Stocks fell on Wall Street as the rally took a pause on Tuesday while European bourses also closed down on the day and remain unable to break free from their ranges. The S&P 500 closed -0.63 per cent at 3,511, but would need to close below 3,500 to bring the 3,400 area and 50-day back into play. Meanwhile the Nasdaq was down by 0.1 per cent to 11,863. The Dow snapped a four-day win streak to finish down 0.6 per cent.
European shares were a shade higher on Wednesday morning. The FTSE 100 rose the most as the pound softened against the dollar, though remains unable to crack 6,000 in any meaningful way. The DAX recovered 13,000 but the Euro Stoxx can’t crack 3,300 yet. Range-bound still with little momentum.
Vaccine headline risk was to the fore as Wall Street fell: Eli Lilly halted its phase three trial of its coronavirus antibody treatment over safety concerns. Earlier Johnson & Johnson said it had paused its late-stage vaccine trial after a participant reported an ‘adverse event’. Markets don’t like negative headlines, but these sorts of bumps are to be expected along the road to a vaccine, particularly given the sheer pace of development.
Apple left investors a little underwhelmed with its leap into 5G territory. Shares fell 2.65 per cent but remain up for the week after Monday’s ramp. There are four iPhone 12 devices being launched, ranging from $399 to more than $1k, which ought to spark a strong upgrade cycle. A broad range of sizes, displays and prices, as well as 5G ‘future-proof’ capability should encourage consumers to replace their existing devices – remember about 350m due for upgrade globally. In many ways we should look at this from a different perspective – not whether 5G will deliver the iPhone upgrade ‘super cycle’, but whether 5G-capable iPhones drives 5G penetration rates and encourages network providers to roll out networks faster. Read our recent tip on Apple.
JPMorgan and Citigroup got the Q3 earnings season over on Wall Street off to a strong start, but it wasn’t enough to lift the shares. Both the banks beat on the top and bottom line, after strong trading revenues and lower loan provisions lifted net income. JPM Q3 provision for credit losses of $0.61bn was well short of the $2.38bn expected. There is hope that having set aside large amounts already, JPM and others are past the peak, even if the economic situation deteriorates. However. CEO Jamie Dimon warned that a double-dip recession means they could need to hike provisions by $20bn. Citigroup posted net income of $3.2 billion, or $1.40 per diluted share, on revenues of $17.3 billion. JPM delivered net income of $9.4bn, which translated to EPS of $2.92.
Worries about net interest income falling and persistent low rates trumped the trading revenues. JPM’s net interest income was down 9% at $13.1bn. The effect of the Fed’s ZIRP and QE ad infinitum continues to exert a drag on interest income and margins. JPM ended down 1.6 per cent. Fears about regulatory actions over its risk controls left Citi down almost 5 per cent. The read across left the whole sector lower on the day.
The dollar posted strong gains – arguably on fading hopes of near-term stimulus. The fact is we are trading ranges for now. DXY bounced off the 93.0 round number and was last testing 93.60 region, a previous level of support. Yesterday did appear to be a bit of strong-dollar, weak-equities story, but there were other factors at work.
GBPUSD was weaker, forced off the top of the near-term range down to 1.2870 by a cocktail of dollar strength and Brexit chatter may also weigh. Wire reports this morning indicate EU leaders will say at a two-day summit on Thursday-Friday that not enough progress has been made for a deal to be reached and that they will step up no-deal preparations. Britain’s own Oct 15th deadline is tomorrow, although that won’t stop the discussions right up to December. GBP crosses may be susceptible to the usual headline risks but for the time being cable remains in the middle of 1.27-1.30 range.
OPEC lowered its demand forecast for the year by 200k barrels per day and warned that the near-term market environment is expected to remain weak due to a large overhang in Middle East distillate stocks. It also warned that rising virus infections will mean the recovery in Q3 will not follow through into the fourth quarter and early 2021. OPEC also cut its demand forecast for next year. WTI (Nov) continues to trip the ranges and was last a shade under $40. Whilst it continues to hold this handle for now, the downside looks favoured given the macro outlook (IMF, OPEC etc combined with rising virus cases).
Rising infection rates and the reappearance of lockdown measures will cripple demand in developed markets. Without the further removal of supply, the weaker demand side could lead to rising inventories that sends prices down. Near-term supply constraints (Hurricane Delta, Norway strike and Libya) have eased. API inventories are due today, a day later than usual due to the Columbus Day holiday in the US.
Central banks are in the spotlight today with the ECB’s president Christine Lagarde, and chief economist Philip Lane, due to speak. The Fed’s Quarles, Harker and Kaplan are on tap, whilst Bank of England chief economist Andy Haldane is also slated to speak.
Earnings later from Goldman Sachs, Wells Fargo and Bank of America. US PPI inflation on the economic calendar.
Equities
Three interesting stocks in London this morning to consider, all of which are Covid-related.
Pearson sees improving trends in Q3 with strong performance in online learning (funny, wonder why that might be). I suppose students who were encouraged back to university with false promises just to make sure the landlords got their rent cheques are a bit miffed, but Pearson can do well from the shift to online coursework globally. Online was up 14% driven by 41% enrolment growth in its Virtual Schools. Overall YTD sales are down 14%. Outlook on track but due to Covid there are larger than usual uncertainties around the fourth quarter performance. Shares fell 1%.
Just Eat Takeaway.com shares rose 5 per cent after it delivered 46 per cent growth in the third quarter with the strongest growth in Australia. Further lockdown restrictions across the continent and the UK should keep demand on the up. As restaurants and bars shut, demand for takeaway rises. Students stuck in their halls have little else to do.
Asos shares fell 6 per cent despite it posting an 18 per cent rise in sales and adding over 3m customers due to the pandemic. Profit before tax surged over 300 per cent to £142m and it moved from a position of £90m in net debt at the end of August last year to having over £407m in net cash this year. Margins however weakened by 140bps. Asos is of course a winner from Covid but it does caution that its younger, 20-something customers (bar workers/students etc) may not have any spare cash to splurge on clothes as unemployment rises and disproportionately affects this age group. Demand for party dresses this year may be slack. Profit –taking also a factor in the share price after an exceptional rally since the March lows.
| Bunzl (BNZL) | 2020 performance has been driven by strong sales of Covid-19 related products, so the company expects revenue in the second half of 2020 to grow strongly at constant exchange rates |
| Barratt Developments (BDEV) | Buoyed by strong demand, the house developer's sales rate since the beginning of July is up 21 per cent year-on-year. Forward sales, home completions and total forward sales are all also on the up. The group's AGM is being held later today. |
| Regional REIT (RGL) | As of last Friday, the diversified real estate investor had collected 90.8 per cent of rent due this year, though this falls to 82.1 per cent for the third quarter. A further 4.9 per cent has been adjusted to monthly rent or new collection plans, leaving 4.3 per cent unaccounted for. |
| Arbuthnot Banking (ARBB) | While revenues have been impacted by weakened lending demand and historically low interest rates, the merchant bank says it traded at a "marginal loss" in the three months to September, after turning a profit in the first half. |
| Ashmore (ASHM) | Amid mounting concerns around Covid-19's effects on so-called emerging markets, the asset manager saw $0.8bn of outflows from its funds in the three months to September. That was outweighed by positive investment performance, as assets under management rose 2.3 per cent. |
| International Personal Finance (IPF) | Despite signs of improving profitability, the high-cost credit provider is seeking a relaxation of covenants on the 2023 retail bond it sold last year. In exchange, they are being offered a five-year maturity extension and a switch to Euro denomination. |
| Stock Spirits (STCK) | The impact of COVID-19 in the second half has been less than initially anticipated, with a strong Off-Trade performance being driven in part by On-Trade restrictions. Overall trading for the year was ahead of expectations. |
| Asos (ASC) | The online retailer’s pre-tax profits more than quadrupled in the 2020 financial year to £142m, as its customer base swelled by 3.1m. The company cited a “solid” start to the current period, but is still cautious on the outlook for demand. |
| Pearson (PSON) | Sales dropped 14 per cent in the past nine months, as Covid-19 shut down test centres and schools. Looking ahead, the publisher expects it will deliver an outturn broadly in line with expectations for 2020. |
| Kainos (KNOS) | Shares jumped 23 per cent after the software company said that it expects results for its 2021 full year to be materially ahead of current market consensus. |
| Synthomer (SYNT) | Shares are on the fly as the chemicals company upgraded guidance and reinstated its dividend. Demand for its latex products has increased significantly during the pandemic. |
Election Watch
Trump made a triumphant return to the campaign trail in Florida, a key swing state that he needs to win. Biden has a national lead of 10pts, and 5pts in the battlegrounds. This time in 2016 Trump trailed Clinton by 5.1pts in these states. Latest betting odds are 66 per cent for Biden, 34.4 per cent for Trump. This time four years ago he was given an 18 per cent chance of winning by some bookmakers. Don’t write off the president yet. The difference this time: turnout could be the factor.
Neil Wilson is chief markets analyst at Markets.com
