This podcast is originally produced and published by BFM 89.9 and can be found at https://www.bfm.my/podcast/morning-run/market-watch/oil-demand-fomc-fed-rates-us-markets.
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Transcript:
BFM
BFM 89.9, you’re listening to The Morning Run with Keith Kam, and I’m Wong Shou Ning. It’s just gone past 7:06. It’s a very wet Thursday morning. It’s the 23rd of November. And in about 30 minutes, we’ll be discussing the outlook for the Indian economy, which is growing at a steady clip in contrast to other major economies this year. But in the meantime, let’s recap how global markets closed yesterday.
BFM
On Wall Street, when Americans sit down for the Thanksgiving dinner, this is another thing they get to be thankful for. The Dow closed up more than 200 points, up 0.5 %. S&P 500 was up 0.4 %. The Nasdaq was also up 0.5 %. Earlier in the day, yesterday, in Asia, Japan’s decay was up 0.3 %. The HangSeng was flat. Shanghai’s composite was down 0.8 %. Singapore’s STI was up 0.6 %. Back home, the FPMKLCI closed 0.5 % lower.
BFM
For some insights on where international markets are hitting, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony, thanks for speaking to us. I know it’s almost Thanksgiving in the USA, so I have a question about you. How thankful are you for the US equity markets? Because the Nasdaq is up 36 %, the S&P 500 up almost 19 %. Can this very, this yearlong rally continue?
Tony Nash
Yeah, to be honest, I think we’re lucky that we are where we are. Are we grateful? Yeah, we are. But I think we’re pretty lucky to be where we are. I think without tech, without tech surging and the AI surge, I think it’d be in a very different place.
BFM
Tony, FOMC minutes revealed that the Fed isn’t keen on cutting rates anytime soon. How might equity and fixed income investors position themselves for a higher for longer scenario? Do you think we might be getting a Santa Claus rally?
Tony Nash
Yeah, maybe it’s possible. I think with higher for longer, treasures are paying 5 %. You can sleep at night with a 5 % return and fall in inflation. Honestly, that’s really a no-brainer, and it’s the easiest trade to make. I’d be careful of tech right here. I’m not saying it’s due to fall. I’m just saying valuations are incredibly stretched. If Hire for longer is really a thing, then tech valuations are likely to take a hit in the new year. I’m not sure much is going to change before the end of the year, but they’re likely to take a hit in the new year. I’d be watching energy stocks. I’d be watching pretty boring sectors like utilities and consumer staples, and really take a look at when it’s time to get in.
BFM
Okay, staying on the team of Tech cutting, I think nobody can ignore NVIDIA results, which actually beat expectations, excuse me, but the stock has come down overnight in the last two days, actually. What is the reason for this?
Tony Nash
I think with NVIDIA, it’s been priced for perfection. I think people are looking at it and asking if this is as good as it gets, because when you look at NVIDIA’s PE ratio, which I know that’s not necessarily perfect, but it’s at 116, 116. Effectively, NVIDIA would have to have 116 years of its current earnings level to justify the current price. That’s optimistic, right? When you look at what the NVIDIA CFO said on the call, she basically said that they do not have good visibility into the magnitude of the impact of the China stuff that the US government has imposed on them. They’re saying they don’t know.
Tony Nash
There’s uncertainty. China is 25 % of their data center revenue, and data center is their biggest revenue bucket. So 25 % of their biggest revenue bucket is uncertain. I wouldn’t be surprised to see some people take some profits here and just wait and see until there’s some clarity.
BFM
Okay, so it sounds like the premium awarded to NVIDIA is really due to the scarcity when it comes to AI teams. Would Microsoft now be that new AI proxy?
Tony Nash
Well, Microsoft has been trading off that because of OpenAI. They have the relationship with OpenAI and ChatGPT, and they’ve added ChatGPT type of activities to all of their products. They’ve already done very well off of that AI theme. I don’t know that they would necessarily be the new darling of AI.
Tony Nash
Microsoft announced, I think last week that they’re going to be making AI chips. Of course, everybody’s going to announce they’re making AI chips, MD, Microsoft, everybody, because that’s where the money is.
BFM
Tony, Fed officials mentioned that they needed to see more weakness in labor markets in order to hit their inflation target. Just jumping off on your comment earlier that 2024 might actually be a bit of a moderation. Do you expect that same moderation to be reflected in US job numbers?
Tony Nash
I do. The bigger issue there, I think, rather than just job numbers, it’s really wages, right? Average hourly earnings as of last month are growing at 4.1 % annualized, while CPI, consumer price inflation is growing at 3.2. Wages are growing faster than inflation, which for the worker is great. But the Fed believes that average hourly earnings number is pulling up prices. We’ve been through the part of the cycle where it’s supply side inflation, and we lived that out in ’21 and ’22. We’re now getting to the part where wages are higher than inflation. The Fed is saying, Hey, that’s where this leftover inflation is coming from. They’re trying to find a way to push down that average hourly earnings number. I think in their minds, they’d like to see some people lose jobs so that there’s pressure, downward pressure on those earnings numbers.
BFM
Okay, Tony, help us understand what’s going on in the oil markets because demand has reached record highs with stocks depleting. Yet crude prices, I would say volatile, in fact, on the downward trend. So why is there a disconnect between this?
Tony Nash
Yeah, well, I mean, that’s a really interesting market to look at, especially in light of the fact that energy is playing such a large part of inflation slowing down, right? And so crude prices falling at this point is really a paper trade rather than a physical trade. It’s possible if we see a recession in say Q1 or Q2 next year, which is not the consensus call, but if we see a recession, the paper to market weakness might become a reality. We might see easing of the demand in global markets. But consensus at the moment seems to say that we’re going to avoid recession. It’s possible the market gain strength.
Tony Nash
My firm, Complete Intelligence, we forecast 1,600 things a month. Crude Oil is one of them. What we’re saying is in Q1, WTI will be in the low to mid ’80s, and Brent will be in the mid to high ’80s. We do see some upward pricing pressure from here. We’re not necessarily seeing the three-digit numbers that some people are talking about for next year.
BFM
Tony, OPEC Plus is meeting this Sunday, and the expectation is they are going to discuss further reductions in supply. What are your thoughts on this going into 2024?
Tony Nash
Yeah, that Sunday meeting, I’m not sure if it’s happening. I thought that had been pushed back until November 30th. The reason being is there were some back-room meetings made between the UAE and Saudi at the last meeting that allowed the UAE to increase their output. My understanding is that other OPEC members are pretty upset that UAE was allowed to pump more, but they weren’t. There’s some disagreement behind the scenes, and my understanding is they put that meeting off until the 30th. That’s really what’s behind today’s price weakness. I think Brent and WTI were down at like 3 % at one point.
Tony Nash
Until we have an idea of the agenda for the November 30th meeting or more clarity on what the outcome will be, I think there’s a fear in markets that the producers will produce more if they’re allowed to. And people want more revenue. People are feeling that economics is a little bit weird, and so they want to produce more to make more money. The Saudi are going to have to work it out with the other OPEC members over the next few days and then come together with some concrete conclusions for the November 30th meeting.
BFM
Tony, do you have any views on gold? Because this is another asset class I can’t really quite figure out. It’s at $19.90 per ounce and at the moment it’s up 10 %. On one hand, the market looks like it’s wrist-on, but that is wrist-off. What do we do with this precious metal?
Tony Nash
What you’re saying is exactly right. Again, we forecast a lot of stuff on our platform. And so when Gold was telling us until two weeks ago, actually until last Monday, that it was going to fall. And gold, in fact, was falling. Some of the items we monitor in the market had turned around and Gold told us this past Monday morning that it was going to start rising again, maybe it was two Mondays ago, that it was going to start rising again. And it did. Actually, that was two Mondays ago. And it did start rising. And gold is one of those that you really have to take a look at frequently.
Tony Nash
We have some customers who made 4X on some of their gold shorts last month. And then when it turned around, they sold those and started to get long again. So gold, and what we’re seeing now is strength in gold. Not a huge amount of strength, but we’re seeing strength in gold. I would be very careful. It’s like looking at equity markets right now. There’s underlying strength in equity markets, but I would wait until a few more things fall into place before you really want to go super long right here.
BFM
All right. Thank you very much for your time. Happy Thanksgiving, by the way, Tony. That was Tony Nash, CEO of Complete Intelligence, telling us to look at some sectors because markets might be volatile in the coming months, looking at utilities, consumer staples, and wow, what do we make of all and gold? The price movements don’t really follow, I suppose, typical market theory.
BFM
Not at all. I’ve been following gold for a while, and I see that it’s got a very, very strong support at 1920, $1,920 an ounce. But it’s been trying for the past two or three months to break that $2,000 resistance, and it did for a split second.
BFM
Sure. Well, whenever there’s any geopolitical tensions, ratcheting up, I noticed. But in the meantime, let’s take a look at one of the world’s largest distributor of agriculture, machinery, deer, and coal, because this is a good barometer in terms of what are farmers feeling like, what have the rising inflation and the rising agriculture prices have meant have they squeezed the margins of agriculture companies? Now they saw a five % increase in the fourth quarter net income to $2.4 billion and a 43 % increase to $10 billion for the fiscal year.
BFM
They saw a one % fall in total worldwide net sales. Revenue was at $15.4 billion for Q4. However, for the full year, it rose 16 % to $61 billion. Moving ahead, the company is actually forecasting slowing demand from farmers driven by declining crop prices because future net income for the fiscal year, they’re expecting to be between $7.8 and $8.3 billion. The full year outlook is also below consensus estimates of $9.3 billion. Not so. Rosy, actually.
BFM
No, not really. I think margins have really been squeezed, actually, because in terms of global food prices, there’s a limit to how much you can raise it, but there definitely has been higher input cost for all these farmers. Now, the stock is actually down 13 % on a year to date basis, trading at a forward PE of 12 times. The street, 16 buys, 11 holds, two sells. Consensus target price for this US listed stock, $427.93. Last done was actually down almost $12 to $370.76. Now that’s all the corporate US corporate news we have for you the moment. Up next, we’ll be covering the top stories in the newspapers and portals this morning. Stay tuned for that BFM 89.9.