What sell-off?

Thoughts of the Day

Despite a sharp sell-off, US stock indices quickly rebounded close to all-time highs. No obvious driver for the dip except lower bond yields. The drop in US bond yields was mainly due to fears that due rising fears that US regional banks could be in trouble again. However, strong earnings from tech giants like Amazon and Meta Platforms drove a swift recovery, reinforcing the strategy of buying market dips. Stay on trend unless we see a resurgence in inflation!

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Day Ahead

The US Nonfarm Payrolls is expected to show +173K jobs being added to the economy in January, down from 216k in December. The US employment rate is expected to tick higher to 3.8% from 3.7%.

US University of Michigan Consumer Sentiment is expected to rise to 78.8 in January from 69.7 in December.

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What Happened Yesterday

Market Movements as of New York Close 1 Feb 24
  • In January 2024, the inflation rate in the Euro Area decreased to +2.8% year-on-year, matching expectations and down from +2.9% the previous month, according to a preliminary estimate. The core inflation rate, excluding food and energy, softened for the 6th consecutive month to +3.3% (vs +3.2% expected)from +3.4%, marking the lowest point since March 2022. Energy prices fell by -6.3% (vs -6.7% expected in December), and services inflation was consistent at +4.0%..
  • The Euro Area’s seasonally-adjusted unemployment rate for Dec 2023 remained stable at 6.4%, meeting market predictions and maintaining a historically low level. The total unemployed count decreased by 17,000 from the previous month, totaling 10.909 million. Additionally, the youth unemployment rate for individuals under 25 slightly improved, dropping to 14.4% from November’s 14.5%. Reactions in the EURUSD to these data points were muted.
  • During its first 2024 meeting, the Bank of England maintained the key Bank Rate at a 16-year peak of 5.25% for the fourth time in a row, as expected by the market. Two members voted for a +0.25% hike, while one voted for a reduction. The bank stated the need for a prolonged restrictive monetary policy to achieve the 2% inflation target sustainably but noted more balanced inflation risks and hinted that the market could be right in anticipating interest rate cuts this year (see article 2). Despite high inflation indicators, service inflation and wage growth declines were larger than anticipated. GDP growth is expected to recover, attributed to the diminishing impact of previous rate hikes. CPI inflation is predicted to hit the 2% target in Q2 2024, then rise in the latter half of the year.
  • New York Community Bancorp (NYCB) extended its losses from Wednesday, falling another -11.1% (low: -14.8%) as investors remained defensive against the stock. The KBW regional banking index (KRX) fell -2.29% on the day (low: -5.53%).
  • The US Treasury Yield curve inversion widened to 0.33% as the US 2-year bond yield fell  -0.07% to 4.20% while the 10-year yield slipped -0.12% to 3.87%. The banking fears were a key reason for falling US bond yields as risk management teams in investment funds remember the huge moves that took out some funds which were positioned the wrong way in the banking failure crisis last year. 
  • The US stock futures rose slightly through the Asian and London trading sessions with the S&P 500 futures up +0.30% before the New York session began.
  • The US stock market opened lower from Wednesday. It traded higher despite the ongoing trouble within the regional banking sector (see headline 1) as investors awaited the earnings from tech giants: Amazon, Facebook and Apple (see headline 3). AS investors bought the dip, the S&P 500 climbed +1.25% (high: +1.27%, low: +0.16%), the Dow Jones rose +0.97% (high: +0.98%, low: -0.11%) while the Nasdaq spiked +1.21% (high: +1.28%, low: +0.23%).
  • Apple (AAPL) fell -2.92%, Amazon (AMZN) rose +7.11% while Meta Platforms (META) rose +15.22% in after market trading following their earnings reports. Nasdaq futures jumped +0.98% in after-hours trading as a result. 
  • The crypto market rose along with the stronger risk sentiment.
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Headlines & Market Impact

US regional banks tumble for second straight day on NYCB woes

Notable Snippet: U.S. regional banks sold off again on Thursday, adding to losses from a day earlier when New York Community Bancorp (NYCB.N) reported increased stress in its commercial real estate portfolio, renewing fears about the industry’s health.

The KBW Regional Banking Index (.KRX) fell 2.3%, after seeing its biggest single-day decline since the collapse of Signature Bank in March 2023.

NYCB shares lost another 11.1% of their value and closed at $5.75. The stock experienced a record single-day drop of 37.6% on Wednesday, according to LSEG.

In a late-Thursday email statement, the bank said it believes its share price will recover as the market sees value enhancing actions being taken.

The frenzied selling in banking shares has rekindled fears about regional lenders, even as many analysts and investors said the problems at NYCB were mostly unique.

“Last year was definitely the year of deposits. No bank wanted to be in a position where they were seeing deposit outflows. This year, the story changes to credit quality,” said Alexander Yokum, senior equity analyst at CFRA Research, adding NYCB’s exposure to real estate is bigger compared to peers.

Moody’s has put its ratings on NYCB on review for a downgrade that could push it into “junk territory”, while Morgan Stanley said it is reviewing earnings estimates for the bank. Many banks, such as Bank of America and UBS, also cut target prices for NYCB.

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Bank of England chief hints the market could be getting it right on rate cuts

Notable Snippet:  Bank of England Governor Andrew Bailey on Thursday signalled that financial markets may be correct in their expectations for the future path of rate cuts.

Speaking to CNBC, Bailey said that he was “not going to commit” to a specific timeline for rate cuts, but added that he did not object to the market consensus.

“I’m not going to give a view on how many cuts there’ll be and when they will be. But I think that view that the market is taking is not one I object to,” he told CNBC’s Steve Sedgwick.

Bailey said that he was “not going to predict” how many cuts there would be, but he indicated that the bank was “on a path” toward lowering rates.

“We’ve moved importantly on from a debate which was around how tight does policy need to be, how high do rates need to be, to how long do we need to retain this stance to achieve sustained inflation,” he said.

“The way I read the market, I think the market is of the same frame of mind as well. The market has to, of course, reach a view on when they think cuts are going to happen,” Bailey said.

“We are not going to commit to ‘it’s going to be here and not there or then and not then.’ But I very much hope that we’re on a path which will allow us to conclude the answer to that question … and we’ll get to a point where we say ‘yes, we can.’”

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Amazon and Meta surge after results, while Apple drops

Notable Snippet: Meta Platforms (META.O) and Amazon.com (AMZN.O) added a combined $280 billion in stock market value late on Thursday after the Big Tech duo reported quarterly results that impressed investors, while Apple’s (AAPL.O) value shrank by $70 billion after its results.

Meta’s stock surged over 14% to a record high $451 after the bell, elevating its market capitalization by $148 billion to $1.16 trillion after the Facebook owner declared its first-ever dividend.

While dividends are associated with mature, slow-growth companies, Meta delivered a 25% jump in revenue to $40.1 billion for the December quarter, fueled by robust advertising and device sales.

Amazon’s stock jumped 8% after the company beat December-quarter revenue expectations on strong growth in online spending during the critical holiday shopping season. That put the online shopping and cloud-computing heavyweight’s market capitalization at $1.78 trillion.

Apple’s quarterly results beat analysts’ expectations, but its sales in China missed estimates and its stock dipped 3.3%. Apple faces tough competition in China, which has worried Wall Street in recent months.

Asked on an investor call about generative AI, Apple CEO Tim Cook said, “We’ve got some things that we’re incredibly excited about that we’ll be talking about later this year.”

Investor optimism about generative AI drove rallies in the U.S. stock market’s most valuable companies last year, with many hitting all-time highs in recent sessions.

In its report after the bell, Meta said its 2024 capital expenditures would reach between $30 billion and $37 billion, a $2 billion increase over its previous plan, driven by investments in servers, some of which will be used for AI.

Chipmakers Nvidia (NVDA.O) and Advanced Micro Devices (AMD.O) both climbed about almost 2% in extended trade, while server maker Super Micro Computer (SMCI.O) added 2%.

(from another article) Amazon said on Thursday that its cloud division grew revenue 13% year over year in the fourth quarter, exactly in line with analysts’ projections. The company pointed to growing traction in cloud services for artificial intelligence.

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Phan Vee Leung
CIO & Founder, TrackRecord