Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Chief Macro Strategist
Summary: US equity market futures stumbled badly after hours yesterday after four of the largest US companies reported earnings. The largest company in the world, Apple, was down more than 4% in late trading on weak iPhone sales, especially in China. With the US election now four days away, the latest polls continue to show Democrat Joe Biden with a commanding lead.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - a whiplash session for traders all around yesterday, as the cash session saw equities rallying nearly all day despite the worst day in months on Wednesday, possibly on the positive surprise in the US Q3 GDP data. But after the close, the reports from four of the largest US equity names crushed sentiment, led by an ugly drop in Apple, and the Nasdaq 100 dropped to its lowest level in a month and the S&P 500 suddenly finds itself within a percent of the pivotal 3,200 level. Sentiment will likely remain jumpy and unpredictable until the US Election results becomes clear – and some US Election outcome scenarios could trigger further volatility, especially if the path to the outcome is contested bitterly or unclear for an extended period.
Apple (AAPL:xnas), Amazon (AMZN:xnas), Alphabet (GOOGL:xnas), Facebook (FB:xnas) - all four US companies reported earnings after the US market close, with Apple taking the headlines as iPhone sales missed for the previous quarter (iPhone revenue was down 21% y/y) and China revenue down 29% y/y on top of no guidance for the current quarter. Apple shares were down 4% in extended trading. Amazon delivered a monster quarter beating on every metric expect maybe on the cloud business and guidance Q4 revenue at $121-112bn vs est. $112bn. However, investors took shares 2% lower in extended trading driven by the cloud angle where the question is whether Amazon is beginning to lose out to Google and Microsoft. Google was the positive surprise with shares 6% higher in extended trading driven by impressive numbers in their cloud and YouTube busines. Facebook’s Q3 earnings were strong and given the backdrop of a global campaign to stop advertising on Facebook revenue came in higher than expected. Despite of these strong results shares were down 2% in extended trading as investors clearly focused on the signs of vanishing users in their North America segment with Facebook guidance MAU flat to down in Q4 vs Q3.
Stoxx 50 (EU50.I) - European equity index futures are continuing lower this morning on the back of megacap earnings from US technology earnings that were not good enough to satisfy the market. STOXX 50 has traded down to around the 2,900 level as we mentioned a couple days ago could be first steppingstone before testing the 2,800 level. Sentiment has soured to a degree where we think the only thing that can bolster sentiment again would be a US fiscal deal ahead of the weekend.
USDJPY and EURJPY – the JPY is back on top after weakening late yesterday on a burst of optimistic equity trading ahead of the massive load of US earnings out after the US equity cash session. With that sentiment dashed in the wake of these reports after the close, the JPY switched back into rally mode and we continue to eye the 104.00 area in USDJPY as a possible catalyst for further selling toward 100.00 and the risk toward 120.00 and possibly lower for EURJPY is weak broad market risk sentiment continues.
AUDUSD and EURUSD – AUDUSD continues to fall toward the critical 0.7000 area in a slow-motion dive despite the extensive volatility elsewhere, suggesting that any dip below this level could yet trigger stop-loss driven selling, but that there is some solid level of resilience in AUD, perhaps driven in part by Australia’s Asian trade orientation and how major economies in the region have seemingly conquered the coronavirus. As well, China’s currency has maintained its strength even as the US dollar put in a sharp rally. As for EURUSD, the ECB’s seeming pre-announcement of a major December package and the EU’s struggles with Covid have EURUSD struggling below 1.1700, leaving only the 1.1612 range support ahead of the enormous 1.1500 chart level.
Gold (XAUUSD) and Silver (XAGUSD) both dropped further yesterday with uncertainty ahead of next week’s U.S. election lifting the dollar, thereby reducing the general appeal for commodities. Especially those that due to strong fundamentals have attracted large investments in recent months. For gold, the continued surge in new coronavirus cases will eventually provide renewed support on expectations that central banks and governments will have to do more in terms of metal friendly monetary and fiscal stimulus support. Gold in our opinion is likely to find support soon and it has despite the latest weakness not yet tested the 38.2% Fibo retracement of the March to August surge at $1837/oz, nor the September low at $1849/oz.
Brent crude oil (OILUKDEC20) and WTI crude oil (OILUSDEC20) - both broke lower yesterday with a resurgent pandemic in the U.S. and Europe reducing fuel demand through reduced mobility of people. If that wasn’t enough, next week’s U.S. election promises more volatility given the different views on fossil fuels being expressed by the two candidates. The focus will now increasingly turn to OPEC+ for clarity on how they view the near-term prospects given the not yet cancelled 1.9m barrels/day production hike planned for January. The worst month for oil since March could now see Brent targeting $34.8/b, the 38.2% Fibo of the April to August rally.
What is going on?
US reported a record GDP growth rate in Q3, as the economy snapped back from the trough of the Covid-19 dip in Q2. While the headline “33.1% annualized” growth rate sounds impressive, the US GDP in Q3 was down in constant US dollar terms by –2.9% year-on-year, so there is considerably more growth to accomplish to get the US economy back to par, and even more so to get it back to trend.
ECB sends clear signal of major December easing push. The ECB decided yesterday to take a more wait-and-see approach to announcing further measures to support the EU economy, perhaps a recognition that upping QE purchases is a futile at the zero- and even negative yield level for supporting an economy that is struggling due to Covid lockdowns. ECB president Lagarde urged EU leaders to spend more, making clear that the ECB will support with purchases as the ECB promised a “recalibration” of its programme in December, once more info and its latest projections for the EU economy are available.
What we are watching next?
US election scenarios and assessing the odds. In yesterday’s US Election Countdown piece, John Hardy runs down the likelihood that young voters will turn out in drastically larger numbers for this election than they did in 2020, and as the younger voting age group is the largest in the US and tends to tilt in favour of the Democrats by an overwhelming margin, their turnout could be the difference between the Democrats squeaking by and a true overwhelming Blue Wave scenario.
Today is ‘energy day’ in US earnings season. Today the focus is on Exxon Mobil and Chevron given the latest breakdown in oil prices and the news yesterday that Exxon Mobil will cut its global workforce to adjust operating expenses to a new reality.
Economic Calendar Highlights for today (times GMT)
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