It has been a brutal week for equities and it looks as if the major European indices will finish in the red today.
A mixture of rising Covid-19 cases and the announcement of tougher restrictions clobbered stocks. Last month, the DAX 30 and the CAC 40 hit multi month highs, while the FTSE 100 reached multi-week highs. Back then, optimism was doing the rounds as economies reopened and there were hopes that US politicians would agree a coronavirus relief package. Now, dealers are bracing themselves for stricter lockdowns, and lawmakers in the US haven’t reached a compromise with respect to the stimulus package.
Natwest announced that third quarter pre-tax profit was £355 million and that was a great deal better than the £75 million loss that equity analysts were expecting. In the three month period, the bank set aside £254 million for bad debt provisions, and that was a massive drop from the £2.1 billion provision in the second quarter. The company now expects its full year credit loss provision to be at the lower end of its £3.5-£4.5 billion guidance – other banks made similar statements. Natwest is keen to reduce its risk weighted assets (RWAS) and that process is going well as it now anticipates that the fall in RWAS will be greater than their guidance of a decline of £185-£195 million. The third quarter net interest margin rate came in at 1 65%, which was a slight increase from the 1.52% registered in the first half. Keep in mind, the full year net interest margin metric for 2019 was 2.47%. Lately, the Bank of England have been talking about negative interest rates, and while that chatter continues, the lending margin is likely to remain squeezed.
Last week, IAG, the parent of BA and Iberia, revealed some of its third quarter figures, and today further details were published. Capacity in the three month period was 78.6% on the year, and down 64.3% in the nine month period. The airline was quick to point out that its total liquidity position stands at €6.6 billion, so it is in a strong position to endure the turbulence of the next few months. IAG confirmed that it will continue to keep costs under control. Sticking with the aviation sector, Air France saw a 69.8% fall in passenger numbers in the third quarter, and it cut its capacity for the third quarter to 35%. On the bright side, the cargo division saw revenue more than double as the drop in capacity boosted freight rates.
Glencore lowered its 2020 coal production output by 5.7%. The group and Anglo American own equal stakes in the Cerrejon coal operation in Colombia – where a strike has been going on for two months. The mining titan maintained its production outlooks for all other minerals Commodity prices are typically tied in with the perceptions about global demand, and seeing as there are fears that lockdowns will hurt economic output, we could see metal prices slide in the months ahead.
Royal Dutch Shell shares have been given a lift thanks to the upgrade from Barclays, the bank raised its rating for the oil group to equal weight from underweight.
US
The mood on Wall Street is bearish as traders are fearful for the health situation. Uncertainty surrounding the Presidential election is a factor as it is likely to have a big impact on the proposed stimulus package – when it might be delivered and what size of a programme could be revealed. The economic indicators from the US were largely respectable, personal spending increased from 1% in August to 1.4% in September, and the income metric rebounded from -2.7% to 0.9%. The spending figure is encouraging as it should assist the recovery. The core PCE metric nudged up from 1.4% to 1.5%, but missed the 1.7% forecast.
Last night was a huge night for big tech earnings. Alphabet inc class C, the parent of Google, was the stand out performer of the bunch. Third quarter EPS was $16.4, which smashed the $11.29 that traders were anticipating. Group revenue was $46.17 billion, which exceeded the $42.9 consensus estimate. The company owns YouTube, and advertising at the division surged by 32% to $5.04 billion, topping the $4.39 billion. Cloud computing has become a major industry and the firm’s division revealed cloud revenue of $3.44 billion, and that topped forecasts.
Apple posted a respectable set of fourth-quarter numbers, but the company didn’t offer any guidance and that hit the stock price. EPS was 73 cents, topping the 70 cents forecast. Revenue ticked up by 1% to $64.7 billion, ahead of estimates. The tech giant is keen to derive a large portion of its total revenue from services and other products, and those divisions saw a 16.3% and 20.9% jump in revenue. Dealers were a little concerned that iPhone revenue dropped by over 20%.
Twitter shares are in the red today as the company’s monetisable daily active users (mDAUs) in the latest quarter came in at 187 million, undershooting the 195 million consensus estimate. For social media companies, the mDAU metric is closely watched. The advertising revenue increased by 15%. The stock has sold off aggressively today, but yesterday it hit a five year high so traders clearly had big expectations for the numbers.
Amazon.com shares are in the red despite quarterly EPS and revenue exceeding forecasts. The online retailer predicts that fourth quarter revenue will be $112-$121 billion, ahead of the $112.3 billion forecast.
Facebook’s third quarter EPS, revenue and mDAU all exceeded analysts’ forecasts but the group cautioned about user growth in North America and that put pressure on the stock.
FX
The US dollar index has cooled a little after its recent bullish run. Yesterday, it hit its highest level since late September so it is not exactly a surprise that it has drifted lower. In recent months, the dollar has attracted safe haven flows and should that trend continue, we might see high demand for the greenback as dealers seem to be worried about the escalating health crisis.
GBP/USD has been given a lift by the dip in the greenback. Yesterday, the currency pair dropped to a two week low and now it seems that we are seeing a bit of a rebound.
The CMC EUR index is in red despite the well-received growth reports from the eurozone. In the third quarter, the French, Italian and Germany economies grew by 18.2%, 16.1% and 8.2% respectively – all the reports showed a significant rebound from the previous quarter, and topped estimates.
Commodities
Gold has rebounded from its four week low. It would seem that short covering and bargain hunting are in play. Recently there has been a strong inverse relationship between the US dollar and the yellow metal, so it is no surprise that gold is up while the greenback is a touch lower.
Brent crude and WTI are in the red again as the overall bearish mood with respect to the health crisis and the lockdowns is hanging over the energy market. The oil contracts are holding above the lows of yesterday, but a move below those marks, could pave the way for further losses.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
