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Stock market investors broke their hands last week. Can this one be better?

Stock market investors broke their hands last week. Can this one be better?

created Daniel Kostecki27 February 2023

It's hard to call it anything other than breaking down investors expecting further increases in stock indices, which started this year. In short, last week nothing was conducive to such a narrative, which could manifest itself in the capitulation of the stock market bulls, to the delight of those betting on price drops.

S&P 500 index ended last week with a drop of over 2,6 percent, which was the third consecutive week of decline and the biggest weekly sell-off since December. The Nasdaq 100 technology stock index fell more than 3 percent, which was also the worst week since early December. Dow Jones also fell by around 3 percent, which was the worst week for this index since September 2022. In Europe, it was slightly better, as the German DAX fell by 1,76 percent, which was also the worst week since the beginning of the last month of last year.

Which companies have investors been selling and which ones to look out for this week?

Stocks that lost the most in Nasdaq 100 index, including shares Mederna (-16,4%) or Rivian Automotive (-14,48%), it is this company that is to announce its results this week (28.02) as a potential Tesla competitor. Recall that when Rivian presented its QXNUMX report, there was optimism that the share price had stabilized as the company began to increase its production capacity.

The electric car company managed to produce 7 vehicles, delivering 363 of them. This brings total production to over 6 since the beginning of the year, which means that at least 584 vehicles will need to be delivered in Q15 to meet the annual target of 000. Adding a second production shift to Normal should go a long way towards this goal , and it will have to, given that the company has 10 pre-orders to fulfill.

Third-quarter revenue was slightly below expectations at $536 million, while the quarterly net loss was $1,7 billion, or $1,57 per share. Full-year losses are expected to be around $5,4 billion, and while the company still has plenty of cash, rising costs could pose a problem unless Rivian raises prices in the coming months. Since the release of the November data, the share price has plummeted to a record low. This is related to rising interest rates in the US, which make investing in loss-making companies less attractive. Fourth quarter losses are expected to be $1,91 per share.

In the German DAX last week, Fresenius SE (-9,49%) and BASF SE (-9,12%) lost the most, and this week more macroeconomic data and statements of central bank representatives may attract attention. It seems that the most important readings for the German stock exchange may be inflation data. Much attention has been given to the fact that January's Consumer Price Index (CPI) fell sharply from 9,2% in December to 8,6% in January. This is certainly encouraging, as are the sharp declines in the headline producer price index (PPI).

However, these sharp declines are not reflected in basic prices, and wages continue to rise. At the time of publication of January's CPI data, the core CPI was at a record high level of 5,2%. It has since been revised upwards to 5,3%. This will probably be a big problem for European Central Bank.

Already today, Christine Lagarde in an interview with the FT said that she has every reason to believe that the central bank will raise rates by 50 basis points at its next meeting in March.

Lagarde said the ECB would raise rates more if necessary, and would rely on data to make rate decisions after March. The board is also ready to do whatever is needed to bring inflation back to the 2% target.

Change in the valuation of interest rates in the US

Meanwhile, in the US, after the recent higher-than-expected PCE inflation data, the market raised expectations for action FED. Right now, around 30 percent The market is pricing in the possibility of a 50 basis point rate hike in March, and the top of the upper end of the federal funds band is expected to fall at 5,5 percent. Moreover, according to the market, this level is to be maintained until the end of the year. Previously, the market assumed that interest rates would not be higher than 4,5 percent at the end of the year. What other data may be important for the market?

On Friday, investors will learn the ISM and PMI readings for the US. It is worth recalling that a lot of attention last month focused on the January non-farm payrolls report, the January ISM report was almost a side event, but it could be argued that it was equally important in shaping the narrative about the resilient US economy. The ISM index for services jumped from 49,6 in December to 55,2, while new orders also rose to 60,4 from 45,2, the highest level since August. Prices paid remained stable at 67,8 and employment at 50,0. The resilience of these numbers, along with sensational retail sales, showed that the US economy grew in January. The question now is whether this was maintained in February. It is expected to slow to 54,2 from 55,2, with the employment rate likely to be the leading indicator for next week's payrolls report.

To sum up, if the inflation data in Europe show a further tendency for disinflation and the US economy develops at a moderate, not too fast, not too slow pace, the markets may improve this week.

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About the Author
Daniel Kostecki
Chief Analyst of CMC Markets Polska. Privately on the capital market since 2007, and on the Forex market since 2010.

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