It seems inexplicable that having spent the last few weeks hoping for a blue wave sweep in the US election, and fearing the prospect of a contested outcome, that markets should rally in any case on the basis of the very outcome they were most concerned about.
With the Trump campaign facing defeat in the Presidential vote, and lawsuits flying in thick and fast this is precisely where we are.
Despite this, US markets, as well as markets in Asia, have delivered a collective shrug off the shoulders, with markets here in Europe also opening higher this morning.
The S&P500 managed to push up to its highest levels in two weeks, while the Nikkei 225 closing at its highest levels this year.
Many reasons have been espoused for the resilience of stock markets despite the current uncertainty, including the prospect that central banks are more likely to step in with greater monetary policy activism. While that is certainly true, that was always going to be the case so it's hard to argue that particular case, with any semblance of credence.
One theory that has slightly more credibility is that the lack of a blue wave is likely to mean that any steps by the Democrats to rein in the tech giants with more business regulation, and higher taxes on the private sector in general is now much less likely. This reasoning probably has more merit. The Democrats policy manifesto certainly did have a higher tax and spend component so the fact that they were unable to gain control of the Senate can certainly be construed as a plus for businesses.
On the flip side of that of course is the prospect that any form of fiscal stimulus is likely to be much lower and probably come later, which helps explain why US treasury yields have fallen back sharply in the last two days, as we also gear up for another day of central bank decisions, starting with the Bank of England, followed later today by the Federal Reserve this evening.
This morning the Bank of England took the decision to get out in front of the likely economic damage of the start of today’s second UK wide lockdown by increasing the amount of its quantitative easing program by £150bn, taking the total to £895bn.
The central bank also cuts its GDP forecasts for the UK economy, while keeping open the prospect of cutting interest rates further, and possibly into negative territory, a controversial policy that in some quarters has invited a lot of derision, due to concerns about its overall efficacy, as well as its harmful effects on the banking system.
The bar to a move into negative territory still remains a very high one given the lack of consensus on that particular policy, with David Miles a former MPC policymaker expressing concern about the idea in comments last week. He’s not alone amongst current MPC members with respect to scepticism about this policy either. The pound has moved higher after an initial dip in the aftermath of the announcement.
The Chancellor of the Exchequer, Rishi Sunak, is also expected to announce a series of further measures later today to help support the UK economy, over the course of the next four weeks of economic lockdown.
The US dollar has slipped back for the third day in a row, as uncertainty over the outcome of this week’s election and a Federal Reserve rate decision late today. Given the current electoral uncertainty it is quite likely that the Federal Reserve will reiterate its determination to support the US economy over the course of the next few months, in the absence of any further fiscal measures between now and the swearing in ceremony of the new President of the US on the 20th January next year
It’s also a big day for European bank earnings this morning, with Commerzbank, UniCredit, Société Générale and ING reporting their latest Q3 numbers.
Société Générale beat expectations due to outperformance in its global markets division which saw an increase in net income of over 50%, largely driven by its equity trading division. The bank also set aside a lower than expected €518m in respect of non-performing loans.
Italy’s largest bank UniCredit also managed to beat estimates for Q3, as revenues came in higher than expected at €4.35bn, and profits of €680m. The bank also raised its full year guidance to €800m. In line with other European banks provisions were kept on the low side at €741m, well below consensus of €1.37bn.
On the flip side Germany’s second largest bank Commerzbank saw its Q3 revenue come in short of expectations, as the bank slid to a loss of €69m. The bank also set aside €272m in respect of non-performing loans, with an expectation of a total losses of up to €1.5bn.
Also missing estimates was Dutch bank ING which saw profits come in below expectations at €788m, while revenues also came in short at €3.33bn. This was despite the bank setting aside lower than expected loan loss provisions of €469m, which should have boosted the headline numbers.
The bank blamed higher costs and announced further reductions in headcount to the tune of 1,000 people, while closing offices in South America and Asia.
UK pharmaceutical giant AstraZeneca this morning, posted a series of announcements about its business. Its Lynparza drug has been approved by the EU for the treatment of prostate cancer, as well as for the treatment in advanced ovarian cancer. The Forxiga drug also gained EU approval for treatment in the case of heart failure.
The company also announced that they were making progress on a coronavirus vaccine, however it was acting as a bit of a drag on profits due to higher costs.
Sales were much better than expected at $6.6bn, however net profits fell short of expectations coming in at $648m.
Sainsbury has become the latest in a long line of retailers to announce that it was looking to reduce headcount, with 3,500 positions set to go, primarily in its Argos division, at various standalone stores, as it announced a first half loss of £137m, due to one off costs of £438m, sending the shares lower in early trade.
Without that, first half underlying profits came in at £301m, above expectations of £285m.
First half revenues came in at £16.56bn, with total sales seeing a rise of 7.1%, with fuel sales acting as a drag, primarily down to the lockdown earlier this year. Sales at Argos saw a significant boost in the first half as more people shopped on line however costs increased by £290m due to Covid, though the cost of this was mostly offset by £230m in business rates relief.
Management also announced the payment of a special dividend of 7.3p, to offset the decision to defer the final dividend from the previous year. The board also approved an interim dividend of 3.2p.
Wizz Air shares have slipped back after the airline published its latest H1 numbers which showed that revenues fell 71.8% to €471.2m. This was below analyst forecasts with the company recording a loss of €243.1m, which in itself shouldn’t have been too much of a surprise, given that most of its fleet, in common with every other airline, is grounded.
Wizz Air has been one of the few airlines that has been expanding its presence across Europe, adding a new base in Oslo and Trondheim in Norway, as well as one in Italy at Bari airport in an update earlier this week.
The outlook for is slightly more positive given the size of the airline’s cash buffer, in riding out the possible grounding of its fleet for most of 2021, however CEO Jozsef Varadi joined in the chorus of airline CEO’s being highly critical of government response to the pandemic, insisting on the need for airport testing for Covid-19 to hasten the return of air travel. No guidance was offered, again unsurprising given the uncertain outlook.
Industrial software company Aveva Group has seen its share price slide after the company missed expectations on first half revenues, which fell 15.1% from last year to £332.6m. This was largely down to lower than expected client spend in the first half, though on the plus side recurring revenue saw a modest improvement across three of four of its business units.
US markets look set to continue their upward trajectory with another positive open later today with the focus set to be on the latest weekly jobless claims’ numbers, after a rather disappointing October ADP payrolls report yesterday. Expectations are for another decline in the numbers from 751k to 735k, while continuing claims are set to fall to 7.2m.
On the earnings front we also get the latest Q3 numbers from Uber which saw big gains yesterday on the back of the prop 22 vote win in California that allowed drivers to designate themselves as contractors. Revenues in Q2 were slightly better than expected and the economic re-openings seen in Q3 should see an improved performance for the technology company as it strives to improve its delivery option. Despite Uber’s problems the shares have recovered well from their March lows near $14 to be now trading back above $40. This seems rather counterintuitive when you consider the company is no nearer to turning a profit than when it came out of the blocks just over a year ago.
We’ll also get to see the latest Q3 numbers from Peloton, which saw its Q4 numbers blast through expectations as sales surged 172%, due to the slow reopening of gyms and exercise spaces. Revenues came in at $607.1m considerably above the $582.5m expected, and well above last year's $223.3m, posting profits of $89.1m, compared to a $47.4m loss, a year ago.
The big question as we head into the winter months is whether the company can continue at its current rate. While the economic re-openings in its most recent are likely to see a slowdown in the rate of growth, further tightening of restrictions as we head towards year end could well hope to maintain momentum. Management expressed optimism about the outlook for 2021 projecting annual sales of between $3.5bn and $3.65bn, which would be almost double from a year ago. Peloton’s biggest problem with respect to its business model is the upfront cost of its $2,000 bike, which is likely to limit its growth potential. With Apple getting in on the fitness market it has a more compelling offering with a Fitness Plus subscription which connects to the Apple Watch and tailors’ workouts where you can do virtual workouts online.
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