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“All it took was a single sentence from Fed chair Jay Powell to cause equities to stumble. In a desire for inflation to be sustainably lower before a rate cut can be considered, he said: ‘I don’t think it’s likely that we’ll reach a level of confidence by the time of the March meeting.’ That was the last thing investors wanted to hear,” says Russ Mould, Investment Director at AJ Bell.
“The comment effectively pushed back any idea of lower interest rates in the near-term and caused upset on the markets as investors begrudgingly took a reality check in that we are unlikely to get the much-desired pivot in monetary policy in the first quarter of the year.
“Markets have been forging ahead in recent months in the hope that rates will come down, making equities more attractive once again versus cash in the bank. Risk appetite has increased and growth stocks have come back into fashion. This is despite a backdrop of many large companies disappointing with their latest round of earnings and 2024 being a year of considerable political uncertainty given a large number of elections around the world.
“Will Powell’s latest comments cause markets to go into freefall over the coming days and give up all the recent gains? It’s hard to tell, but what’s certain is that even more attention will be paid to every major economic data point as investors once again look for clues in how the Fed will act based on the strength of the jobs market, inflation trends and general economic activity.
“Every data point is going to be scrutinised which suggests we’re in for another volatile few months as investors make knee-jerk reactions before thinking rationally afterwards.
“The Nasdaq fell 2.2% last night while the S&P 500 dropped 1.6%. That negativity extended to most of Asia and Europe on Thursday, although the FTSE 100 bucked the trend by moving 0.2% higher thanks to strength in oil producers and a rebound from troubled drinks group Diageo. Shell topped the leaderboard after raising its dividend and starting a new $3.5 billion share buyback scheme, two big carrots which it knows will get investors licking their lips.
“The Bank of England is likely to follow in the Fed’s footsteps and keep its interest rate unchanged later today, again waiting for further evidence that inflation continues to fall before thinking about reaching for the rate cut scissors.”
Adidas
“During Covid the big sportswear brands were beset by supply chain issues but demand was strong in the West as people had a reasonable amount of disposable income to splash out on a new pair of trainers.
“The pre-announcement overnight of Adidas’ latest quarterly results surprised the markets and not in a good way. The numbers for the three-month period itself were just about OK, but the outlook suggested demand for its gear is slowing in core markets.
“Fashions come and go and there is a danger the whole athleisure trend of wearing almost indistinguishable outfits for the gym, relaxing at home and socialising, so helpful to sportswear firms and retailers, has begun to wane.
“This risk will be causing the market more concern than unfavourable currency movements and is the reason shares in the likes of Nike, Under Armour, Frasers and JD Sports are being dragged lower in the wake of Adidas’ soggy outlook. Nike itself was pretty downbeat in December and Adidas’ German rival Puma announced disappointing results last week.
“Some of Adidas’ problems are of its own making. Its association with Kanye West – who now styles himself as Ye – has backfired. Celebrity endorsements are all well and good but going too deep is fraught with risk given anybody you partner up with is human and therefore inherently unpredictable.”
Shell
“Lower oil prices meant Shell’s full year earnings saw a substantial drop in 2023 but that’s the nature of the beast – oil company earnings are as volatile as the energy prices they are tied to. However, the key point from a market perspective is that Shell has still reported numbers ahead of expectations.
“In pleasing news for shareholders, Shell has unveiled a new share buyback and boosted its dividend. Whatever lip service he gives to his commitment to the energy transition, CEO Wael Sawan has provided a clear indication he is prepared to prioritise returns over any commitment to net zero as he looks to close the valuation gap to US rivals.
“Or to put it another way, investments in renewables and other forms of green energy have to stand up on their own merits.
“Integrated oil firms have a lot of moving parts so a shift to simplifying the business is a logical move by Sawan and an area where investors will want to see concrete signs of progress in 2024.
“Shell’s biggest strength is arguably its leading position in liquefied natural gas and the whole gas market in general, given many observers see gas as playing a crucial role as the world gradually weans itself off oil and coal and moves towards greener alternatives.”
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