Today on Wall Street: The start of a new phase

The volatility seen in the past few days seems to have subsided a bit, as investors ponder what strategy to adopt as we’ve now passed the peak of a cycle. Global indices will close the first half of 2021 at or near record levels. U.S. index futures are flat ahead of the half-year-end and U.S. jobs data later this week.

Financial markets always go through phases during an economic cycle. It starts with the phase of upward revision of earnings forecasts, then the peak phase, followed by a downswing and then stagnation or further decline. On June 30, 2021, we are around the peak of earnings and inflation revisions, probably just after. This explains the less volatile phase experienced by the stock markets, and a certain confusion about what strategy to adopt.

In general, earnings momentum goes from its peak to zero in three to five months, according to the work of UBS, based on the experience of the last 20 years. During this period, the performance gap between cyclicals and defensives narrows. When the dynamics tend towards 0, it is logically the defensive stocks that perform better. UBS believes that this time the 3-5 month period could be a bit longer, thanks to government largesse. That said, at the same time, signs of a strong economy could accelerate the reduction of central bank support. All in all, the combination of the end of the rise in earnings revisions and the arrival of more sober policies could lead to a period of mid-cycle correction around the beginning of the fall, at least towards the end of the year.

To put some figures on these mechanics, it is important to remember that the phase of declining earnings momentum is historically favorable in Europe (2.2% average monthly gains over 3 months) and that it is followed by a negative phase (-1.1% per month on average for 6.3 months). In the United States, this favorable phase is slightly longer but less rewarding (0.2% per month over 4.7 months) but the correction phase is less pronounced and shorter (-0.7% per month over 4.5 months on average). In other words, if historical patterns are confirmed, we are still in a favorable phase, which will require more defensive injections around the end of the third quarter or the beginning of the fourth.

These models are obviously historical and cannot take exogenous events into account, but they do help us to better understand the economic cycle.

Questions about the spread of the delta variant are still present, but they weigh a little less, except for companies in the tourism sector. There are quite a few important macroeconomic indicators today, but it is mainly those of Thursday and Friday that are the focus of investors.

 

Today's economic highlights

Several indicators today, including the first estimate of European inflation for June, as well as German unemployment figures. In the U.S., the June ADP employment survey and the June Chicago PMI precede the May old home sales and weekly oil inventories. Earlier today, Japan reported disappointing figures for its May industrial production, while China reported a slightly better-than-expected June manufacturing PMI expansion.

The dollar is back to EUR 0.8415. The ounce of gold is down to USD 1760. Oil is steady at USD 74.98 a barrel of Brent and USD 73.80 a barrel of WTI. The U.S. T-Bond is yielding 1.47% over 10 years. Bitcoin is losing 3% to under USD 35,000.

 

On markets:

* Didi Global, the Chinese VTC group, will list for the first time on Wednesday after raising $4.4 billion (€3.7 billion) via its IPO, two sources close to the matter reported. The Uber rival placed 317 million shares at $14 a share, valuing it at $67.5 billion on an undiluted basis, the sources said.

* The Boeing Company - The Swiss government is expected to announce later today its choice for the renewal of the Swiss Air Force's fighter jet fleet, a deal for which U.S. groups are each vying with the F/A-18 Super Hornet and F-35A, respectively, against Dassault Aviation's Rafale and the Eurofighter.

* WideOpenWest - The broadband telecommunications network operator announced Wednesday that it has completed the sale of its operations in five regions for about $1.8 billion, an amount that should allow it to reduce its debt.

 

Analyst recommendations:

• Apple: UBS reiterates its Buy rating. The target price is still set at USD 155.
• BlackRock TCP Capital : Oppenheimer assumes coverage on stock with outperform rating, $15 pt
• Cairn Energy: Berenberg upgraded from buy to hold, targeting GBp 170.
• CMS Energy : price target from RBC cut to $64 from $66, sector perform kept
• FedEx : Argus raises pt to $330 from $305, maintains buy rating
• Hibbett : Williams Research raises price target to $147 from $110, keeps buy rating
• Intellia Therapeutics : Oppenheimer lifts pt to $125 from $73, maintains perform rating
• Jefferies Financial : Oppenheimer adjusts pt to $40 from $37, maintains outperform rating
• Johnson Matthey: AlphaValue remains Buy with a price target raised from GBp 3355 to GBp 3526.
• Orchard Therapeutics : Wedbush adjusts price target to $13 from $15, maintains outperform rating
• Reckitt Benckiser: JP Morgan reiterates Buy rating. The target price remains unchanged at GBp 9000.
• Royal Dutch Shell: Citigroup upgrades from sell to neutral with a target of GBp 1,450.
• Taylor Wimpey: Liberum remains Buy with target price raised to GBP 195 from GBP 185.
• The Boeing Company: Goldman Sachs keeps Buy rating. The target price is unchanged and still at USD 307.
• Ultragenyx Pharmaceutical : BofA upgrades to buy rating from neutral, maintains $162 price objective
• Workspace: RBC upgrades from sector perform to outperform with a target of GBP 1050.
• XPO Logistics : JPMorgan adjusts price target to $190 from $160, maintains overweight rating