Yesterday, the session had a bad start after the release of a higher than expected reading of inflation for September, Wall Street was broken in the first exchanges. In fact, if inflation is still out of control, the Fed’s aggressive rate hike policy will continue. And if the Fed’s aggressive rate hike policy continues, it means further reductions in liquidity and an increased risk of recession. The probability that the central bank will raise rates by another 75 basis points in November has risen from 85% to nearly 100%. And we’re starting to hear again about the need to go to 100 basis points.
But the markets chose to play a different tune, in one of those movements where no one has a straight and unequivocal answer. There are chartist explanations of arriving at chart supports. There are technical reasons with significant unwinding of short positions after a new phase of decline in shares. There are algorithmic signals that trigger automatic purchases once the S&P500 erases 50% of its post-pandemic gains and crosses the 3500-point threshold. There are microeconomic arguments with some quarterly corporate results being less negative than expected. There are also more obscure reasons, such as too much bad news, or the rather desperate rebound with no tomorrow called the “dead cat bounce”.
As is often the case, movement tends to be a sum of events that pile up and line up in a common direction. This is no doubt accentuated by some investors keeping their finger on the trigger looking for a low point.
There’s another flurry of statistics today in the US, mainly September retail sales and the University of Michigan’s October consumer confidence index. Retail sales remained unchanged in September, but I will not try to make any predictions on how this will affect the markets given the behavior of the indices yesterday. Eyes also turned to China, not because of the macroeconomic data released last night (inflation up but not surprising and producer prices calmed down), but because of the opening of the Chinese Communist Party’s 20th congress on Sunday. The CCP is expected to re-appoint Xi Jinping to a third 5-year term, even as the country faces a slowdown in its economic momentum not seen in decades.
And of course, we have Great Britain, because if you’ve been following the news, now that the Gilts buyback program announced by the Bank of England must end to avoid major damage to the country’s financial system. Gilts are the public debt of His Majesty and his subjects. The balance at the beginning of the last day was positive with bonds going up and rates going down (that’s how the bond market works: when yields go up, bond prices go down and vice versa). The government is about to announce a U-Turn on its unfunded-tax plan, and Liz Truss, UK prime minister, officially sacks chancellor Kwasi Kwarteng.
On the corporate front, the day focused on the quarterly results of JPMorgan Chase, Wells Fargo, Morgan Stanley and Citigroup. So far, it’s not impressive. UnitedHealth will complete the picture.
Today’s economic highlights:
September US retail sales then August business inventories and October’s University of Michigan consumer confidence index. All macro agenda here. China’s annual inflation came in at 2.8%, in line with expectations.
The dollar rose 0.5% to EUR 1.0287 and 0.9% to GBP 0.8931. The ounce of gold was little changed at USD 1653. Oil rebounded, with North Sea Brent crude at USD 92.85 a barrel and US light crude WTI at USD 87.30. The yield on 10-year US debt remains near 3.93%. Bitcoin is trading at around USD 19,800 per unit.
In corporate news:
* JPMorgan Chase & Co reported quarterly profit fell 17% year-on-year, as worsening economic conditions weighed on its M&A advisory business and forced the banking group to increase its provisions for default risk. However, the stock gained 2.3% in pre-market trading.
* Wells Fargo – The bank reported a drop in quarterly profit due to an increase in the cost of risk. The stock rose 1.2% in premarket trading.
* Morgan Stanley and Citigroup will release their quarterly results before Wall Street opens.
* Kroger, Albertson Companies – The two retail groups announced they have reached an agreement to combine for an estimated $24.6 billion.
* UnitedHealth raised its annual profit target and posted better-than-expected third-quarter profit, helped by lower spending on COVID-19 testing and treatment. The stock gained 1.2% in pre-market trading.
* Beyond Meat lowered its full-year profit forecast due to accelerating inflation and announced it would cut about 200 jobs, or 19% of its workforce. The group lost more than 10% in pre-market trading.
* Twitter -Tesla CEO Elon Musk is under federal investigation in the US in connection with his proposed $44 billion acquisition of Twitter, the social network said in a court filing made public on Thursday. In addition, Wells Fargo lowered its price target on Tesla from $280 to $230, citing the risk of deteriorating demand, especially in China.
* Caterpillar’s board of directors is dropping the 65-year-old retirement policy for the company’s chairman and CEO, allowing Jim Umpleby to stay on, the construction equipment maker announced Thursday.
* United Airlines is close to placing an order for more than 100 wide-body jets and is considering proposals for BOEING’s 787 Dreamliner and Airbus’ A350, Bloomberg reported on Thursday.
Analyst recommendations:
- Applovin: Wedbush starts outperform with $26 price target.
- Avangrid: Mizuho Securities upgraded to neutral from underperform. PT was down 0.9% at $39.
- Berkshire Hills: Piper Sandler downgraded to underweight from neutral. PT was down 1.6% at $29.
- Boohoo: Deutsche Bank downgrades from buy to hold, targeting GBp 36.
- BP Plc: Scotiabank downgrades sector perform from sector outperform, sets $33 target price.
- EasyJet: Liberum remains a Buy with a target cut from GBp 460 to GBp 430.
- Glencore: JP Morgan remains Overweight with price target cut from GBp 690 to GBp 660.
- Haleon: Jefferies maintains a Hold rating with a target price cut from GBp 340 to GBp 280.
- Invesco: Goldman Sachs cuts price target to $15 from $15.50, maintains neutral rating
- Liberty Global: Citi restored coverage with a neutral recommendation. PT rose 11% to $18.
- Micron Technology: Loop Capital initiated micron technology on buy with a $70 price target.
- NatWest: Exane BNP Paribas downgraded from Outperform to Neutral targeting at GBp 295.
- Norfolk Southern Corporation: TD Securities downgrades to hold from buy, adjusts price target to $245 from $305
- Northrop Grumman: JP Morgan downgraded to neutral from overweight. The PT was down 2.3% at $490.
- PepsiCo: UBS adjusts price target to $199 from $189, maintains buy rating.
- Procter & Gamble: UBS adjusts price target to $135 from $153, maintains neutral rating.
- ServiceNow: UBS adjusts price target to $465 from $515, maintains buy rating.
- Simon Property Group: Morgan Stanley reiterates overweight rating, $131 price target.