Market Outlook

The week ahead: US Beige Book; Tesla, Barclays results

Watch our week ahead video preview, read our pick of the top stories to look out for this week (19-23 October), and view our key company earnings schedule.

In this week's video, Michael reviews the reasons behind the recent volatility in equity markets, and looks ahead at the key events for the upcoming week, including China Q3 GDP, China and UK retail sales, plus UK, Germany and France flash PMIs, along with a number of key earnings releases.

China Q3 GDP 

Monday: If you were wondering about the accuracy of China’s GDP numbers before recent events, then the 11.5% rebound announced in its Q2 numbers would surely have reinforced those doubts. The rebound more than reversed the 10% fall in output in Q1, suggesting a nice V-shaped recovery in economic activity. The annualised number recovered from -6.8% to 3.2%. This seems highly questionable when you drill down into the component data, as the headline number completely diverges from most of the data that has come out of China since April. Both imports and exports have struggled to recover on both sides of the ledger, while retail sales only recorded positive territory in August. For an economy in which services have grown to almost 50% of economic activity, this seems barely credible, even if recent data has been much improved from the February/March lows, with industrial production back to pre-Covid-19 levels. Expectations are for a 3.3% expansion in Q3, which equates to 5.5% annually. 

China retail sales (September) 

Monday: Retail sales growth in China hasn’t been the same since the country came out of lockdown at the end of February. The mood started to improve in the summer as a result of positive data from  Daimler and the auto sector, with Apple also talking of some decent rebounds in their Chinese markets. Despite this optimism, retail sales in China only struggled back into positive territory in the August numbers. Year-to-date Chinese retail sales are down over 8%, and last month rose 0.5%, a pretty pathetic number when you consider China came out of lockdown in March. It was also the first positive reading this year, giving hope that the slow return to normal will see September retail sales rise 1.9%. This still remains well below the 8% gain at the end of last year. Fortunately, manufacturing has performed much better relative to the Chinese consumer, rebounding to its best level in almost a decade in July, in the various official and private sector purchasing manager indices (PMIs). Industrial production rose 5.6% in August, and is expected to improve further to 5.8% in September.

Netflix Q3 results

Tuesday: Netflix’s biggest concern at the beginning of the year was that the entry of a host of new content providers at cheaper prices would limited its ability to grow its subscriber base in international markets. The launch of Apple TV+ and Disney+ undercut its lowest price SD subscription, making it the most expensive streaming option. This limits Netflix’s ability to increase prices, but also means it would have to offer a significant value add to justify that premium, to not only keep its existing customers, but also acquire new ones. 

So far the premium price is worth paying, given the limited content available to Disney+ and Apple TV+ subscribers, not to mention that Netflix is way ahead in non-English content, which also sets it apart from its peers internationally. In a way the lockdowns came to Netflix’s rescue as the market leader, along with Amazon Prime, with the first two quarters showing a huge increase in subscribers and record revenue. In Q1 and Q2, Netflix added 25.8m new subscribers, almost as many as the whole of 2019, when 27.8m people subscribed. First-half revenue came in at $11.92bn, though profits fell short due to a one-off charge. Management were cautious about their guidance for Q3, reflecting concerns that there may be fewer new subscribers in the upcoming quarter, due to pull-forward effects starting to wane as lockdown measures eased. Estimates for new subscribers in Q3 were set very low at 2.5m new subscribers, the slowest rate since Q1 and Q2 2016, well below expectations of 5.3m. Revenue estimates were set at a fairly solid $6.33bn, which would still be a new record, but also below analyst estimates at the time. It is conceivable that Netflix will have a weak Q3, however it still has a host of great content, with a host of new offerings coming up in Q4, including season three of Star Trek Discovery, and season four of The Crown.

Reckitt Benckiser Q3 results 

Tuesday: Like most companies that sell consumer hygiene and medicine products, Reckitt's profit rose in the first half of the year. This trend is likely to continue if anecdotal evidence of half-empty supermarket shelves is any guide. Sales of Dettol products were popular, rising 62%, even if Nurofen sales were down, with health revenue up 9.3% to £4.2bn. Total revenue came in at £6.9bn, a rise of 11.9%, however there is concern as to whether this is sustainable given the narrow range of products Reckitt has in its portfolio. Profit-before-tax rose by 13.9% to £1.44bn, allowing the company to maintain an interim dividend of 73p a share. The company also raised its forecasts for net revenue in the full-year to be in the high single-digit percentile, and its overall hit to net revenue to be closer to 5% than earlier higher estimates in February.   

US Beige Book (October) 

Wednesday: At the last Beige Book at the beginning of September, Fed officials’ economic gains were still being shown as modest, however there was increasing evidence that some furloughed workers were starting to lose their jobs. Many districts were reporting lower economic activity than normal and slowing jobs growth. This week’s Beige Book is likely to paint a much weaker picture of the US economy, and some Fed officials, notably the head of the Minneapolis Fed, Neel Kashkari, wants to place greater emphasis on how workers are represented in this particular survey. 

It is notable that the Fed’s great focus on unemployment over inflation was likely to lead to a more interventionist approach, however there is a risk that the central bank could compromise its independence in doing so. Trying to combat inequality is not an economic remit, but a political one and while its goals may be noble, the central bank is sailing very close to the wind policy-wise. The most recent Fed minutes showed that members continue to have concerns about the overall direction of the US economy, particularly over impacts on the labour market, with consistent calls for further fiscal measures to support the economy. Wednesday's Beige Book is likely to see the trend of subdued economic activity keeping the US economy at well below its pre-pandemic capacity for quite some time to come.    

Tesla Q3 results

Wednesday: When Tesla released its Q2 numbers in July, the company rather surprisingly reported a profit of $104m, the first time the company had turned a profit for the fourth quarter in succession. Revenue came in at $6.04bn as the company sold 90,650 vehicles in Q2, above the 88,000 sold in Q1, when production was disrupted due to Covid-19 related shutdowns. This raised hopes that Tesla might be included in the S&P 500, though that has yet to come to fruition. Tesla fans will be hoping that it will be able to pull off another quarter of profit, though the numbers are being flattered by the $428m sale of regulatory credits. This means that on sales alone the company is still relying on sleight of hand in terms of being profitable on costs and sales. 

CEO Elon Musk has maintained that Tesla will be able to hit its 500,000-delivery target for 2020, having missed it in 2019. This will be helped by the new Chinese factory, which opened at the beginning of the year. Musk will be hoping that Tesla is able to repeat its trick of last year, where a poor first half was followed by a bumper second half of the year. The only problem with that is that the coronavirus pandemic may have other ideas. Expectations are for a quarterly profit of $0.57 a share.

Microsoft Q1 results

Thursday: In the space of three years, Microsoft has gone from turning over just under $100bn a year in revenue, to turning over $141bn a year. This has been aided by growing its user base into a subscription-based model, while allowing consumers to buy off-the-shelf products, which in turn more or less guarantees a steady cash flow. A sharp rise in PC demand, and the growth in remote working due to coronavirus, also boosted its income. Microsoft Office revenue also increased, while interest in Microsoft Teams has also risen, due to the increasing reliance a lot of businesses have on home working.

The biggest increase came in gaming, which saw a 64% rise in revenue, while cloud-computing arm Azure's growth slowed sharply, with a 47% rise. With gaming performing so well, Microsoft will have high hopes for the release of the new Xbox Series X, which is due for release next month. Anticipation for the new console could well see a slowdown in Xbox sales in this quarter, though GamePass subscriptions are expected to hold up well. Profit is expected to come in at $1.54 a share.

Unilever Q3 results 

Thursday: When Unilever reported its first-half numbers in July, it was notable that the main driver of its performance was in home hygiene and groceries products. Sales of Domestos, Cif and PG Tips saw profit rise by 4%, as consumers spent more on products across the beauty and personal care division, as operating margins improved by 50bps, while home care saw margins improve by 130bps. With a broad geographical reach, the company will inevitably have its weak spots, but Thursday’s Q3 numbers should evidence an improvement in its food and refreshment division, after acting as a drag in the first half. The company tends to feel the benefit of the summer months, with sales of Magnum ice creams and Ben & Jerry’s likely to see a pickup during this year’s heatwave. Sales were down by 1.8% in Europe and down 2.7% in Asia in the first six months, however gains in the Americas helped offset this, with total H1 net sales totalling €25.7bn. Underlying profit was €5.1bn, a rise of 3.8%.

Barclays Q3 results

Friday: One of the starker characteristics of UK banks' Q2 earnings was the impact the economic slowdown caused by the pandemic was having on their profit margins, as well as the rise in non-performing loans. This is unlikely to get any better in the coming months as lockdown measures are tightened in various local areas, and unemployment levels start to rise. 

Fortunately for Barclays it does have other revenue streams away from retail banking, which it finally now appears to be seeing the benefit of, despite pressure from some shareholders to spin off. In the first-half of this year Barclays set aside £3.7bn in respect to non-performing loans. In its Q2 figures, investment banking revenue improved by £6.9bn, up 31% from the previous year, with fixed income (FICC) improving by 83% on the same period last year, with a 31% rise in H1 profit of £695m. Investors will be hoping for a similar uplift for this quarter as we look towards what is likely to be a challenging Q4, as the weather gets colder and economic activity becomes more subdued.

France, Germany, UK flash PMIs (October) 

Friday: There has been increasing evidence in the last couple of months that the rebound in France and Germany has run its course. The most recent September PMIs painted a mixed picture for the German economy, with services in particular showing a slowdown to 50.6, after a strong July performance. In France it was a similar picture with services slowing to 47.5 from 57.3 in July, as rising infection rates prompted localised lockdowns and restrictions being imposed across the country. It is clear that the recovery in the wake of the contractions in Q2 has been a robust one, however the sharp deterioration in the September PMIs is increasing concerns over an economic cliff edge, as we head towards the chill of a European winter. On the plus side, manufacturing has been a strong performer for both Germany and France, helping to offset some of the slowdown. In the UK, the economy has proved to be much more resilient, though that is probably down to having come out of lockdown later, as well as the impact of the government’s Eat Out To Help Out discount scheme in August.

No-deal Brexit concerns notwithstanding, the UK economy has continued to perform well in the post-lockdown period, and after the outperformance in August, September also posted decent numbers across the board. Services activity slowed modestly to 56.1, while manufacturing came in at 54.1, showing that the UK economy performed extremely well in Q3. This seems unlikely to continue in Q4, after what can only be described as a completely incomprehensible communications policy by the UK government over various new lockdown rules around the hospitality sector. Having encouraged people to enjoy the summer months, ministers have single-handedly destroyed consumer confidence by inept messaging and poor communication. 

UK retail sales (September) 

Friday: Consumers have helped drive the recovery in the UK economy over the last four months, after August retail sales showed a rise of 0.8%, rounding off the best sequence of gains in several years. The big question as Q3 ends is whether September numbers show another month of gains, as summer draws to a close. The prevailing thinking if judged purely on the basis of recent PMI data would be positive, however life is rarely that simple. Other retail sales surveys do offer some encouragement. The recent British Retail Consortium sales for September showed a 4.7% rise in August.

Update: Please note Amazon has moved its Q3 results announcement from 23 October to 29 October.

Index dividend schedule

Dividend payments from an index's constituent shares can affect your trading account. See this week's index dividend schedule

Selected UK & US company announcements

Monday 19 October Results
Halliburton (US) Q3
PPG Industries (US) Q3
Tuesday 20 October Results
Bellway (UK) Full-year
Lockheed Martin (US) Q3
ManpowerGroup (US) Q3
Netflix (US) Q3
Philip Morris (US) Q3
Procter & Gamble (US) Q1
Reckitt Benckiser (UK) Q3
WD-40 (US) Q4
Wednesday 21 October Results
Manchester United (UK) Q4
Nasdaq (US) Q3
Sempra (US) Q3
Tesla (US) Q3
Verizon (US) Q3
William Hill (UK) Q3
Thursday 22 October Results
Coca-Cola (US) Q3
Dow (US) Q3
Mattel (US) Q3
Microsoft (US) Q1
Moneysupermarket.com (UK) Q3
Sirius XM (US) Q3
Snap-on (US) Q3
Unilever (UK) Q3
Verizon (US) Q3
Friday 23 October  Results
Barclays (UK) Q3
Barnes (US) Q3

Company announcements are subject to change. All the events listed above were correct at the time of writing.


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