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Apple’s Downgrade Drags Tech Down

Stavros Tousios | Wednesday 03 January 2024

Some stocks dropped significantly on the first trading day of 2024 on Tuesday, January 2, in one of the worst starts to a year. Tech-heavy Nasdaq (US-TECH 100) plunged 1.7% on Tuesday, January 2, led by Apple's (AAPL) downgrade. The Nasdaq goliath, Apple, was devalued by Barclays (BARC-L), pulling the tech sector down. The move was also led by traders paring bets on deep interest rate cuts from central banks in 2024. 

Some analysts still expect stocks to do well in 2024 despite the FOMC minutes expected to show a more hawkish stance later today, Wednesday. Still, many investors expect the Fed to cut interest rates up to seven times in 2024 (beginning March), more than double the three rate cuts forecasted by Fed policymakers in the December dot-plot.   

Market participants will eye the minutes and labour data later this week for clues on the central bank's monetary policy outlook.

An illustration of a laptop and trading charts

Markets Rotate into 2023 Laggards

Treasury yields tilted higher across the curve on Tuesday while some tech stocks declined, signalling a possible rotation from growth stocks into value stocks. 

On the one hand, value stocks like Moderna (MRNA) and Pfizer (PFE), which were weak performers in 2023, gained significantly on the first trading day of 2024. In addition, utilities, healthcare, and consumer staples- which also lagged in 2023 - performed well, with stocks like PepsiCo (PEP) rising on Tuesday.  

On the other hand, the "Magnificent Seven", including Amazon (AMZN), Alphabet (GOOG), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA), all declined on Tuesday, led by Apple's downgrade.  

Key Drivers of Market Drop

One of the key triggers of the market's drop on Tuesday was Apple's decline following a Barclays analyst downgrade from "equal weight" to "underweight"; meaning, the bank expects Apple’s performance to lag the performance of the index. The bank cited concerns about slowing iPhone sales and a lack of catalysts. The downgrade weighed on overall market sentiment as Apple is a major component of stock indices. 

In addition, US money markets appear to show around 150 basis points of Fed rate cuts this year. If these predictions materialise then it would represent about seven basis points less than the preceding week. Currently, the futures markets indicate roughly a 70% probability of a 25 basis point cut at the Fed’s meeting in March, which is still up from 55% a month ago.

Finally, bonds were weighed down by corporate debt issuance. During the first week of this year, bond syndicate desks expected that investment-grade corporate bond issuance would reach approximately  $63 billion, higher than the 5-year average. The upsurge in corporate bond supply likely exerted upward pressure on 10-year US Treasury yields.

What to Focus on Moving Forward

Treasury yields and some stocks moved higher in early 2024 on expectations for Fed rate cuts but pulled back slightly ahead of the release of the FOMC minutes. The minutes are expected to provide new insights into how Fed officials think about inflation and the path of interest rates. The market will look for clues on whether Fed officials see inflation as still too high or are comfortable with disinflation. The former could temper rate cut expectations, while the latter could support more rate cuts. (Source: Market Watch)

Following the release of minutes on Wednesday night, analysts believe upcoming labour market data will likely dictate the next moves. Labour market figures are expected to show that the job market remains strong while slowly cooling. However, a tight labour market coupled with high wage growth also raises the risks of a wage-price spiral where businesses pass higher costs onto consumers through price increases. The Fed will be monitoring this closely.

The minutes matter most of the two because expectations for policy changes influence markets, whereas job data change economic trends. 

Meanwhile, the latest economic data still point to a soft landing as inflation keeps falling. The chief of IMF, Kristalina Georgieva, also stated yesterday that actions taken by the Fed have helped secure a soft landing by “taming inflation” without pushing the economy into a recession.  

Conclusion

Stock markets were down on the first trading day of 2024,  mainly pulled down by Apple's downgrade and reduced expectations of Fed rate cuts. 

Investors will closely watch how many interest rate cuts the minutes may point to this year, with expectations ranging from three to six possible rate cuts. 

The upcoming December jobs report on  Friday will also provide clues about the economy's strength and the appropriate level of interest rates, providing insights into how Fed officials' views have shifted and what economic data they prioritise.


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