Market Outlook: Equities pause after strong week, Bitcoin tumbles, Wall Street earnings in focus

European markets were in a holding pattern early on Monday as investors parsed signals of recovery, vaccine rollouts, surging case loads and tougher lockdowns. The FTSE 100 eased back by around half of a percent, trading around the 6,840 level whilst the Dax traded under 14k. It was a strong run-up last week so we are likely just seeing a little pause for breath.

Democrat calls to impeach Donald Trump with less than 10 days of his presidency to run have hit a wall of Republican resistance. Markets will be more focused on the Biden presidency and what kind of infrastructure and green deal spending is coming over the hill, as well the potential for tax rises and tougher regulation on industry like shale and big tech.

Gold prices have weakened, finding support at the 200-day exponential moving average at $1,816 as US bond yields continued to nudge up following a disappointing payrolls report on Friday that only underlined the need for additional stimulus to keep the economy going before the vaccine rollout achieves critical mass. Meanwhile crude oil prices remain well supported with WTI trading above $51 and Brent above $55 following Saudi Arabia’s massive unilateral production cut pledge.

Bitcoin plunged, with spot prices taking a $32k handle overnight having risen above $42k on Friday. It’s no great surprise; parabolic moves always leave the market prone to sharp pullbacks – the question is always only a matter of timing. Talking of a security that will be suffering a sharp pullback before too long…Tesla shares rose another 8 per cent on Friday to $880 but tracked a little lower after-hours. Boeing will be one to watch after one of its 737 aircraft crashed in Indonesia only days after it agreed to pay $2.5bn to settle fraud and conspiracy charges levelled at the company over the 737 Max crashes.

Looking ahead this week we are focused on the start of the Q4 earnings season on Wall Street. The S&P 500 rose almost 2 per cent last week to make a fresh record high, closing above 3,800 for the first time in its history before advancing another 0.5 per cent on Friday after that soft payrolls report. Ebullience is a factor of the hope in vaccines leading to a return to normal, corporate earnings improving sharply in 2021, and expansionary fiscal and monetary environment offering succour to equity valuations. Whilst the earnings numbers will be important, guidance on the upcoming Q1 and Q2 2021 quarters will no doubt be more important than ever.  

All else equal, stretched multiples in 2021 ought to contract slightly as rates rise but EPS should improve faster with more expansionary and redistributive pro-cyclical policy in Washington. The Democrat wins in Georgia have taken us to Blue Wave territory, though it’s important to stress that with the Senate 50/50 and one Democrat (Joe Manchin) already saying he would not approve more radical policies, we are not in Blue Tsunami mode. 

Earnings per share on the S&P 500 are seen falling by around -10 per cent on last year’s fourth quarter, with revenues seen flat. This compares with the –7 per cent drop in Q3 and –32.2 per cent decline in Q2 at the height of the pandemic and it has been revised up from –12.8 per cent in September. Q1 2021 EPS is currently forecast at +12.6 per cent so a key theme of this season will be to what extent corporates think the growth trend will pick up at the start of this year, or do they fear of a stop-start recovery? 

Key themes 

·         Are banks optimistic about net interest margins as yield curve steepens? 

·         Are banks ready to recommence buybacks? Or, rather, just big are these buybacks going to be? 

·         Do they see further reflationary pressures? 

·         Do CFOs predict earnings growth to pick up further in Q1 on the vaccine rollout? 

·         What do CEOs think about the likely fiscal expansion and pro-cyclical stimulus from a Democrat Congress? 

·         Are CEOs fearful of Blue Wave of regulation and higher corporate taxes? 

·         How confident are the energy companies about oil price stabilisation persisting? 

US Earnings Calendar 

Sources: Markets.com, Reuters, Company websites 

Neil Wilson is chief markets analyst at Markets.com