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Stocks surge on trade optimism as Apple disappoints

US markets closed higher again yesterday, posting their third successive daily gain helped by optimism that for all the bombast of recent weeks, President Trump does appear open to sealing some form of trade deal with China by the end of the year, reportedly asking officials to make a start on an official draft.

While some have suggested that apparent change in tone by President Trump is down to the approach of next week’s midterm elections, it rather ignores the fact that we’d already started to show signs of a possible base before yesterday’s intervention, as markets started to rebound on the back of some positive earnings announcements.

That being said it certainly hasn’t hurt the turnaround in sentiment and has helped to accelerate the momentum behind the week’s rebound, which started in the earlier part of this week.

Apple’s latest results, while positive on the headline numbers of revenues and profits, don’t appear to have gone down too well with investors who drove the shares lower after the bell, after the company slightly lowered its guidance for the Thanksgiving and Christmas quarter.

The decision to stop reporting the unit sales numbers for iPhones, iPads and other individual products also suggests that the company is concerned that we might have hit peak iPhone. Judging by the sales numbers that does seem likely but when your average selling price rises to $793 a unit, due to the launch of higher spec and thus higher priced products who really cares.

Apple management are probably more concerned that a higher unit sale price might prompt accusations that the company is taken its customers for granted by continually ramping up prices, along with the requirement to have to purchase extras on top of that.

There are certainly questions to be raised on that score, certainly when it comes to overall sticker prices, but for analysts to obsess about number of units sold when the company is expected to generate $90bn worth of revenue in its next quarter speaks to a rather twisted sense of priorities.

Chip suppliers could well be a pressure point though as fewer chip sales due to lower units sold might well hurt profits in this area.

In any case the disappointment over Apple’s guidance doesn’t appear to have affected markets in Asia which have seen decent gains on the back of the trade story, and this has seen European markets post a similarly positive open.

In Europe attention is likely to be on the European banking sector as investors prepare for the latest round of stress tests with particular attention likely to be on Italian banks given the recent rise in Italian yields, and the potential effect that those higher rates might have on their capital buffers.

British Airways owner IAG’s shares surged on the open, to a one month high, after the airline raised its long term guidance to an average of £7.2bn for the period 2019-2023, an 11% increase on the previous guidance.

The pound has continued its recent surge, enjoying a sterling couple of days, pun intended, helped by further US dollar weakness and yesterday’s Bank of England meeting which has prompted speculation that a rate rise could well come in the first half of next year. The speculation that some form of deal could be in the offing with respect to financial services has also helped and while EU chief negotiator Michel Barnier was keen to push back on that, he only referred to misleading press articles, which wasn’t exactly a rebuttal.

With concerns about rising US rates at the forefront of investors thinking over the past month today’s payrolls report could well feed into these concerns further, particularly if wages growth starts to push up to and beyond the 3% level in October.

In September, markets looked past a weaker-than-expected non-farm payrolls report, treating it as a hurricane related outlier as wage growth softened from 2.9% to 2.8%, while the headline payrolls report number slid back to 134k.

These numbers flew in the face of some strong ISM numbers for the same month which showed strong growth in both manufacturing and services sectors, in both the headline numbers as well as the internals, especially the employment components.

That being said the latest ISM manufacturing report for October, out yesterday, far from consolidating the strength in September fell back to its lowest levels since April this year, with new orders falling to their lowest levels since April 2017. The employment component also fell back while prices paid jumped sharply, which might suggest some evidence of a slowdown.

The strength of these September numbers while not appearing to be reflected in the September payrolls report could well see a trickle through into today’s October numbers, which suggests that today’s 200k estimate might be on the low side. Alternatively we could well see a significant revision upwards to the headline number for September.

This week’s October ADP report pointed to consistently strong jobs growth, coming in at 228k, a slight increase from the 218k in September, with many employers complaining that they were struggling to fill open positions.

More importantly markets will be paying particular attention to the wages numbers which are expected to push up to 3.1%, which would be the highest level this decade, beating the peak seen in December 2016 of 2.9%.

In the absence of a decent jobs number or a jump in wages we could well see further weakness in the US dollar as markets pare back expectations of an aggressive hiking cycle beyond December. As it is we’ve seen the US dollar slip from 16 month highs against a basket of currencies, as equity markets continued to remain buoyant. A bearish reversal on the daily charts speaks to the possibility of further US dollar weakness in the coming days.

Oil prices have also continued to slide after the US gave eight countries waivers on Iranian sanctions, sending the oil price back below the 200-day MA to a daily close below it for the first time since August 2017.

Given that we’ve seen five successive weeks of inventory builds, we could well see further falls towards the August 2018 lows at $70 a barrel, welcome news for the consumer and particularly welcome for the US consumer who has seen WTI prices fall to their lowest levels since April, thus putting downward pressure on US gasoline prices.

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