Head of Equity Strategy
Summary: Equities are selling off as a bunch of US macro data disappointed yesterday including the important Conference Board Consumer Confidence Index. Factors are now aligning around a negative environment for equities short-term and the recession risk has increased yet again. In today's equity update we also discuss the recent declines in shares of NIO, also called China's Tesla, and the UK-based Metro Bank.
All the talks about a recession in the manufacturing sector and US-China trade war dynamics more damaging to the global economy have been to no avail as investors have pushed the S&P 500 higher on the grounds that the consumer was doing well. This narrative was hit by a massive blow yesterday as Conference Board Consumer Confidence Index was 125.1 for September vs 133 expected and down from 134.2 (revised down) in August. The expectations subcomponent of the survey also declined massively taking out all the gains from January.
On top of that Richmond Fed Manufacturing Index hit -9 vs +1 expected showing weakness persists in the manufacturing sector. At the same time the Case-Shiller 20-City home index y/y fell to 2% the lowest house price gains since Q4 2012. And if weakening consumer confidence was not enough corporate insiders in the US are selling the most shares since the end of the financial crisis.
All these factors confirm us in our thesis for Q4, presented in yesterday’s equity update, that equity volatility will rise substantially in Q4 and that corporate executives will increasingly use the quarter as a kitchen sink in terms of asset write-downs and layoffs. We expect employment numbers and broader economic indicators to weaken over the coming three months confirming the feared spillover effects from a manufacturing sector in recession. What can change the outcome and avoid a recession, or maybe just making the blow soft? The only potent policy choice that with short notice can rectify the slowdown is intervention in the USD. This happens to be our theme for our upcoming Quarterly Outlook.
The price action in yesterday’s US session tells the story of investors being scared that equities might be in for a rough drawdown to reflect the underlying fundamentals. But it’s the only sensible alternative most will say. Sure, but what is small negative yield in a bond relative to a large drawdown? Investors can quickly change their reassessment of negative yielding bonds if a recession unfolds. Technically S&P 500 futures look weak and are rolling over in line with our view for weeks that unless the index could deliver new all-time highs then traders should be shorting the index. Our conviction trade for Q4 is long volatility.
Technology stocks are under pressure lately with the failed WeWork IPO spectacle and Netflix downward revisions and growth concerns. Last night China’s version of Tesla, NIO, delivered disappointing Q3 guidance and misses horribly on Q2 EPS despite a positive surprise on Q2 revenue. The EV-maker will cut global workforce by 20% before year-end. Remember the kitchen sink? The stock is now down 65% from the IPO price and 84% from its all-time high. When the company IPO’ed in September 2018 we did an analysis of NIO which was mostly negative.
Metro Bank shares are stabilizing in today’s session following yesterday’s 36% drop as the bank scrapped a crucial debt sale. It’s a major blow to the UK-based bank and the fact that demand was not strong enough despite an attractive coupon of 7.5% underscores the risk profile of the bank. Shares are down 96% from the peak in March 2018 and the downfall accelerated in January 2019 when regulators said the bank had not classified loans correctly. The situation for Metro Bank is that the bank needs to raise capital to comply with regulatory requirements and if it misses the 2020 deadline then the bank will be forced to sell assets under a potential grace period. Bloomberg’s default risk model saw its estimated 1-year default risk rise to a record high of 1.55% as of yesterday’s close.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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