Trump tweet fuels rally on ECB day
Head of Equity Strategy
Summary: Trump's tweet delaying Chinese tariffs set to go into effect on October 1 has added fuel to risk sentiment although it is only a 14-day delay. Nevertheless, S&P 500 has rallied above the 3,000 level and is flirting with all-time highs. In today's equity update we compare the tiering system in Japan introduced in 2013 and how it might be a playbook for trading Eurobean banks.
Equities continue to rally with Nikkei futures up in eight straight sessions as macro numbers are stabilizing and no longer surprising to the downside. A weaker USD has also lifted financial conditions, especially in emerging markets, and with it lifted rates globally. The next week is going to be crucial for risk sentiment with ECB meeting today and FOMC next week. Depending on the signals from central banks we could get a hangover period, but if we get the right amount of accommodative policy measures then we could be in for a longer rally in equities.
Trump tweet sparks trade deal hope
In a return of gesture, Trump tweeted that the tariffs increase on Chinese goods set for October 1 would be delayed to October 15, so it does not collide with the 70th anniversary of the Chinese Communist Party. Trump’s tweet has fueled risk sentiment sending the S&P 500 above the 3,000 level and close to all-time highs.
The momentum crash that we highlighted in yesterday’s equity update seems to have run out of fuel with quant funds having liquidated the necessary positions. While momentum stocks were not outperforming in yesterday’s rally, they did have a positive session. One thing less to worry about for now.
Nikkei enjoys maximum strength from weaker JPY and rising rates
Japanese equities were once again the best performing equity market in Asia as the country’s equity market benefits the most from weaker JPY, higher rates and improving macro backdrop. It’s becoming a bit tiring to repeat our stance, but we still prefer Japanese equities if we have risk-on in equity markets. German equities are a great alternative for European traders that do not want the JPY exposure.
ECB and European banks
European banks are up 12% from the lows in August as investors anticipating a tiering system on excess reserves that will immediately relieve banks of their deposit pain. In the three months leading op to Bank of Japan’s QE programme and tiering system in April 2013 Japanese banks were also repriced by around 50%. However, the lesson learned from Japan is that it alleviated some short-term pain, but it did not change the structural issue of weak loan demand and low profitability.
As a result, investors must be willing to take profits on those tactical gains from being long European banks. If Japan is any guidance the rally in European banks could, given the right stimulus announced today on the ECB meeting, extend for a month so one has to be opportunistic and analyse today’s ECB decision correctly.
Stocks to watch
Recently London Stock Exchange (LSE:xlon) made a bold bet to acquire Refinitiv (the former Thomson Reuters data business) to create a financial data powerhouse to compete against Bloomberg. This industry transforming deal is now being supercharged from above with Hong Kong Exchanges & Clearing (00388:xhkg) making a $36.6bn bid for London Stock Exchange which shares were up 6% in yesterday’s trading. Investors were not excited about HKEX’s bid for LSE with its shares down 3.5% and flat this morning. Why should investors care? Three years ago, Intercontinental Exchange made a bid for LSE but then walked away. The complete acquisition analysis lies there ready to be pulled out and we would not be surprised to see a counteroffer from ICE. Also, according to the Financial Times, LSE is set to reject the HKEX bid. There also could be a political angle on the acquisition bid from HKEX due to souring relationship between the US and China.
Oracle released FY20 Q1 earnings yesterday with revenue and EPS in line with estimates while the Q2 guidance disappointed on revenue growth and EPS. In addition, Oracle announced that the CEO Mark Hurd will take a leave of absence due to health-related reasons. Shares were initially down as much as 6.7% but then rebounded during extended trading hours as the conference call calmed investors enough. The trajectory of its cloud business is a positive for the company’s outlook as it is the future of the industry.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.