Month: September 2024

Investing.com — The European Central Bank (ECB) is poised to implement deeper rate cuts than markets currently anticipate, as per analysts from BCA Research. 

The gap between market expectations and BCA’s outlook comes from BCA’s belief that worsening economic conditions in the Eurozone, especially rising inflation and recession risks, will push the ECB to cut rates more aggressively than the market currently expects.

Markets are underpricing the scale of monetary easing, particularly in 2025, as the Eurozone faces mounting economic challenges that will necessitate significant policy responses.

The ECB has already lowered its deposit rate to 3.5% from 3.75%, with another cut expected in December. 

These gradual rate cuts follow the ECB’s new strategy introduced earlier this year. However, the market, shown by the €STR curve, has priced in the possibility of an earlier cut in October, giving it a 50% chance. 

BCA Research, though, sees this as premature and believes it’s based more on speculation than real economic factors.

Several key indicators argue against a more immediate rate cut. Services inflation remains high at 4.2%, driven by pricing in recreation and insurance. 

Although this inflationary pressure is expected to ease, it provides enough of a rationale for the ECB to delay additional cuts until December. 

Despite the current elevated inflation, BCA expects inflationary pressures to ease over time, driven by several key factors. 

Unit labor costs and profits, which have contributed significantly to inflation in recent quarters, are now subsiding. 

“As a result, the contribution of unit profits to economy-wide inflation has declined from a peak of 3.6% in Q2 2023 to 1.1% in Q1 2024 ,” the analysts said.

Moreover, labor market conditions are softening. Growth in wages is decelerating, and job creation has weakened. In fact, the employment component of the Eurozone’s Composite PMI has fallen below the key boom-bust line, signaling deteriorating labor demand. 

As a result, wage growth is expected to slow further, reducing the inflationary pressure from labor markets.

Additionally, disinflationary forces from the goods sector will persist. Capacity utilization in the Eurozone’s manufacturing sector has dropped to levels last seen during the Sovereign Debt Crisis, with German utilization nearing Great Recession lows.

 The contribution of non-energy industrial goods to inflation has fallen to just 0.1%, while energy prices have started to subtract from inflation due to weak oil prices​.

BCA suggests that the market is underestimating how far the ECB will need to ease monetary policy in 2025. The €STR curve currently prices at a policy rate of 2% by mid-2025, reflecting market expectations of a soft landing for the Eurozone economy. 

“In practice, this means that the ECB is likely to cut rates more in 2025 than the €STR curve anticipates because the Eurozone will suffer a recession next year,” the analysts said. 

One major concern is the deteriorating global industrial outlook. The Global Manufacturing PMI has slipped to 48.8, signaling contraction, while US housing activity has slowed, with residential investment expected to decline at an annual pace of 8.5%. 

These factors point to a likely recession in the US, which will have spillover effects on European investment, particularly through trade and profit linkages.

Further compounding the problem is weakening consumer confidence in Europe. Real wages, although growing, are being outpaced by rising savings rates, signaling a precautionary approach from households. If labor markets continue to weaken, as expected, consumption will also decline, further undermining economic growth. This combination of declining investment and consumer spending sets the stage for a Eurozone recession in 2025.

In response to these conditions, BCA expects the ECB to cut rates more aggressively than currently anticipated by markets. 

With the Eurozone’s neutral real interest rate (r-star) estimated between -0.5% and 1.1%, and the median nominal neutral rate at around 2%, BCA argues that a recession will necessitate cuts that bring the ECB’s deposit rate below 2% by mid-2025.

BCA Research flags several key investment takeaways from its analysis. First, the brokerage remains bullish on German bunds, as deeper-than-expected rate cuts will drive yields lower. 

BCA’s “Golden Rule of Bond Investing” states that when central banks cut rates more than anticipated by money markets, bond yields typically decline. This implies further upside for German sovereign bonds, particularly in the face of a slowing economy.

The euro, on the other hand, is likely to face downward pressure. While the currency has shown resilience in the lead-up to the first US Federal Reserve rate cut, historical patterns suggest that the euro will begin to weaken once the Fed begins easing. 

The combination of weak global growth and the expectation of more ECB cuts than currently priced will further weigh on the euro. BCA recommends selling EUR/USD as the outlook for the European economy continues to deteriorate​.

Finally, BCA remains cautious on European credit, advising investors to adopt a conservative stance in this space. The weakening economic outlook and rising recession risks make European credit less attractive relative to other asset classes.

Investing.com — Canaccord Genuity analysts are optimistic about Tesla (NASDAQ:TSLA)’s upcoming 3Q24 results, predicting the electric vehicle giant will exceed market expectations for both profit and deliveries.

The firm revised its delivery and earnings estimates based on its analysis of global data, spanning around 40 countries.

“Our enhanced database now covers delivery data for ~40 countries on a monthly basis,” Canaccord noted, highlighting their improved tracking system for Tesla deliveries.

They said that despite the challenging global automotive environment, Tesla’s performance has remained strong.

Canaccord’s updated estimates project Tesla’s 3Q24 deliveries at 469.2k vehicles, compared to the consensus estimate of 458k. While this is slightly lower from the previous estimate of 480k, it still signals solid growth.

The firm noted that “September is typically the highest sales month in the quarter,” which they accounted for in their revisions.

The firm also maintains a positive outlook for the rest of the year, projecting total 2024 deliveries of approximately 1.85 million vehicles, a 2.4% year-over-year increase, above the FactSet consensus of 1.78 million.

In terms of profitability, Canaccord has adjusted its 3Q24 non-GAAP EPS estimate from $0.98 to $0.75, still significantly ahead of the $0.61 consensus.

This revision takes into account Tesla’s aggressive pricing strategies aimed at boosting demand in key markets. The analysts cited strong sales momentum in China and attractive financing options globally as key drivers for the positive outlook.

Looking ahead, Canaccord maintains its 4Q24 delivery estimate of 552k vehicles, implying a substantial 17.7% quarter-over-quarter increase. They base this on Tesla’s historical patterns, noting the company has averaged a 20.4% quarter-over-quarter gain between 3Q and 4Q since 2019.

Investing.com — Crude oil markets are under increasing downward pressure, with a breakdown in prices pointing to further weakness ahead. 

Analysts at BCA Research in a note dated Friday flag the factors contributing to the recent collapse in oil prices and signals that the worst may not be over.

 Investors are advised to reduce their exposure to oil, as market fundamentals suggest that prices will continue to decline over the next six to nine months​.

One of the primary factors contributing to the fall in crude oil prices is the downward revision of global demand forecasts. 

Major organizations, including the International Energy Agency (IEA), U.S. Energy Information Administration (EIA), and OPEC, have all reduced their oil consumption projections for 2024 and 2025. 

This marks a shift in sentiment from earlier, more optimistic projections. Furthermore, prominent Wall Street banks such as Goldman Sachs, Morgan Stanley, and Citi have all lowered their Brent crude price targets.

This pessimism is supported by weaker-than-expected demand data. During the first half of 2024, global oil consumption growth hit its lowest level since 2020, largely driven by reduced economic activity and lower demand from key markets, especially China. 

China’s reduced crude oil imports in August, down 7% compared to the previous year, have heightened fears about global demand.

While demand is weakening, supply-side dynamics have also played a role in depressing prices. Production from countries outside OPEC, such as Brazil, Canada, and the U.S., has surged, more than offsetting OPEC+ production cuts. 

The 1.5 million barrels per day (b/d) increase from these non-OPEC countries has overshadowed the 1.2 million b/d decline in OPEC+ output.

The result has been a flattening of the oil futures curve, indicating waning enthusiasm for near-term contracts. The price differential between immediate and future deliveries has shrunk, reflecting growing market concerns about oversupply in the face of diminishing demand.

While the outlook for crude oil prices remains bearish, there is a possibility of a near-term bounce. 

Money managers have shed their long positions in oil, with net longs in both Brent and West Texas Intermediate (WTI) reaching record lows. 

Historically, such low net long positions have been followed by price rallies, raising the probability of a short-lived rebound.

However, BCA Research stresses that any potential rally will likely be brief. ”Even in the cases when prices rose, the average 23-day duration of the rally is relatively short,” the analysts said.

The absence of strong fundamental catalysts for sustained demand growth further supports the view that any price recovery would be temporary.

From a cyclical perspective, the path of least resistance for oil prices remains to the downside. Historically, oil prices tend to weaken during the fourth quarter, a period marked by lower demand following the summer driving season. 

Refineries typically conduct maintenance during this time, leading to a buildup in crude inventories, which places additional downward pressure on prices.

Moreover, the broader economic outlook is not favorable for crude.

“BCA Research strategists assign high odds to an economic downturn over the coming 12 months. Thus, global demand conditions for crude oil are likely to deteriorate further,” the analysts said.

The reduction in Saudi Aramco’s official selling price (OSP) for Asian buyers to a near three-year low is another negative signal for the demand outlook​.

BCA recommends that investors should reduce their exposure to crude oil, especially over a six-to-nine-month horizon. 

The note underscores the cyclical vulnerability of oil markets and the high likelihood of continued price weakness. 

While short-term rallies driven by technical factors are possible, they are expected to be fleeting, and prices are likely to revert to their downward trajectory once these rallies lose momentum.

BCA Research also flags the limited effectiveness of OPEC+ efforts to stabilize the market. Even if OPEC+ extends its production cuts, it may not be sufficient to prevent an oil surplus in 2025. 

The coalition would need to make even deeper cuts, which risks internal disagreements and compliance issues​.

Investing.com — Bernstein named Infineon (OTC:IFNNY) Technologies AG as its “Best Idea” for the fourth quarter of 2024, signaling confidence in the chip manufacturer’s prospects despite recent cyclical challenges. 

The firm has maintained an Outperform rating on Infineon since initiating coverage in January 2023, and its latest note underscores the company’s resilience and growth potential.

Bernstein believes Infineon remains well-positioned to benefit from both secular and cyclical trends. 

“We’ve named IFX our ‘Best Idea’ twice before, but the secular growth opportunities just were not enough to outweigh the cyclical overhang that investors remained leery of,” they state. 

Bernstein explains that Infineon is a leader in automotive semiconductors, with recent gains in its market share for microcontroller units (MCUs). Automotive applications now account for more than 50% of its revenue, focusing on high-growth areas such as electrification and advanced driver assistance systems (ADAS).

The firm also points to emerging opportunities in AI server power, which Infineon expects to generate EUR 1 billion in revenue within 2 to 3 years. 

“AI server power has also emerged as a new growth driver,” Bernstein observes, further enhancing the company’s growth outlook.

Bernstein indicates that cyclical headwinds are transitioning into tailwinds for Infineon. 

“We find evidence [that] cyclical headwinds are turning into tailwinds,” the analysts state. They note that while industrial and automotive analog sales have faced corrections, company guidance suggests that automotive sales may be nearing a bottom.

Despite EPS revisions for FY24 and FY25 dropping by 31% and 26%, respectively, over the past year, Bernstein believes that Infineon’s current share price does not yet reflect the anticipated improvement in conditions. 

The firm maintains a target price of EUR 40, based on a P/E ratio of 18x on FY25 adjusted EPS. “Valuation looks attractive given secular growth and improving cyclical conditions,” Bernstein concludes.

The Biden administration’s ambitious environmental agenda has significantly boosted electric vehicle (EV) adoption in the U.S., with EV penetration rising from 2.5% in 2020 to 10% in 2024 year-to-date, as per Bernstein.  

However, as per the equity research and trading firm, recent months have seen a slowdown in EV growth, raising concerns about meeting the California Air Resources Board (CARB) and federal Environmental Protection Agency (EPA) targets. 

Bernstein analysts suggested that while a Democratic White House would likely maintain current policies, the slowdown highlights the potential need for additional support or more realistic target-setting.

They anticipated that a Democratic administration would continue to support EV growth with existing policies. Yet, with current trends, the firm notes, “more support may be needed or more realistic target setting may be required.” Without action, established automakers could face increased penalties for non-compliance.

Conversely, Bernstein foresees a Republican administration actively seeking to reverse the Biden administration’s EV policies. Both the Republican National Committee (RNC) platform and Project 2025 indicate intentions to dismantle “harmful regulations” and cancel existing EV mandates. 

However, such reversals would require majorities in both the House and Senate and face potential legal challenges. Changes to EPA policy, particularly concerning 2027 emission targets, could still impact the EV landscape significantly.

In light of this policy uncertainty, Bernstein identified three key priorities for original equipment manufacturers (OEMs). First, automakers should shift their lobbying efforts to emphasize technological leadership, re-shoring, and cost reductions of EVs, rather than solely focusing on environmental credentials. 

Second, increasing flexibility in technology and manufacturing plans will be crucial. Automakers with adaptable platforms, like Stellantis (NYSE:STLA), are better positioned to navigate these changes. Third, making EVs more affordable is essential, requiring rapid innovation and scaling.

Among the major automakers, Bernstein sees Stellantis as the most adaptable to either potential outcome of the U.S. election. “Stellantis’s flexible platform approach enables it to shift between battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs) and adapt to various growth scenarios,” Bernstein noted. The company’s global footprint also helps mitigate potential adverse impacts from the U.S. market.

For General Motors (NYSE: NYSE:GM), Bernstein sees a favorable outlook under a Democratic administration due to its ambitious BEV strategy. 

“GM’s Ultium platform and planned BEV launches would benefit significantly from continued policy support,” the firm stated. Conversely, Ford’s (NYSE: F) positioning might be stronger in a Republican scenario, given the need to adjust its BEV strategy and pivot to more PHEVs while meeting EPA and CARB targets.

Investing.com — Waymo, Alphabet’s (NASDAQ:GOOGL) autonomous driving unit, has seen increased adoption in recent years. As per analysts at Morgan Stanley, by 2025, Waymo could make up a low to mid single digit percentage share of the rideshare markets in key cities like Phoenix and San Francisco.

Waymo’s business has seen growth, reporting about a 10x increase in weekly trips compared to May of the previous year. 

By August 2024, Waymo was conducting 100,000 trips per week, a significant jump from the 10,000 trips in May 2023. 

This rapid scaling is further supported by its expansion into new geographies, including neighborhoods in Los Angeles, airport services in Phoenix, and the San Francisco Peninsula.

The number of miles driven by Waymo also rose exponentially, with its most mature market, Phoenix, witnessing about a 350% year-over-year increase in the first half of 2021. 

By 2025, the company is expected to continue on this trajectory, driven by technological advancements and growing geographic reach.

The base case suggests that Waymo will achieve a 4% market share in Phoenix and 3% in San Francisco. This corresponds to a projected revenue of $76 million in Phoenix and $64 million in San Francisco in 2025​.

Additionally, Waymo’s partnership with Uber (NYSE:UBER) is critical to achieving these numbers, as some trips in Phoenix will be conducted through the Uber platform. This partnership is expected to contribute to Waymo’s ability to secure a portion of Uber’s gross bookings in these regions​.

Waymo is currently operational in four cities, namely Phoenix, San Francisco, Los Angeles, and Austin. However, the company has mapped over 25 cities and continues to expand. 

San Francisco, Los Angeles, and Austin are scaling at 2x the rate of Phoenix, with each new city launch reaching key milestones faster than its predecessor. 

Morgan Stanley highlights that the pace of city launches will be a crucial factor in determining the size of Waymo’s business by 2025. 

“With a presence in only 3 of the top 20 metro areas in the US (Austin is not a top 20 metro), Waymo still only covers a fraction of the overall US population,” the analysts said. 

Morgan Stanley forecasts strong revenue growth across Waymo’s markets. Waymo’s revenue is expected to grow 109% year-over-year in 2025, with the overall revenue across all markets (Phoenix, San Francisco, Los Angeles, and Austin) reaching $180.9 million​. 

These projections do not include the potential revenue from new city launches, which could further accelerate growth.

While Waymo’s growth is promising, challenges remain. Technological hurdles, safety concerns, regulatory requirements, and investment needs make full autonomy a multi-year challenge. 

Morgan Stanley analysts caution that while Waymo’s business can grow significantly by 2025, broad adoption of autonomous vehicles across all cities may still be a distant goal​.

Former President Donald Trump’s proposed tariffs would likely lead to substantial inflationary pressures and economic consequences if implemented broadly, Nomura pointed out in a note published on Monday. 

The firm warned that a broad-based tariff approach, such as Trump’s proposed 10% across-the-board tariffs, would be markedly more inflationary compared to the targeted tariffs seen during his first term.

Nomura noted that Trump’s previous tariffs, which were more narrowly focused, had a relatively benign impact on inflation. However, the firm argued that across-the-board tariffs would likely lead to a significant increase in core inflation, potentially by as much as 1 percentage point, partly because such tariffs would affect a wide range of goods without the possibility for offsets from unaffected countries.

“In contrast to targeted tariffs, which had a minimal impact on retail prices due to margin adjustments and increased imports from exempted countries, broad-based tariffs are expected to push up prices more substantially,” said Nomura. 

The analysis drew on the example of Trump’s 2018 tariffs on washing machines, which led to noticeable increases in both consumer prices and producer prices for domestic manufacturers.

Nomura’s projections suggested that domestic distributors might absorb a significant portion of cost increases from the proposed tariffs, but they would likely have less capacity to do so under broad-based tariffs. “We estimate that the proposed 10% across-the-board tariffs could increase prices for domestically produced goods by up to 10%,” the firm noted, indicating a possible rise in core inflation by 100 basis points.

The firm also discussed the potential economic impact of Trump’s trade policies, emphasizing that broad tariffs would result in substantial tax increases and could negatively affect economic growth. “Higher tariffs could act as a tax on domestic residents, as affected exporters might not lower their pre-tariff selling prices,” said Nomura. 

Looking ahead, Nomura anticipated that a second Trump administration might resume its aggressive trade stance, with Trump proposing not only a 10% across-the-board tariff but also a 60% tariff on Chinese goods. 

“If Trump is reelected, we expect his combative trade policies to continue, although we anticipate some exemptions for key trading partners and negotiated bilateral agreements,” Nomura said.

Investing.com — The potential impact of U.S. Federal Reserve rate cuts on the USD/JPY pair is a critical issue for investors and currency strategists, particularly as we approach a possible Fed pivot in 2024. 

With divergent monetary policies between the Fed and the Bank of Japan (BoJ), market participants are divided on whether Fed rate cuts will lead to a weaker USD/JPY. 

As per analysts at BofA, the relationship between Fed rate cuts and USD/JPY is more nuanced, with a variety of structural and macroeconomic factors playing a role.

Contrary to common market expectations, the relationship between Fed rate cuts and a weakening USD/JPY is not a given. 

Historically, USD/JPY did not always decline during Fed easing cycles. The key exception was during the 2007–2008 Global Financial Crisis (GFC), when the unwinding of the yen carry trade caused significant yen appreciation. 

Outside of the GFC, Fed rate cuts, such as those seen during the 1995–1996 and 2001–2003 cycles, did not lead to a major decline in USD/JPY. 

This suggests that the context of the broader economy, particularly in the U.S., plays a crucial role in how USD/JPY reacts to Fed rate moves.

BofA analysts flag a shift in Japan’s capital flows that dampens the likelihood of a sharp JPY appreciation in response to Fed rate cuts. 

Japan’s foreign asset holdings have shifted from foreign bonds to foreign direct investment and equities over the past decade. 

Unlike bond investments, which are highly sensitive to interest rate differentials and the carry trade environment, FDI and equity investments are driven more by long-term growth prospects. 

As a result, even if U.S. interest rates decline, Japanese investors are unlikely to repatriate funds en masse, limiting upward pressure on the yen​.

Moreover, Japan’s demographic challenges have contributed to persistent outward FDI, which has proven to be largely insensitive to U.S. interest rates or exchange rates. 

This ongoing capital outflow is structurally bearish for the yen​. Retail investors in Japan have also increased their foreign equity exposure through investment trusts (Toshins), and this trend is supported by the expanded Nippon Individual Savings Account (NISA) scheme, which encourages long-term investment rather than short-term speculative flows​.

“Without a hard landing in the US economy, Fed rate cuts may not be fundamentally positive for JPY,” the analysts said. 

The risk of a prolonged balance sheet recession in the U.S. remains limited, with the U.S. economy expected to achieve a soft landing. 

In such a scenario, the USD/JPY is likely to remain elevated, especially as Fed rate cuts would likely be gradual and moderate, based on current forecasts. 

The expectation of three 25-basis-point cuts by the end of 2024, rather than the 100+ basis points priced in by the market, further supports the view that USD/JPY could remain strong despite easing U.S. monetary policy.

Japanese life insurers (lifers), who have historically been major participants in foreign bond markets, are another key factor to consider. 

While the high cost of hedging and a bearish yen outlook have led lifers to reduce their hedging ratios, this trend limits the potential for a JPY rally in the event of Fed rate cuts. 

Furthermore, lifers have scaled back their exposure to foreign bonds, with public pension funds driving much of Japan’s outward bond investment. 

These pension funds are less likely to react to short-term market fluctuations, further reducing the likelihood of a yen appreciation​.

While BofA remains constructive on USD/JPY, certain risks could alter the trajectory. A recession in the U.S. would likely lead to a more aggressive series of Fed rate cuts, potentially pushing USD/JPY down to 135 or lower. 

However, this would require a significant deterioration in U.S. economic data, which is not the base case for most analysts. Conversely, if the U.S. economy reaccelerates and inflation pressures persist, USD/JPY could rise further, potentially retesting 160 in 2025​.

The risk from BoJ policy changes is considered less significant. Although the BoJ is gradually normalizing its ultra-loose monetary policy, Japan’s neutral rate remains well below that of the U.S., meaning Fed policy is likely to exert a greater influence on USD/JPY than BoJ moves. 

Additionally, the Japanese economy is more sensitive to changes in the U.S. economy than the reverse, which reinforces the notion that Fed policy will be the dominant driver of USD/JPY.