AIMSTAR FINANCIAL INSIGHTS – Feb 23, 2024

Your Weekly Guide to Financial Insights and Market Trends

Olena Li and Vikki Zhao

PUBLISHED Fri, Feb 23, 2024, 12:15 PM EST. 10 min read.

WEEKLY MARKET ANALYSIS

For about four months, the S&P 500 has been on a consistent upward trend, driven by positive economic indicators, decreasing inflation, softened expectations for the Federal Reserve’s actions, and falling interest rates. However, recent weeks have seen some disturbances in these trends. Notably, January’s inflation data came in higher than anticipated, including a rise in wages reported in a robust employment summary, increased prices in the ISM Services survey, and a 0.4% increase in core CPI alongside a 0.5% rise in core PPI. These figures, slightly above the preferred levels, have delayed the anticipated timeline for Fed rate reductions. Market expectations have shifted to forecast the first rate cut in June, with 3-4 cuts expected by the end of the year, a revision from earlier predictions of a March start and 5-6 cuts throughout 2024. As a consequence, bond yields have increased.

Despite these inflationary pressures and the uptick in bond yields, the equity market’s upward momentum has largely remained intact. This resilience may stem from investors prioritizing the overall economy’s strength over concerns about inflation and the Fed’s rate cut timeline, underpinned by the belief that inflation is trending downward and rate cuts are imminent. With the economy supported by a tight labor market and government spending, corporate earnings have the potential to rise, and stocks could continue to perform well.

Looking ahead, we maintain an optimistic outlook for the market’s drivers to foster higher prices over the next year. Nonetheless, expecting a smooth upward trajectory may be unrealistic. The market is currently overlooking various factors that could disrupt its positive sentiment in the future. Therefore, we advise a hopeful yet realistic approach to managing portfolios, especially after witnessing a 23% surge in just 72 days.

In the near term, our focus shifts to bond yields. Their recent trend of moving inversely to equity valuation multiples suggests that continued increases could pose challenges for equities. The upcoming Core PCE inflation report on February 29 and speeches from six Federal Reserve officials tomorrow are key events to watch. It wouldn’t be surprising if the S&P 500 enters a consolidation phase to process its recent gains. However, given the strong support levels established during its climb, a brief pause or pullback could be considered a normal and potentially beneficial correction.

Macro US: The most recent indicator to exceed forecasts was the Core Producer Price Index (PPI), recording a monthly increase of 0.5%. This followed notable data points such as robust wage growth in a strong employment report, a rise in prices paid according to the ISM Services survey, and a 0.4% month-on-month increase in core Consumer Price Index (CPI). While placing too much emphasis on a single month’s data is not advisable, inflation for January was somewhat higher than preferred. Observing a reduction in these monthly figures for February and March will be crucial to prevent persistent inflation concerns and tighter expectations for Federal Reserve policy adjustments. The Core Personal Consumption Expenditures (PCE) price index, a key inflation measure closely watched by the Fed, will be particularly significant when released on February 29.

WEEKLY INVESTING EMOJI

This Wednesday, shares of luxury homebuilder Toll Brothers (TOL) are climbing after the company reported robust first-quarter results driven by strong demand. Toll Brothers orders jumped 40% compared to a year ago, as the key spring selling season gets underway.

In pre-market trading on Friday, Nvidia’s stock rose 2.7%, following a 16% surge the previous day, boosting its market value by $277 billion to $1.96 trillion. This marks the largest single-day increase in US stock market history. Nvidia’s stock has risen 59% since the beginning of the year, solidifying its rank as the world’s fourth-largest company by market capitalization, trailing only Microsoft, Apple, and Saudi Aramco.

Square’s Cash App reports a 30% revenue increase in Q4, surpassing expectations. The company’s Q4 revenue hits $5.77 billion, up 24% year-over-year, while Cash App’s revenue grows by 31% to $3.91 billion. Additionally, Square expects Q1 2024 adjusted EBITDA profit to range from $570 million to $590 million, with the stock surging nearly 16% in pre-market trading.

Block Inc (NYSE: SQ) surged 16% as its fourth-quarter performance and first-quarter outlook surpassed analysts’ expectations. The company’s adjusted EBITDA for the full year 2023 reached $1.79 billion, exceeding the anticipated range of $1.66 billion to $1.68 billion. Additionally, Block anticipates first-quarter adjusted EBITDA to range between $570 million and $590 million, surpassing analysts’ forecast of $514.5 million.

😟Bad News

Online travel company Booking Holdings reported better-than-expected fourth-quarter revenue, but net profit plummeted 82% year-over-year to $222 million due to hefty fines. Despite significant growth in total bookings and room nights, indicating strong demand for travel services, challenges persist for the company.

Home Depot (NYSE: HD) pre-market drop of over 2% on Tuesday came after reporting a weaker-than-expected decline in fourth-quarter comparable sales, attributed to consumer spending shifts amid rising interest rates and high inflation.

Rivian (NASDAQ: RIVN) plunged 14% as its annual production target missed Wall Street’s expectations, forecasting 57,000 vehicles for 2024 compared to the anticipated 66,000. The company plans a 10% workforce reduction amid a challenging economic climate.

WEEKLY BUSINESS NEWS

Barrick Gold CEO Warns of Unhealthy Critical Minerals Sector Amid Energy Transition

Barrick Gold Corp. CEO Mark Bristow criticizes the critical minerals sector, essential for the energy transition, as unhealthy and overly speculative. He argues that the rush for metals like lithium, nickel, and cobalt, crucial for battery production and electric vehicles, is led by short-term focused promoters rather than long-term committed miners. Bristow highlights issues such as the lack of world-class standards in cobalt mining and calls for responsible extraction and transaction of these essential metals. Despite recent price volatility, with lithium and nickel prices dropping after record highs in 2022, experts anticipate a recovery in demand. Canada has identified 31 minerals as critical, investing in battery plants to secure supply chains for these key components.

High Housing Costs Prevent Bank of Canada from Lowering Rates

Toronto-Dominion Bank highlights that the persistent high cost of housing is preventing the Bank of Canada from lowering interest rates to meet its 2% inflation target. Rising shelter prices, a significant component of the consumer price index, are keeping inflation above desired levels and interest rates high. Senior economist James Orlando notes that with shelter inflation representing a major part of overall inflation, achieving the central bank’s target without exacerbating the housing market’s inflation appears challenging.

Bank of Canada Anticipated to End Quantitative Tightening Early, Shifting Towards Rate Cuts

The Bank of Canada might end its quantitative tightening (QT) program, which reduces its balance sheet by not replacing maturing bonds, earlier than expected, possibly by April or latest by June, according to a Royal Bank of Canada economist. Initiated in response to high asset levels acquired during quantitative easing (QE) measures in the financial crisis, QT aims to complement interest rate policies for controlling inflation by reversing QE’s bond purchases. This process helps balance demand and supply, moving inflation towards the 2% target. The central bank’s assets decreased by 25% year-over-year to $323.6 billion by September 2023. The Bank plans a stable balance sheet policy soon, potentially resuming bond purchases by April, with an expected shift to rate cuts by June.

Bezos Sells 14 Million Amazon Shares

Jeff Bezos, founder and current executive chairman of Amazon, has once again sold a large number of Amazon shares. Documents submitted to the U.S. Securities and Exchange Commission on Tuesday revealed that he sold approximately 14 million Amazon shares worth about $2.4 billion over the past three trading days. This move follows his announcement in early February to sell 50 million shares, bringing his total cash-out to $8.5 billion after several sell-offs, though he has not disclosed the use of the funds.

Lynx Air Ceases Operations, Advises Customers to Seek Refunds Through Credit Cards

Low-cost airline Lynx Air abruptly halts operations, advising customers with future bookings to pursue refunds from their credit card providers. The Calgary-based carrier, facing financial challenges, obtained creditor protection through an Alberta court order. Lynx urges affected passengers to refer to their website for assistance, clarifying that travel vouchers won’t be honored post-shutdown. The airline cites various industry challenges as reasons for its closure. Canada’s transport minister assures support for affected travelers, emphasizing their priority. Lynx’s fleet includes nine Boeing 737 Max 8s, serving 23 destinations. Investors include Claridge Inc. and Indigo Partners. Despite efforts to overcome difficulties, Lynx’s CEO departed last June, leaving no successor named.

Onex Corp. Q4 Profit Declines to US$373M

Toronto-based investment firm Onex Corp. reports a fourth-quarter profit of US$373 million, down from US$435 million a year earlier. The profit translates to US$4.81 per diluted share for the quarter ended December 31. This marks a decrease from US$5.32 per diluted share in the same period of 2022. For the full year 2023, Onex reports earnings of US$529 million or US$6.65 per diluted share, compared to US$235 million or US$2.77 per diluted share in 2022. Onex CEO Bobby Le Blanc highlights solid performance driven by good investment results amidst a challenging environment. The firm manages fee-generating assets totaling US$33.7 billion as of December 31. (TSX: ONEX)

Gas Prices: Victoria Sees Surge, Canadian Average Falls

Gas prices dipped across Canada, notably in Ontario, after last week’s spike. Victoria, BC, saw a substantial 11.6 cents per litre increase, hitting $1.769. Meanwhile, the national average dropped by 1.6 cents to $1.536. Lower gas prices contributed to Canada’s reduced annual inflation rate of 2.9%, down from expectations of 3.3%. Canadian auto sales are rebounding, with seven provinces surpassing pre-pandemic levels in January.

SOURCE: KALIBRATE • All figures in CAD cents

(*) Denotes markets used in Volume Weighted Canada Average

Reddit Files for IPO

Reddit submitted its IPO paperwork to the SEC, revealing narrowed losses and plans to list on the NYSE under the ticker symbol RDDT in March, with significant retail investor interest expected. The company’s revenue, primarily from advertising sales, rose from $666 million in 2022 to $804 million in 2023.

CSRC Vows Stricter Penalties as Chinese A-shares Rally

China’s securities regulator, CSRC, promises tougher penalties for violations, aiming to deter misconduct and enhance market integrity. Recent cases underscore the crackdown on illicit activities, including insider trading and market manipulation. CSRC Chief Inspector Li Ming emphasizes the severity of such actions and pledges to implement stricter oversight and enforcement measures. Additionally, the regulator vows to punish executives involved in insider trading and increase rewards for reporting violations. In the market, Chinese A-shares extend an eight-day rally, with the Shanghai Composite Index reclaiming the 3,000-point level lost earlier this year.

Standard Chartered Bank: 22% Revenue Growth in 2023, Announces $1 Billion Buyback

Standard Chartered Bank (HK:2888) (LON:STAN_p) reported a 22% increase in revenue for 2023, driven by rising interest rates and robust profits. The bank also announced a $1 billion share buyback plan. However, it revised down its revenue outlook for 2024, forecasting only moderate growth in net interest income due to sticky inflation and potential geopolitical instability posing economic risks. Specifically, for the fiscal year ending December 31, the bank’s underlying profit before tax surged to $5.68 billion, with full-year underlying net interest income climbing 20% to $9.56 billion.

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