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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Equities

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

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

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

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

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

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

Election Watch

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

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