AIMSTAR FINANCIAL INSIGHTS – Mar 1 , 2024

Your Weekly Guide to Financial Insights and Market Trends

Vikki Zhao and Olena Li

PUBLISHED Fri, Mar 1, 2024, 13:41 PM EST. 10 min read.

WEEKLY MARKET ANALYSIS

February is shaping up to be another positive month, with the S&P 500 marking a 6.2% increase since the start of the year. Historically, bull markets have seen an average growth of 152% over a span of approximately 4.5 years, and currently, the S&P 500 has risen by 46% over the last 341 days. The smallest bull market growth recorded was 48% during 1966-1968 amidst rising inflation.

The S&P 500 managed to recover from a downturn on February 13th, sparked by January’s high Consumer Price Index (CPI), following exceptional earnings from a leading semiconductor company, which reignited interest in Technology and AI sectors. Typically, down-gaps could indicate a potential shift from a positive to a negative market trend; however, the quick rebound and new high suggest the market isn’t ready for a trend reversal just yet.

Momentum in the equity market continues to be strong, historically leading to further gains. Since 1950, there have been 28 instances where both January and February saw positive returns, with the S&P 500 experiencing an average increase of 15% in the following 12 months 27 times.

Despite the optimistic outlook for the next year, short-term pullbacks are possible, especially considering the market’s 25% gain over the past four months. The market’s resilience against factors like higher January inflation, stricter Federal Reserve expectations, and increasing bond yields emphasizes the importance of upcoming economic indicators. Key forthcoming data includes the Fed’s preferred inflation measure (PCE), February’s ISM, the jobs report, CPI, and the Federal Open Market Committee (FOMC) announcement.

Bond yields, particularly the 10-year yield’s reaction to the CPI report and its subsequent performance, will be crucial to watch. Rising interest rates could pose a challenge to equity markets in the near term.

Underneath these broader trends, strong earnings in the Technology sector continue to lead the market. However, the equal-weighted S&P index’s relative strength remains low, indicating a need for broader market improvement to signal sustained performance, a development that has been missing for over a year. For the time being, the Technology sector is pivotal in driving market trends.

The tight labor market, coupled with government stimulus, has significantly supported the economy during the Federal Reserve’s interest rate hikes. Notably, unemployment claims are exceptionally low, and as long as individuals are employed, they’re likely to continue spending.

Despite the challenges posed by higher inflation in January, more stringent expectations from the Federal Reserve, and rising bond yields, the market has shown resilience, underscoring the importance of forthcoming economic indicators. The Personal Consumption Expenditures (PCE) index, a preferred inflation gauge by the Fed, is set to be released tomorrow morning. Additionally, we’re anticipating the February ISM data next week, the February employment report on the upcoming Friday, March 8, the Consumer Price Index (CPI) on March 12, and the Federal Open Market Committee (FOMC) decision on March 20.

We will closely monitor bond yields alongside these economic reports. Following the CPI announcement on February 13, the 10-year yield surged but has struggled to maintain its upward trajectory. Should interest rates persist in climbing, it could temporarily dampen stock market performance.

Good news for bullion bulls: Analysts at J.P. Morgan project a bullish future for gold, forecasting a steady increase in its price through the fourth quarter, reaching a peak of US$2,300 by 2025. Natasha Kaneva, the head of global commodities strategy, highlights gold and silver as the commodities with the most promising structural growth for the second year running.

Good news for electric-vehicle shareholders: In a turn of events beneficial to electric vehicle manufacturers, Apple Inc. has shelved its electric car development plans. This move comes as a sigh of relief for EV companies grappling with slow growth and talent shortages. According to Mike Ramsey, a Gartner Inc. analyst, this development likely comes as welcome news to Tesla, Rivian, and Lucid, whose shares surged on February 28 following the announcement.

Good news for non-fungible token fans: The non-fungible token market has seen a significant rebound, with sales nearly tripling to US$918 million in November from the previous month, and then climbing to over US$1.7 billion in December. Despite a dip in January, this surge marks a notable recovery for the NFT sector, previously marred by cryptocurrency scams.

Bad news for electric-vehicle shareholders: The electric vehicle sector has faced significant setbacks, with notable declines in the stock values of key players. Since October, Rivian Automotive Inc. and Lucid Group Inc. have experienced drops of 44% and 33%, respectively, following Tesla Inc.’s warnings about dwindling interest in EVs.

Bad news for office real estate investors: The Canada Pension Plan Investment Board’s recent divestments in Vancouver office towers and a Manhattan redevelopment project at notably low prices signal a broader trend of disinvestment in the office real estate sector. BMO Capital Markets analyst John Kim interprets these actions as a lack of confidence in the office real estate market.

Bad news for Big Six investors: The office real estate sector’s instability poses risks to the earnings of Canada’s Big Six banks, not through insolvency but via increased credit losses related to commercial real estate loans. Nigel D’Souza, a senior investment analyst at Veritas Investment Research Corp., notes that the full extent of potential losses has yet to be fully realized, indicating a challenging period ahead for the banks.

This report by The PF Investor was first published Mar. 1, 2024.

WEEKLY BUSINESS NEWS

Focus On Canada

Canada’s Big Six Banks Outperform Amid High Interest Rates

Canada’s Big Six banks largely exceeded earnings expectations this week, despite high interest rates leading to increased provisions for loan losses. Notably, the Royal Bank of Canada and Toronto-Dominion Bank reported earnings above forecasts, buoyed by strong performances in capital markets and wealth management. Conversely, Bank of Montreal and Bank of Nova Scotia faced challenges from the economic strain on consumers and businesses.

BMO missed revenue estimates in several sectors, while Scotiabank beat expectations but increased provisions for bad loans due to credit quality concerns. Canadian Imperial Bank of Commerce surpassed EPS estimates with growth in its domestic retail business, despite higher credit loss provisions.

National Bank of Canada stood out, hitting a record high on Feb. 28 after reporting impressive earnings, leading in shareholder returns among the country’s largest lenders.

CIBC Sees Growth Amidst Rising Loan Loss Provisions

The Canadian Imperial Bank of Commerce (CIBC) reported growth in its domestic retail business, with a 10% revenue increase in its Canadian operations and a 13% rise in net interest income. Despite this, the bank allocated $585 million for credit loss provisions, slightly above analyst expectations, due to concerns in the U.S. office and Canadian consumer sectors.

CIBC’s first-quarter earnings showed a slight decrease to $1.81 per share from $1.94 a year earlier, amidst a backdrop of higher loan loss provisions across major Canadian banks due to rising interest rates. Nonetheless, its capital markets business revenue grew by 5.4% to $1.56 billion, driven by higher equities and foreign exchange trading revenues.

The bank has taken steps to address its exposure to the stressed U.S. office market, reducing U.S. office loans by 12.5% to US$3.5 billion. Despite facing a $91 million special assessment by the U.S. Federal Deposit Insurance Corp., CIBC’s strategic management of costs and loan quality issues indicates resilience in navigating economic challenges.

RBC Beats Profit Estimates on Higher Fee Income

Royal Bank of Canada (RBC) exceeded analysts’ profit expectations for the quarter, driven by increased fee income in its wealth management and capital market divisions. Despite setting aside additional funds for potential bad loans due to rising interest rates, RBC’s net interest income rose by 2.1% year-on-year. The bank also highlighted a 50% rise in integration costs related to its acquisition of HSBC’s Canada unit, set to close next month.

BMO’s Q1 Earnings Miss Amid Weak Capital Markets and Increased Provisions

BMO fell short of analysts’ expectations in its fiscal first quarter due to weak performance in capital markets and increased provisions for credit losses. The bank’s adjusted earnings per share of $2.56 missed the average estimate of $3.02. Capital markets revenue declined by nearly 20%, while provisions for credit losses surged. Despite higher underwriting and advisory fee revenue, BMO’s capital-markets division experienced a 19% decrease in net income year-over-year.

Total revenue also declined, falling by almost eight percent to $7.67 billion compared to the previous quarter. As a result, BMO’s shares dropped by 3.9% following the announcement. Provisions for credit losses exceeded analysts’ forecasts, totaling $627 million. The bank attributed some of the adjusted results to one-time items, including a special assessment by the U.S. Federal Deposit Insurance Corp. regarding the failures of Silicon Valley Bank and Signature Bank.

TD Bank Group Surpasses Expectations with Strong Profit Growth Amid Regulatory Challenges

In a remarkable financial update, TD Bank Group announced a significant profit increase, reaching $2.82 billion, up from the previous year’s $1.58 billion. This impressive performance was highlighted by earnings per share of $2, surpassing analysts’ expectations and signaling strong operational momentum for the bank.

The achievement is particularly noteworthy as it comes amidst heightened regulatory scrutiny in the United States. CEO Bharat Masrani addressed these challenges head-on, reaffirming the bank’s dedication to improving anti-money-laundering practices and strengthening its risk control framework. This proactive approach to compliance and governance underscores TD Bank’s resilience and strategic focus on sustainable growth and operational excellence.

Scotiabank Surges Past Expectations with Robust Growth in Latin America

Scotiabank has delivered an exceptional start to the year, reporting a net income of $2.20 billion that surpassed first-quarter expectations, largely driven by significant revenue growth in its Latin American divisions. Jerome Hass of Lightwater Partners lauded the bank’s impressive performance, viewing it as a strategic catch-up to its competitors. This strong showing underscores Scotiabank’s effective expansion and operational strategy in emerging markets, positioning it favorably among its peers.

National Bank Hits All-Time High Shares with Strong Q1 Performance

National Bank of Canada showcased its financial strength with a first-quarter profit of $922 million, driving its shares to an all-time high and beating per-share earnings estimates. This performance highlights National Bank’s robust growth and operational efficiency, setting a positive tone for its market position and future prospects.

Canadian Consumer Credit Market Faces Surge Amid Immigration and Economic Pressures

The Canadian consumer credit market is surging due to immigration and exacerbated by high interest rates and inflation, pushing total consumer debt to a record $2.4 trillion. Credit usage is at an all-time high, with significant contributions from newcomers, who account for a 46% increase in first-time credit account openings, adding $3.5 billion in debt. The rise in interest rates has increased the cost of debt management, leading to higher monthly payments and a rise in delinquency rates and loan defaults. This challenging financial landscape, particularly for those new to borrowing, reflects the active state of Canada’s credit market.

Focus On International

Gold Prices Forecasted to Rise Despite Recent Dip

Gold reached an all-time high of US$2,135.39 an ounce last year but has since dipped slightly. This Tuesday, spot gold rose by 0.4 percent to US$2,038.19 as investors await key inflation data from the United States. J.P. Morgan analysts predict that the factors driving gold to record highs in December will continue to push it to new heights in 2025, including a weaker U.S. dollar and expectations of Federal Reserve interest rate cuts. Economic uncertainty and central bank purchases are also expected to support gold prices in the coming months.

Bitcoin Hits Two-Year High, Nearing $57,000

On Tuesday, Bitcoin’s price soared to a two-year peak, largely fueled by continuous capital inflows into the spot Bitcoin ETFs approved earlier this year. The world’s largest cryptocurrency surged over 10% early this week, now less than $14,000 away from its all-time high during the bull market at the end of 2021.

According to a report by digital asset management firm Coinshares, crypto investment products have seen net capital inflows for the fourth consecutive week, driving both Bitcoin and the overall crypto market to sustained gains.

Disney Changes Movie Boss to Boost Flagging Film Success

Disney (NYSE:DIS) has announced a leadership overhaul in its live-action film studio, following a series of underperforming box office releases such as “Haunted Mansion” and “Jungle Cruise.” David Greenbaum, former president of Searchlight Pictures known for producing critically acclaimed films, will replace Sean Bailey as the new president of Disney’s film production company. This move comes as Disney faces significant pressure, with no movie surpassing the $1 billion box office mark since “Star Wars” in 2019, except for “Avatar: The Way of Water” in 2022.

Musk Announces New Tesla Roadster Set for 2025 Release

Tesla (NASDAQ:TSLA) CEO Elon Musk announced on Wednesday that the design for the new version of the Roadster electric sports car has been completed, with the possibility of deliveries starting next year. Musk aims to launch the Roadster by the end of 2024. Originally scheduled for a 2020 release, the new Roadster’s design ambitions have been significantly elevated, including a collaboration with SpaceX.

OpenAI Set for New Directors Amid SEC Scrutiny

OpenAI plans to appoint new board members amid an SEC investigation into last year’s leadership reshuffle, including the brief firing and reinstatement of CEO Sam Altman. The shakeup led to a board overhaul, introducing figures like former Twitter Chairman Bret Taylor and Microsoft gaining a non-voting observer seat.

Dell Surpasses Expectations in Q4, Projects Strong Future Revenue

Dell Technologies reported Q4 revenue of $22.3 billion, slightly above expectations despite an 11% year-over-year decline, and an EPS of $2.20, outperforming the anticipated $1.72. Despite a 12% drop in PC sales, Dell forecasts annual revenue between $91 billion and $95 billion, surpassing the average expectation of $92.1 billion. CFO Yvonne McGill anticipates an adjusted EPS of $7.50, plus or minus 25 cents.

China’s Manufacturing PMI Declines, Caixin Shows Growth

In February, China’s manufacturing sector remained in contraction, with the official PMI at 49.1, slightly down from January but in line with expectations. Contrasting this, the Caixin Manufacturing PMI indicated expansion at 50.9, marking four months of growth and signaling optimism with new export orders hitting a year-high and confidence at a 10-month peak. Despite the official PMI’s contraction, both indexes suggest a solid start to the year and hint at resolving structural economic issues with policy support.

Country Garden Faces Liquidation Petition

Country Garden (HK:2007) announced on the Hong Kong Stock Exchange on Wednesday that EVER CREDIT filed a liquidation petition against the company with the Hong Kong High Court on February 27. The petition relates to an unpaid term loan and accrued interest totaling approximately HK$1.6 billion between the petitioner (lender) and the company (borrower).

Following the announcement, Country Garden’s shares fell 12.50% to HK$0.63. Other real estate developers, including Sunac China (HK:1918), Longfor Properties (HK:0960), and Logan Group (HK:3380), also saw declines. The Hang Seng Index dropped 1.4%, largely dragged down by the real estate sector. Additionally, Country Garden’s subsidiary, Country Garden Services Holdings (HK:6098), fell 6.5%, leading the declines among Hang Seng Index constituents.

Ant Group Acquires Credit Suisse’s China Division Amid Regulatory Speculations

Ant Group, the fintech giant associated with Jack Ma, has successfully acquired the investment banking division of Credit Suisse in China, reportedly outbidding Citadel with an undisclosed amount. The bid surpasses Citadel’s late 2023 offer of 1.5 to 2 billion yuan (approximately $210 to $280 million). This move could expand Ant Group’s securities business footprint in China. However, insiders suggest that Chinese regulators may prefer the division to be acquired by foreign buyers, potentially subjecting the deal to strict regulatory scrutiny.

Nikkei 225 Surges, Driven by Tech Optimism and AI Enthusiasm

Japan’s Nikkei 225 index approached record highs, hitting the 40,000 mark before closing up 1.92% at 39,940.00, spurred by a tech rally and AI excitement. Renesas Electronics led the gains, with plans for new semiconductor plants boosting the sector. U.S. market uplift and anticipation of a Fed rate cut in June further buoyed investor sentiment.

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