After roughly five weeks of gains, risk assets reached a plateau in early February. In the past few sessions, upswings were quickly wiped out by contractions. Last week was slightly negative for the US broad index S&P500 and slightly positive for its technological peer the Nasdaq 100. The biggest losers were companies in the energy sector, which is suffering from profit taking after two exceptional years, and real estate, due to the current interest rate environment.

U.S. interest rates are still the main focus for investors, who believe that the current rate hike cycle is coming to an end, and so are central bankers. But they differ on two points. First, on the level of the rate peak. Central bankers obviously think it will be a bit higher than investors. But I would like to say that this divergence is relatively small. It may cause a stir between two Fed decisions, but it does not call into question the proximity of the high point. Secondly, and more annoyingly, there is clearly a deeper disagreement about the duration of high rates. Some in the market are betting that the central bank will not be able to hold its position for very long if the economy falters. The Fed's response is that its fight against too much inflation will take longer than some imagine. If we add in the minor annoyances of the times, such as geopolitics, the labor shortage in the developed world, or the direction of the economy and the housing market in this high rate environment, we end up with an optimism slider that has deteriorated a bit from a crazy January in the stock market.

The week ahead will include a few macroeconomic data starting today with February's leading PMI indicators. These are very popular statistics because they give a good idea of the strength of the major economies. To try to guess the Fed's intentions, on Wednesday there will be the minutes of the last central bank meeting and on Friday the January PCE inflation in the US, which measures the evolution of prices paid by consumers.

PMIs are live polls of business purchasing managers' sentiment in industry and services, to give a good picture of the current economic momentum. They are being released throughout the day, and started with Japan, where they came out mixed, with dynamic services but a much more cautious manufacturing industry. The US PMIs are due at 9:45 am and so have not yet been published as I write these lines. The US PMIs will resonate louder than the others because they are supposed to give indications on the Fed's future monetary policy. That is, depending on how the market interprets them, which is far from an exact science. The scenario that would reinforce investors' short-term fears is the announcement of stronger-than-expected PMIs, which would raise fears of a tightening of policy by the Fed, which does not want to let the economy take off again without cutting inflation.

Elsewhere in the news, corporate earnings continue to roll in, with solid numbers. The corporate calendar still contains a few good names this week, including BHP, Walmart, The Home Depot, HSBC, Nvidia and Rio Tinto. Earnings remain strong and the outlook is not particularly downbeat. All indications are that companies are continuing to pass on their cost increases to the consumer without encountering any setbacks for the time being. Perhaps this is also what worries central banks, since this situation is far from deflationary.

On the geopolitical front, Joe Biden's visit to Kiev has been the subject of much discussion, especially after the increase in commitments to send NATO equipment to Ukraine. Russia, isolated, does not really benefit from major official support, even if China has called for a de-escalation of the conflict. Xi Jinping is due to deliver a major speech on Friday, one year to the day after the start of the Russian offensive in Ukraine. Vladimir Putin, meanwhile, just delivered a state of the nation address in the Duma today, where he said the West was responsible for the war in Ukraine and announced that Russia suspended the New Start arms control treaty. Meanwhile in London, Prime Minister Rishi Sunak is working to convince the hardline Tory wing to embrace his proposed post-Brexit deal in Northern Ireland.

 

Economic highlights of the day:

A flurry of flash PMI indicators for the month of February, notably in the euro zone and in the US. We also have Existing Home Sales. All the agenda is here. 

The dollar is slightly up against the euro to EUR 0.9378 and down 0.7% against the pound to GBP 0.8250. The ounce of gold is worth 1836 dollars. Oil is relatively steady, with North Sea Brent at USD 83.30 per barrel and US WTI light crude at USD 77.00. The yield on 10-year US debt is back up to 3.85%. Bitcoin is back within range of USD 25,000.

 

In corporate news:

* Walmart dropped 3.5% in pre-market trading after the publication of an annual profit forecast that fell short of expectations, the retail giant also showing caution about the evolution of consumption in the United States, which could be affected by inflation.

* Home Depot fell 3.8% in premarket trading in response to a lower-than-expected annual profit forecast on Wall Street amid rising costs and falling demand.

* Meta Platforms advanced 2.2% in premarket trading as Facebook's parent company announced Sunday it is testing a monthly subscription-based service under certified accounts.

* Microsoft Chairman Brad Smith will try to convince European authorities in a closed-door hearing on Tuesday that the U.S. software giant's $69 billion bid for Activision will boost competition, a European Commission document seen by Reuters shows.

* General Mills - The food company raised its full-year organic sales and profit forecast on Tuesday, citing price increases, sending the stock up 2% in premarket trading.

* Merck & Co announced Tuesday that Lagevrios, its COVID-19 treatment, did not reduce the risk of SARS-Cov-2 infection in people living with a patient infected with the virus.

* Medtronic - The medical equipment maker reported better-than-expected quarterly earnings Tuesday on strong demand for its cardiology and diabetes devices, sending its stock price up more than 2% before the Wall Street opening.

* Travere Therapeutics jumped 12% in pre-market trading after the U.S. Food and Drug Administration (FDA) approved its renal failure treatment.

 

Analyst recommendations:

  • Asos: Goldman Sachs remains neutral with a price target raised from GBp 850 to GBp 1050.
  • Caleres: Piper Sandler upgrades to overweight from neutral. PT up 35% to  $35.
  • CF Industries: HSBC downgrades to hold from buy. PT up 9.3% to $90.
  • Currys: Numis Securities downgrades from Sell to Hold, targeting GBp 65.
  • DFS Furniture: Numis Securities moves from Hold to Lighten with a target of GBp 135.
  • EasyJet: Barclays starts in-line weighted tracking targeting GBp 510.
  • Glacier Bancorp: Raymond James upgrades to outperform from market perform. PT up 8.2% to $51.
  • Howden Joinery: Berenberg upgrades from hold to buy targeting GBp 870.
  • International Consolidated Airlines: Barclays starts in-line weighted tracking targeting GBp 160.
  • MarineMax: B Riley Securities upgrades to buy from neutral. PT jumps 55% to $52.
  • Mosaic: HSBC downgrades to reduce from hold. PT down 14% to $43.
  • Next: Numis Securities downgrades from buy to hold targeting GBp 6700.
  • Pets at Home: Numis Securities downgrades from buy to hold targeting GBp 410.
  • Prosperity Banc: Raymond James upgrades to outperform from market perform. PT up 13% to $85.
  • Sonic Automotive: J.P. Morgan downgrades to neutral from overweight. PT down 8.3% to $55.
  • Trustmark: Raymond James upgrades to outperform from market perform. PT up 15% to $34.
  • Wizz Air: Barclays moves from Overweight to Underweight targeting GBp 2400.