Head of Saxo Strats
Summary: In today's equity update we take a look at Tesla ahead of tonight's Q3 earnings release which will focus on Chinese demand for Tesla's cars. We also cover the US government's latest antitrust case against Google for using it dominance as digital gatekeeper on Internet search queries to limit competition. Finally, we take a look at the stronger CNY and how it has the potential to export inflation into the developed world.
US equities are higher today renewed fiscal deal optimism and a set of positive US earnings in pre-market session from Abbott Laboratories, Verizon, Biogen, and Snap. On top of that we observe copper and US 30-year yields are higher underscoring that the reflation trade is back in town. Helping this trade is the stronger CNY which essentially has the potential to export inflation to the developed world.
Can Tesla deliver on the hype?
The earnings season is in full swing this week and tonight after the market close Tesla will report Q3 earnings which is one of the most anticipated earnings releases this season due to the hype of Tesla shares. Analysts expect revenue of $8.26bn up 31% compared to last year and EPS of $0.55 up 217% y/y. Tesla announced earlier this month around 140,000 deliveries in Q3 setting a new record and on track to potentially meet the 500,000 target for 2020, although it will require a substantial q/q increase in deliveries. The share price should not react too much on earnings numbers as the regulatory carbon credits can move the needle a lot, but even more importantly the CEO Elon Musk said on the Q2 earnings call that Tesla is not going to be super profitable in the short-term as it is maximizing growth rate and affordability of its cars. The key therefore is the outlook for the Chinese and European market including updates on the Gigafactory in Berlin and guidance on Model Y production which has the potential to accelerate Tesla’s lead over the competitors.
The technology regulation has started
Yesterday, the US government filed an antitrust case against Google which was recently part of a year-long investigation by the House Subcommittee on Antitrust where the committee looked at competition in digital markets. In case against Google is centered on its search engine and how Google is using its power to strengthen its stronghold on search queries on the Internet with its partnership with Apple being mentioned as an example. According to the antitrust documents it is estimated that Google pays Apple $11bn a year for having Google’s search engine as the default option in the Safari browser on Apple’s iPhones. The Google payments to Apple is roughly 19% of Apple’s profits and thus depending on the outcome of the antitrust case could be a massive tail-risk to Apple. The next obvious target for the US government seems to be Facebook but the attack will most likely not be launched until after the election.
The stronger CNY has the potential to export inflation
In today’s FX Update we go through the various factors behind the strengthening CNY which are a combination of domestic tightness in monetary policy, stability objective of China to increase appeal of its currency vs USD, and lastly the outlook for a Biden administration that could soften the stance on China. The Chinse manufacturing industry is producing many of the consumer goods enjoyed in the developed world and many are operating at low margin which means that a stronger CNY potentially exports inflation into the world as importers of Chinese goods will have to pay a higher price and Chinese manufacturers cannot offset the pressure on the product price because of thin margins. This would be a new dynamic to Chinese inflation into the world as the previous strong relationship has been tied to the producer price index in China. For now, actual measured non-financial asset inflation is still low in both the US (see chart) and Europe. However, on top of a stronger CNY and higher copper prices, the US 30-year yield is also moving higher reflecting investors expectations that inflation is coming.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
