Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Head of FX Strategy
Summary: As the final votes are being tallied in the US Election, the accumulation of mail-in votes looks set to send Biden over the top, although President Trump is crying foul and has declared himself the winner. The Fed kept a very low profile at its meeting last night and markets are easing back after the blistering rally in nearly everything over the last two sessions.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) The added surge yesterday in US equity markets was considerable, if far smaller than the Wednesday’s enormous surge after the “clarity” of a weak mandate for fiscal stimulus and no mandate for the Dems to raise taxes emerged from the likely US election outcome. Equity traders don’t seem to be sweating the contested election scenario playing out before their eyes – let's see if that confidence can be maintained if the election remains undecided going into the weekend. The US futures were weak overnight, but can consolidate quite a bit farther without reversing the rocket launch from the pre-election lows.
AUDUSD – the “everything up” trade that has materialized in the wake of the US election has super-charged the Aussie versus a very weak US dollar, even after the RBA this week launched a large QE programme and chopped rates to a bare minimum of 0.10%. For the pair to continue higher, we need to see a continued interest in the “reflation trade”, with a rise in risk sentiment, commodities and the anticipation of rising inflation and the continued outperformance of the Chinese and Asian economies. Technically, the next focus for AUDUSD traders is on the cycle high, now not that far away at 0.7414 - above there and the focus eventually shifts to the major 0.8000 area.
USDJPY – USDJPY has broken down through the big 104.00 area, theoretically opening up the chart toward the 100.00 area. But USDJPY is proving low beta to the general US dollar sell-off, as is often the case, and appears to be mostly getting dragged lower by USD weakness as opposed to JPY strength. A more profound broad JPY rally would likely require this recent sudden explosion higher of risk assets to reverse, together with a safe-haven bid going into US treasuries on fears that a blocked path to US stimulus is raising the risks of disinflation rather than reflation. For now, USDJPY traders will watch for whether the 104.00 area holds for follow through lower.
Gold (XAUUSD) and Silver (XAGUSD) have both paused after racing higher amid a general US dollar sell-off. Biden’s road to the White House looks increasingly bumpy with rising risk of a contested election. However, a Biden win and a Republican controlled Senate has raised the prospect for more support instead being provided by the Central Bank. Not least considering the continued surge in Covid-19 case count with the U.S. election day at risk of becoming a super spreader event. Gold now needs to consolidate its gains with a band of support between $1917 and $1930 the key focus. Silver’s outperformance has seen the XAUXAG ratio break the uptrend from the August low.
Brent crude (OILUKJAN21) and WTI crude oil (OILUSDEC20) trade lower for a second day as the focus returns to a surging coronavirus and its potential negative impact on fuel demand during the Northern Hemisphere winter together with the increased risk of a contested U.S. election. OPEC+ led by Saudi Arabia and Russia meanwhile continue to discuss postponing the planned production hike in January. Brent crude remains stuck in a wide $42/b to $35.50/b. Next week’s focus: Covid19 and OPEC+ developments as well as monthly oil market reports from EIA, OPEC and the IEA. The Adipec virtual conference next week will hear speeches from key producers and big oil companies.
Treasury yields close flat as there isn’t a clear winner yet (10YUSTNOTEDEC20, 30YUSTBONDDEC20). The rally in Treasuries loses steam as there is not a clear winner yet, but a Biden win looks to be more likely. The Federal Reserve didn’t increase its bond purchasing program, however it said that it will hold interest rates steady near zero. We expect the U.S. yield curve to resume its steepening once a clear winner is declared. In the meantime, however, rates can fall further with the 10-year yields trying their support line at 70bps and the 30-year yields falling as much as 1.4%
Risky assets surprisingly gain amid unclear result of the US election (HYG:arcx). The iShares iBoxx High Yield Corporate Bond ETF rose 2% from the beginning of the week. The sectors leading the rally were senior financial bonds and technology, while the worst performing assets were subordinated financials and materials.
Allianz (ALV:xetr) - strong Q3 earnings with operating income at €2.91bn vs est. €2.65bn, but despite the strong profitability the company suspending its share buyback programme to preserve cash. The CFO says that the insurer sees lower claims from new lockdowns in Europe and thus there is a path to higher profits in 2021.
Square (SQ:xnys) - shares were up 2% in extended trading on strong Q3 earnings. EPS was $0.34 vs est. $0.16 driven by strong uptake in gross payment volume hitting $31.7bn up 13% y/y. The company is saying that the pandemic has fueled its cash app showing a clear future path to a second business segment for Square. Q3 net revenue was $3bn vs est. $2bn.
Uber (UBER:xnys) - shares were down 2% in extended trading after the Q3 earnings release showing net revenue of $2.81bn vs est. $2.82bn and EPS loss of $0.61 in line with estimates. Uber says it is still confident that it can meet its positive EBITDA target before end of 2021. With the recent resurgence in Covid-19 cases in the US there could be lockdown or mobility restrictions coming to the US which would materially impact Uber’s business and their profit target.
What is going on?
US Election math tilting toward a Biden win / Senate sees focus switch to Georgia run-offs: As final mail-in votes are being tallied, Trump’s lead in Pennsylvania is evaporating and is seen as disappearing entirely when the final results are in. In Georgia, Trump’s lead is down to less than 1,800 votes, with 14,000 votes said left to count. Nevada continues to show Biden ahead, but has not been declared and would be enough to give Biden the win, as long as Arizona remains in Biden’s column (some residual controversy on whether the last 10% of votes to be counted there could see his lead disappear. In the Senate races, the last tiny sliver of hope for the Democrats appears to be that both Georgia Senate races will go to a January run-off, with two wins for Dems there sending the Senate to 50-50 and hence give the Democrats control.
The Fed and Chair Powell kept a very low profile at the FOMC meeting last night – with very few tweaks to the new monetary policy statement. The Fed will have a tough time developing a set of credible forecasts for the next year at its December meeting, given the political gridlock in Washington and the likely prospect of a Biden presidency with a blocking Republican majority in the Senate preventing the fiscal stimulus they have so loudly called for in recent months, knowing that their toolkit of monetary policy tools is inferior for addressing the situation.
The agriculture sector continues to attract demand with Chicago soybeans at a four-year high with local prices in China hitting record levels on supply shortages. Yesterday, the UN FAO published its monthly Global Food Price index for October. It showed a continuation of the upward trend with the index rising to the highest since January while showing a year-on-year rise of 6%. The month on month 3.1% increase was driven by much firmer prices of sugar, dairy, cereals (wheat and corn) and vegetable oils (soybeans) with only meat prices showing a small drop.
The collapse in implied equity volatility has stopped. The VIX has stabilised around 27.50 after being down to as much as 26 earlier in today’s session. Our view is that VIX will slowly progress down towards the long-term equilibrium around 22, and then we will have to see what the new natural VIX futures curve levels are, as the massive retail investor participation in single stock options is currently creating an upward bias in the VIX Index.
What we are watching next?
How long will US Election uncertainty stretch? The fight is getting ugly, but courts seem to be largely rejecting the flurry of attempts that President Trump’s team is making to stop vote counts in various jurisdictions. The counts should be sufficiently clear ahead of the weekend for Biden to declare himself the winner, but will Trump concede? Some Republican leaders are clearly taking a stand against some of Trump’s claims and even admonishing him for his behaviour in some cases.
Covid-19: high case count and possibly dangerous mutations. The pandemic continues to rage in the US and in Europe, with France reporting a record case count despite widespread lockdown measures enacted several days ago and 85% of France’s intensive care capacity in hospitals is now occupied by virus patients. The US also registered a record case count of 120,000. In Denmark, authorities moved to shutdown portions of Northern Jutland where the world’s largest mink-farming industry is concentrated after authorities there have discovered mutations of Covid-19 that occurred in mink populations that have then spread back into the human population, with the specific risk that the mutated virus will prove less responsive to the hoped for Covid-19 vaccines.
Q3 earnings season continues this week. Yesterday saw many strong earnings releases across the board from companies such as AIG, Square, Booking, and this morning Allianz and Toyota are out better than expected. Toyota is lifting its FY operating income to JPY 1.3trn vs previously JPY 500bn indicating that carmakers are getting more optimistic on the future. S&P 500 Q3 EPS is now $36.24 vs est. $32.64 before the earnings season translating into 47% q/q growth in corporate earnings. Companies have yet again showed extraordinary cost discipline to protect profitability.
Economic Calendar Highlights for today (times GMT)
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