The DAX 40 index was hovering near its all-time high as the third quarter earnings season started, and as traders waited for the upcoming European Central Bank (ECB) decision. It was trading at €19,432, a few points below the record high of €19,630.

European Central Bank decision ahead

The DAX index remained on edge as the ECB prepared to deliver its November monetary policy meeting.

In it, the bank is expected to deliver the third 0.25% rate cut of the year, bringing the base interest rate to 3.25%.

Recent economic numbers show why the ECB is under increased pressure to cut interest rates. Data released on Wednesday showed that the headline Consumer Price Index (CPI) in key countries like France and Italy continued falling in October.

In Italy, the headline Consumer Price Index (CPI) dropped by 0.2% in September and to 0.7% on a year-on-year basis. The annual inflation report has moved much lower than the ECB’s target of 2.0%. 

The preliminary report showed that the European inflation data also dropped to 1.7% in September, down from over 10.6% in 2022. 

At the same time, the European economy was not doing well as the labor market started to show signs of weakening. For one, some big employers in Germany like Volkswagen and BASF are considering large layoffs as demand wanes.

Therefore, the ECB will likely decide to cut interest rates to stimulate the economy by making it cheap to access capital.

The odds of more easing by the ECB are reflected in the bond market. The German 10-year bund yields dropped to 2.20%, down from 2.30% on Friday and 2.7% in June. The five-year bund yield also retreated to 2.04%.

Central banks easing and China

Other global central banks have room to continue cutting interest rates. In the US, the Federal Reserve delivered a jumbo rate cut in its last meeting, and the odds of a 0.25% cut in November have risen. 

Central banks like the Bank of England, Swiss National Bank (SNB), and Riksbank have also slashed rates in the past few months.

The DAX index and other Chinese firms do well when there are rising chances of more rate cuts in the future. 

Meanwhile, the DAX index has risen to a record high because China has opened the floodgates of money in the past few weeks.

Officials have announced several stimulus packages worth billions of dollars to stimulate an economy that is weakening. 

For example, the central bank has brought interest rates to near zero and become more flexible on bank rules.

The happenings in China are important for the DAX index because many companies in the index do a lot of business there. For example, automakers like Volkswagen and BMW count China as one of their biggest markets. 

Corporate earnings ahead

The next important catalyst for the DAX index ist the ongoing earnings season in the US and Germany.

Most US companies like Goldman Sachs, JPMorgan, and Morgan Stanley published strong numbers. These banks have been helped by higher interest rates and the ongoing stock trading frenzy. 

German companies are also expected to publish their numbers in the near term. Adidas stock price retreated by over 6% on Tuesday even after the company published strong financial results and forward guidance. It expects to make €1.2 billion in revenue this year, helped by its Gazelle and Samba brands.

SAP, the biggest company in Germany, will be the next top firm to publish its financial results next week. These numbers will come at a time when the stock has surged to a record high, helped by its momentum on cloud and artificial intelligence. SAP shares have rallied by over 170% from the lowest level in 2022.

After SAP, the next top company to watch will be Deutsche Bank, the biggest bank in the country, which will release on Wednesday. Beiersdorf and Mercedes Benz Group will also release their numbers next week. 

Most DAX index constituents have done well this year. Siemens Energy moved from the worst performer in 2023 to the best this year as it soared by over 190%. Other firms like Rheinmetall, MTU Aero, Commerzbank, SAP, and Zalando are the other top performers.

DAX index forecast

The weekly chart shows that the DAX index has been in a strong bull run in the past few years. It has risen from the 2022 low of €11,905 to over €19,432. Along the way, it has formed an ascending channel pattern, and remained above the 50-week and 100-week Exponential Moving Averages (EMA).

The MACD and the Relative Strength Index (RSI) have formed a bearish divergence pattern. Therefore, while more gains are likely to happen, the index may show some volatility in the coming weeks. This means that it may retest the important psychological point at €19,000.

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In a significant restructuring effort, McKinsey & Co., the prominent US-based consulting firm, is poised to overhaul its operations in China, which includes laying off approximately 500 employees—roughly one-third of its workforce in the region.

This move follows a strategic pivot away from government-linked clients and is part of broader changes aimed at mitigating security risks associated with conducting business in the country, as reported by the Wall Street Journal.

According to sources familiar with the situation, McKinsey has begun to decouple its China unit from its global operations.

This shift reflects an increasing concern over the complexities of the Chinese market and the associated risks.

Over the past two years, the firm has systematically downsized its staff across Greater China, which encompasses Hong Kong and Taiwan.

As of June 2023, McKinsey had reported nearly 1,500 employees on its Greater China website.

While McKinsey did not provide immediate commentary in response to inquiries from Reuters outside regular business hours, the firm’s restructuring efforts underline a significant transition in its approach to the Chinese market.

Compounding these operational challenges, McKinsey is reportedly on the verge of reaching a settlement with US prosecutors concerning its previous engagements with opioid manufacturers.

Insiders indicate that the consulting giant could pay upwards of $500 million to resolve ongoing federal investigations into its role in supporting opioid sales, a matter that has drawn considerable scrutiny.

This forthcoming settlement, which is expected to be announced in the coming weeks, would conclude both criminal and civil inquiries led by the Justice Department.

Although the details are still being finalized and subject to change, the implications of this settlement are substantial for the firm. Representatives from both the Justice Department and McKinsey have declined to comment on the matter.

This settlement would add to the financial burdens already faced by McKinsey, which has previously settled claims with various US states regarding its advisory roles for drug companies linked to the opioid crisis.

The firm, which reported a record revenue of $16 billion last year, had already agreed in 2021 to pay substantial sums to settle accusations that it contributed to the opioid epidemic by providing sales strategies and marketing guidance to manufacturers of addictive painkillers.

Despite these allegations, McKinsey has maintained that its past activities were legal. In 2019, the firm pledged to cease consulting for companies involved in producing opioid-based medications.

In a statement on its website, updated as of May, McKinsey acknowledged that its prior work with opioid manufacturers, while lawful, did not meet the elevated standards it sets for itself.

The firm noted that it has invested nearly $1 billion since 2018 to enhance its risk, legal, and compliance operations, alongside implementing a more stringent client selection process.

Ongoing investigations by US attorney’s offices in Boston and Roanoke, Virginia, in conjunction with Justice Department lawyers in Washington, highlight the extensive legal pressures McKinsey faces.

Thousands of state and local governments are pursuing claims against opioid manufacturers and distributors, aiming to recover the billions spent on addressing the fallout from the opioid crisis.

Additionally, reports from Bloomberg Law indicate that a US judge has approved McKinsey’s proposal to pay $230 million to settle claims from cities and states, although the firm continues to navigate potential legal challenges related to its previous consulting work.

From 1999 to 2021, opioid overdoses have claimed nearly 645,000 lives in the US, encompassing both prescription and illicit substances.

The decade of the 2010s saw a troubling surge in overdose deaths, a trend that has been exacerbated by the emergence of synthetic opioids in the aftermath of the Covid-19 pandemic, leading to hundreds of thousands more fatalities.

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Hyundai Motor Co.’s Indian arm is experiencing a rocky start as its monumental $3.3 billion initial public offering (IPO) struggles to captivate investor interest amid a challenging market landscape.

In just two days, Hyundai Motor India Ltd. has managed to secure only 42% of the shares available in this landmark IPO—the largest in India’s history.

With the offering set to close on Thursday, this tepid demand, coupled with sluggish gray market activity, has dampened expectations for a strong stock debut.

This disappointing response reflects the broader trend of Indian equities faltering in recent weeks, as investors increasingly focus on the potential for stimulus measures in China.

Hyundai’s IPO had generated significant excitement, especially as India had recently emerged as the world’s most active IPO market.

The South Korean parent company is divesting up to a 17.5% stake in its Indian subsidiary, positioning Hyundai Motor India with a valuation nearing $19 billion at the upper limit of the IPO range.

Trading for the shares is scheduled to commence on October 22.

Despite the initial sluggishness, there remains a possibility for a turnaround.

Historically, large IPOs in India often see a surge in subscriptions as the deadline approaches, with retail investors stepping in to match institutional interest.

As of Wednesday, institutional investors had placed bids for 58% of the shares on offer, while retail subscriptions lagged at 38%.

Under local regulations, a minimum subscription of 90% of the total offering is required for IPOs to proceed with share allotment and listing.

“I’m pretty confident that the issue will sail through,” remarked Astha Jain, an analyst at Hem Securities Ltd., in an interview with Bloomberg.

She attributed the weak demand to the high valuation of the shares, which leaves little upside for potential investors.

Jain noted that retail traders, who typically seek quick returns, may be hesitant to engage.

Before the public offering launched, Hyundai successfully raised approximately 83.2 billion rupees ($990 million) by allocating shares to anchor investors at the upper price point of 1,960 rupees each.

Notable investors such as BlackRock Inc. and Baillie Gifford were confirmed as participants, following earlier reports from Bloomberg News.

With Hyundai’s IPO proceeds, the total capital raised from Indian IPOs this year has surpassed $12 billion, outpacing volumes from the previous two years, yet still falling short of the record $17.8 billion achieved in 2021, according to Bloomberg data.

Other significant IPOs in the pipeline include food delivery giant Swiggy Ltd. and the renewable energy division of state-owned power producer NTPC Ltd.

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Goldman Sachs and Amundi are showing increasing confidence in UK bonds, a reflection of optimism that the new government will manage the country’s finances responsibly while aiming to stimulate economic growth.

With Chancellor of the Exchequer Rachel Reeves set to unveil her first budget on October 30, bond markets are making a clear bet that the UK won’t experience another fiscal crisis like the one triggered by Liz Truss’s mini-budget in 2022.

According to a Bloomberg report, Amundi, Europe’s largest asset manager, has shifted its exposure away from European bonds to focus on UK debt.

Similarly, Goldman has advised clients to buy gilts ahead of the budget announcement.

BlackRock has also upgraded UK bonds from neutral to overweight, while Legal & General Investment Management and Aviva Investors are adding exposure to UK debt as well.

A bet on fiscal prudence and market discipline

The influx of funds into UK gilts reflects investor confidence that Reeves will balance her budget while tackling the £22 billion hole in public finances.

Although the national debt continues to grow, Reeves is expected to exercise fiscal discipline.

Daniel Loughney, head of fixed income at Mediolanum International Funds, said, “She will want to maintain some kind of perception of fiscal discipline,” signaling why his firm is also overweight on UK bonds.

Part of the optimism around UK bonds is fueled by expectations that the Bank of England will soon begin cutting interest rates more aggressively.

This sentiment strengthened after recent data showed a significant slowdown in inflation. John O’Toole, head of multi-asset investment solutions at Amundi, expressed confidence, stating,

The UK should benefit from slowing inflation and fiscal discipline.

Gilt underperformance won’t last, say strategists

Despite a challenging month for UK bonds, with the 10-year yield climbing over 30 basis points since mid-September, many believe this underperformance will reverse.

Goldman Sachs strategists, including George Cole, remain confident that a “fairly gilt-friendly” budget will help bonds recover.

Meanwhile, BNP Paribas economists expect the government to use the budget as an opportunity to send a strong message of fiscal responsibility, which could ease market concerns.

“Fixed income markets are likely to balk at anywhere near to half of this sum given the impact of issuance on yields,” warned Mark Dowding, chief investment officer at RBC BlueBay Asset Management, highlighting the potential effects of significant borrowing on yields.

Changes to fiscal rules and market expectations

Investors are anticipating some fiscal maneuvering in Reeves’ budget, including potential tax hikes and changes to the self-imposed fiscal rules that currently limit government borrowing.

While some are concerned about moving the “fiscal goalposts,” Sunil Krishnan, head of multi-asset funds at Aviva, reassured investors, saying,

We understand the concerns about moving fiscal goalposts, but unlike the Truss mini-budget, we expect the Office for Budget Responsibility to be an important check on government plans.

One potential move could involve excluding the Bank of England’s balance sheet from national debt calculations, which would free up an additional £16 billion for borrowing.

A more aggressive option could provide up to £67 billion in borrowing headroom, although this would likely cause concern in the bond market.

Citigroup economist Ben Nabarro recently warned of the risk of a “buyers’ strike” if Reeves’ budget leads to borrowing increases of around £50 billion next year, given that the bond market is already dealing with a record supply of debt this year.

Careful balance between borrowing and investor trust

While investors remain cautiously optimistic, they trust Reeves to tread carefully.

Most believe she will increase borrowing modestly to maintain investor confidence.

Barclays Plc echoed this sentiment, suggesting Reeves may even wait until 2025 to adjust the fiscal rules, allowing more time for a proper assessment.

Moyeen Islam, a rates strategist at Barclays, remarked, “To have had one gilt crisis triggered by proposed fiscal expansion might be regarded as a misfortune, but to have two will look like carelessness,” as he recommended buying gilts over German bonds.

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After a challenging year, Expedia Group is showing signs of recovery that could make it an appealing choice for investors, with added momentum from recent speculation that Uber Technologies is exploring a potential acquisition of the online travel giant.

With travel demand stabilizing post-pandemic and strategic shifts under new leadership, the company’s potential is starting to look much brighter.

The company has endured a rollercoaster year, with its stock tumbling after the departure of CEO Peter Kern and disappointing quarterly results earlier in the year.

Kern, who had successfully guided the company through the pandemic, left amid growing investor impatience.

His successor, Ariane Gorin, is now leading a turnaround, focusing on boosting market share for Expedia’s core brands—Expedia, Hotels.com, and VRBO.

In a report by Barrons, senior analyst Naveen Jayasundaram at ClearBridge Investments said,

“Expedia is a business in the midst of a turnaround. There are early signs of progress.”

Uber’s interest fuels optimism for Expedia’s future

Reports from the Financial Times suggest that Uber has explored a potential acquisition of Expedia, which has drawn further attention to the stock’s potential.

Expedia shares jumped 7.6% in after-hours trading after the report came out.

Uber’s CEO, Dara Khosrowshahi, previously led Expedia and remains on its board.

An acquisition could create synergies between Uber’s global transportation network and Expedia’s travel booking services, offering a more comprehensive travel solution for customers.

While no formal deal has been confirmed, Uber’s interest speaks volumes about the value proposition that Expedia represents.

Investors see this as a sign that the company’s assets and operational platform are increasingly attractive to major players in the travel and tech industries.

Travel demand stabilizes as Expedia eyes market growth

Despite fluctuations in the travel market post-pandemic, global travel demand remains robust.

Domestic and international air traffic has returned to 2019 levels, and cruise bookings are set to exceed pre-pandemic figures by nearly five million travelers in 2024.

Expedia, as one of the largest online travel agencies in the world, stands to benefit from this sustained demand.

Expedia’s market dynamics have also shifted as consumer preferences evolve.

Today’s travelers, especially new users unfamiliar with traditional booking platforms, are more likely to rely on online travel agents (OTAs) like Expedia for hotel and airfare deals.

Christopher Conway, senior portfolio manager at GYL Financial Synergies said in the report,

“The more fragmented the industry is, the harder it’s going to be for [competitors], even Google.”

While some bears argue that hotels may resist paying commissions to OTAs in the same way airlines have, the hotel industry remains fragmented, with many properties owned by smaller operators.

This limits the potential for a large-scale rebellion against platforms like Expedia and Booking Holdings, which together control roughly 42% of global travel bookings, according to travel industry firm Skift.

Source: Barron’s

Expedia’s valuation: Undervalued and ready for growth

Expedia’s stock is trading at attractive valuations, making it an appealing option for value-focused investors.

The stock is priced at just 11 times forward earnings, a significant discount compared to its main competitor Booking Holdings, which trades at 22 times forward earnings.

Dan Ahrens, managing director at AdvisorShares, refers to Expedia as a “blue-chip travel stock” that’s simply too cheap at current levels.

Jay Aston Jr., a portfolio manager at Neuberger Berman, echoes this sentiment, noting that “Booking does a good job, but Expedia has a pretty fantastic platform.”

He also highlights that Expedia’s unified platform, streamlined during the pandemic, is now generating significant cash flow.

The company posted $1.3 billion in free cash flow in the most recent quarter, a 42% increase from the previous year.

Aston adds,

A more unified platform will allow Expedia to generate significantly more meaningful cash flow, and there’s a lot more operating leverage to come.

Earnings growth and a bright future under new leadership

Expedia’s financial outlook appears strong, with analysts predicting a 21.5% increase in earnings per share this year, rising to $11.78, and an additional 20% growth in 2025 to $14.18.

Revenue is expected to grow by approximately 7% in both years, driven in part by the company’s home rental service, VRBO, which rebounded in the second quarter thanks to the launch of the One Key loyalty program.

Additionally, Expedia’s business-to-business (B2B) division, which allows other travel companies to tap into Expedia’s inventory, has also been a growth driver.

This part of the business, combined with other strategic initiatives, positions Expedia for continued success.

The company will report its third-quarter results on November 7, giving investors another opportunity to assess the effectiveness of its new leadership and strategy.

Randy Hare, director of equity research at Huntington National Bank, believes Expedia is well-positioned for growth, saying,

Expedia is probably interesting here, relative to Booking, since the valuation is more attractive—we like that. Their estimates seem doable…we could see decent growth and upward movement.

With analysts continuing to revise their earnings estimates upwards, and the company poised for further growth under the leadership of CEO Ariane Gorin, Expedia may just be the travel stock investors need to keep on their radar.

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