Fed sticks to its guns, Apple and Facebook earnings blowout

Morning Note

The Federal Reserve remains resolutely firm. Jay Powell reiterated that the central bank is not even close to talking about tapering bond purchases, a move that would begin to unwind some of the extraordinary accommodation delivered in the wake of the pandemic. The Fed chair said the US economy is still a long way from achieving the progress required to dial back stimulus – over 8m jobs are still lost and that means we need several blowout jobs reports to get there. Powell also stressed that policymakers are not worried about inflation and think any price pressures will prove temporary.  The Fed is doubling down here and sticking to its guns. Advance GDP numbers due to today should show the US economy roaring back. 

 

All this should be a green light for stocks, but the markets are wary right now as they tread record highs and all this stimulus is priced in and the macro outlook well understood. The US 10-year bond yield moved to test the 1.65% level. US stock markets closed marginally lower, though the small cap Russell 2000 managed to eke out a small gain. Futures point to solid gains for Wall Street later today when the cash equities open. European stock markets are largely higher in early trade today, with the FTSE 100 popping its head above 7,000 again on a raft of largely positive corporate updates.

 

Apple reported another stunning quarter, with sales soaring from last year and a fresh round of buybacks. The company raised the dividend by 7% to $0.22 per share and announced $90 billion in share buybacks. Apple revenues grew more than 50% year-on-year, with total sales of $89.58bn vs around $77bn expected. EPS came in at $1.40 vs $1.00 expected. At all levels, we can see Apple outperforming even the most bullish expectations. The core iPhone business saw sales up 65% to $47.94 billion vs. $41.43 billion estimated. This was stunning – the iPhone remains the golden goose and way in which consumers become part of the Apple ecosystem. Services – a higher margin business that includes things like the Cloud, App Store, Apple Music – grew revenues by 26.7%. Revenues in China rose 87% – albeit this was in comparison to a quarter last year in which China was most affected by the pandemic. Shares rose 2% in the after-hours market. A really exceptional quarter – it’s not a surprise that it exceeded quite a low bar, but noteworthy just by how much.

 

Facebook shares advanced 6% in after-hours trading as the company reported posted forecast-beating revenues and earnings. However, the company warned investors that growth could slow as new Apple privacy policies would make it harder to targe ads on social media. I’m fairly used to Facebook using earnings calls to warn that rates of growth could slow in future, and I think investors are too. Earnings per share came in at $3.30 vs $2.37 expected on revenues of $26.17bn, which were about $3bn more than expected and up 48% on a year before. Net income rose 94% to $9.5bn. Average revenues per user came in at $9.27 vs. $8.40 expected. 

 

BT confirmed it is looking to sell its TV business.  This has been a long time coming – the vast sums BT paid to secure football rights was always at odds with the core business. In a statement responding to press speculation, the company says “early discussions are being held with a number of select strategic partners, to explore ways to generate investment, strengthen our sports business, and help take it to the next stage in its growth”. Whilst clearly the pandemic has badly hit sport, BT has never set too well in the content space; there are many with deeper pockets who do content. Ballooning costs left BT paying a hefty bill for sports that wasn’t being covered. It’s further evidence of chief executive Philip Jansen ripping up the Gavin Patterson era playbook to focus squarely on the Openreach rollout and modernise BT. 

 

Shell raised its dividend after beating expectations thanks to higher oil prices and improved margins in its chemicals business. Adjusted net income rose 13% from a year before. Net debt fell $4bn. Meanwhile French firm Total said profits are back to pre-pandemic levels as adjusted net income hit $3bn, higher than the pre-crisis first quarter of 2019. 

 

Unilever shares rose over 2% as the company announced it will commence a €3bn share buyback scheme next month after a 5.7% jump in sales in the first quarter. Most (4.7%) came from higher volume, with just 1% from stronger pricing. For 2021 Unilever stuck to its target of underlying sales growth to be within 3-5%, with the first half at around the top of this range. Management also pointed to additional supply chain costs, with rising commodity and freight prices a factor as margins are seen declining a touch in the first half before picking up later in the year. Ongoing covid restrictions in some areas of the world continued to support in-home sales, whilst the slackening of restrictions in some geographies boosted out of home sales. Mayonnaise and ice cream were strong sellers. India and China both posted strong double-digit growth against a backdrop of strict lockdown measures which impacted the prior year. 

 

NatWest reported Q1 2021 operating profit before tax of £946 million and an attributable profit of £620 million. This was boosted by the reversal of provisions for bad loans as government support schemes reduced the amount of loan delinquency banks had anticipated. NatWest booked at net impairment credit of £102m. But shares fell as the total income was a slight miss, coming in at £2.66bn vs £2.7bn expected. Net interest margin fell 2bps to 1.64%. Shares declined more than 3% in early trade. Standard Chartered continued the run of positive news from the large banks as it recorded underlying pre-tax profit rising 18% to $1.4bn as lower impairment charges and strong cyclical recovery in the global economy offsetting lower interest margins. Return on tangible equity rose 220bps to 10.8% and management reaffirmed their view that income will start growing again in the second half of the year and for impairment charges to reduce significantly.

 

Smith & Nephew shares rose 6% to the top of the FTSE 100 after reporting Q1 revenue up 6.2% on an underlying basis (11.5% reported) to $1.264bn. This included 3.4% from foreign exchange and 1.9% from acquisitions, whilst the quarter also included two more trading days than the equivalent 2020 period. 

BT shares leap as European equities trade higher

Morning Note

Still no love for Europe? Equity indices in Europe dropped last week as risk appetite waned into the weekend, whilst US stocks closed Friday at record highs, albeit the rally since the March lows has been very uneven – all the chatter over the weekend was about a K-shaped recovery.

Can beaten down value stocks catch up? With Europe lacking a lot of the high-quality tech and growth names, it may struggle until there is a vaccine, the pandemic is over, and dividends are reinstated. Short-term the price action in stock indices seems more down to the individual narrative of the day or week.

Stocks up as markets focus on Covid-19 treatment and vaccine news

Today it’s positive. European equities took the cue from a strong Asian session and pushed higher on Monday morning, with the narrative centring on treatment and vaccine news. Donald Trump is said to be mulling fast-tracking AstraZeneca’s vaccine candidate, whilst the FDA issued an emergency use authorisation for using plasma from recovered patients to treat Covid-19. Shares in AstraZeneca rose 2% in early trade.

Meanwhile, the US and EU have struck a ‘mini’ deal to cut tariffs on a range of items, which marks an important de-escalation of trade tensions that has dogged relations for many months.

BT surges as it readies takeover defence

BT shares leapt 7% after reports it is seeking to bolster its defences against a possible takeover. At a valuation of £10bn, the group has become a definite target. And whilst BT has a lot of legacy baggage – notably £18bn in net debt and a major pension deficit – it’s also got the Openreach crown jewel, which would be worth considerably more on its own than the group is valued today.

Of course, there is no formal offer, but shares could jump further if one emerges. Deutsche Telekom, which owns 12% in BT, is seen as a likely candidate. The question is whether there could be more bombed out UK-listed stocks that could be taken out by a timely takeover…perennial rumour-favourite ITV, for instance?

Deadlocked Brexit talks weigh on Sterling

Elsewhere, sterling made a push higher last week, but the dollar came back. Brexit talks did not go very well and there was virtually zero progress on some key elements. The failure to break the long-term weekly trend resistance makes GBPUSD susceptible to further pull backs, with a gravestone doji weekly candle also a bearish indicator. Support kicked in at 1.3060 on Friday and offers the near-term test for bears.

Bulls will require a weekly close above the trend line to be confident. EURUSD failed to overcome 1.1960 and pulled back to 1.1760 where it has found support. A further rise in EUR net long positions to almost 200k contracts evident in Friday’s COT report from the CFTC indicates extremely bullish positioning that may be too crowded and liable to a squeeze lower. GBP speculative positioning turned net long from net short for the first time since April.

What we’re watching this week:

Republican convention fires campaign starting pistol

The Democrats seem to have got through their set-piece without a hiccup. Now over to Trump and co for the Republican convention, which will not only mark the starting pistol for this year’s presidential run, but also the race for the 2024 GOP candidate. Market attention will increasingly come around to the November presidential race with barely over two months left until polling day.

Vix futures indicate investors are starting to position for more volatility as the election approaches and we should be prepared for a decent nudge higher in volatility and swing lower for stocks over the next two months. This is will be the last major set piece event before the first presidential debate on September 29th.

Jackson Hole

A confusion of central bankers convene in Wyoming online for the annual Jackson Hole Symposium. This year’s virtual theme is “Navigating the Decade Ahead: Implications for Monetary Policy”. I could answer that in one sentence: lower for longer, outright debt monetization, force inflation up to clear debts. But I’m not a central banker, although I would go to Jackson Hole for the trout fishing.

Federal Reserve chair Jay Powell speaks on Thursday just a few moments before the US cash equity on Wall Street. Bank of Canada Governor Tiff Macklem follows and Bank of England Governor Andrew Bailey speaks on the Friday. Given the way the minutes of the Fed’s July meeting rocked risk appetite and checked the bulls’ progress, this will offer a chance to catch up on where the Fed one month on with its mid-September FOMC meeting in focus.

Economic data to watch

There is a lot of economic data to get through this week, notably some Q2 GDP second estimates for the US among others. On Tuesday we are looking at the US CB consumer confidence report.  Wednesday sees the weekly crude oil inventories report as well as US durable goods orders and Australian construction activity. On Thursday the US weekly initial jobless claims number gets released, after last week’s disappointing print of 1.1m. Look also at the pending home sales and preliminary (second estimate) GDP numbers.

More US data rounds out the week on Friday with the Fed’s preferred inflation gauge, the core PCE price index; personal spending; University of Michigan consumer sentiment; and the Chicago PMI on the slate.

Earnings to watch

Ad titan WPP reports it interim results for the six months ended June 30th on Thursday. The advertising giant is a useful barometer of economic confidence. Big brands have slashed marketing budgets to cope with pandemic and WPP has warned of the hit it will take this year.

But rival Publicis reported a 13-% drop in second quarter like-for-like sales, which was well ahead of the –20% anticipated. Shares in WPP are down over 40% this year – could Publicis offer a clue as whether the stock may find a new course? Does WPP see ad spend picking up? How has the Facebook boycott impacted it?

We are also interested in recruiter Hays – which reports finals on Thursday and is often a great indicator as to the overall health of the labour market globally. Salesforce.com(CRM) is expected to deliver earnings and revenue growth when it reports numbers for the quarter ended July on Tuesday. EPS is seen at $0.7 on revenues of $4.9bn.

European markets tumble in catchup trade, Trump bashes China

Morning Note

On the plus side, the UK is sketching out how it plans to end the lockdown. On the minus side, it’s going to take a long time to get back to normal. This, in a nutshell, is the problem facing the global economy and it is one reason why equity markets are not finding a straight line back to where they were pre-crisis.

Indices on mainland Europe are catching up with the losses sustained in London and New York today, having been shut Friday. The DAX retreated 3% on the open to take a look again at 10,500, whilst the FTSE 100 extended losses to trade about 20 points lower. Hong Kong turned sharply lower ahead of its GDP report.

Whilst monetary and fiscal stimulus sustained a strong rally through April – the best monthly gain for Wall Street since 1987 – it’s harder to see how it can continue to spur gains for equity markets. Moreover, US-China tensions are resurfacing as a result of the outbreak, which is weighing on sentiment. Donald Trump spoke of a ‘very conclusive’ report on China – the demand for reparations will grow, and trade will suffer as the easiest policy lever for the White House to pull. This is an election year so I’d expect Trump to beat on the Chinese as hard as he can without actually going to war. Trade Wars 2.0 will be worse than the original.

And as I pointed out in yesterday’s note, equity indices are showing signs of a potential reversal with the gravestone doji formations on the weekly candle charts looking ominous.

Warren Buffet doesn’t see anything worth investing in. Berkshire Hathaway has $137bn in cash but the Oracle of Omaha hasn’t found anything attractive, he said on Sunday’s shareholder meeting. His advice: buy an index fund and stop paying for advice.

In FX, today’s slate is rather bare but there are some European manufacturing PMIs likely to print at the low end. The US dollar is finding bid as risk appetite weakens, favouring further downside for major peers. EURUSD retreated further having bounced off the 100-day SMA just above 1.10 to find support around 1.09250. GBPUSD has further pulled away from 1.25 to 1.2460.

Front month WTI retreated further away from $20. CFTC figures show speculative long trades in WTI jumped 35% – the worry is traders are trying to pick this market and the physical market is still not able to catch up with the speculators. The move in speculative positioning and price action raises concerns about volatility in the front month contract heading into the rest of May.

BT Group shares dropped more than 3% on reports it’s looking to cut its dividend this week. Quite frankly they ought to have cut it months ago. I rehash what I said in January: Newish CEO Philip Jansen should have done a kitchen sink job and cut the dividend from the start. The cost of investment in 5G and fibre is crippling, despite the cutbacks and cost savings. Net debt ballooned to more than £18.2bn – up £7.2bn from March 31st 2019. How can BT justify paying over £1bn in dividends when it needs to sort this debt out, get a grip on the pension deficit and do the kind of capex needed for 5G and mass fibre rollout? Given the current environment, a dividend cut seems assured.

What to watch this week

NFP – Friday’s nonfarm payrolls release is likely to be a history-making event. Last month’s -701k didn’t reflect many days of lockdown, so the coming month’s print will be seismic. However, this is backward looking data – we know that in the last initial jobless claims have totalled around 30m in six weeks – the NFP number could be as high as 22m according to forecasts. The unemployment rate will soar to 16-17%. The main focus remains on exiting lockdown and finding a cure.

BOE – The Bank of England may well choose this meeting to expand its QE programme by another £200bn, but equally it may choose to sit it out and simply say that it stands ready to do more etc. The Bank will update forecasts in the latest Monetary Policy Report, with the main focus likely to be on how bad they think Q2 will be. Estimates vary, but NIESR said Thursday the contraction will be 15-25%.

RBA – The Australian dollar is our best risk proxy right now. The collapse in AUDJPY on Thursday back to 68.5 after it failed to break 70 was a proxy for equity market sentiment. We will wait to see whether the Reserve Bank of Australia meeting on Tuesday gives any fresh direction to AUD, however there is not going to be a change in policy.

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