Trade and Brexit optimism sparks rally in equities

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  While macro data continue to be weak and the recession probability is arguably high for the global economy equities are having a small party up 1% today on trade deal and Brexit deal hopes. In today's equity update we also take a look on earnings growth and which sectors have seen the worst growth decline as we kick-start the Q3 earnings season next week.


Global equities are staging an impressive rally with S&P 500 futures up 1% as Trump tweets are indicating a potential narrow trade deal. China’s announcement today of moving the timetable forward on ownership caps for foreign financial firms is also interpreted as indication that the negotiations are moving forward. But as we learned so many times in this US-China trade war sentiment can change quickly. As we wrote in yesterday equity update a deal or no deal is irrelevant because the downside dynamics are already so strong that a small sentiment shift on trade will not avoid a further slowdown, but it will probably soften the slowdown.

Source: Saxo Bank

Adding to sentiment in equities is what seems to be a breakthrough in the Brexit negotiations. The EU and UK negotiators are both describing the meetings as constructive and the speculation is that UK PM Boris Johnson maybe gave some concessions to Irish PM Varadkar on the Northern Ireland border issue. The reaction is primarily concentrated in the FTSE 250 Index, which comprises of domestically oriented companies, up 2% today whereas FTSE 100 is almost flat for the day except for a few gainers among the banks. Our view is that if a Brexit deal can be made foreign interest in the FTSE 100 will rise as the valuation is attractive with an attractive 5% dividend yield. Tactically UK stocks could become one of the best equity markets next year if we avoid an ugly global recession and UK can kickstart growth again.

Source: Saxo Bank

The Q3 earnings season is also starting next week although a few companies of less importance have reported this week. Earnings growth has been slowing for the past two years in line with the slowdown in OECD’s global leading indicators. Emerging market companies were holding up longer than companies in the developed world but during 2019 the conditions for emerging markets have deteriorated significantly. EBITDA growth among emerging market companies slipped into negative in June this year while developed market companies are still seeing growth. As we have said repeatedly in the past couple of weeks, we expect earnings growth to go negative and outlook to disappoint as the Q3 earnings season unfolds.

As the table below shows all sectors except health care have seen its profit growth declining significantly from a year ago. The headwinds have been the biggest for financials, energy and materials sectors which is not a surprise given their cyclical nature.

Among the 2,000 companies we track during the earnings season around 84 of them will report next week. The 30 largest companies reporting next week are mostly US companies (see table) with the most interesting from a market impact being:

§  Kweichow Moutai – reports Q3 earnings on Tuesday. Being China’s largest beverage companies it’s a good indicator on consumer spending in China.

§  JPMorgan Chase – reports Q3 earnings on Tuesday. The largest US bank with a big international footprint. Will give insight into how falling rates are impacting banks profitability.

§  Citigroup – reports Q3 earnings on Tuesday. Compared to JPMorgan Chase, Citigroup has a larger footprint in emerging market countries and thus typically gives good insight into sentiment in these economies.

§  ASML – reports Q3 earnings on Wednesday. The first European semiconductor company to report earnings with analysts expecting revenue growth to climb back into positive territory (+8.4%) following two negative quarters.

§  Netflix – reports Q3 earnings on Wednesday. The online TV streaming service has gone from growth darling to worries over competition, pricing pressure, too much debt and profitability concerns. Very important earnings release for longer term sentiment.

§  Honeywell – reports Q3 earnings on Thursday. One the largest industrial companies in the US and thus provide insight into industrial demand and investments in the economy.

§  American Express – reports Q3 earnings on Friday. Good indicator on consumer credit and thus spending. Still a cost efficiency play as the company depends on a mature US market with contained growth rates.

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.