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/us-stocks-fed-rate-hikes-oil-gold-prices.
BFM’s Description:
Investors seem to hope that this current cycle of rate hikes by the US Federal Reserve is near an end. Tony Nash, CEO of Complete Intelligence, talks to us about expectations that such a rally might or might not be sustainable as well as where he thinks commodities like crude oil and gold may be headed.
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They discuss recent market trends, particularly focusing on the performance of US stock market and the implications for the global economy. They speak with Tony Nash, CEO of Complete Intelligence, who provides insights on the sustainability of the current equity rally and the factors influencing it, such as corporate earnings, energy prices, and expectations for the US economy. Nash also shares his perspective on gold prices and the performance of companies like Disney and Arm Holdings.
The transcript also covers the quarterly earnings report of Disney, which exceeded analysts’ expectations due to profit growth in areas such as ESPN Plus and Theme Park, despite a decline in ad revenue and losses in the streaming business. Additionally, the earnings report from Arm Holdings reveals a sales forecast below expectations, attributed to a slump in smartphone sales and uncertainty surrounding new licensing deals. The discussion provides a comprehensive overview of recent market developments and their potential impact on various industries and companies.
Transcript:
BFM
BFM 89.9, good morning. It’s 7:06 AM on Thursday, the ninth of November. You’re listening to The Morning Run. I’m Shazana Mokhtar with Keith Kam. Now in half an hour, we’re going to discuss the trends impacting the outlook for the global insurance industry. But as always, we’re going to kickstart this morning with a look at how global markets closed overnight.
BFM
On Wall Street, the markets generally closed flat-ish. The Dow Jones was down 0.1 %, the S&P 500 was up 0.1 %, but the gain is still a gain. So it’s eight straight days of gains for the S&P 500. It’s the longest streak in two years. The Nasdaq was up 0.1 %. Earlier in the day, it was a red day for Asian markets. Japan’s Nikkei was down 0.3 %. Hongkong’s Hang Seng fell 0.6 %. Shanghai’s Composite was down 0.2 %, and the STI was down 1.4 %. The FBMKLCI closed 0.4 % lower yesterday.
BFM
So for some thoughts on what’s moving international markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Always good to have you. So we do see US stocks have resumed their upward trend in hopes that this current cycle of rate hikes by the Fed is near an end. Are these green shoots pointing to a sustainable rally in equities, or do you see this as more of a dead cat bounce?
Tony Nash
Well, I think as far as the number of green days closing, I think we’ll take the win. It’s nice to see that after the few months we’ve had. I think we’re heading in more of a range trade until we get a good view of where things are headed. You can look at the implied pivot that the Fed has made, and you can make that assumption. You can also look at where energy prices are and say, Well, oil prices are falling. The Fed is potentially easing. That’s great for equities. But we’re looking at corporate profits that were mediocre this quarter, given where GDP growth was in Q3. If earnings don’t begin to break out and if we don’t have an actual move on rate cuts, then equities may stall out. Can we.
BFM
Just take a look at this earnings quarter so far, Tony? What have been the standouts for you? Which sectors or stocks do you see outperforming versus the laggards, perhaps?
Tony Nash
Yeah. I mean, of course, energy has had a tough time. I think we’ve seen some great tech earnings. But again, if we look at it on a relative basis, things are not necessarily accelerating as much as they had been. What my concern is about really is the deterioration of earnings. These earning surprises, I think at average, they were 6% or something. But when you have, say, a nominal GDP that’s at 8%, they’re not even really keeping up with the rate of inflation. We can look across sectors and say sector A was good, sector B was bad. But if they’re not keeping up with that 8% nominal GDP growth, then we have to really discount the impact of that earnings growth.
BFM
Tony, what I’ve been noticing is that we’ve been looking at consecutive days of gains going to seven, eight days. And it’s been a long time since we’ve been able to see something like that and forget how that felt. What are you expecting in terms of the US economy next year? Because I think a lot of people are expecting things to be a lot better, hence the winning streak.
Tony Nash
Yeah, I don’t know that things will be a lot better. I think people are looking for things to be good enough. If we keep the wage gains that we’ve got over the past couple of years and we start to see disinflation and we continue to see energy prices moderate, if we could get mortgage rates down just a little bit more, we could be in a real sweet spot. I mean, look, when people started talking about a soft landing for the Fed, a lot of people just a big eye roll and nobody really thought they could do this. But the two 75 basis point rate hikes they had over a year ago, I think they did shock the system a little bit. Then they’ve been very persistent in continuing with those. I do think that it might actually be possible to have a soft landing, which would be great. A soft landing is just a victory for everybody. The real problem I have, a real question I have is about valuation expansion. Would we continue to see valuation expansion? And would we be able to get margin expansion for manufacturing and services companies if we don’t have underlying inflation and the implied pricing power or infer pricing power from big companies?
Tony Nash
Because people have really accepted a lot of price rises over the past couple of years. A lot. And they’re really tiring of it.
BFM
What’s your prognosis for a Christmas rally, a year-end rally, so to speak? I mean, some of the analysts that I’ve read seem to be in favor of something like that happening.
Tony Nash
Yeah. I think we’re seeing it now. I suspect the further we get into Q4, we may realize that it’s not Q3 all over again, which was a great GDP print. If you look at things like trucking employment and trucking activity in the US, it’s way down, okay? That tells me that there is not necessarily the demand that people saw in previous quarters. Of course, there are other indicators we can look at, but I think things like trucking really tell us that we’re losing momentum on the growth that we saw in previous quarters and previous years.
BFM
Speaking of demand and growth, I do want to turn our attention to the energy prices because we are seeing, as you’ve mentioned, oil prices come down. I think this morning, Brent crude is actually trading below $80 per barrel. Wti is trading at $75. Some say that this is due to weak growth in the Chinese economy, but is that the main or only reason? What are the factors at play that you see that’s going to affect energy prices moving forward?
Tony Nash
Yeah, I don’t think it’s only China. Of course, people are looking at China. They’re looking at Chinese exports. They’re looking at expectations for economic growth. But again, I think people are looking at US growth and they’re looking at things like that trucking indicator I talked about and saying, Oh, gosh, we really are slowing down. Interest rates really are hurting people’s ability to build credit. Small and mid-sized companies, the borrowing cost for small and mid-sized companies in the US are in the double digits. If you want to get a small or medium-sized business loan, you’re looking at 12% or something. Really, the breaks are being put on consumption. I think that’s really what people are looking at with the crude prices. It’s really interesting to me that the US is getting to a place where they really have to start refilling the SPR, and we’re seeing these crude prices meshed down, which is, I guess, really fortunate for the US Department of Energy as they start to fill that up.
BFM
Tony, I just want to turn your attention to, pick your brains a little bit on gold prices. We saw it hit above $2,000 just a few days ago, a couple of weeks ago, and it’s now just below 2,000. And it’s hit 1,600 at one point during the year, one of its lowest. And some of the analysts’ reports that I’ve read is that we should actually buy on dips when it comes to gold. What’s your prognosis on this?
Tony Nash
Yeah, that’s not really my view. Gold got pretty hammered during US trading today. It touched $2,000 for a day or two, I think, in October, but it’s pretty much been in retreat sense. The dollar has been rising since November first, and commodities that we talked about crude and we’re looking at gold, commodities have really taken a hit with an appreciating dollar. With the Fed undertaking quantitative tightening, while interest rates remain high, it’s hard to see an environment where gold is sustainably over $2,000. We would have to see some QE or stopping of QT or an actual pivot or something. But we expect real downside for gold prices in November and December, and that’s baked into our forecast. We don’t see gold hitting 2,000 on a sustainable basis anytime before the end of the year.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead, weighing in there on whether the Fed is actually managing to navigate that soft landing that we’ve been talking about all this year. Is it going to be soft or hard? And there is the possibility of a soft landing, but so many factors come into play really from now until whenever that happens.
BFM
But that seems to be what traders have been banking on the past week, actually, when you look at how the stock market has been, Wall Street has been performing, that soft landing as well as the scaling back of the fat tightening as well. But I picked up on the fact that he said that gold at above $2,000 is a bit overboard.
BFM
It is currently trading at 1,000-951 US dollars per ounce this morning. We’ll be following to see how that tracks for the rest of the morning. But let’s turn our attention to some of the earnings report. There have been a lot of companies that reported this morning. Starting off with Disney, the world’s largest entertainment company, they reported quarterly results that actually beat analysts’ expectations. Earnings grew to 82 cents a share, beating the 69 % average of analysts’ estimates. And this was thanks in part to profit at ESPN Plus as well as the growth at Theme Park. So everyone who’s been visiting Disneyland or Disney World around the world, they’ve actually been contributing to this impressive bottom line.
BFM
So this 100-year-old company, actually, it celebrated its centenary this year. Its revenue grew 5.4 % to $21.2 billion. That’s below estimates of 21.4 billion, no thanks to a decline in ad revenue. On top of the better than expected Q4 earnings, it will seek an additional two billion US dollars in cost savings from 5.5 billion US dollars to seven and a half billion. Interestingly, their streaming business actually lost $387 million in the quarter down sharply from the 1.47 billion loss a year ago. I guess you could say that competition in that space is really intense with so many services coming up.
BFM
Indeed. And I think these earnings are particularly significant for Bob Iger. He did come back a year ago to turn the company around. I think the jury is still out on whether he’s actually managed to do that, because while profits may be up, we do see that in terms of streaming, in terms of TV networks, there’s still a lot of decisions that are left on the table. I think Disney is also looking about its presence in India, how they’re looking to whether maintain that or out. And he’s also got activist investors coming up against him in the boardroom. So I think a lot of different calculations playing out for Bob Iger when it comes to Disney, definitely a story to watch moving forward. Can we quickly cover Arm? Because a semiconductor company, Arm Holdings, delivered its first earnings report since its IPO in September 2023, and it provided a sales forecast below Wall Street estimates. And this is because the company is dealing with a slump in smartphone sales and also uncertain timing for new licensing deals.
BFM
So in the just ended Q2, revenue grew 28 % to $806 million, topping the $747 million estimate. Licensing sales rose by 106 % year on year to $388 million last quarter, royalty revenue declined by five % to 418 million. That’s just short of the predicted $429 million.
BFM
So I’m taking a look at how Arm is looking like in terms of its stock price at the moment. Arm is currently trading at $54.40. It is down 1.6 %. If we take a look at how analysts are viewing this stock, don’t forget this was a really huge IPO earlier this year. I think they still like it. There are 19 buys, eight holds, and two sells for armed. Consensus target price is $61.25. Last price, as mentioned, $54.40. It’s 7:19 in the morning. We’re going to head into some messages, but we’ll come back to look at more news from the newspapers and portals this morning. Stay tuned to BFM 89.9.