Why Citigroup Says Gold Could Jump To $2,000 An Ounce

Plus, Moody’s downgraded Ford to junk, China’s Huawei dropped a lawsuit against the U.S., WeWork is moving ahead with its IPO, and Wendy’s is bringing back breakfast.

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Stocks were down on the open Tuesday morning. The Dow lost 110 points, or -0.4%, while the S&P 500 traded down -0.7%. The Nasdaq lost -0.9%.

Ford stock was the biggest decliner of the S&P 500 this morning after Moody’s downgraded the auto maker’s credit rating to junk. Shares are down -3.4% at the time of writing. Moody’s said it expects weak earnings and cash generation for Ford as it pursues an expensive and lengthy restructuring plan. The ratings service said Ford’s outlook is stable, but that its cash flow and profit margins are below expectations and the performance of its peers. “These measures are likely to remain weak through the 2020/2021 period including a lengthy period of negative cash flow from the restructuring programs,” wrote Moody’s Senior Vice President of Corporate Finance Bruce Clark. Clark went on to say that Ford’s erosion in performance happened while the global auto market was healthy, and that the company and CEO Jim Hackett need to address operational problems as the demand for vehicles is softening in major markets. Ford responded that its underlying business is strong, its balance sheet is solid, and it has plenty of liquidity to invest in its future. “We are making significant progress on a comprehensive global redesign – reinvigorating our product lineup and aggressively restructuring our business around the world,” Ford wrote in a statement.

In the latest sign of easing tensions between the China and the U.S. amid the ongoing trade war, Chinese telecom giant Huawei dropped one of its lawsuits against the U.S. after equipment seized by Washington two years ago was returned to the company. “After a prolonged and unexplained seizure, Huawei has decided to drop the case after the US government returned the equipment, which Huawei views as a tacit admission that the seizure itself was unlawful and arbitrary,” Huawei wrote in a press release on Tuesday. Earlier this year, Huawei was blacklisted restricting American companies from selling products to the Chinese firm, and the company has attempted to fight back through the courts. In other China news, the world’s second largest economy just opened the doors for foreign investment in its capital markets, further opening up its markets to the world. Global funds no longer need approvals to purchase quotas to buy Chinese stocks and bonds, according to China’s State Administration of Foreign Exchange, and it’s the latest push by Chinese authorities to increase use of the yuan in international transactions. “The move is more symbolic and won’t trigger significant capital inflows,” said Ding Shuang, chief China and North Asia economist at Standards Chartered Bank. “But it’s a good gesture for the officials to make, as the 70th anniversary of the People’s Republic of China’s founding is approaching and there’s a lack of positive development in the trade talks with the U.S.”

Gold prices could rally to $2,000 an ounce in the next two years, according to Citigroup. The firm issued a laundry list of positive drivers that could push gold to a new record including rising risks of a global recession, and the likelihood that the Federal Reserve will reduce U.S. interest rates to zero. “We expect spot gold prices to trade stronger for longer, possibly breaching $2,000 an ounce and posting new cyclical highs at some point in the next year or two,” Citigroup analysts wrote in a note Tuesday. According to Citigroup, low or lower-for-longer nominal and real interest rates, global recession risks that are exacerbated by the trade war between the U.S. and China, and heightened geopolitical rifts are “combining to buttress a bullish gold market environment.” The note continued, “in affinity to our U.S. rates research colleagues, we believe the Fed will ultimately end up cutting rates all the way to zero.” Gold rose to a six year high this month as global central banks ease policy to address the slowdown in growth amid the ongoing trade war. Investors expect the European Central Bank to unleash more stimulus this Thursday, while it is broadly expected that the Federal Reserve will cut rates again at its two-day meeting next week. Gold was trading at $1,496 at the time of writing, down slightly early this week on rising optimism on the trade war front. Citi has upgraded its baseline forecasts for gold on the Comex to $1,575 an ounce for the fourth quarter of 2019, and to $1,675 for 2020.

WeWork is moving ahead with its roadshow starting Monday to promote its IPO, according to a report from CNBC. The IPO is still on despite several setbacks including a dramatic cut in its valuation that had investors expressing serious concerns about the business and its corporate governance. The move flies in the face of reported urging by WeWork’s biggest investor, Softbank, to shelve the IPO for now. SoftBank and its affiliates own about 29% of WeWork. According to Bernstein, SoftBank could be forced to write down its multi-billion dollar investment in the office co-working company. “The lower the IPO value, the greater the recorded loss and greater dilution for SoftBank,” Bernstein analyst Chris Lane wrote. “Combined with current weakness in Uber and Slack (both stocks have declined approximately 30% since June 30th), we are likely to see a weak quarter for [SoftBank’s] Vision Fund.”

Wendy’s shares are down nearly -12% after the fast food company cut its 2019 outlook and announced it was bringing breakfast back to its menu next year. Guggenheim downgraded Wendy’s to neutral on the news, saying its entrance into breakfast is a “potentially risky” way to add top line growth. “Our investment outlook is reduced as we see the announcement to enter breakfast as adding risk to shares and diluting the NT free cash flow generation,” Guggenheim said in a note. “Management reduced 2019’s outlook to account for a $20mm upfront investment relating to launching breakfast across the U.S. system in 2020. While it could lead to longer term system sales, we view the day-part expansion as a sign of slowing NT momentum in the core lunch and dinner business.” Shares of Altria are down -0.39% this morning after Piper Jaffray downgraded the stock to neutral from overweight, citing concerns about a potential merger with Phillip Morris International. “We have less confidence in Altria’s outlook following company discussions between Altria and PM of a potential merger of equals,” Piper Jaffray wrote. “We do not know the terms of a deal, if one happens, but any interest in a deal without a premium could suggest more stress on the underlying fundamentals and management’s outlook for the future than we had appreciated.”

Stocks We’re Watching

Spero Therapeutics (NASDAQ: SPRO): Shares of this biotech are up 80% year-to-date and are up nearly 12% over the past week after two firms initiated coverage of the stock, both with Buy ratings. Janney Montgomery Scott initiated SPRO yesterday with a price target of $27, indicating 124% upside over the next twelve months. Last week, H.C. Wainwright assumed a Buy rating with a $28 price target, with analyst Raghuram Selvaraju calling the company’s lead antibiotic candidate a “triple threat” given the next-generation carbapenem’s oral bioavailability, “favorable” pharmacokinetic profile, and “substantial de-risking” based on clinical and commercial experience achieved in Japan.

Allegiant Travel (NASDAQ: ALGT): Shares of this budget airline are up over 48% so far this year and 4.9% over the last week. Last week, Zacks upgraded the stock to a Strong Buy citing an upward trend in earnings estimates. For Allegiant’s Q3 2019, revenue is expected to jump 9.23% to $429.39 million, and Q4 revenue is projected to grow by over 11%, lifting full-year fiscal 2019 revenue by 9.7% to $1.83 billion. For 2020, it’s projected that Allegiant’s revenue will climb 11.3% to $2.04 billion.

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