Rally Resilience, China's Return, and Earnings Outlook ??????

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*Figures correct as of February 19, 2024

Onwards and upwards ??

Despite a sharp sell-off last Tuesday following the release of the hotter-than-expected inflation numbers, markets recovered remarkably quickly. Investors also paid scant attention to Thursday’s weak US Retail Sales. On Friday, US Wholesale inflation, as measured by PPI, also came in higher than expected- bond yields and the dollar spiked higher, but US stock indices were little moved.

Investors appear to have put aside concerns that inflation may be stabilising one full percentage point (as measured by Headline CPI) above the Federal Reserve’s inflation target. Yet as Fed Chair Jerome Powell has explicitly stated, stabilisation above the 2% target would be a block to rate cuts. Investors have also pushed out the predicted timing of the first rate cut to June from March.

In addition, according to the CME’s FedWatch Tool, the market is pricing in 75-100 basis points-worth of cuts this year, down from 150 at the end of January. So, if a sharp drop in the Fed Funds rate this year isn’t the driving factor for the rally, what is?

There’s the unexpected robustness of the US economy last year for one, and the low unemployment rate: both of these have been achieved against a backdrop of aggressive monetary tightening by the Fed since March 2022.

At the same time, the fourth quarter earnings season is providing a boost, along with the bullish outlook for technological breakthroughs due to generative AI. No wonder there’s so much excitement ahead of NVIDIA’s earnings report on Wednesday.

Check out NVIDIA.

China comes back ??

China’s stock market reopens on Monday after a week-long close for the Spring Festival, but the break hasn’t stopped other Asian Pacific stock indices from joining the rally in global equities. At the end of last week, Hong Kong’s Hang Seng led the charge, ending the session 2.5% higher. Meanwhile Japan’s Nikkei 225 came within one hundred points (0.25%) of its record high from December 1989, before pulling back ahead of Friday’s close.

Friday morning saw the Euro Stoxx 50, German DAX and French CAC all trading at fresh highs. The UK’s FTSE 100 was also firmer, as it continues to get support from sterling’s weakness, but the index is still more than 4% below its previous peak from twelve months ago. Its heavy weighting towards oil, mining and banking and away from tech has contributed to its lacklustre performance.

Last Thursday there was confirmation that the UK is in a technical recession, with two successive quarters of negative GDP. This is unwelcome news for the Conservative government going into election year as their pledge to boost growth looks hollow.

The Tories took a thumping loss in two by-elections last week- it will now be politically difficult for Chancellor Jeremy Hunt to justify tax cuts in next month’s Spring Budget.

Looking ahead ??

Earnings season ???

We’re getting towards the end of the fourth quarter earnings season, with well over 70% of S&P 500 constituents having now reported. Of these, according to analysis from FactSet, 75% have beaten earnings forecasts, and 65% have beaten on revenues. Currently, earnings growth is running at +2.9% when compared to Q4 2022, which is encouraging.

On the other hand, fifty two corporations have issued negative guidance for Q1 2024, against twenty one being positive. Additionally, market valuations are high when compared to both the five and ten-year averages, which is hardly a surprise when you look at the size of the stock market rally since the end of October last year. The rally however, has proceeded without many significant pullbacks, which is unusual.

What could trigger a change in sentiment big enough to see some sizeable profit-taking, let alone a stampede to the exits?

There is some evidence of troubles in US commercial real estate. Two weeks ago, Moody’s downgraded bonds of New York Community Bancorp to junk, and the stock slumped over 60%.

This could be an isolated issue, but it may unsettle some, coming almost a year after the last banking crisis which saw the failure of the Silicon Valley Bank and others.

Check out the US 500.

Crude oil ??

Crude oil fell sharply last Wednesday: the move brought an end to a nine-day rally which saw front-month WTI gain just under 10%. Prices subsequently recovered although there’s no longer any discernible trend, and the market appears directionless.

There has been little change to the fundamental background in that there’s still a war being waged between Ukraine and Russia, and no end in sight to the hostilities in the Gaza strip. Shipping is still being disrupted by Iranian-backed Houthis in the Red Sea, while supply remains plentiful, particularly from the US where production is at record levels.

On top of this, last week’s data from the American Petroleum Institute and the Energy Information Administration both showed significant builds in US crude inventories, but the demand outlook is murkier. In its latest monthly oil report, OPEC forecasts an increase in demand growth this year.

However in a report released last Thursday, the International Energy Agency downgraded its forecast for 2024, noting a loss in momentum for global oil demand growth.

Check out crude oil.

The economic calendar ???

Please note, there is no trade in US equities on Monday as it is Presidents’ Day.

?? Tuesday sees the release of minutes from the Reserve Bank of Australia’s last monetary policy meeting together with an update on Chinese 1 and 5-year Prime Rates. There’s also an update on Canadian CPI at lunchtime.

?? First thing on Wednesday we get Australia’s Wage Price Index, followed by UK Public Sector Net Borrowing and CBI Industrial Order Expectations. Later that evening, we have minutes from the US Federal Reserve’s last monetary policy meeting.

?? On Thursday we have Flash Manufacturing and Services PMIs for France, Germany, the Eurozone, the UK and US. There’s also a final update on Eurozone CPI and the accounts of the last European Central Bank’s monetary policy meeting. From the US there’s also weekly Unemployment Claims, Existing Home Sales and Crude Oil Inventories.

?? We round off the week with the UK’s GfK Consumer Confidence, and German ifo Business Climate survey.

This week’s key Q4 earnings ??

?? Monday:

BHP Group, Transocean, Mansonite International.

?? Tuesday:

Walmart, Home Depot, Palo Alto, CoStar, Keysight Tech, Barclays, Intercontinental, Toll Brothers.

?? Wednesday:

NVIDIA, HSBC, Rio Tinto, Analog Devices, Synopsys, Suncor, Garmin, eBay, Rivian, Marathon Oil, Etsy, Lucid.

?? Thursday:

Intuit, Booking Holdings, Pioneer Natural Resources, Nu Holdings, Block, Newmont Corp, Lloyds, Moderna, Carvana, WPP, Bath & Body Works, Macy’s.

?? Friday:

Berkshire Hathaway, EOG, Monster Beverage, Autodesk, Warner Bros, Southwestern Energy, NexGen.

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