Stocks drift lower, Netflix earnings on tap

Morning Note

European markets closed lower on Monday despite the firm open; the FTSE 100 ending –0.55% at 5,886 and the DAX off –0.41% at 12,855. The Euro Stoxx 50 declined 0.12% to 3,241. All are treading their well-worn ranges.

Wall Street had something of a drubbing after opening higher with a broad-based selloff leaving the S&P 500 and Nasdaq –1.6% lower and close to the lows of the day at the close. The S&P 500 sits comfortably above the 50-day SMA at 3,400 but another down day could test this. Futures point mildly higher this morning.

Softness is evident again today: Asian equities were mixed with Shanghai up and Tokyo down. European shares were broadly lower at the open but remain well above last week’s lows.

There wasn’t a huge lift for travel stocks despite Heathrow introducing one-hour Covid tests to enable passengers to fly in and out of the UK without needing to quarantine. IAG rose almost 2% but EasyJet and Ryanair fell. Initially it will only be available for flights to Hong Kong and Italy, which require pre-departure testing. However, it indicates that the world is slowly reopening and adapting.

In Washington, there are signs the two main parties are closer to achieving a pre-election stimulus package and are narrowing their differences.

Still, it looks like ‘fading stimulus hopes’ clearly did for stocks yesterday. House Democrat leader Nancy Pelosi’s self-imposed deadline for agreement expires today – the door of opportunity is barely even ajar.

Federal Reserve vice chairman Richard Clarida said more monetary and fiscal stimulus is required, another year for GDP to return to 2019 levels and even longer to achieve full employment. Christine Lagarde, the ECB president, echoed these comments by saying that the recovery in the eurozone would be set back by new restrictions to fight the disease.

The pound is steady despite threats of a no-deal exit from the transition period. Brexit no-deal commander-in-chief Michael Gove indicated that there is a wide gap between the sides however we know they are talking, and both the EU and UK want a deal. Michel Barnier said the EU could compromise with Britain and begin detailed discussions around the legal texts this week.

No one is walking away – it’s all part of the negotiations. GBPUSD was knocked back from the 1.30 resistance but sits comfortably above the 1.2860 support area around 1.2920 as of send time. Just a hint of weakness in early trade but still well within recent ranges.

Minutes from the Reserve Bank of Australia’s latest meeting showed rates could go lower than they are now.

Policy members discussed ‘the case for additional monetary easing to support jobs and the overall economy’ and specifically talked about ‘reducing the targets for the cash rate and the 3-year yield towards zero, without going negative, and buying government bonds further along the yield curve’.

And whilst they cautioned that ‘the transmission of easier monetary policy had been impaired as a result of the restrictions on activity’, members felt it ‘reasonable to expect that further monetary easing would gain more traction than had been the case earlier’.

Asst governor Christopher Kent followed this up by saying there is room to cut rates further. The Aussie drifted lower with AUDUSD looking to the key horizontal support at 0.70 in view.

Oil got a lift as Saudi Arabia’s energy minister said OPEC+ will do “what is necessary” to rebalance the oil market. However, rising Covid cases is weighing heavily on demand forecasts and it will likely take more than mere jawboning to support the market.

Saudi Energy Minister Prince Abdulaziz bin Salman also noted that some countries were slow in compensating for past overproduction. WTI (Dec) couldn’t break the $41.50 resistance zone and retreated to take a $40 handle, still towards the top of the Sep-Oct range. API inventories later today – shut-ins along the Gulf of Mexico due to Hurricane Delta ought to see another drawdown.

Netflix earnings are on tap today. A big focus for the market will be the number of subscribers Netflix managed to add in the third quarter. Lockdowns around the world delivered a huge boost in the first half of 2020, with paid net subscriber additions soaring to 26m from 12m during the same period a year before.

The company has forecast 2.5m paid net adds for Q3 versus 6.8m in the prior year quarter as the surge in H1 likely pulled forward some demand from the second half of the year. However, this could be a very conservative estimate and Netflix could beat this number handsomely with growth outside the US seen improving off the back of some very successful local language releases. Netflix is getting good at ‘tamping down expectations’ so I expect guidance to be conservative and I think the market understands this.

Investors will also be looking at the expected cash burn as production schedules fill up again; the investment in content is both a cost but also seen as an important lever for Netflix in overcoming rivals in an increasingly competitive space. Spending on content is set to exceed $13bn this year and Netflix continues to borrow heavily – it raised $1bn in April and has over $15bn in long-term debt.

Goldman Sachs, which has previously noted that the company’s “massive content investments, global distribution ecosystem and improving competitive position will further drive financial results significantly above consensus expectations”, recently raised its price target on the stock to $670 from $600, citing better-than-expected Q3 results as a likely bull catalyst.

Election Watch – 14 days to go

Betting markets are narrowing – in the last week Biden’s chances have come in from 67 to 61, whilst Trump’s have improved from 33 to 40. Nationally Biden leads by 8.9% but polls in key battlegrounds are far tighter and tightening, with Biden’s lead down to 4.1%. At this stage in 2016 Trump was 5pts behind Hilary Clinton in the most important swing states. The final debate takes place on Thursday – can Trump deliver a blow to the Biden campaign?

Chart: Cable remains steady despite Brexit noise

European stocks rally; all the usual narratives

Morning Note

Vaccine hopes, stimulus rumours Brexit risks, earnings optimism– choose your narrative and apply it accordingly. The truth is the major indices are not really going anywhere right now.

Treasury yields have barely budged with 10s holding 0.77%, gold is holding a little above $1,900 and the dollar index sits in the middle of the 93.30-93.90 range.

WTI (Dec) trades above $41 ahead of today’s OPEC JMMC meeting which will discuss compliance with cuts. A full meeting at the end of Nov could see OPEC+ put on hold plans to scale back production cuts to 5.8m b/d from the current 7.7m.

European shares rose strongly at the open as investors put an unsatisfactory week behind them and indices continue to run over very well-trodden turf. The FTSE 100 pushed above 5950 as the bounce from last week’s test of the 5780 support zone held.

Wall Street was mixed, with the Dow up 0.4% and the Nasdaq down the same. The S&P 500 split the difference to be flat on the day, arresting three days of losses and finish back where it was the previous weekend. Futures indicate a higher open for US markets.

Rising case numbers across Europe is raising the risk of a second recessionary wave, but ample central bank support means we are holding the Sep-Oct range.

Meanwhile, in the US, House Democrat leader Nancy Pelosi said she is ‘optimistic’ about getting a pre-election stimulus deal agreed. Lots of chatter around this dictating some of the price action but not a lot of substance – what we do know is that some kind of stimulus package is on its way.

What we don’t know is whether the market is really reflecting this just yet. News on Friday that Pfizer will apply for emergency approval for its Covid-19 vaccine candidate is also underscoring a more positive view for equities this morning.

Rebounding growth in China helped lift sentiment a bit after the initial headline miss and gave bulls the excuse to drive up European stocks.

China GDP up 4.9%, which was a little short of the 5.2% expected but still shows solid recovery. Industrial production was up 6.9%.

Meanwhile, Japanese exports fell 4.9% year-on-year in September, vs –2.4% expected. But this was much better than the double-digit declines registered in each of the last six months.

Data on Friday showed US retail sales rose sharply in September with spending above the pre-pandemic level, but there are fears the lack of stimulus will start to bite.

A University of Chicago survey showed that pandemic relief funds worth $600 a week in additional jobless benefits boosted the savings of unemployed Americans, but the bulk of this had run out by the end of August.

Both the UK and EU are trying to revive faltering Brexit talks by saying the other needs to change approach. Michael Gove said on Sunday the door was ‘ajar’ for discussions should the EU be prepared to compromise.

GBPUSD rose at the start of the session to 1.29750 and approach near term resistance around 1.30. We saw last week how headlines and announcements can create significant volatility in sterling crosses but there is no real direction to GBP right now as traders wait for a clearer steer from the trade talks. Right now a skinny deal looks most likely.

Election Watch – 15 days to go

Early voting in the key state of Wisconsin starts Tuesday. Trump has to win this one to stand a chance. Biden’s national lead fell to 8.9pts, whilst in the battlegrounds Trump trails by 4.3pts, which is narrower than it has been for some time.

At this stage in 2016 Trump was 5pts behind in the top battlegrounds but still pulled off a surprise election night win. Fears of a contested election result have receded. Our friends at BlondeMoney crunched the numbers to forecast the outcome of the most important battles in the Senate race. (spoiler: it’s called 51/49 for the Democrats, in line with current polling)

European stocks bounce, ‘Spoons shares sink – Comment

Morning Note

European stocks took a beating yesterday but bounced well in early trade on Friday.

Dead cat bounce? Not so sure – we’re still just trotting over well-worn turf and there is not any real momentum on either the upside or downside.

The FTSE 100 tested close to the September lows but these held and the index finished at clear of the 5,800 level at 5,832. This area around 5,780 has been tested 6 times in the last month and is holding.

This morning gains took it towards 5900. US markets fell slightly, but the S&P 500 was down just 0.15% to 3,483 after 3,440 held at the low. Asian markets edged higher. US futures were flat.

Gold is steady above $1,900 but approaching channel resistance around $1,917/20. WTI (Nov) is holding $40 after EIA showed 3.8m barrel draw on US stockpiles but bulls failed to sustain a move north of $41.

Markets remain pretty wedded to their September ranges for now as investors wade through a swamp of worry – Brexit, pandemic, US elections etc. But as stated yesterday, the broader backdrop of strong fiscal and monetary support remains supportive.

Choppiness around the US election can be expected for the US market, in particular, however, there are additional risks seen around Europe given the twin threats affecting the bloc’s export economy consisting of rising coronavirus cases going into the winter leading to fresh lockdowns, and the prospect of a no-deal Brexit.

Christine Lagarde said the ECB would do more if necessary, to support the eurozone economy as new restrictions suppress activity. Euro is unmoved – EURUSD holding 1.17 for the time being as it chops through the middle of the Jul-Sep range.

Pubs are finding it tougher as London and other regions head towards Tier 2 status – sentiment in hospitality is being crushed by the restrictions and many will become unviable.

The government doesn’t seem bothered. There is a sense of inevitability about further lockdowns as more cities and regions go up the tier ladder.

JD Wetherspoon preliminary results for the year to July 26th showed a near 30% decline in like-for-like sales as it slipped to its first annual loss since 1984. Of course, it’s not just lockdowns shutting pubs, it’s depressed consumer sentiment.

If you do go out these days, you get a less-than-optimum experience, so why bother?

Chairman Tim Martin complained of ‘a marked slowdown’ since the introduction of forced table service, the requirement to wear a mask when not seated and the 10pm curfew. Shares fell 12%. With no signs of when restrictions in the capital and elsewhere will be lifted pubs are becoming uninvestable in the current climate.

Britain’s Oct 15th Brexit deal deadline came and went with little fanfare or outrage. The two sides are still talking but there is some concern the EU has not committed to ‘intensified’ talks.

Sterling is unmoved as it trades the ranges. Headline risk remains but I’d anticipate talks going on for several more weeks – Boris Johnson is likely to step up the no-deal rhetoric to force the EU’s hand here and that may drag GBPUSD back to the low end of the range at 1.27.

The World Health Organisation (WHO) said Gilead’s drug Remdesivir had little to no effect on Covid-19 mortality. This follows a couple of setbacks for vaccine trials lately and highlights the fact we cannot rely on things ‘getting back to normal’ any time soon.

US stimulus hopes faded…how many times has this been said? Anyway, the Republicans’ $1.8tn offer has not won support from House Democrats. A deal will come but not yet it seems. Markets will continue to be on the hook for the headlines.

US initial jobless claims were soft, coming in at 898k vs 830k expected, though continuing claims fell sharply and are now down to their lowest level since March after declining by 2.7m in the last three weeks. Lots of important US data follows today with the retail sales print, industrial production and the University of Michigan consumer sentiment report.

Election Watch

Both Presidential candidates held separate televised town hall events with voters, replacing the scheduled 2nd presidential debate.

Trump committed to a peaceful transition (not that he has much say in this anyway, but it’s been a useful trope for the Democrats to suggest he would cling on). Biden +9.4pts nationally and +4.9pts in the battleground states. Trump trailed by 5.4pts at this stage in 2016 in these swing states. Betting odds still at 65% in Biden’s favour.

Stocks slide as markets look to Brexit deadline, more Covid restrictions

Morning Note

“I love deadlines. I like the whooshing sound they make as they fly by.”

Douglas Adams, meet Brexit talks. Time is relative, so are deadlines.

The Oct 15th deadline was a bargaining chip – talks are expected to continue for now despite ramping of no-deal preparations.

The EU summit kicks off today with European leaders set to discuss progress on trade talks.

So far there are no signs of a compromise leading to a breakthrough, though fears the UK would walk away from the talks today seem to have eased with negotiators adamant they can get a declaration in the next couple of weeks.

I think we could easily see another month of toing and froing over the final sticking points around the level playing field, governance, and fisheries.

Bottom line, both sides want a deal and as far as sterling is concerned, it’s still a currency people want to own. Sensitivity around headlines is marked which makes it difficult to call where the price action is headed – for now, GBPUSD is within its range of the last month and a half.

There is a strong risk-off tone to today’s trade in Europe. Fading stimulus hopes, Brexit risks, and rising virus cases across Europe – all make for a nasty cocktail for risk appetite this morning after stocks fell in Wall Street yesterday.

Treasury Secretary Steve Mnuchin said it would be difficult to get a deal done on stimulus before the election as the Republicans and Democrats remain far apart on certain issues.

France has locked down its cities, Germany has posted a record increase in daily cases. The UK is heading for further restrictions that will hurt the economy.

Fears of a second wave leading to further restrictions on people’s movements and activity are certainly affecting confidence today, but we are not making new lows – yet. Second wave and lockdown fears have really hit travel & leisure stocks this morning in particular.

Nevertheless, the broader landscape for equity markets remains supported by monetary and fiscal stimulus. Bond yields are negative in real terms right along the curve, earnings should recover as the economy picks up, albeit gently, whilst central banks are offering direct support to equities through the purchase of corporate bonds.

Meanwhile, in the US we know that a stimulus package is coming – the question is only really one of timing and scale. But another 10% of GDP should not be discounted by equity markets. A bit of pre-election fright could see a snap back, and arguably markets are not pricing for the volatility that occur around the election accurately. Having said that, fears of a disputed result may be overblown.

For the time being ranges are holding – though there is some heavy selling today amid the risk-off mood that may see these tested. European stock markets ticked lower on the open on Thursday, with the FTSE 100 heading back towards the low end of its range around 5,800 having broken the 50-day SMA at 5,983.

The Dax was also down around 2% in early trade to test the Oct 5th lows at 12,730, and the Stoxx 600 was off the most since September 21st.

These are sharp moves lower today and we need to watch whether we break out of the trading range – particularly on the FTSE where there is a significant degree of uncertainty over Brexit to make investors wary of exposure to the UK despite it being undeniably ‘cheap’. 5,778 is the low made on Sep 4th which has not yet been tested – a failure to break under will suggest the range is solid and suggest a push back to 6,000.

However we cannot ignore that the index keeps making lower highs and comes back to test lows around 5,800 on a number of occasions – knock hard enough and it could come crashing down.

We should also be prepared to see much stronger correlation between the FTSE 100 and GBP; that is, the two rising together if a deal is done, and falling together if a deal is not done, despite the recent inverse correlation related to the predominance of foreign earnings on the FTSE 100 meaning a weaker pound is positive for the market.

Traditionally there has been a tighter correlation and sentiment towards the UK as a whole would be a major factor driving both in tandem.

Stocks on Wall Street fell – the S&P 500 did indeed close under 3,500 at 3,488 and this could see a retest of the 50-day SMA at 3,393. The Nasdaq dipped 0.8% to 11,768 – first real test comes at 11,600 before the 50-day line at 11,438. The Dollar index found some support from the 50-day SMA at 93.30 but faces near-term resistance at 93.70. For now, it’s trapped between the two – which way will it go?

Earnings season continues and interest rates seem to be the emerging story of this quarter’s bank updates. Q2 was all about trading income and loan loss provisions; Q3 is all about the collapse in net interest income.

It should come as no surprise that US banks are struggling with ultra-low rates, but there has been a significant drop in the core earning capacity of banks this quarter that cannot be masked by strong trading revenues. Bank of America beat on the bottom line but missed on the top. Net income came in at $4.9 billion, or $0.51 per diluted share, which was a little ahead of the $0.49 expected and down 16% on the year.

Oil got some support after API inventories showed a larger-than-expected draw on inventories of 5.4m barrels. Gasoline stocks were –1.5m, distillates –3.9m. Stocks are Cushing, Oklahoma rose by 2.2m, though we should note there were likely some significant distortions to the data as a result of hurricane-related shut-ins along the Gulf of Mexico. WTI (Nov). EIA inventories due later today expected to show a drop in excess of 2m barrels.

On tap today: earnings from Walgreens Boots Alliance and Morgan Stanley. The big question is how is Morgan Stanley’s wealth management division cushioning any drop in trading revenues? US initial jobless claims later expected to come in at 810k vs 840k last week.

Election Watch

With Biden leading so handsomely in the polls, the market is apparently very confident of a Democrat win. This is leading to the correct assumption that the Senate is where we should be looking, as the race here will determine to a large extent how much of his agenda Biden could get through the legislature. A GOP-controlled upper house would tie his hands.

Current polling indicates it’s a toss-up in a number of states – Georgia, the Carolinas, Iowa Michigan, Montana and Maine, so the eventual make-up of the Senate is tough to call. Biden still leads by 9.2pts nationally, though this has dropped from yesterday’s 10pts.

In battlegrounds his lead has dipped slightly to 4.9pts. At this stage in 2016, Trump was behind in the key battleground states by 5.4pts. Still all to play for – don’t write off the President.

Chart: FTSE 100 heading for new low? Watch the bearish MACD crossover.

FTSE 100 index

European stocks firm, Apple underwhelms a little, bank earnings in focus

Morning Note

Stocks fell on Wall Street as the rally took a pause on Tuesday while European bourses also closed down on the day and remain unable to break free from their ranges.

The S&P 500 closed -0.63% at 3,511, but would need to close below 3,500 to bring the 3,400 area and 50-day back into play. Meanwhile the Nasdaq was down by 0.1% to 11,863. The Dow snapped a four-day win streak to finish down 0.6%.

European shares were a shade higher on Wednesday morning. The FTSE 100 rose the most as the pound softened against the dollar, though remains unable to crack 6,000 in any meaningful way. The DAX recovered 13,000 but the Euro Stoxx can’t crack 3,300 yet. Range-bound still with little momentum.

Vaccine headline risk was to the fore as Wall Street fell: Eli Lilly halted its phase three trial of its coronavirus antibody treatment over safety concerns. Earlier Johnson & Johnson said it had paused its late-stage vaccine trial after a participant reported an ‘adverse event’.

Markets don’t like too much negative headlines, but these sorts of bumps are to be expected along the road to a vaccine, particularly given the sheer pace of development.

Apple left investors a little underwhelmed with its leap into 5G territory. Shares fell 2.65% but remain up for the week after Monday’s ramp. There are four iPhone 12 devices being launched, ranging from $399 to more than $1k, which ought to spark a strong upgrade cycle.

A broad range of sizes, displays, and prices, as well as 5G ‘future-proof’ capability, should encourage consumers to replace their existing devices – remember about 350m due for upgrade globally. In many ways we should at look from a different perspective – not whether 5G will deliver the iPhone upgrade ‘supercycle’, but whether 5G-capable iPhones drive 5G penetration rates and encourage network providers to roll out networks faster.

JPMorgan and Citigroup got the Q3 earnings season over on Wall Street off to a strong start, but it wasn’t enough to lift the shares. Both the banks beat on the top and bottom line, after strong trading revenues and lower loan provisions lifted net income.

JPM Q3 provision for credit losses of $0.61bn was well short of the $2.38bn expected. There is hope that having set aside large amounts already, JPM and others are past the peak, even if the economic situation deteriorates. However. CEO Jamie Dimon warned that a double-dip recession means they could need to hike provisions by $20bn.

Citigroup posted net income of $3.2 billion, or $1.40 per diluted share, on revenues of $17.3 billion. JPM delivered net income of $9.4bn, which translated to EPS of $2.92.

Worries about net interest income falling and persistent low rates trumped the trading revenues. JPM’s net interest income was down 9% at $13.1bn. The effect of the Fed’s ZIRP and QE ad infinitum continues to exert a drag on interest income and margins. JPM ended down 1.6%. Fears about regulatory actions over its risk controls left Citi down almost 5%. The read across left the whole sector lower on the day.

The dollar posted strong gains – arguably on fading hopes of near-term stimulus. The fact is we are trading ranges for now. DXY bounced off the 93.0 round number and was last testing 93.60 region, a previous level of support. Yesterday did appear to be a bit of strong-dollar, weak-equities story, but there were other factors at work.

GBPUSD was weaker, forced off the top of the near-term range down to 1.2870 by a cocktail of dollar strength and Brexit chatter may also weigh. Wire reports this morning indicate EU leaders will say at a two-day summit on Thursday-Friday that not enough progress has been made for a deal to be reached and that they will step up no-deal preparations.

Britain’s own Oct 15th deadline is tomorrow, although that won’t stop the discussions right up to December. GBP crosses may be susceptible to the usual headline risks but for the time being, cable remains in the middle of 1.27-1.30 range.

OPEC lowered its demand forecast for the year by 200k barrels per day and warned that the near-term market environment is expected to remain weak due to a large overhang in Middle East distillate stocks. It also warned that rising virus infections will mean the recovery in Q3 will not follow through into the fourth quarter and early 2021.

OPEC also cut its demand forecast for next year. WTI (Nov) continues to trip the ranges and was last a shade under $40. Whilst it continues to hold this handle, for now, the downside looks favoured given the macro outlook (IMF, OPEC, etc combined with rising virus cases).

Rising infection rates and the reappearance of lockdown measures will cripple demand in developed markets.

Without further removal of supply, the weaker demand side could lead to rising inventories that sends prices down. Near-term supply constraints (Hurricane Delta, Norway strike and Libya) have eased. API inventories are due today, a day later than usual due to the Columbus Day holiday in the US.

Central banks are in the spotlight today with the ECB’s president Christine Lagarde, and chief economist Philip Lane, due to speak. The Fed’s Quarles, Harker and Kaplan are on tap, whilst Bank of England chief economist Andy Haldane is also slated to speak.

Earnings later from Goldman Sachs, Wells Fargo and Bank of America. US PPI inflation on the economic calendar.


Three interesting stocks in London this morning to consider, all of which are Covid-related.

Pearson sees improving trends in Q3 with strong performance in online learning (funny, wonder why that might be). I suppose students who were encouraged back to university with false promises just to make sure the landlords got their rent cheques are a bit miffed, but Pearson can do well from the shift to online coursework globally. Online was up 14% driven by 415 enrolment growth in its Virtual Schools. Overall YTD sales are down 14%.

Outlook on track but due to Covid there are larger than usual uncertainties around the fourth-quarter performance. Shares rose a touch.

Just Eat shares rose 5% after it delivered 46% growth in the third quarter with the strongest growth in Australia. Further lockdown restrictions across the continent and the UK should keep demand on the up. As restaurants and bars shut, demand for takeaway rises. Students stuck in their halls have little else to do.

Asos shares fell 6% despite it posting an 18% rise in sales and adding over 3m customers due to the pandemic. Profit before tax surged over 300% to £142m and it moved from a position of £90m in net debt at the end of August last year to having over £407m in net cash this year. Margins however weakened by 140bps.

Asos is of course a winner from Covid but it does caution that its younger, 20-something customers (bar workers/students, etc) may not have any spare cash to splurge on clothes as unemployment rises and disproportionately affects this age group. Demand for party dresses this year may be slack. Profit-taking also a factor in the share price after an exceptional rally since the March lows.

Election Watch

Trump made a triumphant return to the campaign trail in Florida, a key swing state that he needs to win. Biden has a national lead of 10pts, and 5pts in the battlegrounds. This time in 2016 Trump trailed Clinton by 5.1pts in these states. Latest betting odds are 66% for Biden, 34.4% for Trump.

This time four years ago he was given an 18% chance of winning by some bookmakers. Don’t write off the president yet. The difference this time: turnout could be the factor.

Wall Street enjoys tech rally on Apple, Amazon events

Morning Note

You got a sense yesterday that an old friend was back in town and everyone wanted to take her out: Tina (There is no alternative) reappeared with retail investors trying to take her out for a drink again. The Nasdaq whale maybe also reappeared with some large options activity going on.

The S&P 500 is within striking distance of a fresh all-time high after a tech-led surge on Wall Street left the broad market +1.6% to close at 3,534, while the Nasdaq jumped 2.6% as it notched its best day since April. This was a real momentum/growth charge and tech volatility also rose as options activity remains elevated.

European shares faltered in early trade Tuesday with US futures also a tad lower following Monday’s ramp. All sectors on the Stoxx 600 fell with utilities and tech least affected while consumer cyclicals and financials were at the bottom of the heap.

Volatility on the S&P 500 has retreated, though there is some premium around the US elections. The narrative around the elections is very much on what a Blue Wave means for the market. Right now we think that this means more stimulus and a removal of uncertainty – all the market wants is to get the election out of the way. But there are also things like higher taxes and regulation that need to still be appreciated.

Nevertheless, clearly the consensus seems to be that a Blue-Nami would be risk on – the sheer scale of the stimulus on the table – $2.2tn is about 10% of US GDP – is also underappreciated.

Meanwhile, there are also fears of delays to vaccines at the same time as rising cases globally are leading to new lockdowns, which will favour Covid winners like US large-cap tech over cyclicals names which had been shown promise. Johnson & Johnson has paused its vaccine trial after an ‘unexplained illness’. Dr Fauci said the US faces a lot of trouble as case numbers rise into the winter.

The UK is embarking on a 3-tier system but even the chief medical officer thinks the most stringent restrictions as they stand are not enough to stop the spread (and protect the NHS, at all costs to mental health and wellbeing), which begs the question – why not have a fourth, stricter tier? Of course, the idea is to make local leaders take the really tough decisions. The UK economy will endure a long winter.

Apple and Amazon provided bull catalysts for the Nasdaq as they jumped ahead of the new iPhone 12 launch later today and Amazon’s Prime Day event, which takes place Oct 13-14th.

Apple shares surged on a retail flood of options activity which could see a melt-up further in tech stocks as we head into the end of the week expiries. Apple is today expected to unveil its new 5G-capable iPhone 12, with investors eyeing how the new product line-up will drive top sales growth in the near-term.

It could be the most important event in several years for Apple as it seeks to drive a game-changing upgrade cycle. Recent earnings from Apple show consumers are a long way from any kind of smartphone or device fatigue – the question is whether 5G is the moment to unleash further demand for iPhones.

The event, screening online from 10 am Pacific time on Oct 13th, is expected to mark Apple’s delayed and long-anticipated launch into the 5G space. Whilst it’s behind the curve of several manufacturers on this front, penetration rates for 5G phones have not been significant yet.

In many ways, consumers have been waiting for Apple to get this party started. Moreover, 5G networks are in early stages. I would anticipate that this is the moment many Apple users have been waiting for and it could mark a step-change in the device upgrade cycle as we saw with the X.

Apple’s iPhone refresh will be the first major update since the launch of the X in 2017. Apple is expected to announce four new iPhone devices with a range of sizes and a design that takes its inspiration from the iPad. There will be a number of other ancillary product releases, too, but all that matters for the shares will be the reception to the iPhone.

Supermarkets – Kantar said Tesco’s 12-week sales rose 9.2%, Sainsbury’s +6.8% and Morrisons +11.5%. Shares in all three rose mildly.

Carmakers – Chinese car sales rose 8% in September, with electric vehicle sales +60%. Overall auto sales rose 13%.

Trade – Chinese imports rose 13.2% in September, while exports rose 9.9% as trading partners around the globe lifted coronavirus restrictions. AP Moller Maersk upped its profit guidance after a swifter-than-expected rebound in shipping volumes.

Election Watch

Biden extends national lead to 10.2pts and holds a 4.8pt lead in the key battlegrounds – but Trump was down 5.1pts at this stage in 2016. Betting odds still favour a Biden win at 65%.

Chart: GBPUSD holds onto the 1.30 handle as the dollar tries to stage fightback. 50-day SMA offers key support.

Bank of England lays ground for negative rates

Morning Note

The Bank of England is laying the groundwork for a descent into negative interest rates. This should worry us all. In a letter to banks today, deputy governor Sam Woods asked firms to detail their “current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these”.

The letter notes that “the financial sector … would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms”, and explains that “the MPC may see fit to choose various options based on the situation at the time”.

It comes after details from the last policy meeting showed that the BoE is actively considering negative rates, whilst Andrew Bailey has been at pains to stress that this does not necessarily mean they will take that route.

Indeed there is clearly a debate within the MPC going on right now that we are seeing play out in public. Last month deputy governor Dave Ramsden issued a note of caution only a day after Silvana Tenreyro pointedly backed negative rates.

It looks as though there are some clear ideological disputes among rate setters that needs to be worked out over the autumn, implying as Andrew Bailey suggested last week that negative rates are not likely on the near horizon, albeit they are being considered actively.

The problem for the Bank would be an unemployment crisis into Christmas that could put pressure on the MPC to act.

Sterling doesn’t mind too much, with GBPUSD making its highest in almost 5 weeks before paring gains a little. Bank shares also didn’t take fright, with Natwest and Lloyds higher at the open.

Money markets have already priced in negative rates next year – today’s update does not materially alter the perception that the Bank is thinking seriously about negative rates but is in no rush to wheel them out. US bond and money markets are closed today for the Columbus Day holiday.

The idea that negative rates boost lending doesn’t wash – banks are not worried about the marginal impact on net interest margins as they are about whether the principal is repaid or not. And this in the current economic downturn and threat of rising unemployment, this will weigh on banks’ willingness to lend.

Indeed, I refer you again to the San Francisco Fed study from last month that shows the ECB made a big mistake by going negative.

This noted “banks expand lending only temporarily under negative rates” and “as negative rates persist, they drag on bank profitability even more”. It concluded that while lending initially increases under negative rates. “…gains are more than reversed as negative rates persist”. And under extended periods of negative rates, the evidence shows that “both bank profitability and bank lending activity decline”.

Negative rates are meant to increase loan growth, not depress it.

Chart showing how negative interest rates will affect UK monetary policy.








Equities were mildly higher in European trade early on Monday. The FTSE 100 enjoyed a solid week and managed to close on Friday above the 6,000 level that has proved so tricky to hold onto.

The FTSE weakened a little in early trade back to this round number support, with energy and consumer cyclicals dragging.

The S&P 500 rose Friday and closed at its best level since the start of September when it made the all-time high. Stimulus hopes remain in the forefront but the market, as a result, remains on the hook to rumours and headlines.

Donald Trump upped his offer to $1.8tn but Nancy Pelosi said it wasn’t enough. A stimulus package is coming sooner or later, although as stressed last week, there is a risk that a disputed election result delays this until 2021.

On the slate this week: IMF and World Bank meetings kick off today, whilst we have three days until the UK’s self-imposed Brexit deadline.

Nevertheless, even if there no breakthrough comprehensive trade deal agreed this week, the two sides are pledged to continue talking right up to the last moment.

Emmanuel Macron, who faces elections in the not-too-distant future, may seek too many concessions over fishing rights, which may scupper a deal. However, with the coronavirus causing havoc with the economy, neither side has a particularly strong hand and both sides need a deal.

Wall Street banks kick off earnings season across pond – read our preview here.

Election Watch

Biden leads by 9.8pts nationally and by 4.5pts in the battlegrounds. The Democrats lead by 4.9pts in the battleground states four years ago – Trump has been over this ground before and won against the odds – don’t write him off just yet. Trump has pulled ads in Ohio and Iowa leaving him off air in those states for a third week in a row. According to our friends over at BlondeMoney are the two most winnable swing states for Trump.

They say: “Either Trump is supremely confident he’s got these in the bag, despite polling neck-and-neck with Biden. Or he realises that he’s got to double down and go for the tougher states, and hope to sweep up those that are easier to win in the process. If he doesn’t get Florida or Wisconsin, Ohio or Iowa barely matter.”

My sense is that there is do-or-die attitude in the White House and he needs to shore up support elsewhere, such as Florida as his campaign finances, rather like his business empire, are not all they appear to be.

The dollar appeared to roll over last week. On DXY we had a MACD bearish crossover and 14-day RSI trendline break that indicated (as we flagged) that there could be downside.

What’s harder to say is whether this is yet more of a chop sideways for the dollar or renewal of the downtrend.

The close under the 50-day SMA could be taken as bearish signal and we may yet see the 91 handle tested again. The near-term support at the mid-Sep swing low sits around 92.70.


The Dollar index on the morning of12.10.2020

UK growth cools, British Land resumes dividend

Morning Note

UK growth unexpectedly cooled  in August, signalling a slower pace of recovery into the back-end of the year. GDP rose by 2.1% in August, which was below the 4.6% expected, despite the eat out to help out scheme boosting the hospitality sector significantly. The food and beverage service activities industry grew almost 70% over July thanks to the easing of lockdown restrictions and the government support scheme. 


Nevertheless, the outlook is not particularly encouraging. August 2020 GDP was now 21.7% higher than its April 2020 low, but the UK economy is still 9.2% below pre-pandemic levels. Sticking plasters like eat out to help out act only as a mild salve. Moreover, as the government considers more restrictions on people’s liberties to combat the virus, it is clear the path of recovery to pre-pandemic levels of activity will be slow and difficult. The pace of recovery has peaked, and things may get worse as we head into the winter before they improve again. The UK Chancellor Rishi Sunak will announce the next phase of the job support programme later today, which is set to include support for workers in industries forced to close under local lockdowns, such as bars and pubs. Sterling was unfazed by the loss of momentum in the economy with GBPUSD nudging up to 1.2970, yesterday’s high and close to the top of the range at 1.30.


Markets of course rather decoupled from the realities of the economy thanks to vast amounts of central bank stimulus and liquidity. The FTSE 100 rose above 6,000 for the first time in three weeks but this level continues to act as a very difficult barrier for bulls to clear. The S&P 500 closed up 0.8% at the highs of the day at 3,446. The Dow added 0.43% for its third positive session of the week and the Nasdaq added 0.5%. House speaker Nancy Pelosi said Democrats would reject any standalone stimulus packages. But we know stimulus of some sort is coming either before or after the election – the problem emerges if there is a contested election. 


Dallas Fed president Robert Kaplan underscored his more hawkish credentials, saying there is no need for additional QE on top of the Fed’s $120bn-a-month programme. A Fed paper this week suggested it could increase asset purchases by $3.5tn to boost the economy. Kaplan said that “the bond-buying needs to curtail, the Fed balance sheet growth needs to curtail”. The Fed’s position however remains that it will continue to purchase assets at least at the current clip.  


Election Watch 


With 25 days to go to the US election, Joe Biden leads Donald Trump by 9.7pts at a national level but his lead in the top battlegrounds has come down to 4.6pts. Trump trailed Hilary Clinton by 5.1pts in the key battleground states at this stage in 2016, but we should note there are fewer undecided voters this time. Latest betting odds imply 65% chance of a Biden win. 




The pandemic has wrought damage on the commercial property sector as businesses have found it difficult to meet rent payments on time and the value of assets has been written down. Land Securities advised today that of £110m rent due Sep 29th, just 62% was paid within 5 working days, vs 95% for the same period a year before. Businesses renting office space (82% on time) were timelier than retailers (33% on time). For the earlier part of the year, the company has received 84% of rent due on 25 March (up from 75% at 2 July) and 81% of rent due on 24 June. Nevertheless, shares rose 3.5% in early trade as these numbers are perhaps not as bad as feared. 


British Land gave a very robust update though, noting all retail assets and 86% of stores are open. Footfall is 21% ahead of benchmark, retailer sales 90% of the same period last year. Collection rates for June have improved to 74%; 98% offices, 57% retail. Meanwhile 69% of September rents have been collected (91% offices, 50% retail). Management was also keen to talk up balance sheet strength – £1bn in undrawn facilities and cash, with no need to refinance until 2024. So robust in fact it’s resuming dividend payments – another little boost for the bedraggled income investor. Divis will be paid at 80% of underlying EPS. Those income investors cheered as shares rose 5%. 


London Stock Exchange confirmed plans to offload Borsa Italiana to Euronext. The €4.325bn is perhaps a little behind what had been touted, but it’s a necessary step to clear the decks for their Refinitiv acquisitions.  




Gold still within the falling channel but making higher lows and now pushing up to the top of the channel – 50-day SMA above but the horizontal resistance at $1.920 needs to be cleared first.

Euro Stoxx 50 – still within the long-term range but after moving above 21-day SMA now is looking to clear a cluster of moving averages including the 50-day SMA and 200-day EMA.

TalkTalk bid, IMB up on smoking, S&P 500 breaks range

Morning Note

The yo-yo week on Wall Street continues with stocks bouncing after Donald Trump tweeted support for a range of fiscal stimulus measures, having earlier set the market down by calling off talks on a comprehensive package until after the election. Whether it’s now or after November, what’s been made clear to investors is that fiscal stimulus is on its way.

The timing becomes less important – doubts would resurface if there is a contested election result that leaves Washington lawmakers unable to come to a deal. However, Joe Biden’s lead in the polls would suggest this is becoming less likely, albeit my inclination is that Trump will do a lot better than the polls indicate.

Europe opens higher, can Wall Street gain for a second day?

The S&P 500 rose to its highest level since the start of September, finishing up 1.74% at 3,419, with the Sep 4th closing high at 3,426 offering the daily resistance. All 11 sectors rose. The Dow climbed 530 points, or 1.9%, to notch its best day since July. The Nasdaq added 1.9%.

The question is whether market can put two straight days of gains together, something it’s not managed in a week. The range-bound nature of the market right now and the general uncertainty around stimulus and the election – not to mention the Q3 earnings season about to kick off – may make it tough to cement gains.

Nevertheless, futures point to further gains when the cash equities open later. European markets opened higher in early trade on Thursday.

FOMC minutes

Fed minutes showed that officials are divided over the application of the central bank’s new policy framework. Policymakers ‘discussed a range of issues associated with providing greater clarity about the likely path of the federal funds rate in the years ahead’.

Meanwhile a report from Fed economist Michael Kiley called for the central bank to juice bond holdings by another $3.5tn to support the economy. The market probably liked this idea, too. Participants agreed on the uncertainty facing the economy, albeit there are the likes of Bullard who think it’s all going to be fine by the end of the year.

Weekly unemployment claims data later today will be watched as closely as ever.

German exports rose more than expected in August, climbing by 2.4% vs expectations for 1.7%. However, this was down from the 4.7% recorded in July. Exports to the US were down 21%, whilst China imported only 1.1% less goods than last year.

Toscafund offer boosts TalkTalk shares

TalkTalk shares shot higher after it received an offer Toscafund Asset Management for 97p a share. TALK rallied over 16% to exactly 97p. Executive chairman Charles Dunstone needs to approve the takeover for it pass. With no discount and no premium in the price this morning, the market seems to think he is.

There were signs of something afoot in the summer – Dunstone purchased 1m additional shares at the end of June at 86p after Tosca raised its stake to 29%.

TalkTalk had somewhat gone off my radar of late so I must revert to a two-year old note from 2018: “Increasingly TalkTalk looks like it’s ripe for takeover. It provides a good entry point into the UK broadband market and with growing subscriber numbers, there is plenty to recommend it.

Indeed, with a strong subscriber base, improving margins and shares still at multi-year lows, for anyone looking for an entry point into the UK broadband market then it’s probably your best bet.”  Recently it’s enjoyed decent cash growth on better fibre rates and cost control.

Imperial Brands rises alongside smoking demand

Smoking kills: Imperial Brands is seeing increased demand for its products as a result of the pandemic. And it’s good old fashioned cigarettes and tobacco we’re talking here – ‘next generation products’ like vaping are down 30%. Another unwanted side effect of governments’ inept, disruptive and failing approach to dealing with the coronavirus.

It’s been about fighting Covid at all costs and the UK government for one has systematically failed to consider the wider public health implications of their response. For example, Matt Hancock recently admitted that cancer patients would only be treated if the virus was ‘under control’.

Management today noted: “We have experienced some COVID-related changes in consumer behaviour with increased overall demand against our expectations, as consumers appear to have allocated more of their spend to tobacco, as well as some demand shifts between different markets and channels. This has resulted in better than expected volumes, driven by improved volume trends in several key European markets and in the US.”

Group revenues are slightly ahead of the half-year guidance, but additional manufacturing costs as a result of Covid have been incurred. Constant currency earnings per share are down about 6%, in line with expectations.

EasyJet on track for first-ever annual loss

Meanwhile, EasyJet reports today it’s on course for its first-ever annual loss as a result of the pandemic restrictions on air travel that have crippled the industry. Management expects to report a group headline loss before tax in the range of £815m to £845m after flying 50% fewer passengers than last year.

The airline flew 38% of planned capacity in Q4, in line with the September update in which it said capacity would be slightly less than 40%. These sorts of losses were anticipated and, overall, I think investors only really care about liquidity and headroom to get out the other side of this. On that front easyJet had a cash position of £2.3bn as of the end of September and it’s lowering costs aggressively to reduce the cash burn wherever it can – Q4 cash burn was less than Q3, which is a positive. Capacity of Q1 2021 will be at 25%.

With winter coming it’s usually a lean time for airlines and it’s going to be a long period of uncertainty as we await to see whether next summer is strong enough to prevent further cash being required. But easyJet looks ok for now.

Plans for a testing system for arrivals into the UK to reduce the quarantine period would be a boost, but there many factors that will weigh on demand, from unemployment to fears about the virus itself.

Tesco profits slump, stocks swinging on mixed stimulus messages

Morning Note

Stocks fell after Donald Trump nixed hopes of a stimulus deal, or so it seemed. The S&P 500 declined 1.4% on the day having earlier traded higher.

But Trump also called for support for airlines and then sent a tweet addressing the House Democrat leader Nancy Pelosi: “If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now. Are you listening Nancy?”

In short, Republicans, including the President, don’t want to pay for a tonne of social programmes which Democrats have made part of the stimulus bill. But they do want to support the economy. Stimulus is clearly coming some way, somehow, just probably not before the election.  Or it could, who knows.

Markets remain clearly on the hook to the headlines but the fundamentals haven’t changed much. The election is taking on more significance the closer it gets and markets just want it out of the way to move forward.

Biden’s lead in the polls is compelling and tonight’s vice presidential debate probably won’t change much with so few voters undecided. Nevertheless, Trump is back and cannot be written off just yet.

Indeed whilst the S&P 500 fell, it didn’t even look at 3,300 and remains in the middle of the September range. Earlier it briefly broke the Sep 16th intra-day high, hitting 3,431.  European markets are similarly short of much direction right now – in fact they’ve been clamped in a tight range since June and were flat in early trade on Wednesday.

Tesco shares up on earnings

Tesco profits fell as costs and sales rose. Operating profit before nasties was down 15% despite group sales rising almost 7%. Retail free cash flow decreased by £91m year-on-year to £554m. Tesco Bank is becoming a headache and needs to be offloaded – sales here slipped a third and it slumped to an operating loss of £155m due to provisions for bad debt and lower income.

Management noted that a ‘marked deterioration in macro-economic indicators, particularly UK unemployment and GDP, drove an increase in the provision for potential bad debts’. Shifting the financial division on to some other party seems like one of the first things for Ken Murphy. Having already offloaded the mortgage book, Tesco has one foot out the door already.

Booker continues to do well with Retail sales up 22%; offsetting Catering sales falling 12%. And whilst we often compare Tesco to a super tanker that can take a long time to turn around, Tesco’s scale has been important in retooling for the pandemic age.

Online delivery capacity more than doubled to reach 1.5m slots a week, which compares favourably with Ocado and the problems it has in building capacity. Whilst increases costs, being provisioned to handle more online orders is essential and makes Tesco look well placed – shares rose over 2%.

Democrat report hammers big tech

As flagged in yesterday’s note, a Democrat-led Congressional committee has issued a damning report on big tech. Following more than a year of reports and investigations, the 449-page report said Amazon, Apple, Alphabet and Facebook enjoy ‘monopoly power’ and called on them to restructure their businesses and possibly even be broken up.

It’s just a report at this stage but a Democrat clean sweep in November’s elections could see elements become legislation. Share in the four companies fell by around 2-3% yesterday.

FOMC meeting minutes later will be parsed for any further details on what policy makers believe could trigger any tightening. The September meeting minutes ought to provide more granular detail about how policymakers view the shift to average inflation targeting, and to what extent the consensus is strained by this.

EIA data in focus for oil

EIA inventories out later today coming the API report yesterday showed build in crude stocks of 951k barrels in the week ending Oct 2nd. As previously argued, we need to closely watch global inventories flipping from draws to builds which would signal demand failing to re-emerge at the levels anticipated.

EIA is forecast to record a draw of 1.2m barrels. WTI is trading at $40 but faces resistance.

Chart: E-mini futures take elevator down on Trump tweets but climb stairs back up


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