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

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy, Saxo Bank Group

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

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.