Not a convincing bounce back in equities

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Yesterday's unconvincing bounce back doesn't make us change our short-term negative view on equities due to the deteriorating technical and fundamental picture. In today's equity update we also take a look at ABN Amro that's being investigated by the Dutch prosecutor for money laundering and today's first day of trading for Peloton the next IPO from Silicon Valley.


The energy in equity markets is still low despite the sell-off two sessions ago around the release of that disappointing US consumer confidence figure for September. Yesterday, two news saw S&P 500 rally into the close. The released transcript of Trump’s phone conversation with the Ukraine president calmed fears of impeachment and then later Trump boasted that a trade deal with China could happen sooner than people think. Despite yesterday’s rally we maintain our negative view on US equities driven by a weak technical picture and deteriorating fundamentals. Also, we do not expect US earnings in Q3 to be a positive catalyst for equity markets as Q4 guidance will likely disappoint analysts.

Source: Saxo Bank
Source: Saxo Bank

Another factor weighing in on our short-term negative equity view is the fact that VIX index remains in a short-term uptrend with the front-month VIX futures (see chart) trading around 17.30 up from 14.30 a week ago. As we have reiterated in our recent equity updates long volatility remains our conviction idea for Q4.

Source: Saxo Bank
Source: Saxo Bank

One of Netherlands’ largest bank ABN Amro (ABN:xnas) is down 10% in early trading as the bank is being investigated for money laundering by the Dutch public prosecutor. As we saw with Danske Bank the bank apparently failed to report suspicious transactions and didn’t make enough due diligence on clients. Money laundering seems to have been systematic on a constantly larger scale than initial thought in Europe. Another reason to not be positive on European banks despite the tiering system recently introduced by the ECB. We remain long-term negative on European banks due to low loan demand, immense regulation, negative rates, too high cost structure and ongoing uncertainty over money laundering investigations.

Source: Saxo Bank

Peloton Interactive (PTON:xnas) is the next Silicon Valley company going public with the company pricing its shares yesterday at the high-end of the price range at $29 per share; the shares will start trading today. Including all outstanding shares and options this translates into at $10bn market value. For this price investors are getting, as typical will Silicon Valley companies these days, a company that is operating with negative cash flow. This can be acceptable to public investors in the short term if revenue growth is high, which it is for Peloton delivering 110% growth y/y in Q2, but there also must be a visible path to profitability. We have not done a valuation of Peloton so we will refer to NYU professor Aswath Damodaran’s excellent valuation analysis of Peloton. His model produces a median fair price of $18.30 which is 37% below the IPO price. For those that have never heard of Peloton before the company sells high premium at-home fitness equipment, although the company sees itself as anything but that, combined with a subscription model giving access to training exercises.

Source: http://aswathdamodaran.blogspot.com
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 is not intended to and does not change or expand on this. 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-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
Rooms 2001-02, 20/F York House
The Landmark
15 Queen's Road Central
Hong Kong

Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 Queen's Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.