Equities 5 minutes to read

Weaker USD and ECB next week to extend risk-on in equities

Peter Garnry

Head of Equity Strategy

Summary:  News that US and China to hold trade negotiations in early October combined with weaker USD and positive anticipation of central bank moves the next couple of weeks are driving equities higher. S&P 500 is breakout out today and looks to strengthen further if the USD weakness persists. In today's equity update we also take a look at Slack and Starbucks both disappointing on their fiscal year outlook.


The current risk-on sentiment seems to have three drivers. US and China are to hold trade talks early October in Washington which has lifted general sentiment and the outlook for tariffs not being hiked again in October. USD weakness which especially accelerated yesterday partly due to flow reversion in GBP extending into other pairs is easing financial conditions and lifting emerging markets.

There also seems to be a green shoot element in the DAX futures momentum as traders are betting on Germany to increase government spending, as South Korea has recently done, and lately a rebound in some key manufacturing indices in Sweden which like Germany is a high beta country to global economic activity.

One asset class not supporting our current view of a short-term rally here in equities is gold with spot only inches away from the recent highs. Gold spot is down today but not by the magnitude if this was a one-way street in equities. Also, some credit spreads are also higher the last couple of weeks.

First the DAX and now the S&P 500

The initial breakouts from tight trading ranges happened in FTSE 100 and DAX futures driven initially by weaker GBP and EUR. In the last couple of trading sessions, the momentum has continued without the help from weaker local currencies reinforcing real price action for all the reasons mentioned above.

S&P 500 futures have the breakout crowd today pushing through the 2,945 resistance level that have been the blocker for weeks. With current events that have unfolded over the past week we see momentum extending from here in US equities. Weaker USD is key to fuel the move. A surprise tiering system announced at next week’s ECB meeting could be a massive catalyst for markets as it would elevate European equities across the board.

Source: Saxo Bank
Source: Saxo Bank

Fundamentally S&P 500 is around 0.7 standard deviations expensive across nine valuation metrics. However, using data since 1991 the 10-year forward real return annualized is estimated 2.8% which is still higher than offered in many bond segments of the market.

S&P 500 profit growth

EBITDA growth y/y in S&P 500 remains high at 7.7% but given the strong USD, slower growth in the world and many key macro indices are we expect EBITDA growth to come down meaningfully over the coming quarters. Depending on central bank outcomes the next weeks and US-China trade negotiations it might not be a problem for the overall index but beneath the surface a sharp slowdown in EBITDA growth is typically a bloodbath in some key segments of the market. We expect technology hardware, semiconductors, materials and industrials to be the negative surprise here.

Stocks to watch

Slack Technologies (WORK:xnys) shares were down 13% in extended trading despite a Q2 beat on revenue and EPS, and an upward revision to its FY revenue guidance. It was the company lower FY EPS guidance that disappointed as investors clearly want to see a faster path to profitability as the valuation is extremely stretched with a trailing EV/Sales ratio of 29.x. Slack has generated negative free cash flow of $117mn in the last 12 months a significant worsening from a year ago.

Source: Saxo bank

Starbucks (SBUX:xnas) shares were initially down yesterday as the US coffee chain adjusted its FY20 outlook seeing EPS growth below the long-term growth target of 10%. Compared to the outlook presented by Starbucks in previous investor presentations their growth is significantly diverging from expectations. The key risk for Starbucks long-term growth plans is the relationship between China and the US. If the relationship worsens it will also have a negative impact on US companies’ ability to do business in China. Technically the 92.50 level is crucial for support here as it’s the gateway to a major gap. For now, there are many technical buyers of Starbucks shares as minimum volatility and momentum ETFs are long Starbucks.

Source: Saxo Bank
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
Australia

Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Combined Financial Services Guide & Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.