entertainment (PLAY)

Thursday: Adobe Inc. (ADBE), Autodesk (ADSK)

Economic Calander:

Tuesday: NFIB Small Business Optimism, OPEC Monthly Report?

Wednesday: FOMC Rate Decision, CPI, Interest Rate Projection

Thursday: Jobless Claims, PPI, Fed’s Balance Sheet

Friday: UMich Consumer Sentiment

Commentary - The Week Ahead

Resilience in Mega Caps Amid Market Concentration

This past week, investors have shown remarkable resilience, continuing to buy dips in Mega Cap stocks like Microsoft (MSFT), Nvidia (NVDA), and Apple (AAPL). Notably, these three stocks now account for over 20% of the S&P 500's value, a concentration not seen since 2000. Market breadth indicators, particularly at the 50-day moving average level, highlight this concentration, with less than half of S&P 500 companies trading above their 50-day moving averages despite the index setting new highs.

Technical Analysis and Market Breadth

From a technical standpoint, the market breadth underscores the concentration narrative. The ongoing outperformance

of the market-cap-weighted S&P 500 relative to the equal-weighted S&P 500 suggests the increasing significance of Mega Cap stocks. Investors should keep a close watch on these stocks, as their performance could dictate broader market movements in the coming days.

Interest Rates and Bond Yields

Bond yields will be a crucial indicator to watch. Should yields push above 4.50%, it could threaten the recent equity rally. Until a decisive breakout above recent highs, the market is likely to remain choppy and consolidate.

Fed's Dot Plot and Inflation Outlook

The market is pricing in a near certainty of no rate hike, making the Fed's dot plot the focal point. Recent strong jobs data and sticky inflation suggest the Fed may maintain a cautious stance. The upcoming CPI figures are expected to show a 0.3% month-over-month increase in core inflation, with the annual rate easing to 3.5%.

Weekly Spotlight - Maersk Profit Outlook

Danish shipping giant Maersk on Monday said it expected its profits in 2024 to be $3 billion higher than previous projections as freight rates have increased amid the crisis in the Red Sea. Months of Huthi attacks by Yemen's Iran-backed Huthis have prompted some shipping companies to detour around southern Africa to avoid the Red Sea route, which normally carries about 12 percent of global trade.

Despite the challenges, the shipping industry has shown remarkable resilience. Maersk cited the ongoing increase in container freight rates and escalating port congestion in Asia and the Middle East as reasons for the more upbeat guidance. The company is now anticipating underlying earnings before interest, taxes, depreciation, and amortization (EBITDA) of $7 billion to $9 billion, a substantial increase from the previous guidance of $4 billion to $6 billion. Operating profit expectations have also improved to a range of $1 billion to $3 billion, a much more promising outlook than the range between a $2 billion loss and no earnings. Up until the start of May, Maersk had forecast an operating loss of as much as $5 billion. Free cash flow expectations now total at least $1 billion, up from negative free cash flow of $2 billion.

Philip Damas, managing director at Drewry Supply Chain Advisors, explained that carrier profits in container shipping are currently driven by system-wide events reducing shipping capacity, inflating both freight rates and carrier profits. He interpreted Maersk’s announcement as an expectation that current disruptions will continue for longer than previously anticipated.

Trading conditions remain subject to higher-than-normal volatility given the unpredictability of the Red Sea situation and the lack of clarity on future supply and demand, according to Maersk. Most commercial vessels continue to skirt the Red Sea amid repeated missile and drone attacks from Yemen-based Houthi militants, opting instead to travel around southern Africa’s Cape of Good Hope. These longer transit times have resulted in less capacity out on the ocean, with Maersk expecting capacity losses of 15 percent to 20 percent on Asia-to-Europe routes in the second quarter. The Danish company is experiencing substantial delays in vessel schedules due to severe congestion across Mediterranean and Asian ports like Singapore and Shanghai, which has extended waiting times and impacted the firm’s ability to maintain regular schedules. This has forced the company to blank sailings on two service lines starting in July.

Vincent Clerc, CEO of Maersk, noted that while demand for container transport remains strong, supply has been negatively impacted by missed sailings, longer routes, equipment shortages, and delays leading to increased congestion across several key ports in Asia and the Middle East. This demand and supply imbalance has had an immediate and profound impact on freight rates. The ongoing threats to commercial vessels in the Red Sea and growing supply chain bottlenecks indicate that this situation won’t improve soon. More capacity than expected will be needed to resolve these issues and stabilize the global supply chain.

Interestingly, even as shipping companies cut certain routes and face more port congestion, leading to fewer shipments, the resulting higher freight rates can still lead to increased EBITDA. The shipping industry is benefiting from these elevated rates, which offset the reduction in shipment volumes. As the container shipping liner expects more capacity constraints, it still has an expected 33 ships carrying 408,836 20-foot equivalent container units (TEUs) in its orderbook, according to data from Alphaliner. But until the industry gets more of its new orders online, it appears ocean freight rates will continue to stay elevated. According to Drewry’s World Container Index (WCI), spot freight rates increased 4 percent to $4,226 per 40-foot container in the week ending May 30. These spot rates have jumped to their highest averages since September 2022, and are up 215 percent from October 2023 when they were $1,342 per container.

Maersk's revised outlook underscores its resilience and adaptability in the face of significant operational challenges. The company continues to navigate a complex environment marked by geopolitical tensions, port congestion, and fluctuating freight rates. As the industry awaits the delivery of new ships, elevated freight rates are likely to persist, shaping the financial landscape for Maersk and its peers in the months ahead.