New highs in S&P 500 within reach on earnings; Tesla shocks market with strong Q3 result
Head of Equity Strategy
Summary: Equities are higher globally with S&P 500 now within reach of a new all-time high as Microsoft delivers strong earnings and outlook, while Amazon is poised to also deliver tonight. In France the PMI figures for October surprised significantly to the upside indicating potential green shoots in Europe. The biggest surprise in the earnings season was Tesla's Q3 result last night smashing by a wide margin the most positive estimate on Wall Street with the shares gaining 20% in extended trading
EU consumer confidence figures (A) in October published yesterday missed expectations at -7.6 the worst reading since December raising the stakes for the consumer narrative to weaken and hit the economy harder than the current soft patch mostly hitting the manufacturing sector. But already this morning the worse than expected consumer confidence numbers will be forgotten as France PMI figures jump to live in October smashing estimates with the composite PMI hitting 52.6 vs est. 51. Less impressive are the October PMI figures from Germany that missed estimates highlighting Germany’s difficulties in a global slowdown. Nevertheless, the market is weighing on all the macro and earnings data saying they are on the margin positive sending European equities 0.5% higher in today’s session.
On another positive side, if you will, the Fed increased the liquidity injections in the repo market to $120bn. The bulls will say more stimulus is good for risky assets because the Fed is on the ball and getting ahead of the curve, and the bears will say it shows things are rotten deep inside the machine room of money markets. It’s too early to call which narrative will win. For now, it seems most investors believe the repo market stress and Fed’s injections are less important.
Microsoft (MSFT:xnas) delivered FY20 Q1 earnings last night and beat both on the top and bottom line while indicating expectations of a strong FY20 Q2 result. However, the market was less impressed with the shares unchanged in extended trading. Tonight, after the US market close Amazon will report earnings which we have said is important for market sentiment as investors are worried about a margin squeeze and growth slowdown for the e-commerce giant. But there were clues in Microsoft’s earnings report that Amazon will beat earnings estimates as Microsoft said margin improved in its cloud business and expected it to continue improving. If Amazon has same tailwind this bodes well for tonight’s earnings release. As we wrote this Monday, good earnings from Microsoft and Amazon given their combined 7.2% weight in the S&P 500 Index is all its takes for the S&P 500 to set a new record. Given the positive momentum today, and given we don’t get any bad macro headlines, and Amazon delivers tonight then it’s not unlikely that S&P 500 will see a new high today.
Nordea (NDA_FI:xhel) shares were initially down 5% in early trading but has recouped some of the loss as investors listened in on the conference call but also recognized that not all numbers were bad in the Q3 result. The largest bank in the Nordics is slashing the dividend per share to €0.40 in 2020 vs estimates of €0.60 as the bank needs to preserve costs as the bank undertakes large IT investments. The new CEO is also changing the strategy leaving room for M&A activity. The CET1 ratio and the top line looked good, but it was the initial headline of a quarterly loss due to a €1.3bn one-off item that spooked investors.
Other stocks on the move in today’s European session are Norwegian (NAS:xosl), AstraZeneca (AZN:xlon) and Nokia (NOKIA:xhel). Norwegian delivers a surprisingly strong Q3 result and AstraZeneca is raising its sales forecast. Nokia on the other hand is cutting its guidance.
Tesla (TSLA:xnas) shares rose 20% in extended trading as the Q3 earnings release surprised everyone and the most optimistic analyst delivering EPS $1.86 compared to consensus $-0.24. The solar division delivered its first profit and management announced that car production has already started in its new Chinese factory and that the new crossover Model Y will start production two months before scheduled next year. Better cost discipline drove gross margin to 18.9% up from a dismal 12.5% in Q1, the low point for Tesla on gross margin, but revenue declined 8% y/y for the first time since Q3 2012 and analyst expect revenue to continue declining in Q4 but starting to show growth again in Q1 2020. For all of Elon Musk’s empty promises and tight deadlines we must give him credit for a staggering turnaround in the business as Tesla has improved 12-month free cash flow from $-4.2bn to $975mn in just two years. It seems like Tesla’s business is finding its feet with sustained profitability at current production level. The Chinese factory should also help improve margins and drive growth in the Chinese market unless the US-China trade war turns ugly and Chinese consumers begin to boycott US consumer goods.
Today’s ECB meeting and press confidence will have zero policy implication as the market is expecting nothing from the ECB as the central bank is close to the limit of what it can do. However, the ECB meeting will mark the end of Mario Draghi’s reign over European monetary policy and unthinkable experiments on monetary policy such as negative deposit rates and quantitative easing (asset purchases) in a German influenced political union. Mario Draghi’s famous improvised words “whatever it takes” with a Financial Times journalist in July 2012 likely saved the Euro to some degree and as time passed the ECB grew more divided as Mario Draghi continued to push ECB into unchartered water. The incoming ECB President Christine Lagarde takes over a divided ECB and an agitated German political class that don’t like negative rates on deposits. Our view is that Lagarde could likely become the person that brokers a deal with EU leaders to take rates back to zero or slightly positive with fiscal policy offsetting whatever weakness this action creates. One counter argument is that Germany has just nominated Isabel Schnabel to the Governing Council and she is far more pro monetary stimulus in the current form than the outgoing Sabine Lautenschlaeger.
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