Your Weekly Guide to Financial Insights and Market Trends

Vikki Zhao and Olena Li

PUBLISHED Mon, May 13, 2024, 11:30 AM EST. 6 min read.

The previous week proved pivotal for equities, with a significant emphasis on interest rates, inflation data, and Federal Reserve actions. AimStar’s analysts foresaw a sideways basing pattern in the market amid fluctuating expectations for Fed rate cuts and interest rate volatility. Notable highlights included a postponement in rate hike expectations following Canadian employment data, Warren Buffett’s heightened investment activity in Canada, apprehensions surrounding the Canadian dollar potentially dipping below 70 cents USD, a notable upsurge in gold prices, and the highly anticipated OpenAI conference scheduled for later in the week.

This Week, before the market opened, US stock index futures rose, with Dow futures up about 90 points, as the market’s focus shifted to this week’s upcoming release of US CPI data. Meanwhile, today’s OpenAI event is also drawing attention, and on Tuesday, Google will also hold its developer conference, expected to be closely related to AI.

The upcoming week is crucial for equities, with key influences being interest rates, inflation data, and the Federal Reserve’s actions. We are set to receive important inflation readings, with the Producer Price Index (PPI) on 5/14 and the Consumer Price Index (CPI) on 5/15.

While the last three CPI readings have been “hotter-than-expected” due to monthly fluctuations, the overall trend is moving in the right direction. The April core CPI is projected to increase by 0.3% month-over-month, continuing the year-over-year deceleration in inflation. In the longer term, the market forecasts inflation in the 2-3% range, which has historically been favorable for equity valuations. Current 5-year and 10-year breakeven are at 2.32%.

Equities recently experienced a ~6% pullback after a multi-month climb from the October 2023 lows, which we consider a “normal drawdown.” However, AimStar’s analyst believe equities are not out of the woods yet. Looking ahead, we foresee a sideways basing pattern as the most likely scenario.

1. Sprint to New Highs:

   – Driven by AI enthusiasm, a resilient macro environment, moderating inflation, expectations for Fed rate cuts, and the early stages of a bull market cycle.

2. Sideways Basing Pattern:

   – Likely as the market digests fluctuating expectations for Fed rate cuts, interest rate volatility, and month-to-month inflation variability.

3. Beginning of a Downtrend:

   – The S&P 500 needs to avoid a short-term failed breakout above the 5120 level, which could result in a lower high and initiate a downtrend similar to last October.

Overall, AimStar’s analyst remain optimistic about equities. Earnings are performing well, with 79% of companies surpassing expectations by an average surprise of 8.2% during the earnings season. The intermediate-term risk-on indicator (relative performance of equal-weight Consumer Discretionary vs. EW Consumer Staples) is holding support, supporting our positive outlook for equities.

While small caps still have work to do, they are showing some signs of improvement. Importantly, recent weakness has occurred within the context of a healthy intermediate-term uptrend, suggesting a normal drawdown as the market consolidates gains. Historical trends still indicate elevated odds for a higher market over the next 12 months.

*This article’s viewpoints are attributed to Tony Yuan and authored by Olena Li.

GOOD NEWS

Good news for oilpatch company shareholders: More executives are saying the expanded Trans Mountain pipeline connecting Alberta to British Columbia will narrow the pricing differential between Canadian and U.S. oil. “With (TMX) now complete, we anticipate … differentials will remain narrow for years while Canadian egress remains unconstrained,” says Meg Energy Corp. vice-president of marketing Erik Alson.

Good news for First Quantum Minerals Ltd. shareholders: The election of pro-business José Raúl Mulino as president of Panama could help resolve the dispute that shuttered the Canadian miner’s Cobre Panama copper mine in December.

Good news for FTX Trading Ltd. customers: The cryptocurrency exchange has amassed billions of dollars more than it needs to cover what customers lost in its November 2022 collapse, setting them up to receive all their money back, plus interest. “In any bankruptcy, this is just an unbelievable result,” said FTX chief executive John Ray, who took over after the firm collapsed. Unfortunately, nothing will be left for equity holders.

Yeti shareholders’ good news: Yeti Holdings exceeded profit expectations in Q1 and raised guidance, driven by strong international sales.

Novavax shareholders’ good news: Novavax surged 107.83% in pre-market trading on May 10th after partnering with Sanofi for a multi-billion-dollar collaboration. They will jointly commercialize Novavax’s COVID-19 vaccine and develop combination vaccines.

Reddit shareholders’ good news: Reddit announced optimistic revenue expectations and steady user growth for the current quarter, leading to a 15% surge in pre-market stock price. However, Q1 reported a $575.1 million loss due to IPO-related expenses.

BAD NEWS

Bad news for Shopify Inc. shareholders: The e-commerce company’s shares tumbled 18.5 per cent on Wednesday after it reported a surprise first-quarter net loss of US$273 million, compared to a profit of US$68 million a year earlier. Nevertheless, some analysts think the recent slump makes for a compelling entry point for investors.

Bad news for Toronto-Dominion Bank shareholders: Shares of Canada’s second-largest bank have dropped about six per cent since it was revealed that it is facing a series of regulatory and law-enforcement probes in the United States over allegations that it was used for laundering drug money.

Bad news for loonie fans: The Canadian dollar could slip below 70 cents U.S. if the Bank of Canada cuts rates before the U.S. Federal Reserve, especially since the U.S. dollar is soaring, says TD Economics.

Bad news for Roblox shareholders: Roblox Corp plunged 27% in pre-market trading on May 9th, despite better-than-expected earnings and revenue for the first quarter. However, the second-quarter performance guidance fell below expectations, leading to a downgrade in the full-year performance outlook. Prior to this, the company had already laid off hundreds of employees and closed several studios.

Bad news and good news for Arm shareholders: Although companies have invested heavily in artificial intelligence, chip design company Arm Holdings announced annual revenue guidance that was lower than expected, and the company’s stock price fell 7.99% before the market opened on the 10th. But on the other hand, Arm announced plans to develop artificial intelligence chips with the goal of mass production in 2025.

Canadian Dollar Faces Downward Pressure Amid Greenback Strength

Mounting challenges confront the Canadian dollar as the U.S. dollar gains momentum and the Bank of Canada considers rate cuts ahead of the Federal Reserve. Analysts warn of a potential drop below 70 cents as the loonie struggles against a robust greenback, exacerbated by economic uncertainties and geopolitical tensions. Factors including a weakening economy, rising unemployment rates, and potential interest rate cuts loom over the Canadian dollar’s stability. Additionally, geopolitical conflicts and oil price fluctuations could further dampen the loonie’s prospects. Experts caution investors to monitor these developments closely, signaling a challenging outlook for the Canadian currency.

2024 Federal Budget Significant Change: How the New Rate Affects What Investors Will Pay on Capital Gains

The government’s budget, released last month, included plans to tax Canadian companies on two-thirds of their capital gains, up from half currently. The change will also apply to individual taxpayers when they have gains over $250,000 in a year, although people will still be able to sell the homes they live in tax-free. The money raised by the tax hike is to be spent on a number of programs, including initiatives to help younger people afford a home. But the poll suggests many are not swayed by the plan. 

Read more: https://aimstar.ca/2024-federal-budget-significant-change-how-the-new-rate-affects-what-investors-will-pay-on-capital-gains/

Canada’s Strong Job Growth Alters Rate Cut Expectations

Canada surprised markets with a job gain of 90,000, far exceeding the forecast of 20,000. This prompted a shift in expectations, lowering the odds of a June rate cut by the Bank of Canada from 75% to 50%. Capital Economics revised its forecast for the first rate cut to July due to the unexpected job market strength. However, despite the headline gain, concerns persist as the labour market shows signs of weakening. The unemployment rate remains at 6.1%, with the number of new jobs falling short of new entrants. Analysts suggest that while there’s job growth, the labour market conditions are gradually loosening. The upcoming inflation report on May 21 will play a crucial role in the Bank of Canada’s rate decision on June 5.

Warren Buffett Eyes Increased Investment in Canada

As a billionaire investor, Warren Buffett faces a dearth of trading opportunities, with Berkshire Hathaway Inc.’s cash reserves hitting another record, expected to reach $200 billion by the end of this quarter. Despite the company’s cash hoard soaring to $189 billion, opportunities for significant investments remain scarce, leaving Buffett struggling to find ideal investment targets. Additionally, Berkshire disclosed that its first-quarter operating earnings reached $11.2 billion, buoyed by growth in its insurance businesses. Buffett stated that while Berkshire hopes to make more investments, it must ensure they carry little risk and offer significant returns. Despite the current lack of major trading opportunities, Buffett remains optimistic about investing in Canada, noting that the company is considering a new investment.

TD Bank Pursues Global Resolution Amid Drug-Money Probes

Toronto-Dominion Bank CEO, Bharat Masrani, aims for a comprehensive resolution to multiple regulatory investigations in the U.S. concerning allegations of money laundering. Masrani emphasizes the challenges ahead while highlighting the bank’s cooperation with authorities and internal reforms. Despite potential fines and market constraints, TD Bank remains focused on enhancing its anti-money laundering measures.

Canadian Crude Prices Expected to Benefit Long-Term from Trans Mountain Expansion Project

Meg Energy Corp. anticipates that Canadian oil producers will enjoy better prices in the coming years with the official launch of the Trans Mountain pipeline expansion project on May 1. However, the company also predicts that the pipeline will reach full capacity within five years and does not anticipate the construction of another new pipeline anytime soon. Meg Energy CEO Darlene Gates stated that the pipeline expansion will reduce price differential volatility and enhance the company’s gross profit per barrel. The Trans Mountain pipeline, owned by the federal government’s Trans Mountain Corp., is expected to transport approximately 890,000 barrels of oil per day. Other oil producers also foresee improvements for Canadian companies due to the pipeline’s operation.

June Set to Witness Key Central Bank Decisions, Says BofA Analysts

Bank of America analysts suggest that June will be a memorable month as many central banks are poised to make significant decisions. Highlighting unexpected actions already taken this week, such as Sweden’s pre-emptive rate cut and the Bank of England’s confidence in inflation trending positively, they anticipate pivotal moves from numerous central banks in the coming month. With the Bank of England taking decisive steps towards its first rate cut, analysts suggest upcoming meetings will be crucial. Despite the Bank of England displaying a “structural” dovish stance, BofA maintains its prediction of the first rate cut occurring in August, citing wage stickiness. Additionally, BofA forecasts the focus in European markets to shift towards upcoming UK labor market data and anticipates continued improvement in Germany’s ZEW index in May, alongside preliminary GDP data for insights into the eurozone’s economic growth.

Tech Stocks Witness Largest Fund Outflow in 7 Weeks, Bonds Garner $17.8 Billion

According to analysts at Bank of America, there has been a significant outflow of funds from tech stocks over the past seven weeks, while bonds have attracted $17.8 billion. Cash, bonds, and stocks have all seen inflows, with cash receiving the largest inflow of $67.8 billion, marking the highest level since July 2021. Bank of America warns that once the performance of U.S. government bonds surpasses that of credit markets, the prices of risk assets may be nearing their peak. Meanwhile, investment-grade bonds attracted $7.3 billion in inflows, marking a record 28 consecutive weeks of inflows. High-yield bonds and municipal bonds also saw significant inflows, but emerging market bonds continued to experience outflows.

Gold Price Surges 1%, Futures Rise Above $2375

During European trading hours last Friday, the price of gold continued its upward trend, primarily driven by the weakening signs in the US job market, dragging down the US dollar and boosting Treasury yields. Gold was poised to end its consecutive weeks of decline last week, partly due to market pessimism regarding a ceasefire agreement between Israel and Hamas and news about the possibility of the US imposing new tariffs on China, both of which bolstered safe-haven demand. As of the deadline, spot gold rose by $22.45 or approximately 0.96%, to $2368.48 per ounce; gold futures prices increased by $35.10 or approximately 1.50%, to $2375.50 per ounce. Spot gold prices are expected to record a gain of over 2% this week, marking the first increase in three weeks, although still lagging behind the historical high reached at the end of April.

Assets in US Money Market Funds Rise to Four-Week High

Assets in US money market funds have risen for the third consecutive week, as market expectations for higher short-term interest rates continue following signals from Federal Reserve officials indicating no rush to cut rates. Data from the Investment Company Institute shows that in the week ending May 8, approximately $31.1 billion flowed into US money market funds, increasing total assets from the previous week’s $6 trillion to $6.03 trillion. Government funds (which primarily invest in Treasury securities, repurchase agreements, and institutional debt securities) saw their assets rise to $4.88 trillion, up by $20 billion. Funds inclined towards higher-risk assets such as commercial paper saw their assets increase to $1.03 trillion, up by $8.6 billion.

US Revokes Chip Sale Licenses for Huawei from Qualcomm and Intel

Reports confirm that licenses allowing companies like Intel (NASDAQ: INTC) and Qualcomm (NASDAQ: QCOM) to sell computer and smartphone chips to Huawei have been revoked by the United States. This move comes amid ongoing restrictions on Huawei by the US government, although Huawei has reduced its reliance on Qualcomm by manufacturing its own chips. The impact on Huawei’s laptop and desktop products, which still use Intel chips, remains uncertain.

Biden to Take Action Against China! Tariffs to be Extended on Electric Cars, Power Batteries, and More

According to media reports, the White House is expected to announce tariff policies targeting Chinese companies as early as this week, focusing on China’s electric car industry and several other key sectors. Sources familiar with the matter indicate that the Biden administration plans to extend the tariffs imposed on Chinese goods during former President Donald Trump’s tenure, with a higher degree of targeting, particularly on electric cars, batteries, and solar equipment. Some individuals speculate that imposing tariffs on Chinese electric car manufacturers by the United States may thwart their internationalization plans. Additionally, given the heavy reliance of American electric car manufacturers on Chinese battery technology, tariffs on the Chinese battery industry may also have adverse effects on US automakers.

Apple (AAPL.US) to Utilize In-House Server Chips for AI Functions This Year

Apple is set to roll out some upcoming artificial intelligence features by using data centers equipped with its in-house processors this year. According to sources familiar with the matter, Apple will deploy high-end chips in cloud computing servers to handle cutting-edge artificial intelligence tasks on Apple devices, while simpler AI-related functions will be processed directly on iPhone, iPad, and Mac devices. The plan to use in-house chips and process AI tasks in the cloud was proposed about three years ago but has been expedited due to the AI boom. The first AI server chip will be the M2 Ultra, introduced last year, although Apple is already looking ahead to future versions based on the M4 chip. This move will be part of the iOS 18 system set to launch in the fall.

Arm to Establish AI Chip Division; OpenAI Unveils Conference

Arm is set to establish an artificial intelligence chip division with the goal of producing prototypes by spring 2025 and entering mass production by fall 2025. Arm will bear the initial development costs of the AI chips, which could be substantial. Following mass production, Arm’s AI chip business may be “spun off and owned by SoftBank.” According to LSEG data, Arm’s stock price has risen nearly 45% year-to-date, with a market capitalization exceeding $113 billion, fueled by the surge in AI computing. However, SoftBank Group’s quarterly earnings report released on Monday showed a reversal to profit from losses, but the losses for the fiscal year ended March 31 narrowed, without significant boost from the AI frenzy.

Meanwhile, OpenAI is set to livestream a demonstration of updates to ChatGPT and GPT-4 on Monday, although OpenAI CEO Sam Altman previously denied claims of releasing GPT-5 or a search engine. According to The Information, a Silicon Valley tech media outlet, OpenAI is developing an AI voice assistant with audio and visual understanding capabilities. OpenAI believes such an assistant could catalyze technological transformations akin to smartphones, capable of tasks beyond existing AI assistants, such as serving as mentors for student essays or math problems, translating road signs, or diagnosing car issues. Additionally, there are reports suggesting that Apple is nearing a deal with OpenAI to integrate ChatGPT technology into the upcoming iOS 18 operating system.

On Monday (the 13th), before the market opened, US stock index futures rose, with Dow futures up about 90 points, as the market’s focus shifted to this week’s upcoming release of US CPI data. Meanwhile, today’s OpenAI event is also drawing attention, and on Tuesday, Google will also hold its developer conference, expected to be closely related to AI. Key events for the week ahead include:

• On Wednesday, the Canadian Real Estate Association will release April housing sales data, while Canada’s mortgage and housing agency plans to release preliminary data on April housing starts.

• US inflation data for both the Producer Price Index (PPI) and Consumer Price Index (CPI) will be released this week, with analysts expecting Wednesday’s CPI report to show a year-over-year increase of 3.6% in core inflation, the smallest rise in over three years.

• On Wednesday, the US will release April retail sales data, and major retailers such as Walmart (NYSE: WMT) and Home Depot (NYSE: HD) will also report earnings this week, providing new insights into the state of US consumer spending for investors.

• On Friday, China will release April housing price data, along with industrial production, retail sales, and fixed asset investment data.

• On Tuesday, the UK will release its first employment report, with divergence expected on whether to stick to higher interest rates for longer at the June 20th monetary policy meeting.

• OpenAI will livestream demonstrations of updates to ChatGPT and GPT-4 on Monday, while Google’s 2024 Google I/O developer conference will kick off on Tuesday, with AI being a key focus.

• Canada Goose and Lightspeed will announce fourth-quarter earnings before the market opens on Thursday.

The most anticipated earnings releases for the week of May 13, 2024 are Alibaba #BABA, Walmart #WMT, Nu Holdings #NU, Home Depot #HD, Applied Materials #AMAT, Baidu #BIDU, Nextracker #NXT, Cisco Systems #CSCO, JD.com #JD, and StoneCo #STNE.