SLR exemption to end

Rates backed up a touch and we saw some movement on NDX futs as the Fed announced it will let the SLR exemption expire as planned on Mar 31st. Following yesterday’s spike there was not a lot of bid coming back in bonds. There is some debate about whether ending the SLR exemption will lead to selling of Treasuries by banks, but what is obvious is that the Fed is confident to let things move now and this means we should be seeing higher yields still. It’s a good sign that the Fed is confident in the way some of the market plumbing like repo markets are functioning well and some of the supports for banks can be removed. 


Remember it’s quad witching today so expect added volatility in addition to the whole yield freak out – US stock options, stock futures, market index futures and market index options all expire. NDX tested 12,760 ahead of the cash open as the SLR news broke – bearing in mind these expiries it will be choppy again if investors decide to take risk off table ahead of the weekend. 12,730 looks to be the area of interest today and a breach to the downside at this level could open further selling towards the March lows around 12,200.


Banks slipped pre-market with JPMorgan down 2% on the leverage ratio change. 


Nike fell in the pre-market after it said congested ports in the US meant sales fell short, although it delivered EPS of $0.90 – 14 cents ahead of forecast. FedEx shares rose 5% in pre-mkt as it reported a bumper holiday season. EPS came in at $3.47 vs $3.23 expected. Revenue rose 23% to $21.51bn from $17.49bn a year ago. Tesla shares are a little lower in the pre-mkt whilst Ford is up after an upgrade from Barclays. 


Elsewhere stocks are broadly lower this afternoon in Europe as the week ends on a bum note following the spike in rates and some wobbly thinking vis-a-vis vaccines.  DAX holding up ok for the week but the FTSE seems set to finish lower and is about 1% off today.


Sterling is weaker as the dollar has come back to life with the uptick in yields supportive of the greenback. GBPUSD sank to LOD around 1.3850 at pixel time to test the low of Wednesday. Breach here calls for retest of the 1.380 area, the week low. 

Big tech weighs, Natwest rounds off solid quarter for UK banks

Morning Note

European shares once again fell and then tried to come off the flatline in early trade on Friday after another down day in the previous session, but the mood is pessimistic.

The FTSE 100 is trading above 5,500 but with little support under 5,400 we could yet see a retest of the March lows at 5,000-4,800.

Wall Street rallied as the bulls put in a solid defence with the S&P 500 recovering 3,300. Big tech earnings beat expectations yet shares fell after hours and this weighed on the futures, which are pointing to a weak open for the US market. Bear in mind also month-end flows which are helping muddy the waters.

The US dollar surged with US yields moving higher yesterday. DXY advanced to near-term resistance at the top of the October range at 94. WTI (Dec) sank amid the broad risk-off tone yesterday and demand fears were to the fore.

US jobless claims fell and GDP in the world’s largest economy rebounded a little more than expected in the third quarter, but none of this matters much since the market is entirely focused on the spread of new cases and lockdown measures.

The annualized 33.1% bounce in the third quarter masks the fact the economy is 15% smaller than it was before the pandemic hit. The pace of the recovery is slowing in the fourth quarter albeit it remains on a sure enough footing compared to Europe (lockdowns to blame there), whilst the glow from the $600-a-week stimulus cheques (which stopped at the end of July) is dimming quickly. And whilst we believe new stimulus measures are coming over the hill, the longer the delay the tougher it becomes for Main Street.

The European Central Bank (ECB) didn’t do anything but sounded more dovish and signalled it is ready to act in December by pumping up its emergency quantitative easing programme.

In fact, there was overall a surprisingly strong pre-commitment to taking additional easing measures in December. It’s all but a down deal now that France and Germany have locked down and the economy is heading for another recession.

The euro fell, weighed down by the dollar’s advance but also because of the ECB’s stance. Christine Lagarde said staff were working on recalibrating all instruments, which means even interest rates could be cut further in addition to expanding QE envelopes.

EURUSD dropped to take a 1.16 handle but found support at the 100-day SMA at 1.1650. Cable traded weaker, briefly taking a 1.28 handle but caught some bid around the 1.29 level to steady the ship. 100-day SMA at 1.2877 offers the near-term support under here.

More upbeat numbers from the high street banks with Natwest this morning reporting Q3 operating profit more than twice market estimates at £355m vs ~£130m expected.

Impairments were half the market expectations at £254m vs over £550m expected. CET1 very strong at 18.2%, net interest margin down 2bps to 1.65%. A good set of numbers to round off a strong performance by the UK banks but doubts remain about a potential increase in impairments down the road, weak economic growth in the UK, Brexit challenges, and the threat of negative rates eating away at margins.

Big tech reported earnings that showed its resilience to the virus but also betrayed just how richly priced these stocks are in the wake of the pandemic. With the exception of Google parent Alphabet, shares fell across the board after hours, which weighed on US futures overnight.

Alphabet shares rose over 6% in after-hours trading as earnings indicated a bounce back in the search business. EPS of $16.40 beat the $11.29 expected, on revenues of $46.17bn. Advertising revenue rose to $37.10bn, compared to $33.80 bn in the year-ago quarter. YouTube +32% was notably strong. Alphabet will start breaking out its cloud earnings performance from the next quarter.

Amazon posted a blowout third quarter of revenue growth and is poised to capitalise on a record Christmas shopping season. Net income rose to $6.3bn vs $2.1bn in the same quarter a year before despite spending significant amounts on coping with the virus.

In total, Amazon has incurred more than $7.5bn in incremental Covid-related costs in the first three quarters of 2020, and expects to incur approximately $4bn in Q4, CFO Brian Olsavsky said. AWS net sales rose 29% to $ Shars slipped almost 2% in the after-hours market.

Facebook shares fell 3% after-market as it posted a decline in North American users and signalled more uncertainty ahead. Revenue +22% to $21.47bn was a beat to expectations, whilst net income was +29% to $7.85bn. Whilst the shift offline to online among business and retail is a powerful tailwind for the advertising earnings, shares priced for lots of growth are just as sensitive to user numbers and the drop in core US/Canada users is a concern.

Similarly, Twitter shares got whacked after hours as it too posted a disappointing user growth story. Revenues rose 14% to $936m in the quarter, but the +1m gain on daily active users to 187m was short of the 195m expected.

Finally, Apple shares fell 5% after hours as a 20% decline in iPhone revenues weighed on the stock, whilst the lack of any guidance for 2021 was taken as a negative.

Whilst Mac and iPad sales rose strongly over the company’s fiscal fourth quarter, it was not enough to offset the drop in iPhone sales. However, with the quarter covering the period immediately before the launch of the iPhone 12, we would think that weakness in iPhones will prove fleeting.

Mac revenues +28% to $9bn and iPad sales +46% to $6.8bn partially offset iPhone’s –20.7% to $26.44bn. EPS of $0.73 beat the $0.70 expected, whilst overall group revenues rose 1%. Services continues to do well, with revenues +16.3% to $14.55bn.

Uncertainty around the virus means Apple continues to not offer guidance, however Tim Cook said he was optimistic about the iPhone 12 and is ‘confident’ Apple will grow in Q1 2021. Ecosystem is still the biggest draw and should support the multiple expansion.

Lloyds: PPI still bites as Q1 profits miss expectations


Compensation for customers mis-sold PPI continues to gnaw away at Lloyds profits, whilst it missed on top line revenues in what’s probably not the best quarter for the bank. Net interest income remains ok but we wonder if there is enough in here to continue the rally in shares YTD.

Lloyds took an additional charge of £100 million for PPI in the first quarter, bringing its total provision to very close to £20bn since the scandal first came to light. 

Net income increased by 2% to £4.4 billion, which was a little below the consensus forecast. Profits were flat at £1.6bn, which again was below expectations. Doubts on credit risks are not going away, with asset quality ratio up again to 25bps. Return on tangible equity improved to 12.5%, above its cost of equity. CET1 dropped to 14.2% pre dividend.  

Its net interest margin looks solid enough, holding at 2.91%, which compares favourably with peers.  Cost cutting is helping the bottom line even if revenue growth is not really there – cost to income improved to 44.7% with positive jaws of 6%. 

The company backed its full year outlook – NIM remaining around 290 basis points, operating costs below £8 billion and a net asset quality ratio below 30 basis points. Lloyds still expects a return on tangible equity of 14-15% in 2019.  

As previously stated, the problem with Lloyds is from its very high exposure to the UK market, both unsecured and mortgage lending. It’s really tethered to the UK economy – rising and falling in tandem with consumer spending and the mortgage market, and doesn’t seem to be driving revenue growth unless the economy is growing. 

Shares skidded 2% lower after the results underwhelmed.  After the PRA boosted the stock by cutting its capital requirements, it’s as you were.

Lloyds shares have outperformed chief peers Barclays and RBS in the last year.


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