European shares once again fell and then tried to come off the flatline in early trade on Friday after another down day in the previous session, but the mood is pessimistic. The FTSE 100 is trading above 5,500 but with little support under 5,400 we could yet see a retest of the March lows at 5,000-4,800. Wall Street rallied as the bulls put in a solid defence with the S&P 500 recovering 3,300. Big Tech earnings beat expectations yet shares fell after hours and this weighed on the futures, which are pointing to a weak open for the US market. Bear in mind also month-end flows which are helping muddy the waters. The US dollar surged with US yields moving higher yesterday. DXY advanced to near-term resistance at the top of the October range at 94. WTI (Dec) sank amid the broad risk-off tone yesterday and demand fears were to the fore.
US jobless claims fell and GDP in the world’s largest economy rebounded a little more than expected in the third quarter, but none of this matters much since the market is entirely focused on the spread of new cases and lockdown measures. The annualised 33.1 per cent bounce in the third quarter masks the fact the economy is 15 per cent smaller than it was before the pandemic hit. The pace of the recovery is slowing in the fourth quarter albeit it remains on a sure enough footing compared to Europe (lockdowns to blame there), while the glow from the $600-a-week stimulus cheques (which stopped at the end of July) is dimming quickly. And while we believe new stimulus measures are coming over the hill, the longer the delay the tougher it becomes for Main Street.
The European Central Bank (ECB) didn’t do anything but sounded more dovish and signalled it is ready to act in December by pumping up its emergency quantitative easing programme. In fact there was overall a surprisingly strong pre-commitment to taking additional easing measures in December. It’s all but a down deal now that France and Germany have locked down and the economy is heading for another recession. The euro fell, weighed down by the dollar’s advance but also because of the ECB’s stance. Christine Lagarde said staff were working on recalibrating all instruments, which means even interest rates could be cut further in addition to expanding QE envelopes. EURUSD dropped to take a 1.16 handle but found support at the 100-day SMA at 1.1650. Cable traded weaker, briefly taking a 1.28 handle but caught some bid around the 1.29 level to steady the ship. 100-day SMA at 1.2877 offers the near-term support under here.
More upbeat numbers from the high street banks with Natwest this morning reporting Q3 operating profit more than twice market estimates at £355m vs ~£130m expected. Impairments were half the market expectations at £254m vs over £550m expected. CET1 very strong at 18.2 per cent, net interest margin down 2bps to 1.65 per cent. A good set of numbers to round off a strong performance by the UK banks but doubts remain about a potential increase in impairments down the road, weak economic growth in the UK, Brexit challenges, and the threat of negative rates eating away at margins.
UK company announcements | |
| IAG (IAG) | The owner of British Airways recorded a post-tax loss of €5.57bn over its nine months to 30 September, having taken an exceptional €2.76bn charge linked to fuel hedges, restructuring costs and asset write downs. Passenger revenues stood at €4.89bn, 71 per cent shy of last year's level. |
Big Tech reported earnings that showed its resilience to the virus but also betrayed just how richly priced these stocks are in the wake of the pandemic. With the exception of Google parent Alphabet, shares fell across the board after hours, which weighed on US futures overnight.
Alphabet shares rose over 6 per cent in after-hours trading as earnings indicated a bounce back in the search business. EPS of $16.40 beat the $11.29 expected, on revenues of $46.17bn. Advertising revenue rose to $37.10bn, compared to $33.80 bn in the year ago quarter. YouTube +32 per cent was notably strong. Alphabet will start breaking out its cloud earnings performance from the next quarter.
Amazon posted a blowout third quarter of revenue growth and is poised to capitalise on a record Christmas shopping season. Net income rose to $6.3bn vs $2.1bn in the same quarter a year before despite spending significant amounts on coping with the virus. In total, Amazon has incurred more than $7.5bn in incremental Covid-related costs in the first three quarters of 2020, and expects to incur approximately $4bn in Q4, CFO Brian Olsavsky said. AWS net sales rose 29 per cent to $11.bn. Shares slipped almost 2 per cent in the after-hours market.
Facebook shares fell 3 per cent after-market as it posted a decline in North American users and signalled more uncertainty ahead. Revenue +22 per cent to $21.47bn was a beat to expectations, while net income was +29 per cent to $7.85bn. While the shift offline to online among business and retail is a powerful tailwind for the advertising earnings, shares priced for lots of growth are just as sensitive to user numbers and the drop in core US/Canada users is a concern.
Similarly, Twitter shares got whacked after hours as it too posted a disappointing user growth story. Revenues rose 14 per cent to $936m in the quarter, but the +1m gain on daily active users to 187m was short of the 195m expected.
Finally, Apple shares fell 5 per cent after hours as a 20 per cent decline in iPhone revenues weighed on the stock, while the lack of any guidance for 2021 was taken as a negative. While Mac and iPad sales rose strongly over the company’s fiscal fourth quarter, it was not enough to offset the drop in iPhone sales. However, with the quarter covering the period immediately before the launch of the iPhone 12, we would think that weakness in iPhones will prove fleeting. Mac revenues +28 per cent to $9bn and iPad sales +46 per cent to $6.8bn partially offset iPhone’s –20.7 per cent to $26.44bn. EPS of $0.73 beat the $0.70 expected, while overall group revenues rose 1 per cent. Services continues to do well, with revenues +16.3 per cent to $14.55bn. Uncertainty around the virus means Apple continues to not offer guidance, however Tim Cook said he was optimistic about the iPhone 12 and is ‘confident’ Apple will grow in Q1 2021. Ecosystem is still the biggest draw and should support the multiple expansion.
Neil Wilson is chief markets analyst at Markets.com
