The Week Ahead
There is plenty of economic data coming this week, including: 3Q2020 GDP (expected +30.8% annualised), personal consumption and housing data in the U.S.; and confidence measures, 3Q20 GDP, unemployment, price data and an ECB decision in the Eurozone. 180 S&P 500 companies report earnings this week, including some big names like Google, Facebook, Apple, Amazon, Boeing, Ford, and Exxon Mobile, amongst many others. The EU and UK continue negotiate a post-BREXIT trade agreement, and the House leaders and Trump Administration continue to negotiate a new fiscal stimulus package. Both look fragile at the moment. Market sentiment overall shifted to a slightly positive bias last week, favouring a rotation towards more beaten-down value and cyclical names, and solid performance of credit as US Treasuries weakened. Given what is ahead of us, I am not sure I see this trend continuing, but let’s see.
What Happened Last Week, Summary (details below)
Equity markets were slightly weaker as better-than-expected earnings in general and decent economic data could not overcome concerns about the next wave of CV19 as its spread accelerates and the US presidential election moves closer. Perhaps the one defining feature in markets for the week was the sharp sell-off in US Treasuries, which abated slightly on Friday. The 10-year US Treasury hit its highest closing yield on Thursday since early June, and the yield curve (2-10 year) steepened to its widest point of the year. This signals a better outlook for the economy, or perhaps more appropriately, a realisation that no matter which party wins the US election, more fiscal stimulus is in store to address economic costs of the pandemic. Such stimulus would inevitably provide even more rocket fuel for risk asset classes, even to the point of reigniting concerns about inflation. Equity markets were slightly weaker as better-than-expected earnings in general and decent economic data could not overcome concerns about the next wave of CV19 as its spread accelerates and the US presidential election moves closer.
Global Equity Markets
The equity markets struggled much of the week although earnings were solid and economic data was generally as anticipated. Of course, earnings and economic data are both backwards looking, and we are continuing to stare ahead at both a highly charged US Presidential election in two weeks and worsening news globally regarding the pandemic, both of which are weighing heavily on global financial markets. Only the Japanese equity market was in the green last week, as you can see from the table below.
With its 0.8% decline last week, the S&P 500 broke its streak of three consecutive weeks of gains but remains positive for the month (+2.8%), a nice turn following a difficult September. Cutting another layer deeper, the rotation towards value stocks (at the expense of high flying tech stocks) and potential mid-cap cyclical names seems back on, as you can see in the table below.
The tech / healthcare-heavy NASDAQ was the worst performing index of the four in the US last week, and the Russell 2000 was the best. Month-to-date, the Russell 2000 has had the best performance, generating more than twice the return of the NASDAQ. Having said this, big tech has found more support this month coming off a poor September, and even the formal launch of an investigation on Tuesday by the US Department of Justice of Google (antitrust suit a la MSFT two decades ago) could not stop the more cyclical tech names like GOOG (+4.3% w-o-w) and FB (+7.1% w-o-w) from turning in a solid performance. In fact, as the outlook increasingly favours another round of fiscal stimulus in the US post-election regardless of which party wins the White House, the beaten-down cyclical and mid-cap value names which have lagged the recovery potentially stand to be the biggest winners.
Earnings last week were generally better-than-expected in both the US and Europe. Continuing the trend from the prior quarter, many companies are reporting better results than expected. In their earnings update for last week, Refinitiv (report here) reported that 83.7% of the 135 S&P 500 companies have reported earnings so far that have beaten consensus expectations, versus the long-term average of 65.1%. However, a stock’s performance post-announcement continues to be influenced by a combination of data underpinning headline figures (like revenues and net income growth) and management’s commentary on the outlook. Two contrasting fortunes for companies that reported last week were SNAP and NFLX. SNAP beat its top line (+22% vs consensus), its earnings and – importantly – subscriber growth estimates (+4% vs consensus) and was up 55.1% w-o-w, whilst NFLX disappointed on earnings (18.7% lower than consensus) and subscriber growth (38.4% below consensus) and was down 8% on the week. Much-watched TSLA (-4.3% w-o-w) reported better-than-expected adjusted earnings (5th consecutive quarter of bottom-line profits) and revenues for the quarter, delivering the most vehicles ever in a quarter (139,300). However, regulatory credits continue to be the factor that heavily influences (over-valued in my opinion) TSLA’s gross margins and enables the company to generate profits in spite of its small volume sales. In Europe, the auto companies and banks were the best performers, with the former generally beating expectations (Renault, Daimler) and the latter (Barclays, HSBC, Santander) benefiting – as most global banks last week – from the steeper yield curve.
This week, 180 S&P 500 companies report earnings, including largely followed stocks like: Alphabet (GOOG parent) and Beyond Meat on Monday; Caterpillar, Merck, Pfizer and Microsoft on Tuesday; GE, Boeing, Mastercard, VISA and Ford on Wednesday; Amazon, Apple, Activision, Facebook, Twitter, Spotify and Shopify on Thursday; and Chevron and Exxon Mobile on Friday.
Credit Markets
The credit markets were uneventful but marginally better on the week as USD investment grade (BBB) corporate spreads tightened 3bps and USD and EUR high yield spreads tightened 5bps-7bps across the credit spectrum (from BB to CCC). The outlook for defaults remains largely stable vis-à-vis the last few weeks. As odds improve in favour of a new stimulus package in the US either before or after the election, credit stands to benefit from this potential economic steroid injection.
Safe Haven Assets & Oil
US Treasuries, the US Dollar and Yen all weakened last week, with the 10-year US Treasury reaching its highest closing yield (0.87%) on Thursday since June 8th. Treasuries recovered modestly on Friday as the 10-year UST closed the week to yield 0.85%, still 9bps wider w-o-w. The 2-10 year yield curve also steepened by 5bps to +0.67%, reaching 0.71% on Thursday which was its steepest level of the entire year. The steepening yield curve suggests that better things might lay ahead for the US economy, supported by solid corporate earnings and perhaps even renewed concerns over future inflation. Gold was also ever-so-slightly better for the same reasons (+0.1% w-o-w), closing at $1,901.55/ounce to end the week. WTI crude oil was fairly stable and firm much of the week, but then weakened into the close on Friday to close at $39.78/barrel, down 2.5% for the week but still largely range-bound on either side of $40/barrel. Economics & Politics
The week started with China releasing 3Q20 GDP on Monday morning, which increased an impressive 4.9% (vs 3Q19). As strong as this growth is compared to western countries in this time of a global pandemic, it still missed analysts’ consensus expectations of 5.5%. Retail sales increased 3.3% in September, and industrial production increased 6.9%, impressive figures, too. Still, the Chinese equity market was mixed following the release, and global equity markets shook off this good news from the world’s second largest economy as another wave of CV19 in the US and Europe took centre stage.
US payroll data on Thursday was stronger than expected with first-time US jobless claims hitting their lowest level (787,000 actual vs 875,000) since the early stages of the pandemic in mid-March. This, coupled with ongoing discussions regarding a new fiscal stimulus package and better-than-expected earnings, provided some support to the equity and credit markets, although equities struggled most of the week for reasons already discussed. The final Presidential debate took place on Thursday and was a much more cordial – and informative – affair than the first debate a few weeks back. Most pundits seemed to think it was more or less a draw, meaning that President Trump and challenger Joe Biden held their ground in the polls. President Trump continues to trail challenger Joe Biden by 7%-8% in the popular vote, depending on the poll, although the race in certain key swing states is actually much tighter. The rhetoric regarding challenging the election results has fortunately been toned down, but a lot of uncertainty remains as far as the outcome of the election. The Senate Judicial Committee voted 12-0 to confirm Amy Coney Barrett as an Associate Justice for the Supreme Court to replace the late Ruth Bader Ginsberg, and her nomination will be presented before the full Senate on Monday. Voting is expected to be along party lines, meaning that she will almost certainly be confirmed, increasing the conservative-leaning justices on the US’s highest court to six (of nine). In the UK, PM Boris Johnson walked back considerably from his line in the sand a couple of weeks ago, as the UK and EU continue to try to reach agreement on a post-BREXIT trade deal. It’s hard to say how this is going to end given we are nearly to November, but perhaps both sides will eventually soften their stance on the remaining critical issues so that a deal can be done. Let’s hope so. Of course, should a deal get done, the next issue facing the UK will undoubtedly be a strong push by Scotland for another referendum for independence, as the SNP gains ground and momentum. I shudder at the thought of this moving (again) to centre stage, although it most certainly will as the logical next step in the ill-fated vote by Brits to leave the European Union.
COVID-19
CV19 rages on with governments nearly everywhere now threading the needle between curtailing the spread and further slowing their economies, a delicate balance.
As the table to the right illustrates, October will almost certainly have the most significant increases in cases of CV19 since the start of the pandemic, although mortality fortunately continues to decrease.
France and Spain became the latest two countries to pass the 1 million threshold as far as cases of CV19, with the US (8.5m cases), India (7.8m cases) and Brazil (5.4m cases) remaining the leaders. Many European countries and US states are taking more drastic action to curtail the spread of the new wave of the virus as the northern hemisphere moves towards winter.
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