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.
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.
