Analyst
Dovish remarks by Fed Chairman Jerome Powell, even if not intended to be dovish, led to strong price gains in the previous week, but Friday's U.S. labor market data (NFP), which came in slightly higher than expected, raised expectations that U.S. policy rates still have more room to move up in the current tightening cycle (higher terminal rate).
The Fed's monetary policy, or expectations of it, remains the driving force behind Wall Street's moves. Investors are trying to extend the year-end rally in hopes of improving their poor performance, but also in hopes that stocks have strong recovery potential from here. I still see Wall Street in a bear market rally, supported by signs of easing monetary tightening, the belief that U.S. inflation has peaked, and the stabilization of bond yields. However, with the Fed likely to raise rates toward 5%, it will be difficult for the 10-year U.S. Treasury note to trade much below 3.5%.
Favourite stock pick for this week is BOEING. Even after rising 25% over the last month, Boeing still has plenty of upside and is still trading more than 57% below its all-time high (reached on March 1, 2019). Quality issues with Boeing's key 737 MAX and Boeing 787 "Dreamliner" jets have weighed heavily on the stock in previous years. In particular, the grounding of the 737 MAX after two fatal crashes and a slump in the travel industry during the pandemic caused the stock to plummet in 2019/20.
With deliveries of the 737 MAX and Dreamliner resuming, Boeing has plenty of room to recover, especially since China, one of Boeing's most important markets, still won't allow the 737 MAX to fly commercially. China's Covid Zero policy, which has weighed on the industry, also sees light at the end of the tunnel as Beijing gradually eases restrictions.
The most important factor in the very short-term is the possible announcement of a gigantic deal with United Airlines. The U.S. carrier could buy up to 125 Boeing 787s worth $18 billion in the most positive scenario.
We also see the current positive market sentiment strengthened by increasing signs that Beijing is planning a gradual shift away from its stringent covid zero policy. Chinese authorities eased covid testing requirements in major cities over the weekend, despite increased cases.
The prospect of higher demand from China could provide a big boost to risk sentiment, which is why I expect further gains in risk-sensitive assets this week and in the near term.
Commodities also benefit from Chinese easing measures but also from a weaker USD. Oil prices were also boosted by the fact that OPEC+ left oil production unchanged, meaning that the 2 million bpd cut remains in place.
While We expect US equities to decline again in 1Q2023 and the current bear market rally to end as early as the second half of December, there is still room to move higher in the near term. Strong performance of equities in Asia also supports risk sentiment.
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