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Old Yellen goes big, Netflix surges on subscriber adds, buybacks, Burberry shares up on margins, Asia
Shares traded mostly higher in Europe following a positive start on Wall Street on Tuesday as traders returned from the three-day weekend to some upbeat earnings from Goldman Sachs and Bank of America to send the S&P 500 up 0.81% and the Nasdaq +1.53%. Janet Yellen’s Senate hearing confirmed that that stimulus is the order of the day and ‘fiscal sanity’ will be discussed, but not yet. She stressed that worrying about battered finances and raising taxes – the ‘who’s going to pay for it all’ question that MMT’ers say we should not be asking – would be for another day once the economy has recovered. By some measures that could mean years, but it underlines that the new administration is pushing for maximum relief and a period of fiscal expansion. I doubt she’ll ever admit to fully embracing MMT, but we in many ways already there.
For now, as far as equity markets are concerned, it seems as though investors are shuffling the deck, rotating in and out of sectors ahead of the next big move for the broader market. Joe Biden will be inaugurated as the 46th president of the United States today. The end of the Trump era will be marked by a changing of the guard in Washington, but will we see much change on Wall Street and in corporate America? Some corners of the market may look rather different in 4 years’ time.
Netflix shares surged 12% in after-hours trade after it posted a stronger-than-expected rise in net subscribers and said it’s close to returning cash to shareholders via share buybacks. Subscriber adds rose to 8.5m in the final quarter, ahead of the 6m or so expected. Lockdowns across Europe starting in November and surging cases globally probably helped cement demand, whilst churn has not been as much of a problem as feared. Free cash was +$1.9bn in 2020, though this can be mostly explained by delayed production costs due to the pandemic whilst revenues rose on subscriber additions. And whilst 2021 will be negative, it plans to be cash-flow positive going forward from 2021, allowing it to start to return cash after raising $15bn in debt over the last decade to finance expansion. Netflix’s content library may be smaller than in the past, but the strong year has been boosted by big hits like ‘The Queen’s Gambit’, ‘The Crown’ and ‘The Midnight Sky’. EPS was a little light at $1.19 vs $1.39 expected, but investors are content to look through this when subscriber adds are strong, whilst the prospect of buybacks is a clear tailwind for the stock. The strong performance by Netflix appeared to bolster the broader FAANGs with big tech enjoying a solid bump yesterday.
Elsewhere, the dollar eased back further as the near-term rally lost more steam, with the dollar index retreating further away from its 50-day simple moving average. EURUSD pushed up to 1.21580 as the 50-day SMA held firm. Cable also nudged back up with GBPUSD rallying above 1.360 with bulls likely shaping up for a return to 1.37 and clear the Apr 2018 peaks again.
Gold has inched back to $1.850 but still trades a pretty narrow range since the big drop on Jan 8th. Bulls eye the 50-day SMA at $1,860 as US real rates (10-year TIPS) have swung back down by around 6bps or so in the last two days, whilst the dollar’s easing off its peaks has provided some lift. Oil was firmer with WTI above $53 again as markets digested the report from the IEA, which lowered its demand forecast for 2021 but stressed that “a widespread vaccination effort and an acceleration in economic activity is expected to spur stronger growth in the second half of the year”, adding that: “Much more oil is likely to be required, given our forecast for a substantial improvement in demand in the second half of the year.”
Burberry posted a tough set of headline sales numbers, but margins are looking better. Sales dropped 9% on a like-for-like basis, worse than the –7% expected, but the focus on reducing markdowns is helping shore up profits, whilst demand recovery in Asia is encouraging. Burberry has taken a hit as luxury was affected by the pandemic, with footfall down across the board and sales in Europe particularly affected by the collapse in Asian tourist visits. But there have been clear signs of improvement as resilience in key markets has been impressive. Efforts to reduce markdowns and the push to attracting younger, richer customers through celebrity endorsements from the likes of Kendall Jenner and Marcus Rashford is helping. Clearly the closure of physical stores as lockdown restrictions re-emerged towards the end of last year has affected sales, but direct-to-consumer online channels are more profitable.
At its half-year report in November, Burberry reported 31% revenue fall with adjusted operating profit down 75% and adjusted diluted EPS down 88% (reported diluted EPS down 66%). But it noted that recovery was underway with sequential improvement in comparable store sales to -6% in Q2 FY2021 from -45% in Q1 FY2021 and returning to growth in October. Today is records strong performance in Asia-Pacific in Q4, with sales +11% led by Mainland China and Korea. Europe, Middle East, India and Africa sales –37% on collapse in tourism. Americas –8% down to price mix changes.
Burberry remains a strong brand in the luxury space with room to appeal to a broader consumer base over the coming years. The strategy to focus on up-market and full-price sales seems to be paying off and investors agree – shares rose 5% despite the worse-than-expected fall in sales. Also given the consolidation in the sector, Burberry may seem like a potential target with shares still trading at a discount to peers.
Retail remains a mixed bag depending on the corner of the market. Dixons shares fell a touch despite a peak Christmas trading update showing decent growth in Electricals with LFLs +11% across the group as locked-down consumers splurged cash on big TVs and gaming consoles. Online market share +8% is a positive and AO World shares fell –2% perhaps as a result. The real problem remains in Mobile, where total revenues fell –40% with restructuring ongoing in Carphone Warehouse.
WH Smith shares rose over 6% after December saw its High Street division recover to 92% of 2019 levels, up from 82% in November as the country was hit by a broad lockdown. Sales in January are at 70% of 2019 levels so far. Travel – where Smiths has been making its money of late – is trading at about 36% of 2019 levels. Demand in the US – where there is substantially more domestic internal air travel – has recovered more quickly than in the rest of the world. Management say they generated cash during November and December and ended December with a stronger cash position than anticipated with liquidity of £90m, which was “materially ahead of our original plan”.
Week ahead: ECB press conference, Joe Biden enters White House and earnings season rolls on
Looking forward to next week, the ECB holds its first meeting and press conference for this year. Is inflation heading the EU’s way? Elsewhere, earnings season continues with more and more large caps reporting earnings and Joe Biden finally enters the White House as the Trump era finally comes to an end.
First ECB meeting of 2021
The ECB holds its first meeting and press conference of 2021 on Thursday 21st January against a backdrop of heightened stimulus and a warning for governments to not to be too hasty when retightening their post-lockdown belts.
Christine Lagarde, ECB President, has warned to avoid against reacting swiftly against any improvement in economic conditions this year if inflation starts to bite. Speaking on Wednesday 14th January, Lagarde predicted a rebound due to “pent up demand” but said this wouldn’t be enough to warrant a major readjustment in monetary policy as this could lead to serious risks.
The pandemic has led to a sharp rise in household savings across Europe with a corresponding drop in services activity like restaurants, holidays and trips to the cinema. This has contributed to downward pressure on prices precipitated by lower energy costs and VAT cuts in countries like Germany. As such, the ECB inflation rate dropped in the negative in the final months of 2020.
Another deflation cause is the strengthening of the EUR against USD, which has hit three-year highs recently. Import prices are lower, while exports are higher.
Prices may start to track higher in the coming months, according to ECB forecasts. Its latest eurozone forecasts suggest consumer price inflation will reach 1% in 2021, and 1.3% by 2023.
In December 2020, the ECB expanded its main stimulus policy. Its emergency bond-buying programme increased €500bn to €1.85tn. The ECB also readjusted its economic forecasts, cutting them in response to the pandemic’s resurgence across Europe.
The central bank now predicts a pan-EU growth rate of 3.9% in 2021, factoring in longer lockdown measures. However, it did say that any lockdowns post-March could have severe economic affects. Germany’s latest GDP figures show a 5% contraction, so if the bloc’s biggest economy is suffering, what will the knock-on effect be for the rest?
Earnings season continues on Wall Street
Earnings season continues in earnest as the large caps continue a steady stream of Q4 2020 reports.
US big banks kicked things off last week, with JPMorgan Chase, Citigroup, and Wells Fargo giving their initial reports. This week will see a more varied approach as large cap companies and blue chips across all sectors report.
Netflix is one of the earnings to watch this week. The market expects the streaming service to deliver a year-on-year increase in revenues, but last quarter’s reports only just beat market expectations. Q3 EPS was significantly below forecasts, at $1.74 against the $2.12 analysts expected. Will this be the case again? Asia-Pacific has been the key growth market for Netflix in the lockdown world, so it’ll be interesting to see if the streamer has been able to build on its earlier gains there while offsetting any potential drops in other geographies.
Joe Biden inauguration
President-elect Joe Biden becomes President Joe Biden on January 20th, drawing a line under the Trump presidency. Four years since the billionaire reality TV star took the White House, America is as divided as ever. Could Biden prove the emollient the United States requires to become a little more united once again?
At the time of writing President Trump is accused of allegedly instigating the recent Capitol Building riots with inflammatory rhetoric and is about to be hit by his second impeachment trial of his term. No US President has ever been impeached twice during their term. Even with under a week to go for his full term, Trump could be removed from office and may even face criminal charges – an ignominious end to an sometimes less-than-dignified presidency.
But what about the start of the Biden era? How will markets react? There are several factors to watch out for as Biden starts his term, such as:
- Fiscal stimulus – Investor confidence could be bolstered by potential stimulus packages Biden is expected to introduce. He has vowed “trillions” in stimulus once he enters the White House. The Federal Reserve could also continue giving major supports to markets during the new era’s first couple of weeks.
- Foreign trade – Biden is expected to take a multi-lateral approach to foreign trade, and his policies could be more reconciliatory compared with Trump’s more chauvinistic approach.
- Covid-19 – After a laissez-faire approach to pandemic control Trump’s administration deployed, Biden is said to favour a more hands-on approach. His plans include a speedier vaccine rollout, a more detailed plan to get children back into school and asking all Americans to wear masks for the first 100 days of his term to combat the virus spread. Essentially, measures to make it so more citizens can get back to work and get the economy rolling again.
Upon Joe Biden’s election in November, the S&P500 rose 5.2%. Will his inauguration cause the same positive bump for this index?
Major economic data
|Mon Jan 18||2.00am||CNH||GDP q/y|
|Tue Jan 19||7.00am||EUR||German Final CPI m/m|
|Wed 20 Jan||7.00am||GBP||CPI y/y|
|3.00pm||CAD||BOC Monetary Policy Report|
|3.00pm||CAD||BOC Rate Statement|
|Tentative||CAD||BOC Press Conference|
|Tentative||USD||President-Elect Biden Speaks|
|Thu Jan 21||12.00am||AUD||Employment Change|
|Tentative||JPY||BOJ Outlook Report|
|Tentative||JPY||Monetary Policy Statement|
|12.45pm||EUR||Main Referencing Rate|
|12.45pm||EUR||Monetary Policy Statement|
|1.30pm||EUR||ECB Press Conference|
|Fri Jan 22||7.00am||GBP||Retail Sales m/m|
|8.15am||EUR||French Flash Services PMI|
|8.15am||EUR||French Flash Manufacturing PMI|
|8.30am||EUR||German Flash Manufacturing PMI|
|8.30am||EUR||German Flash Services PMI|
|9.00am||EUR||EU Flash Manufacturing PMI|
|9.00am||EUR||EU Flash Services PMI|
|9.30am||GBP||Flash Manufacturing PMI|
|9.30am||GBP||Flash Services PMI|
|1.30pm||CAD||Core Retail Sales m/m|
|1.30pm||CAD||Retail Sales m/m|
|2.45pm||USD||Flash Manufacturing PMI|
|2.45pm||USD||Flash Services PMI|
|3.30pm||USD||Natural Gas Storage|
|4.00pm||USD||Crude Oil Inventories|
Key earnings data
|Tue Jan 19||Bank of America Corp.||Q4 2020 Earnings|
|Netflix Inc.||Q4 2020 Earnings|
|Charles Schwab||Q4 2020 Earnings|
|Goldman Sachs||Q42020 Earnings|
|State Street Corp.||Q4 2020 Earnings|
|Halliburton Co.||Q4 2020 Earnings|
|Logitech S.A.||Q3 2021 Earnings|
|J.B Hunt Transportation Services Inc.||Q4 2020 Earnings|
|Larsen & Toburo Infotech Ltd.||Q3 2021 Earnings|
|Wed Jan 20||Procter & Gamble Co.||Q2 2021 Earnings|
|UnitedHealth Inc.||Q4 2020 Earnings|
|ASML NV||Q4 2020 Earnings|
|Morgan Stanley||Q4 2020 Earnings|
|U.S. Bancorp||Q4 2020 Earnings|
|Bank of New York Mellon||Q4 2020 Earnings|
|Kinder Morgan Inc (P)||Q4 2020 Earnings|
|Fastenal Co.||Q4 2020 Earnings|
|Discover Financial Services||Q4 2020 Earnings|
|Citizens Financial Group Inc.||Q4 2020 Earnings|
|United Airlines Holdings Inc||Q4 2020 Earnings|
|Thu Jan 21||Intel Corp.||Q4 2020 Earnings|
|Costco Wholesale Corp.||Q4 2020 earnings|
|Union Pacific Corp.||Q4 2020 Earnings|
|IBM Corp.||Q4 2020 Earnings|
|Intuit Inc.||Q4 2020 Earnings|
|Intuitive Surgical Inc||Q4 2020 Earnings|
|CSX Corp.||Q4 2020 Earnings|
|BB&T Corp.||Q4 2020 Earnings|
|Investor AB||Q4 2020 Earnings|
|Travelers Inc (Travelers Companies)||Q4 2020 Earnings|
|Sandvik AB||Q4 2020 Earnings|
|Fifth Third Bancorp||Q4 2020 Earnings|
|Northern Trust Corp.||Q4 2020 Earnings|
|M&T Bank Corp.||Q4 2020 Earnings|
|Woodside Petroleum Ltd.||Q4 2020 Earnings|
|KeyCorp||Q4 2020 Earnings|
|Baker Hughes Inc.||Q4 2020 Earnings|
|Fri Jan 22||Schlumberger N.V. (Ltd)||Q4 2020 Earnings|
|Kia Motors Corp.||Q4 2020 Earnings|
|UltraTech Cement Ltd||Q4 2020 Earnings|
|Kansas City Southern||Q4 2020 Earnings|
|HDFC Standard Life Insurance Company Ltd Registered Shs||Q3 2021 Earnings|
|Regions Financial Corp.||Q4 2020 Earnings|
|Huntington Bancshares Inc.||Q4 2020 Earnings|
|Ally Financial Inc||Q4 2020 Earnings|
|Gjensidige Forsikring ASA||Q3 2021 Earnings|
Joe Biden declared president-elect, stocks rally
Joe Biden has been declared president-elect, but Donald Trump is refusing to concede. Markets are not particularly fussed and see some clear light – relative clarity is providing a boost to risk assets.
Stocks enjoyed the best week since April, though there was some payback on Friday as traders consolidated gains.
The S&P 500 rallied 7% over the five sessions, but this did come after just about the worst pre-election week for stocks on record. Investors were shifting a lot of flow into lower volatility debt markets ahead of the election to reduce exposure to stock market volatility, and this is now unwinding back into equities.
In particular, the Biden White House and split Congress ought to mean lower rates, lower inflation and this benefits Growth stocks, and gold.
The dollar index has slumped to its weakest since September 1st put tried to rally early on Monday. A weaker dollar is supportive for gold, which broke out past $1,950. WTI (Dec) tracked sideways around the $38 mark.
Stocks in Asia rose, with the Nikkei up 2% and Hang Seng rising over 1%. Stocks opened firmer in Europe with the bullish trend asserting itself as Biden’s triumph seems all but assured.
The FTSE 100 rallied 1.5% to 6,000, whilst the DAX rose 1.7% to 12,700 and the Stoxx 50 returned to 3,250. US futures indicate Wall Street will open higher after a lacklustre session on Friday.
It would take a lot of big and unlikely legal victories for Trump to turn the result now. Recounts are likely as are multiple legal actions – but the lead for Biden is such that it would imply some enormous voter fraud in several states. Safe Harbor Day is Dec 8th, by which date all states need to have decided who’s won ahead of the Electoral College votes on Dec 14th.
The MSCI All Country World Index hit a record intra-day high this morning. A Biden win is seen to be much better for international cooperation, an end to the Trump-era isolation and critically, good for trade with the potential for a reset in transatlantic relations probably the most exciting aspect for investors. Whilst the Democrats won’t go easy on China, the relationship is expected to be steadier and escalation of tariffs seems less likely than under Trump.
According to weekend data Chinese exports jumped 11.4% in October, whilst imports rose 4.7% in USD terms. This was the best export performance since the pandemic and shows the recovery taking place outside of those countries where lockdowns linger.
It’s a good indicator that global demand is picking up in spite of pandemic restrictions in certain areas. This morning saw some decent German export numbers for September (+2.3%), but France’s economy is operating down 12% in November due to the lockdown.
After the relief rally, where next?
The Senate looks to be heading for Republican control, which removes a lot of the regulatory and tax overhang. Georgia run-offs will keep us unsure for a while longer, but the odds favour a very slim Republican majority in the upper house. Gridlock could be good for multiples and earnings longer term, but it’s not conducive to a large stimulus package right now.
And will Biden go for a more aggressive approach to containing coronavirus? We know that the greater the restrictions the greater the economic damage. Europe is enduring this reality again. A Biden win is probably good news for clean energy companies – the president-elect is committed to re-joining the Paris Climate Accord. Scottish Widows is offloading £440m in ESG unfriendly investments – the wind is blowing only one way.
Sterling was holding well above $1.31 but dollar weakness aside, the pound remains susceptible to a significant amount of Brexit headline risk.
Boris Johnson and Ursula von der Leyen said ‘significant differences remain’ in trade talks, citing fishing and the provisions for a level playing field. All the showboating and posturing should give way to pragmatism and the realpolitik of securing a deal before the New Year. The current ‘deadline’ is November 15th but talks could well extend beyond this. After tapping on 1.32 briefly early doors, GBPUSD dropped to 1.3140 by around 9am.
The FTSE 100 hit 6,000 and seems to have broken the downtrend. Next to 6,300, or will the downtrend reassert itself? The jump this morning marks a clear move off the 50-day simple moving average at 5,888 and the 100-day simple moving average at 6,011 offers resistance.
Stock markets consolidate gains, dollar close to September lows, Bitcoin fizzes
Some wise words this morning from one of the most exceptional and reliable performers on the UK market, Scottish Mortgage Investment Trust. In the long run, management write in today’s half-year report, stock market returns are driven by “a small number of exceptional companies”.
They add: “The progress of such companies is rarely smooth or linear. They have breakthroughs and they have setbacks. Sentiment in the market exaggerates the peaks and troughs, driving price volatility that is commonly mistaken for risk. When we believe we have identified an exceptional company that is pursuing a large opportunity, we look beyond this cycle of feast and famine. With a longer timeframe, such oscillations matter less, and the picture of compounding growth becomes clearer. Many, if not most, investments won’t turn out as we hope.
“However, for the companies that do succeed, the returns are transformational and they have a disproportionate impact on the portfolio. This is why we approach our task with optimism. It is more important to identify the factors that will allow a company to prosper than to enumerate the potential pitfalls along the way.”
SMT’s net asset value per share with debt at fair value (NAV) rose by 76% over the last 6 months, compared to a 24% increase for the FTSE All-World Index.
Over the last ten years, they’re up 674% vs 191% for the index. Management conclude the update optimistically: Opportunities for investing in companies building the future of the economy with capital and patience “remain plentiful”. They also note that investors should treat “confident pronouncements” with “scepticism”. Amen to that.
Investors moved to consolidate gains early on Friday after a very decent bump up in stocks over the last week, with European bourses in the red in the first hour of trade.
The Stoxx 600 is on course to rise 7% for the week, whilst US markets have posted similar gains as technology has risen strongly. The Nasdaq is up 9% for the week and the S&P 500 has risen 7% in four sessions. Futures indicate a weaker open in the US. The dollar has retreated to its weakest in over two months, whilst gold broke out to $1,950.
Votes continue to be counted in a number of key battleground states and whilst Donald Trump is pursuing legal avenues, his chances of getting anywhere appear slim.
So far courts have thrown out his appeals. Moreover, Joe Biden is closing the gap in those states still counting and these last bastions of hope for the President could also flip. We appear set for a Biden presidency and Republican Senate, which should mean less stimulus, less infrastructure spending and less uncertainty over regulation and taxes, which equals a positive situation for Growth stocks over Value and the big tech names that have dominated the US market for years.
The Fed left rates on hold and made no changes to the pace of asset purchases as chairman Jay Powell warned of the downside risks to the economy. In truth,the Fed was never going to do anything at this point and no one expected it to rock any boats. Nonfarm payrolls today but these are increasingly irrelevant against the backdrop of the pandemic, stimulus and the weekly claims numbers, but the release could still move the market at 13:30 GMT.
Bitcoin blitzed through $15,000 for the first time since the beginning of 2018 and came close to taking out $16,000 as investors rode a momentum trade that has been building up a head of steam ever since PayPal announced it would let users buy, sell and hold a variety of major cryptocurrencies. Bitcoin futures broke above $16,000. Two big things seem to be at work that are interconnected. Increasingly millennial investors are favouring Bitcoin within their portfolios as a diversification holding similar to people own gold. Given the scale of the gold market ($2.6tn in bars and coins + $240bn in ETFs) only a modest rotation out of gold would imply a significant increase in prices for Bitcoin from here. PayPal’s move has been super important. The more that businesses and payment processors, card providers and so on accept cryptocurrencies, the higher their value as a utility as a means of payment.
Reflation trade unwinding…maybe not. The dollar sank to the bottom of the recent range where the support has just about held. Bears will be eyeing a test of the September lows at 91.70.
Gold broke free from the descending trend line to the $1,950 area with a positive MACD crossover backing the move.
Bank of England pulls QE lever, Biden close to victory
Easing ain’t as easy as it looks: The Bank of England increased its programme of government bond purchases by an additional £150bn.
This was more than the market was expecting and took the total stock of government bond purchases to £875 billion.
That said, the BoE had pretty well telegraphed this move yesterday when it decided to bring the decision forward from 12 noon to 7am – most pundits assumed that this meant a monetary policy decision of note that the BoE didn’t want to get entangled with the chancellor’s latest pandemic statement.
Interest rates were kept at 0.1% and the MPC voted 9-0 for the measures. There was no talk of negative rates, just mention of the risks to the currency being to the downside. That may be, but sterling rallied as there was no surprise rate cut and no mention of plans to take rates negative.
GBPUSD rose sharply from 1.2940 to above 1.30 after the announcement, eyeing near-term resistance peaks at 1.3050 and then the 1.3140 high at the peak of the ‘blue wave’ dollar selling on election night before the results showed a much tighter race than polls indicated.
Trump’s election chances hang by a mainly legal thread now that Joe Biden has secured Wisconsin and Michigan. Nevada resumes counting today with Biden having a tiny lead in the state and 25% of the vote yet to count – you think this would favour the Democrat.
Meanwhile, NBC projects that Nebraska’s 2nd Congressional District will swing it for Biden. Legal challenges from Trump are incoming in Wisconsin and Georgia but unlikely to be a material drag – excluding some attempts to block counts and question the validity of some ballots, the smooth transition of power was never really in doubt. But it’s clear there has been no Blue Wave.
The Democrats’ chances of flipping the Senate to Blue appear to have gone, though counting continues. America remains as divided as ever, with a Blue White House needing to work with a Red Senate, some of the more extreme tendencies of the Democrats will be handicapped. The worst of the volatility is behind and while we need to get through these legal challenges, a return to a Blue White House and Red Senate may result is a calmer policy situation (fingers crossed!).
It looks almost certain we will get the ‘So Mauve’ outcome from our election playbook (Biden win, Senate stays red). As detailed there, this implies a degree of gridlock in Washington, which ex-stimulus is not always a bad thing for the market:
- Less uncertainty over policy likely to support equities, particularly Big Tech, whilst a Biden presidency ought to see some degree of a reset with trade partners that would boost sentiment and corporate earnings.
- Stimulus delays could create near-term volatility, but it would be in no one’s interests to drag their feet for long given any ballot box risk would be two years away.
- Tax uncertainty removed = +ve for equity valuations, especially Growth
- Improvement in trade relations with partners and China could see EM supported as well as European equities/currency – would also tend to boost US corporate earnings
- Not as bad for the dollar as a Blue Wave result with trade reset likely to support flows, also less fiscal expansion a factor, but USD seen weaker in this outcome as part of broader downtrend.
US and European equities rallied Wednesday in the wake of the election and carried through with this positivity. Solid gains of 0.5% registered on the FTSE 100 taking the blue chip index above 5,900 and the trend indicates a push to 6,000.
There is clearly some relief in the markets that the election is (almost) behind us – as I’ve been saying the threat of a ‘crisis’ level disputed election (Trump refusing to leave office) was always overstated and a few days of court decisions won’t matter much for investors with a longer-term horizon, and it’s these flows that are driving things here.
The Blue Wave reflation trade clearly had to unwind – US 10 year yields have retreated to 0.73%, from achieving a multi-month high on election night of 0.945%. Financials fell, with shares in JPMorgan –3% and Bank of America –4%. Lower nominal rates also +ve for gold, with spot to $1,915 in early trade this morning.
Just to highlight how much Tech likes the result (i.e. no Democrat Senate to mess around with regulations and raise taxes, as well as no reflation trade to spark rotation out of growth to value), Nasdaq futures are up 10% from their Monday lows. Amazon and Alphabet jumped 6%, with Apple +4% and Facebook rallying +8%.
Risk bid on US election day
Dollar down, nominal yields up, risk bid: has the market already priced in a Democrat clean sweep? Equity markets braced for the election with a strong showing on Monday, recovering ground after last week’s drubbing, and extended gains on Tuesday morning. There is a strong bid for risk early doors, with stocks in Europe rising +1%, the dollar down ~0.5% to 93.75 from 94.30 at yesterday’s highs, and WTI crude oil (Dec) up +1% and touching on $38 as it continues to break out to the upside. The FTSE 100 has recovered 5,700 on broad based gains with only really ABF falling on a dividend cut. The mentality right now is to buy the dip ahead of the election.
Is this greater confidence about a Biden win, or simply a bit of buying on oversold conditions from last week’s decline? It’s hard to really say – the election looms and we are expecting volatility as results come through later. Certainly a clean result on the night is what markets are hoping for – whether it’s Biden (higher yields, Value positive) or Trump (Yesterday, the S&P 500 rallied over 1.2% to reclaim its 100-day simple moving average at 3310 by the close. Value sectors prospered and led tech, perhaps on expectations of a Biden triumph leading to stimulus and infrastructure spending.
Voting in the US presidential election ends today – most ballots have already been cast. Watch for the early call from Florida – almost every president for the last 100 years has won this state and it remains too close to call. Biden leads in several key states and takes a 2.8pt lead in the battlegrounds heading into polling day. Now we turn to the results – be careful with exit polls – they don’t have the best track record. Polls in Florida close at 7pm EST (midnight GMT), so we should start to see markets moving after this on calls being made by pollsters and forecasters. From 8pm we start to get a feel for the rust belt states of Ohio, Pennsylvania, Wisconsin and Michigan – all states Trump needs to win. 3 of those 4 should do it if Florida goes red along with Georgia. But ensuring a clean picture of who’s won will be even more challenging this time due to the large number of postal votes. Delays will be inevitable, but it is unclear whether this is material – if Biden performs as the polls indicate it won’t matter much.
Donald Trump has already suffered two defeats, after judges rejected Republican attempts to nullify thousands of early votes cast in Texas and Nevada. Mr Trump has already said he will throw his lawyers at Pennsylvania after the Supreme Court extended the deadline for mail-in votes. It tends to point to a real prospect of a disputed result if things are tight on the night.
The Reserve Bank of Australia eased as expected with a 15bps cut to the cash rate to a new record low of 0.1%, whilst it also lowered the three-year yield target and its Term Funding rate to 0.1% from 0.25% as well. The RBA also pledged to buy A$100bn worth of bonds over six months as part of an expanded QE programme. Governor Philip Lowe stressed the RBA is not financing the government and that negative rates were “extraordinarily unlikely”. Nevertheless, the path of the global economic recovery remains patchy and the RBA may decide to expand its QE programme further still.
Markets poised for US election uncertainty
Lockdowns across Europe seem fully discounted now – markets haven’t really reacted massively the UK government’s caprice. Stocks hugged the flatline in early trade Monday as all eyes shift now to the presidential election, with some bid actually coming through after the initial downtick. The elephant in the Oval Office is Donald Trump: a victory in the election this week for the incumbent would surprise just about everyone. I say this since strategists everywhere seem to be discounting the possibility. Some of the pre-election selling we have seen could be more about an expected Biden win and what that would do to tax and regulation. Polls show a healthy Biden lead for sure but are tighter in the battleground states. Moreover, there is likely a silent group of shy Trump supporters who would never admit to voting for the president. On the other hand, Biden has a clear lead in four key states – Wisconsin, Pennsylvania, Arizona and Florida, a new poll shows, which would see the Democrat through with ease. It’s still a contest though, and with states being called or mis-called on inaccurate exit poll figures throughout the election night we ought to prepare for some significant volatility over the course of the evening.
The main thing Wall Street wants is to get the election out of the way and get some clarity. As such a contested election would present the greatest near-term risk to equities, which may be reflected partially by the Vix going above 40 last week. This is a level that needs to be watched, though returns post a spike like this tend to be positive.
But investors may not get the result on election night. The sheer volume of mail-in votes in those states which require counting to only start from Nov 3rd (Michigan, Pennsylvania), could delay the result even without the risk of legal action. Donald Trump is clear he’s going to fight where he can, saying in reference to Pennsylvania: “The night of — as soon as that election is over — we are going in with our lawyers.” Now there is a very large difference between a delayed result and a contested result, but the latter would almost inevitably ensue from the former as it all centres on the legality of postal votes. The worry for investors is that neither side accepts defeat.
As detailed in our election playbook, in the event of a Democrat clean sweep, whilst it would generate a large amount of fiscal stimulus (+ve for stocks) the expected hike to corporate taxes and capital gains tax creates policy uncertainty and could generate additional volatility into the year-end as investors liquidate positions to realise returns prior to the tax rises. There is also chatter about a financial transactions tax, which would be a negative for risk.
And, moreover, there is a key question that will remain unanswered this year if Biden cleans up: Will the gigantic stimulus that the Democrats will unleash flood the US economy with too much liquidity at a time of strong economic recovery, creating inflation and leading to monetary policy uncertainty? In other words, do we get so much fiscal stimulus that the Fed becomes cornered and is forced into hiking rates much sooner than planned?
Stocks closed out a bad week on Friday in the red again, with the S&P down 1.2%. There was a decent bull rally into the close though to leave it 36pts above the low at 3,270. European stocks were mixed in early trade on Monday.
The new lockdown in England is a big problem for some and good news for others – the slow recovery from the crisis just took a giant step backwards, but online will do well. Primark owner Associated British Foods warned it will suffer £375m in lost sales as a result of stores being closed here and across Europe in November, but this assumes Dec 2nd will be the day restrictions are lifted. If I were a betting man, I’d say it’s more likely to later, despite what the chancellor says. Shares fell 3%. Meanwhile Ocado shares jumped 8% as it raised its full year earnings guidance to £60m from £40m. This should be a positive for MKS but it’s lower this morning. Just as the first lockdown accelerated online shopping habits, the second lockdown will undoubtedly offers some additional near-tern support for Ocado stock.
The US dollar remains well bid above 94 after breaking out of the October range and it looks to test the upside of the sideways channel formed by the September peak at 94.82. Dollar strength pushed cable back to 1.2860, with Brexit barely being mentioned right now despite the very tight timetable. Expect some headlines this week on that front to disrupt. We also have the Federal Reserve and Bank of England meetings to contend with. Lots of chatter around negative rates but the MPC is much more likely to deliver a QE boost to support the economy. The decision to lock down the economy in November gives all the cover the central bank needs to do more. Data like the nonfarm payrolls and global PMIs this week can be largely ignored now we’re clearly into a new phase of the pandemic lockdowns and the election will dominate.
US Election Playbook: 3 outcomes for trading the market reaction
Election Night Volatility
Volatility, as viewed through the lens of the Vix, has already risen sharply in the lead up to the election but has been largely because of the surge in virus cases, and lockdown measures in Europe in particular, weighing on risk sentiment.
As far as the election itself goes, I think Trump is closer to victory than the pollsters, bookies and financial markets believe, which in itself favours election night volatility as states are called one-by-one, and a big response early Wednesday when European cash equities open to we would assume some clear result.
What also favours a large swing in futures pricing and in some FX crosses will be the way in which calls on individual states are made. With some states processing the in-person ballots before the postal ones are counted, and with some states allowing postal votes to arrive after Nov 3rd (as long as they are postmarked by this date), we could get an inaccurate and uneven sample when the West Coast polls close.
If the polls are correct and show a comprehensive Biden victory, volatility would likely ensue as investors call their accountants to assess their holdings in expectation of much higher taxes. FX crosses to watch will be focussed in the EM space (USDMXN, USDCNH among others) as a Biden win is seen as particularly positive for those currencies.
We’ve included three potentials outcomes (the fourth variant: Trump wins and Senate turns blue has been omitted since if there is a Trump surge it’s hard to see the Senate going Blue).
A little history: The stock market has risen under both Democrat and Republican presidents – stocks don’t really care who’s in charge. Moreover, ongoing monetary policy support underpins the equity market valuations – the Fed is not about to remove the punch bowl.
Whilst longer-dated Treasury yields have started to rise after a period of stagnation this appears to be on the expected increase in the money supply and fiscal expansion which would accompany just about any of the results. We should note that yields are very much within tight ranges and any significant break free to the upside would require a serious bout of inflation (as previously argued this may be the consequence of a vast increase in the money supply).
Fiscal stimulus is coming over the hill whatever the result – the only exception would be a contested result which would of course tend to create heightened volatility and a slower path to stimulus. Fiscal largesse will make a significant difference and we would tend to think that a Blue Wave result would support the largest fiscal expansion of the possible outcomes.
A Biden White House and GOP Senate increases the risk of delay, particularly if some of the new senators don’t feel like voting for huge increase budget increases. A disputed election would need to be resolved in the Supreme Court and Trump has just scored a big win with his new justice.
Whilst a disputed result is possible and would cause the most volatility, it is a) being over-egged since postal votes should not make a big difference in the key states and b) it certainly won’t come to the point where Trump refuses to leave office. Leaving the unedifying and frankly undesirable prospect of a disputed result aside, we can look at the three main possible outcomes and what these mean for the markets.
Red Rum: Trump win, Senate stays red
- Less stimulus – not the $3tn Heroes Act but something that is a little short of what the market had been hoping for. Removal of tax and regulatory uncertainty supportive of equity valuations, however.
- Nominal yields down and real yields more negative favours gold + growth stocks + multiple expansion: more upside for the S&P 500 with the removal of the expected increase in corporate and capital gains taxes and reduction in policy and regulatory uncertainty.
- Growth beats Value status quo
- Dollar could outperform in the near term with a strong post-election euphoric bounce until stronger economic, monetary and fiscal trends are reasserted and drag on USD – however, trade tensions could be a headwind for USD bears.
- Policies supportive of US shale and further drilling, increasing domestic supply. Less stimulus could be –ve for demand, therefore WTI prices could tend to fall, especially as it looks like the winter is set up for inventory builds. Global demand will matter more for commodities in general and even for oil there are greater forces at work than who’s in charge.
- Reinvigorated Trump with Senate support would likely see the president up the ante on trade, which would tend to be negative for emerging markets and boost the USD. It could also be a negative for European equities and the euro.
So Mauve: Biden win, Senate stays red
- Less uncertainty over policy likely to support equities, whilst a Biden presidency ought to see some degree of a reset with trade partners that would boost sentiment and corporate earnings.
- Stimulus delays could create near-term volatility but it would be in no one’s interests to drag their feet for long given any ballot box risk would be two years away.
- Tax uncertainty removed = +ve for equity valuations.
- Improvement in trade relations with partners and China could see EM supported as well as European equities/currency – would also tend to boost US corporate earnings
- Not as bad for the dollar as a Blue Steal result with trade reset likely to support flows, also less fiscal expansion a factor, but USD seen weaker in this outcome as part of broader downtrend.
- Little impact on commodities – arguably less stimulus creates headwind to recovery but broadly speaking the global post-Covid expansion will matter more, as well as the relative weakness of the dollar.
Blue Steal: Biden win, Senate goes blue
- It’s a reflation and redistribution thing – more stimulus = more spending + higher prices (tax reform nails the rich who have less marginal spending power than poorer folks)
- Timing is everything: do tax hikes get applied instantly and retroactively – which could spark selling into the year-end before stimulus floods through in the spring of 2021.
- Lots of stimulus is a +ve for stocks and favours Value stocks – less overall potential for the broad market but tilted in favour of Value again over Growth.
- Remember the fiscal expansion is two-fold: Covid relief and massive infrastructure boost.
- Rising nominal yields, steepening of the curve = bad for gold (unless and until inflation appears) + good for banks.
- Expected hike to corporate taxes and capital gains tax creates policy uncertainty and could generate additional volatility into the year-end as investors liquidate positions to realise returns prior to the tax rises.
- Higher corporate taxes and regulatory uncertainty increases risk premium for equities, whilst could see nominal yields rise and reduce the TINA appeal for equities.
- Seen as more negative for USD with fiscal expansion and tax/regulatory regime weighing on demand for US equities.
- Over the medium to long term, a Democrat clean energy push would restrict US output and reduce demand for oil products. Larger stimulus would boost demand near-term – also watch as to whether a Blue Steal result leads to a deal with Iran that brings more production onto global markets.
- Result likely +ve for emerging markets with dollar weaker, better trade relations – look to USDMXN, USDCNH upside in this scenario.
- Better trade relations with partners a +ve for Euro (see weaker dollar narrative) and for European equities, particularly cyclical names.
Key question that will remain unanswered on Nov 4th: Does the gigantic stimulus that Biden and company would unleash flood the US economy with too much liquidity at a time of strong economic recovery, creating inflation and leading to monetary policy uncertainty?
In other words, do we get so much fiscal stimulus that the Fed becomes cornered and is forced into hiking rates much sooner than planned?
Polling continues to show Joe Biden commanding a roughly 7.5pt lead nationally, whilst in the key battlegrounds, the lead is less than half at 3.4pts.
There are ranges and differences between states, but the broad picture remains that a Blue Wave is to be expected if we take the polling data as accurate. However, on a personal basis, my belief is that Trump has many ‘quiet’ supporters who do not show up in the polls, and many of whom will have been affected by the unrest over the summer. The Senate race is extremely tight right now but still indicate the Democrats just taking back control.
Latest Presidential polls as of Oct 29th, from RealClearPolitics (who power our election tracker):
|North Carolina||48.4||47.7||Biden +0.7|
Sector & Single Stock Volatility Picks
Within our Biden20 basket of stocks which could do well from a Democrat clean sweep, green energy stocks look most exposed to downside if there were a Trump victory since it would materially affect the expected regulatory backdrop for clean energy investment.
Biden plans to set the US on an “irreversible path” to net-zero carbon emissions by 2050, with an ambitious goal to build a carbon pollution-free power sector by 2035. The proposals clearly imply a far more aggressive shift away from fossil fuels than a Trump administration would pursue.
The proposals would also involve upgrading millions of commercial and residential properties over 4 years to increase energy efficiency, with among other things the installation of solar panels, which is a potentially huge growth area (Sunrun, Solaredge, FirstSolar in our Biden20).
We also note a positive policy position on EV (Tesla, Nikola) with plans to invest in 500,000 electric vehicle charging stations. European clean energy stocks would also benefit from a Biden win, whilst automakers like VW and Daimler could benefit too.
As far as the corporate tax agenda goes, there could be several companies who benefitted most from the 2017 tax cuts who see earnings cut in 2021 in the event of a ‘Blue Steal’ result. Among European stocks, those with a large exposure to US sales like Ferguson, CRH, Ashtead could see a reduction in EPS due to tax hikes – however, it is likely that massive infrastructure spending and stimulus would offer significant support to those names in particular.
Our Trump20 Blend includes some of the largest US stocks which benefitted from the 2017 tax cuts (and therefore could see the worst EPS haircut in the event of a Biden win and Democrat Senate).
These include Nvidia, Netflix, Salesforce.com, CSX, Boeing, Union Pacific and ServiceNow.
Week Ahead: Big tech earnings to drive pre-election volatility
It’s set to be a volatile week for US markets as earnings season continues on Wall Street with Big Tech reporting. Apple, Amazon, Microsoft, Alphabet and Facebook are among the biggest names delivering their quarterly updates. Meanwhile central banks are in action aplenty with the Bank of Japan, Bank of Canada and European Central Bank all holding policy meetings. And we of course countdown to November’s US presidential election with all eyes on the Vix.
Big Tech Earnings
It’s a massive week for corporate earnings and the focus will undoubtedly fall on the FAANGs with Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL) and Facebook (FB) all set to report quarterly earnings figures on Thursday. Earnings come amid scrutiny on big tech as the US Department of Justice opened an antitrust case against Google’s parent company, Alphabet, which focuses on agreements it has made with handset manufacturers and carriers to be the default search engine on new phones. Whilst investors have shrugged this off so far, earnings may well provide fuel for greater volatility in the stock.
Meanwhile there are fears that the case could create headwinds for Apple’s services business. The DOJ said Apple earns between $8 billion and $12 billion from Google, which would equate to between 17% and 26% of Apple’s revenues from Services last year. Apple recently released its iPhone12 but increasingly the reason for the stock’s higher multiples is about the ecosystem and Services revenues. Nevertheless, analysts remain bullish on these tech giants and they remain among the biggest winners YTD. Microsoft reports on Tuesday and there are dozens of large cap stocks reporting over the next few days.
With the euro gaining ground again versus the US dollar, attention in the FX markets will be on the European Central Bank (ECB) meeting on Thursday. Markets are increasingly betting on the ECB carrying out further easing in a bid to boost faltering economic growth and stagnant prices. The Eurozone slid into its second straight month of deflation in September and with further lockdowns being imposed across the bloc, the risks to the economic outlook have clearly deteriorated since the last meeting. The threat of a double dip recession is real, with Christine Lagarde saying recently that the resurgence of the virus is a clear risk to the economy. Given the murky outlook and dreadful inflation backdrop it seems all but certain the ECB will increase its bond buying programme by another €500bn by December.
To get a flavour of the mood in the ECB, the usually hawkish Austrian central bank head Robert Holzmann, said recently: “More durable, extensive or strict containment measures will likely require more monetary and fiscal accommodation in the short run.”
Meanwhile there are also meetings of the Bank of Japan and Bank of Canada taking place this week.
The advanced reading for US GDP growth in the third quarter will be the highlight as markets look for clues to the pace and sustainability of the recovery. The economy is expected growth in the region of 30% as businesses reopened following lockdowns. The Atlanta Fed’s forecast indicates the economy will have expanded by 35% on a quarterly basis – but this of course masks the real damage when it’s coming off the back of a 31% drop in Q2. The GDP reading comes at an opportune moment for Donald Trump who will be able to proclaim that the economy is on fire.
The final straight: polling data may not change much – the number of undecided voters has been small. Biden commands a strong national lead but in the key battlegrounds that will determine the result it’s tighter. We’re hosting a special pre-election live event on Nov 2nd to run through how the markets might react.
Top Economic Data This Week
Open the economic calendar in the platform for a full list of events.
|Oct 26th||German Ifo business climate|
|Oct 26th||UK Nationwide house price index|
|Oct 26th||US new home sales|
|Oct 26th||SNB Chairman Jordan speaks|
|Oct 27th||BoJ core CPI|
|Oct 27th||US durable goods, core durable goods|
|Oct 27th||US CB consumer confidence|
|Oct 28th||Australia CPI inflation|
|Oct 28th||Bank of Canada rate decision|
|Oct 28th||EIA crude oil inventories|
|Oct 28th||FOMC member Kaplan speaks|
|Oct 29th||Bank of Japan policy statement & economic outlook|
|Oct 29th||German preliminary CPI inflation|
|Oct 29th||UK mortgage approvals & lending figures|
|Oct 29th||US advanced GDP – Q3|
|Oct 29th||US weekly jobless claims|
|Oct 29th||ECB policy decision & press conference|
|Oct 29th||US pending home sales|
|Oct 29th||US natural gas storage|
|Oct 30th||Tokyo core CPI|
|Oct 30th||Japan industrial production|
|Oct 30th||French flash GDP|
|Oct 30th||German preliminary GDP|
|Oct 30th||Eurozone CPI flash estimates|
|Oct 30th||Canada GDP|
|Oct 30th||US personal spending & core PCE price index|
|Oct 30th||Chicago PMI|
|Oct 30th||UoM consumer sentiment|
Top Earnings Reports This Week
Don’t forget to tune into our Daily Earnings Season Specials on XRay for more updates
|26-Oct||SAP SE||Q3 2020 Earnings|
|27-Oct||Microsoft Corp.||Q1 2021 Earnings|
|27-Oct||Pfizer Inc.||Q3 2020 Earnings|
|27-Oct||Ping An Insurance Co.||Q3 2020 Earnings|
|27-Oct||Merck Co.||Q3 2020 Earnings|
|27-Oct||Novartis AG||Q3 2020 Earnings|
|27-Oct||Eli Lilly and Co.||Q3 2020 Earnings|
|27-Oct||3M Co.||Q3 2020 Earnings|
|27-Oct||AMD (Advanced Micro Devices) Inc.||Q3 2020 Earnings|
|27-Oct||Caterpillar Inc.||Q3 2020 Earnings|
|27-Oct||HSBC Holdings plc||Q3 2020 Earnings|
|27-Oct||S&P Global Inc||Q3 2020 Earnings|
|27-Oct||BP plc||Q3 2020 Earnings|
|28-Oct||Visa Inc.||Q4 2020 Earnings|
|28-Oct||MasterCard Inc.||Q3 2020 Earnings|
|28-Oct||United Parcel Service Inc. (UPS)||Q3 2020 Earnings|
|28-Oct||Amgen Inc.||Q3 2020 Earnings|
|28-Oct||ServiceNow Inc||Q3 2020 Earnings|
|28-Oct||Boeing Co.||Q3 2020 Earnings|
|28-Oct||Sony Corp.||Q2 2020 Earnings|
|28-Oct||GlaxoSmithKline plc (GSK)||Q3 2020 Earnings|
|28-Oct||Gilead Sciences Inc.||Q3 2020 Earnings|
|28-Oct||Anthem Inc.||Q3 2020 Earnings|
|28-Oct||Equinix Inc||Q3 2020 Earnings|
|29-Oct||Apple Inc.||Q4 2020 Earnings|
|29-Oct||Amazon||Q3 2020 Earnings|
|29-Oct||Alphabet||Q3 2020 Earnings|
|29-Oct||Facebook Inc.||Q3 2020 Earnings|
|29-Oct||Samsung||Q3 2020 Earnings|
|29-Oct||China Life Insurance Co Ltd (A)||Q3 2020 Earnings|
|29-Oct||Comcast Corp. (Class A)||Q3 2020 Earnings|
|29-Oct||Shopify Inc (A)||Q3 2020 Earnings|
|29-Oct||Sanofi S.A.||Q3 2020 Earnings|
|29-Oct||AB InBev SA-NV (Anheuser-Busch InBev)||Q3 2020 Earnings|
|29-Oct||American Tower Corp.||Q3 2020 Earnings|
|29-Oct||Starbucks Corp.||Q4 2020 Earnings|
|29-Oct||Shell (Royal Dutch Shell)||Q3 2020 Earnings|
|29-Oct||Volkswagen (VW) St.||Q3 2020 Earnings|
|29-Oct||Stryker Corp.||Q3 2020 Earnings|
|29-Oct||China Petroleum & Chemical (Sinopec) (A)||Q3 2020 Earnings|
|29-Oct||China Life Insurance Co. Ltd.||Q3 2020 Earnings|
|30-Oct||China Construction Bank Corp.||Q3 2020 Earnings|
|30-Oct||AbbVie Inc||Q3 2020 Earnings|
|30-Oct||ExxonMobil Corp. (Exxon Mobil)||Q3 2020 Earnings|
|30-Oct||Chevron Corp.||Q3 2020 Earnings|
|30-Oct||Honeywell||Q3 2020 Earnings|
|30-Oct||PetroChina Co Ltd (A)||Q3 2020 Earnings|
|30-Oct||Postal Savings Bank of China Registered Shs -A-||Q3 2020 Earnings|
|30-Oct||TOTAL S.A.||Q3 2020 Earnings|
|30-Oct||AUDI AG||Q3 2020 Earnings|
|30-Oct||Altria Inc.||Q3 2020 Earnings|
|30-Oct||Colgate-Palmolive Co.||Q3 2020 Earnings|
|31-Oct||Berkshire Hathaway Inc.||Q3 2020 Earnings|
|31-Oct||Industrial and Commercial Bank of China Ltd (A)||Q3 2020 Earnings|
|31-Oct||Industrial & Commercial Bank of China Ltd.||Q3 2020 Earnings|
|31-Oct||China Merchants Bank Co Ltd.||Q3 2020 Earnings|
|31-Oct||Bank of China Ltd||Q3 2020 Earnings|