Will earnings break sentiment in global equities?

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Despite the probability of a global recession is alarmingly high equities continue to be bid this week as investors are clinging to a positive US-China trade deal narrative, Brexit breakthrough and an earnings season that will completely disappoint. Our view remains that equities could suffer a sizable drawdown in Q4 driven by "kitchen sink" behaviour in the upcoming months and earnings releases. The US-China trade deal seems also to be on thin ice and could create havoc to equities at anytime.


Global equities are higher following yesterday’s confusion over the US-China “first phase” trade deal, that includes China buying $50bn in US farm products most notably soybeans, as China’s government wants more talk before signing the trade deal. Our view remains that there will not be any comprehensive trade deal between China and the US inside the current US presidential period.

In Europe, the prospects of a potential path to a Brexit deal on top of better than expected ZEW survey are leading the way for equities up 0.6%. The Euro STOXX 50 Index is flirting with the highs going back to Q2 2018 and there are multiple arguments for being long European equities although we think it’s too early. If we are proven right on a weaker real USD this will play into European equities relative to US equities. Also, European equity valuations are attractive, but for obvious reasons of low growth and general poor capital efficiency by European companies, which means there is value to found. If investors couple these two factors with a potential global economy moving into the recovery phase of the business cycle within the next couple of months, then European equities could become the best trade among equities in 2020.

Source: Saxo Bank

Staying with Europe the continent is seeing low growth and brewing recession in manufacturing sensitive countries such as Germany and Sweden. Willingness to do more fiscal stimulus is still low due to existential risk and shock that followed during the Euro crisis of 2010-2012. But Europe might have a deeper problem rooted in Germany’s complex economy. John Authers had a great Gadfly piece yesterday in Bloomberg that presented a recent study from the Growth Lab at Harvard University that indicates that Germany might have maxed out its economic potential. The study used data from the Atlas of Economic Complexity (MIT) showing that Germany has a high degree of economic complexity and has virtually exploited  all major existing products meaning very little room for economic growth outside heavy innovation and new product categories. This means that Germany must reinvent itself which will bring about its own disruption to its economy.

Source: Bloomberg

Another equity market that is seeing momentum is Japan with the Nikkei 225 close new highs for the year despite worsening leading indicators on the economy. The weaker JPY has recently added fresh support to the equity market in local currency but also a positive prospect for a US-China trade deal is a positive for the Japanese economy which has suffered from the trade war.

Source: Saxo Bank

The earnings season starts today in the US with the most important earnings to watch from JPMorgan Chase (11:00 GMT) and Citigroup (12:00 GMT). JPMorgan Chase is expected to lift Q3 EPS to $2.46 up from $2.36 a year ago driven by their market leading position and diversification across multiple business segments. A negative surprise from JPMorgan Chase would not be a big surprise given the low volatility, low investment bank activity and lower rates. Citigroup is important to watch due to its exposure to emerging market countries. This gives clues to sentiment in arguably the most hard-hit part of the global economy due to the manufacturing slowdown and strong real USD.

Our overall view is that global earnings growth will go negative in the fourth quarter and that the outlook presented in Q3 earnings releases will be that of high uncertainty. In Friday’s equity update we showed which sectors that have been hit the hardest over the past year which are the energy, financials and materials sectors. But for equity indices the two most important sectors due to the market value weights are health care and information technology which both have hold up well the past year.

As sentiment on technology stocks is important tomorrow’s earnings from Netflix is this week’s most important earnings release. Analysts are looking for 31% y/y revenue growth and EPS growth of 40% y/y. This sounds impressive to most and surely net positive for the stock, but this is already in the price and investors will only react to subscriber growth figures most notably in its international markets. We expect Netflix to continue being cash flow negative the company’s outlook could suffer from a warning due to more intense competition.

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.