Big Tech earnings may provide a brief distraction today but the main event for markets this week is waiting in the wings.
The Federal Reserve is expected to keep interest rates unchanged Wednesday but Chairman Jerome Powell's comments after the decision could be of huge significance for the stock market.
The Fed has backed itself into a bit of a corner after opening the door to the prospect of rate cuts at its meeting in December. Anything less dovish this time around risks stalling, or even reversing the S&P 500's recent march to record highs.
Traders are also having second thoughts. The probability of a rate cut by March fell back below 50% early Tuesday, according to CME's FedWatch tool. They were pricing in an 89% chance just a month ago.
The March meeting isn't that far off now and there are only two more inflation readings and two more jobs reports before the rate decision. That makes the language and tone used by Powell of crucial importance.
It's still likely to be a game of cat-and-mouse between the market and the Fed, though. Powell may well push back on rate-cut pricing. Investors will then have to decide to what degree they believe it -- the market has disagreed with the U.S. central bank for most of the past two years on the path of interest rates.
Markets currently see five of six quarter-point cuts in 2024, the Fed's median projections in December imply just three. It's hard to see the market being right if the Fed doesn't cut rates in March.
The rate rift is about to come to a head and the S&P 500's record run is at stake.
-- Callum Keown
***
M&A Poised to Rebound After Last Year's Doldrums
After the weakest year for global mergers and acquisition announcements since at least 2019, the pipeline may be picking up to start 2024, according to S&P Global Market Intelligence. That may also be the case for initial public offerings and other stock issuance, with at least five IPOs lined up to price this week.
-- The total value of global M&A deals fell 26.7% to $2.27 trillion after a
more than 33% drop in 2022, S&P said. Higher interest rates kept buyers
and sellers on the sidelines, but in the fourth quarter two biggest
transactions of the year were announced.
-- Exxon Mobil struck a $65 billion deal for Pioneer Natural Resources and
Chevron unveiled a $60 billion deal for Hess. In the U.S., companies have
hesitated on big deals because of regulators' antitrust crackdown, but
recent large deals suggest they are getting more comfortable, S&P said.
-- The fourth quarter was the eighth-straight period in which total stock
issuance was below $100 billion, S&P said. But the IPO market is heating
up. The biggest expected this week is Amer Sports' $1.7 billion deal,
which would give it an $8.3 billion market value, Renaissance Capital
said.
-- Three other companies, American Healthcare REIT, Fortegra, and Fractyl
Health, all released estimated price ranges. And FanDuel sports betting
parent Flutter had a second listing on the New York Stock Exchange on
Monday.
What's Next: European companies are coming to U.S. markets. Amer Sports, a Finnish sports equipment and apparel maker, is expected to price its IPO as early as Wednesday. And U.K.-based activewear brand Perfect Moment plans to raise $8 million at a $101 million market value.
-- Janet H. Cho
***
Oil Markets on Edge Over Continued Middle East Violence
Traders remained in a wait-and-see mode over oil prices despite violence in the Middle East that could expand the economic toll of the conflict. The situation is getting more complicated after the deaths of three American service members in a drone attack by Iran-backed militant groups.
-- President Joe Biden promised to retaliate and met with his national
security advisors on Monday to develop a response, including national
security adviser Jake Sullivan and Defense Secretary Lloyd Austin. Any
action against Iran -- a top oil producer -- would affect energy prices.
-- Brent crude was trading around $82 a barrel late Monday afternoon, while
West Texas Intermediate traded just under $77 a barrel. The Biden
administration, in an election year, most likely will act in a way that
minimally affects oil's price, Anas Alhajji, a managing partner at Energy
Outlook Advisors, told MarketWatch.
-- Alhajii said anything higher than $85 a barrel for Brent is a "danger
zone" in an election year. One year ago, Brent was trading above $87 a
barrel, while WTI was around $79 a barrel. Biden has taken several steps
to ensure oil prices and gasoline prices stay lower.
-- Oil prices were also reacting to reports that U.S. negotiators have made
progress toward a deal under which Israel would temporarily pause
fighting in Gaza for two months in return for the release of more than
100 hostages captured by Hamas in the Oct. 7 attack.
What's Next: RBC Capital Markets analyst Helima Croft sees a "very real risk" of returning to the situation in 2019, when more than half of Saudi Arabia's production was curtailed after militant attacks around the Persian Gulf, noting that the Strait of Hormuz is the oil market's "most crucial supply chokepoint."
-- Avi Salzman and Janet H. Cho
***
Elon Musk's Neuralink Places First Chip in Human Brain
Elon Musk said late Monday that the first human has received an implant from his brain-chip start-up Neuralink and is "recovering well." Initial results showed promising neuron spike detection, he added in a post on X.
-- It's a potentially significant breakthrough in the field of
brain-computer interface technology and the development will also have
implications for the tech sector. Big Tech names such as Apple, Microsoft
and others will undoubtedly be monitoring Neuralink's progress even if
they don't plan to get involved in brain-computer interface technology
for now.
-- In a separate post the Tesla CEO confirmed that Neuralink's first product
will be called 'Telepathy,' enabling users to control their phone or
computer, and by extension any other device, "just by thinking."
-- The human trial, launched in September, sought individuals with
quadriplegia -- limited function in all four limbs. From its initial aims,
the healthcare implications are clear and it's easy to imagine that
demand would be strong.
What's Next: The trial was only launched four months ago, so the company has reached this key milestone in rapid time. There are also the obvious safety and ethical concerns. Recent artificial intelligence developments have sparked a debate around safety, and Neuralink's breakthrough will undoubtedly do the same in the weeks and months ahead.
-- Callum Keown
***
Gas Stoves Are Staying Put in America's Kitchens, After All
In the gas stove battle, the gas stove owners won. The Energy Department said 97% of gas stoves already meet its new energy efficiency standards, but this is after the Biden administration ignited controversy by suggesting (as some interpreted) last year that they could be banned for health reasons.
-- The new standards mainly focus on electric stoves, ensuring that new
models use at least 30% less energy than today's lowest-performing models,
without sacrificing features and functions consumers expect, the Energy
Department said.
-- Last January, former Consumer Product Safety Commissioner Richard Trumka
Jr. suggested the agency could ban gas stoves as safety hazards,
including studies linking them to 12% of childhood asthma cases. Trumka
later clarified that stoves currently in use wouldn't be targeted.
-- But stove makers and conservative politicians objected, and Sen. Joe
Manchin (D., W.Va.) said the U.S. government "has no business telling
American families how to cook their dinner." The White House tried to
reassure the public that the president didn't support banning gas stoves.
-- The Association of Home Appliance Manufacturers said Monday the new
standards will save energy while preserving cooking methods and features
home cooks want. The Appliance Standards Awareness Project said the
standards were developed after input by it and other "stakeholders."
What's Next: The requirements would apply to new models starting Jan. 31, 2028. If adopted as proposed, it and other recommendations would lower consumers' utility bills by nearly $1 trillion and cut at least 2.5 billion metric tons of greenhouse gas emissions over 30 years, the Energy Department said.
-- Janet H. Cho
***
Regulator Boosts Scrutiny of Bank Mergers as Industry Braces for Capital Rules
Bank mergers are getting renewed attention from the Biden administration. A top federal banking regulator plans to close a loophole that allows some deals to get approved. The move comes ahead of an anticipated wave of bank consolidation as new capital rules put pressure on regional lenders.
-- Acting Comptroller of the Currency Michael Hsu announced the plan, saying
he wanted to make sure the agency has to proactively approve or deny
merger applications. Under current rules, a merger is automatically
approved if the office doesn't take action in 15 days after the close of
the comment period.
-- Hsu said the OCC would outline what attributes of merger applications
make them likely or unlikely to be approved, such as unsatisfactory
supervisory ratings, open enforcement actions, or other concerns that
need to be resolved.
-- Other regulators, including the Federal Reserve, have also promised to
increase scrutiny of bank mergers after the collapse of lenders such as
Silicon Valley Bank and Signature Bank last year.
(MORE TO FOLLOW) Dow Jones Newswires
January 30, 2024 06:34 ET (11:34 GMT)
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