How much can equities take?

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Equities ended last week on a surprisingly strong note given the repo market uncertainty and mixed macro numbers. This week is off to a worse start with South Korea exports hitting biggest decline in a decade and Germany PMI figures underscoring that the country is in a recession. The main question is now when the manufacturing weakness is hitting services; our take is that it could come soon. In today's equity update we also discuss energy stocks, Thomas Cook bankruptcy and SoftBank implication of the failed WeWork IPO.


In today’s session we are finally seeing the weight of bad news having an impact on equities with European equities down following Asia. South Korea exports (Sep P) were down 21% y/y which is the biggest drop in a decade led again by the semiconductor industry. As if this was not enough Germany followed up with a manufacturing PMI (Sep P) this morning at 41.4 cementing the fact that Germany is in a recession. Euro STOXX 50 futures are down 0.8% and rates are higher across the board while EUR is slipping against the USD.

Source: Saxo Bank

The most important question now for investors is when the manufacturing recession evident across many OECD countries will begin to have spillover effects into the services sector and the broader economy. As year-end approaches many companies may readjust their cost structures to be leaner going into a new calendar year. Fourth quarter is known to be the kitchen sink quarter on write-downs and layoffs, so if sentiment has finally become weak enough for companies then layoffs could be accelerating over the coming three months.

Later today we will get two important macro figures from the US with the first being Chicago Fed National Activity Index out at 12:30 GMT expected to rebound in August but also expected to still confirm that the US economy is operating below trend growth. The second macro print is preliminary US PMI figures for September is expected to gain m/m, but so was Germany’s manufacturing PMI.

Source: Blooomberg

On top of weaker macro data, the situation in the Middle East is getting more and more tense with the US deploying additional military forces in Saudi Arabia. Iran’s president warned that foreign forces are threatening the security of the Gulf. This news is likely to increase the geopolitical risk premium in oil. But how should investors play this in equity markets? While oil services stocks have been battered over the past five years down 60% it’s not the preferred option to be long risk in oil and Middle East tensions. Oil services stocks depend on a credible trajectory for higher capital expenditures which is not the case with oil majors in conservation mode. The best way to play the risk premium in oil is to be tactical long in oil and gas stocks where the short-term higher oil price feeds into the bottom line.

Source: Blooomberg

In US politics the 2020 election is heating up with Democratic Presidential candidates fighting to be the party’s nominee and over the weekend the Iowa Democratic Presidential Caucus (key state) poll showed a +2 points lead for Elizabeth Warren over Joe Biden. This is a dramatic turn of events as Biden had a +10 points lead only a few weeks ago. Warren is apparently getting voters from Sanders as the political profile has large overlaps, but Warren’s surge is making Wall Street nervous because her campaign is running on a quest to radical change the US which includes a hefty wealth tax to close the wealth gap.

Thomas Cook Group shares were down 97.5% as of Friday’s close since the peak in Q2 2018. Over the weekend intense talks between the company and its creditors failed and the travel company has filed for compulsory liquidation. One’s loss is another’s gain, so it’s not a big surprise to see the competitor TUI up 8% in early trading. Given the size of Thomas Cook in the European travel market the positive dynamics for TUI could extent for a year.


Source: Saxo Bank
Source: Saxo Bank

The disastrous WeWork IPO forcing the company to lower its valuation from $45bn to around $10-15bn is taking another turn with SoftBank, its largest shareholder, planning to demote the CEO and co-founder Adam Neumann on an extraordinary board meeting today. A good discussion and overview of what’s up and down around the WeWork sage comes from the NYU professor Scott Galloway in his recent analysis last Friday. Since WeWork is not publicly listed the implications for investors in public markets are instead through SoftBank, which is listed in Japan, which will undoubtedly see large write-downs on its WeWork holding in its famous Vision Fund. The failed WeWork IPO extend beyond WeWork and lower across the board valuations in Silicon Valley based start-ups as corporate governance is likely to become a more important factor going forward.

Source: Saxo Bank
Disclaimer

The Saxo 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 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 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 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 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 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/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
3 Church Street, #30-00
Samsung Hub
Singapore 049483

All departments are available 08:30 to 17:30 Monday to Friday.

Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.