Equities Equities Equities

Overnight funding issues, FOMC junction and FedEx shock

Equities 5 minutes to read
Peter Garnry

Head of Saxo Strats

Each new week adds another dimension. This week oil markets saw massive volatility as the attack on Saudi Arabia’s largest oil processing facility sent oil prices higher before giving back most of the gains yesterday as Aramco announced that production would be back to pre-attack levels by end of September. On top of oil market volatility, the past two days have seen jumps in the general collateral overnight repo rate (see chart) and the FRA-OIS spread which measures credit risk in the banking system.

Source: Bloomberg

The jump in overnight repo rate has been due to several colliding factors from large Treasury auctions and corporate tax payments. However, both events are well-known beforehand so one must wonder how the repo market could be so unprepared. Our sources also tell us that Saudi Arabia pulled USD from the system to offset weakness domestically from the attack which naturally has added funding stress. The expectation is that the Fed intervenes again today in the repo market but in general market consensus is that the spillover effects are low as the constraints in the repo market can easily be solved short-term.

But the jump overnight repo rates put the Fed in a difficult situation tonight at the FOMC rate decision because the narrative has definitively changed from being that of excess reserves and temporary slowdown coupled with some uncertainty over US-China trade war. The narrative seems to be tight USD funding markets, strong USD is slowing global growth, Fed cannot reduce balance sheet while the US government increases its fiscal deficit and the US-China trade war will persist deep into 2020. The Fed Chair Powell must steer away from the story of a mid-cycle adjustment to that of the world flirting with recession.

The base scenario tonight is a 25bp rate cut with language likely to the hawkish side against current market expectations. It should be clear by now that the Fed is close to losing control over monetary policy and is perceived by the market as being behind the curve.

In Europe this morning car sales showed significant weakness in August and growth turning down again (see chart) whereas China seems to have managed a sustained improvement in its car market. Yesterday’s better than expected ZEW figures on expectations would normally have lifted markets but the current conditions index still declined and today car sales figures show that Europe is in need for more stimulus. However, the ECB cannot do more to help the economy and apparently Draghi’s cry for help from the fiscal side has started talks among governments in Europe. The Dutch government announced yesterday plans for increased government spending in 2020 and cutting taxes.

FedEx shares plummeted 10% in extended trading as the company significantly downgraded its FY EPS guidance. In June the logistics company guided minus 5% EPS growth in current fiscal year. But yesterday that guidance was lowered to minus 16-29% which is a shocking development. FedEx is impacted by the US-China trade war which is softening the demand for logistics services globally but also the recent split from Amazon as FedEx now perceives the e-commerce retailers as a competitor has hurt the outlook.

Source: Saxo Bank

On top these events FedEx is integrating an acquisition in Europe so the economic slowdown could not happen at a worse point in time. In terms of valuation FedEx is valued at a significant discount to US equities but investors and analysts are not really biting. FedEx has accumulated a massive debt exposure over the years with the net debt expanding from $2bn in 2013 to around $32bn as of August 2019. This debt accumulation has come while operating earnings have only increased by around 30% so the credit quality has obviously deteriorated for FedEx. The company will strategically be stuck for years to come due to the ongoing US-China trade war, the loss of Amazon and need to reduce balance sheet leverage.

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

Contact Saxo

Select region

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 UK 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. Registered in England & Wales.

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.

©   since 1992