European stocks rally; all the usual narratives

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)

US bank earnings quick take: BoA losing interest – Comment

Interest rates seem to be the emerging story of this quarter’s bank earnings. 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. Provision for credit losses increased to $1.4 billion, driven by COVID-19 impacts in commercial lending.

BoA is very sensitive to rates and shares in pre-market trading did not take well to the decline in rates income, with BAC -1.6% after its 2.84% decline yesterday. Net interest income (NII) was down $2.1bn, or 17%, to $10.1 billion, driven by lower interest rates.

This comes after JPM reported –9% yesterday and it is a material increase in the pace of the decline from the –11% posted in Q2. This sensitivity is explained by the fact that loans were up 5% to $319 billion; while JPM saw lending decrease, which would lower its exposure to interest rates. In the consumer bank, net income declined $1.3 billion to $2.1 billion, while revenues of $8.0 billion were -17% lower, driven by lower NII from lower rates.

Noninterest income was also lower, declining by 4% to $10.2bn, reflecting a drop in fee income which was offset by better trading and investment banking results. That said, trading revenues weren’t spectacular – FICC +3% and equities +6%, which was not as strong as peers.

Return on equity improved. In Q2 return on equity (ROE) fell to 5.44% from 5.91% in the prior quarter and was down significantly from last year’s Q2 11.62%. Return on tangible equity (ROTE) slipped to 7.63% from 8.32% in Q1 2020 and from 16.24% in Q2 2019. In Q3, ROE rose to 7.24%, while ROTE rose to 10.16%.

Week Ahead: Massive week for earnings, Federal Reserve meeting on tap

Coming up this week – will the Federal Reserve lean on bond yields, and can Amazon, Alphabet, Apple and Facebook meet lofty expectations for earnings? 

Earnings 

Investors are becoming increasingly concentrated in a handful of big names, especially the very popular tech sector. The concentration is so large that the biggest five stocks make up almost a quarter of the total market capitalisation of the S&P 500. These stocks have returned 35% YTD, while the remaining 495 stocks have declined –5%. With such a high concentration in big tech, earnings updates from four of the five this week are going to be critical for the market’s direction. 

Facebook (FB), Amazon.com (AMZN), Apple (AAPL), and Alphabet (GOOGL) are all due to report earnings this week. This will provide the market with an important steer on the resilience of earnings among the largest-cap stocks as well crucial guidance on the coming quarters.  Read our preview to the Amazon earnings.

In a very busy week for earnings, Royal Dutch Shell and AstraZeneca are the biggest UK stocks to report, whilst luxury comes in for scrutiny with results due from Hermes and LVMH. 

Federal Reserve meeting – leaning on the front end? 

Talk of yield curve control is keeping Treasury rates low and weighing on real rates, but it is unclear whether the Federal Reserve will seek to lean any more on the front end of the curve when it meets on Wednesday. Chair Jay Powell has stressed that the Fed isn’t even thinking about thinking of raising rates, whilst the decline in US real yields to record lows is a sign perhaps that the market believes the Fed may do more. 

No policy change is expected at this week’s meeting, but it the talks are likely to set the stage for a move in the autumn to inject further support after last month the Fed said that highly accommodative policy was likely to last many years. At the last FOMC meeting, it was agreed that officials need more analysis of yield curve control but there was agreement on the need for more explicit forward guidance on interest rates, perhaps tying it to concrete targets for inflation or employment levels. This could further anchor the front end of the yield curve, acting as a de facto control mechanism.  

GDP figures – how bad was it? 

After the Fed, Thursday sees the release of the advanced US GDP reading for Q2. The Atlanta Fed’s GDPNow model indicates the world’s largest economy shrank by around 35% in the second quarter. However, we already know that the June quarter was terrible – the backwards-looking data may prove less instructive than the now hot-ticket US weekly jobs report, also due on Thursday. Ahead of these and before the European session opens the latest German GDP numbers will be released. 

 

Highlights on XRay this Week  

Read the full schedule of financial market analysis and training. 

07.15 UTC  Daily  European Morning Call 
12.00 UTC  27-Jul  Master the Markets 
From 15.30 UTC  28-Jul  Weekly Gold, Silver, and Oil Forecasts 
17:00 UTC  30-Jul  Election2020 Weekly 
19.30 UTC  30-Jul  Daily FX recap 

  

Top Earnings Reports this Week 

Here are some of the biggest earnings reports scheduled for this week: 

27-Jul  SAP 
27-Jul  LVMH 
28-Jul  3M 
28-Jul  Starbucks 
28-Jul  McDonald’s 
28-Jul  Amgen 
28-Jul  Visa 
28-Jul  Pfizer 
29-Jul  PayPal 
29-Jul  Facebook 
29-Jul  Boeing 
30-Jul  Nestle 
30-Jul  Samsung 
30-Jul  Procter & Gamble 
30-Jul  Alphabet 
30-Jul  Amazon 
30-Jul  Apple 
30-Jul  Shell 
30-Jul  AstraZeneca 
30-Jul  Hermes 
31-Jul  Chevron 

  

Key Events this Week 

Watch out for the biggest events on the economic calendar this week: 

08.0UTC  27-Jul  German Ifo Business Climate 
12.30 UTC  27-Jul  US core durable goods orders 
07:0UTC  28-Jul  Spain unemployment rate 
14:00 UTC  28-Jul  US CB consumer confidence 
01.30 UTC  29-Jul  Australia CPI inflation 
14:0UTC  29-Jul  US pending home sales 
14.30 UTC  29-Jul  US EIA Crude Oil Inventories 
18.00 UTC  29-Jul  Federal Reserve statement + press conference 
06:00 UTC  30-Jul  German preliminary GDP 
12.30 UTC  30-Jul  US Weekly Jobless Claims 
12:30 UTC  30-Jul  US advanced Q2 GDP 
14.30 UTC  30-Jul  US EIA Natural Gas Storage 
01.00 UTC  31-Jul  China PMIs 
12:30 UTC  31-Jul  US core PCE inflation, spending 

 Find every event in our economic calendar.

Stocks nudge higher as investors look beyond trade deal, oil recovers

‘Markets rally on trade deal hopes/tumble on trade war fears’ have been regular refrains of headline writers and commentators for months. The good news, for those of us who detest change, is that these should be applicable in the coming months just as much as over the last year. If you thought phase one was good, wait ‘til you see what’s coming…Trump will be able to keep markets on his leash with tweets and tirades about trade and China for months.

Maybe with the trade deal signed we can refocus on the data and, more importantly, what to the reaction function of the Fed will be to any softness in the coming months.

Nevertheless, putting a natural cynicism to one side, US equity markets made fresh record highs after the US and China put pen to paper on their historic trade deal. The Dow closed above 29k for the first time and the S&P 500 rose 0.2% to 3289.

Yes, the deal may be a bit puny for some, and there are plenty of risks ahead, but in coming to this agreement they’ve apparently averted never ending war. And doubts about the details of the deal had surfaced in recent days, so the fact it’s done is a relief. The truce will require calm on both sides to prevail and for lasting peace – a far more substantive phase 2 deal – to be reached.

Defensive sectors like healthcare and utilities led the gains on Wall St, and US bond yields were down, so it wasn’t entirely a case of risk-on. Indeed, as noted in previous commentary, there are multiple  risks ahead, some of which have been crystallised by this agreement.

– what if the renminbi breaks 7 again – how does Washington respond? The provisions on the currency are far from watertight – e.g. commitments relating to fx positions don’t amount to much as they’re already published.
– when does phase 2 start and what will be its scope and ambition? A phase 2 agreement of any substance won’t be done quickly. Which means tariffs are here to stay. The Sphinx-like Mike Pence said talks on phase two had begun.
– does Trump take a hard line pre-election? With the ‘victory’ secured on paper, and tariffs still in place, Mr Trump has a free pass to threaten to walk away from the phase one deal.
– does the US turn its trade gaze to Europe?
– with tariffs staying put, what is outlook for growth or inflation? GDP probably won’t be much affected, but inflation may be different.(though inflation is the dog that didn’t bark).

Markets were also cheered by suggestions the Trump administration is working on tax cuts 2.0. Details are of course sketchy and anything of this nature would be difficult to do before the election, but markets will lap it up nonetheless.

Earnings are helping too – four-fifths of S&P 500 companies that have reported have beaten estimates. There’s a clear sense that after the lacklustre growth seen in 2019 (and Q4 will only be +1-2% at best) that there’ll be a significant pick up in 2020. After multiple expansion in 2019 drove the vast part of the stock market’s gains, it’s over to earnings to drive more gains.

Asia’s response to the trade deal has been sanguine, with the major indices flat. Global stocks just nudged a record high in the wake of the trade deal being signed. In Europe, yesterday the DAX was a touch softer while the FTSE rallied 0.3% to 7642.80.

Ahead of the open, futures indicate Europe is treading water following the trade deal signing – the key question is where do we go from here. There are many possible routes.

Data overnight showed Japanese machinery orders up 18% in November. German CPI came in as expected at +0.5% MoM, 1.5% YoY.

Inventory data yesterday sent oil for a brief tumble but WTI has since reclaimed the $58 handle and is trying to hold onto the 50% Fib level of the rally from the Oct 2018 low to the recent high, which sits around $58.30. Although crude stocks fell more than expected, the build-up of products was huge. Crude inventories dropped by 2.55m barrels for the week through to January 10th vs -474k expected. But gasoline inventories were up 6.7m barrels vs +3.4m expected. Distillate stockpiles rose 8.2m vs +1.2m expected. Rejection of the 100-day moving average at $57.30 and the doji candle formed yesterday looks bullish but the momentum remains to the downside.

In FX, it’s steady as she goes. EURUSD is stalking around 1.1140, although it did make a stab at 1.1160 as the dollar was offered amid the fall in Treasury yields. Clearance of 200-day and 200-hour moving averages seem to be snapping a two-week downtrend. Bulls need to clear the swing high at 1.11680 before a push to 1.12.

GBPUSD is starting to push north of the 1.30 level and has cleared the 50-day moving average at 1.3030 to trade close to 1.3050, although it’s still got a strong attraction to this round number, like a moth to a flame. Markets still undecided on whether a rate cut is coming this month so if the Bank does move to ease it opens up possible fresh downside towards the 1.28 region. USDJPY is just a little shy of 110 and has moved below the 200-week moving average again.

On tap today

ECB meeting minutes – looking for clues about future monetary policy from the Dec meeting. The first minutes from a Lagarde meeting could be interesting, but this was a dead meeting. Lagarde is no Draghi but she’s smart and buying herself time. She is due to speak in Frankfurt later also.

US retail sales – how strong is the US consumer? Probably still pretty strong by all accounts. Forecast +0.3%, or +0.5% for the core reading.

Stocks advance as trade deal looms, pound slips as BoE doves circle

European stocks are a tad higher after a lacklustre end to the week. US-China trade deal will be the main talking point for risk. Early doors Monday the FTSE 100 is back above 7600 and the DAX is north of 13,500 – will that all-time high be achieved this week? Asia has been higher, with Japan closed for a holiday. On Friday, US stocks fell after the bell as bulls tried to shake out the weaker hands before staging the rally that took the Dow to 29k. But gains were quickly unwound and selling built through the day to close -133pts. US futures are pointing a touch higher today.

The US-China trade deal is the focal point. White House officials are adamant it’s a fait accompli, save translating the 86-page document into Chinese. It’s expected to be signed on Wednesday.

With the phase one deal baked in, what markets want to know is how quickly – if at all – the two sides can move things forward to phase 2. There’s no doubt that building on this deal is going to take a lot more effort and compromise. Of course, phase one could unravel at any moment if either side wants to walk. Enforcement is an issue too.

It’s easy to miss it, but US earnings season gets underway this week as the big banks begin reporting on Jan 14th. Weak corporate earnings growth could dent optimism around US stocks, but with the fourth quarter of 2019 out of the way, the market’s real focus is going to be whether we get the 10% earnings growth forecast in 2020.  As ever the focus is on the guidance.

Consensus estimates indicate a 1-2% decline in Q4 earnings, but the tendency to beat expectations suggests we will see earnings growth, albeit small.  

Last year we saw multiple expansion massively outweigh earnings growth as the driver of the 28% rise in the S&P 500 last year. This poses problems as it means valuations are already rather stretched and reliant on strong EPS growth in 2020. The S&P 500 forward PE has jumped to 19 from about 14 at the beginning of 2019, having averaged 16-17 over the last five years.

Starting to see some focus on the US presidential election with the key Iowa Caucus on Feb 3rd. A poll last week showed Sanders leading Warren.

Oil – speculative long positioning hasn’t been this stretched since 2018, partially explaining why we saw such a sharp turnaround last week. Net longs rose 567k contracts. WTI has recovered the $59 handle but weakness is evident throughout. Saudi energy minister on the wires today saying that OPEC+ will take a decision on extending cuts in March.

Gold – likewise long positions were stretched, as net longs rose to 322k. We’ve not seen such a crowded long trade in years. Prices holding around the $1550 level for the time being.

In FX, still lots of uncertainty about the dollar in the wake of that NFP release. We have chewed on this but ultimately it doesn’t tell us much new. We have an average earnings figure that was well short of expectations, which will tame any tentative Fed hawks as it suggests inflation won’t run hot. Payrolls were a tad light at 145k but not by enough to be a worry about USA plc. Wages though were substantially short at 2.9% annual vs 3.1% expected (0.1% vs 0.3% monthly). Unemployment steady at 3.5%. Revisions to the last two months were modest at -14k. 

A dule of doves? Or a cote of doves? Either way, they’re gathering at Threadneedle St. A cut is coming. The pound is under pressure at $1.30, briefly taking a $1.29 handle, as Bank of England doves circle. MPC member Gertjan Vlieghe said he’d like vote to cut if data doesn’t show a turnaround sharpish. He’s joined Carney and Tenreyro in arguing that more stimulus may be needed sooner rather than later. One senses the Bank doesn’t want to get behind the curve and is seeking to get a jump on markets whilst still teeing up the cut. Michael Saunders – who along with Jonathan Haskell has voted to cut at the last two MPC meetings – speaks on Wed and will no doubt reiterate his belief a cut is needed now. 

Doubts about the UK’s ability to negotiate a trade deal with the EU this year are dragging on the pound. On tap today – November month Industrial Production, Manufacturing Production, monthly GDP and trade numbers will be a smorgasbord if delights but not the main course.

USDJPY is stalling at 109.60. Having cleared the 200-day and other MAs bulls seem to have now decisively broken resistance on the trend line drawn from the falling highs since the swing high of Oct 2018, at 109.50. Long term 61% Fib level to cross at 109.60 where we have seen rallies hit a wall several times lately. This area is offering a decent amount of resistance as a result but if taken out could see a sharp spike higher. The 200-week moving average sits just above at 109.70/80 – a break here calls for a sustained drive back to 112. EURUSD is holding a 1.11 having bounced off key trend support and the 50-day SMA.

Bond blowout, equities take breather, Scottish Mortgage feels pain

Stocks rally on trade optimism, dip on trade fears – rinse, repeat. Only, in the US at least, the market just keeps on cranking higher, seemingly no matter what. 

Yesterday, US equities pushed the record highs again and bonds tumbled, while European stocks firmed around 4-year peaks on hopes and perhaps signs of real progress on trade following remarks, just before the London open, that the US and China were in agreement on rolling back tariffs as part of a managed ceasefire. 

There was confusion over exactly what the Chinese official said, but seemed to be clarified by the US saying the phase one deal would include tariff rollback. White House ‘sources’ reports later talked of ‘fierce internal opposition’ with no final decision made.

There a strong sense of the ‘if’ about this. If a first phase trade deal is done, there is agreement to roll back some existing tariffs, but only if the deal is agreed. Usual story – mixed reports really all just noise.

The bulls took it happily. The S&P 500 broke 3090 but closed off the highs of the day, still though at a record high at 3,085, up 0.3%. The Dow and Nasdaq continued their run.

European markets are riding this wave too. The Euro Stoxx 600 has reached its best level in 4 years, and is now only c2% off the all-time highs. Within this we’ve seen the DAX take a real lead. 

Asian equities have been weaker overnight, and Europe is off to a softer start in early trade.

Bonds were blasted as the risk-on mood took hold of debt markets. US 10s shot 15 basis points higher to 1.96% on the sell off. Yields eased off the highs a touch overnight as selling waned.

The blowout in bonds left gold bulls in tatters, nursing heavy losses. Having looked steady around the $1485 support area, gold dived sharply to nearly touch $1460. Pressure has eased overnight with prices managing to climb back to $1470. Bulls will seek to recover the 100-day moving average at $1477. Failure to test the October lows despite this large selloff indicates bulls remain, just, in charge. $1460 held – if it goes then the bears take over.

It’s all sparked renewed bid for the dollar. EURUSD is starting to come under heaps of pressure on the approaches to 1.10 with a couple of tests around 1.10350.

Bid for risk saw USDJPY push through the 109 barrier and the 200-day moving average.

Sterling is in a post-BoE funk, not helped by dollar strength. GBPUSD is testing the bottom of the range at 1.28.

Equities

Scottish Mortgage Investment Trust is something of a quiet hero of the stock market. It’s only cut its dividend once. But it’s entered one of those sporadic bouts of underperformance which can afflict even the steadiest. Since the end of March  net asset value per share (NAV), rose but 3.2% compared with 9.9% for the FTSE All-World Index, in total return terms. To put that in context, over five years the NAV has gained 137.5% vs 86.5% and over 10 years it has increased by 415.1% vs 204.4%. Dividend is flat.

When you look at the makeup of the trust it’s clear why. The company has invested heavily in high growth tech stocks from the US and China, which have been stars since the crisis. But lately there has been a rotation out of growth and into value which has hit returns over the last six months. A pummelling for Baidu, which was once a very significant holding, has not helped.

Interesting comments on the state of public stock markets, with management saying they are ‘convinced that the long term risk taking, essential to economic and social progress, is continuing to migrate to private markets and at an accelerating pace’. SMT looks to be happy to go with the trend too. The risks of being in unquoted entities have been clearly highlighted by the Woodford and SoftBank travails. Public markets exist for a reason.

IAG shares came under pressure due to softer medium terms guidance. The British Airways owner is forecasting slower capacity growth and weaker earnings potential.  

Management now see ASK – available seat kilometres as a measure of capacity – growth of 3.4% per annum compared to approximately 6% per annum for 2019-2023 previously guided. ASK growth in 2020 is currently planned to be 3.2%. Average EPS growth is now seen at 10%+ per annum against the previous guidance for 12% growth, reflecting the slower pace of capacity growth. 

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