The quarterly earnings reports are coming thick and fast, and they’ve been very much a mixed bag.
Yesterday the FTSE100 underperformed due to HSBC reporting a much bigger than expected revision on non-performing loans of $1.1bn, while profits were weaker than expected. Today the focus shifts to Barclays Q3 numbers with similar attention on this area, as well as its investment banking division.
US markets finished the day higher after bond yields reiterated sharply and the US dollar slumped after housing data came in weaker than expected, and positions were adjusted ahead of next week’s Fed meeting. There appears to be an increasing belief that a Fed pause is close, and while we can still expect to see another 75bps, it’s what comes next that appears to be generating some caution, after Mary Daly of the San Francisco Fed commented at the end of last week that after November the time could be ripe for talk about stepping down.
The Nasdaq 100 led last night’s gains for US stocks, with a third successive positive daily close, however there was still some apprehension around the results from Microsoft and Google owner Alphabet, both of whom closed higher, not only around how much of a slowdown we might see in their latest quarterly numbers, but also what sort of outlook these big two tech giants would paint.
In any event it was a mixed bag with Alphabet missing expectations, while Microsoft managed to outperform, however the shares of both still slid back after hours, although this weakness doesn’t look set to weigh unduly on today’s European open, due to strong gains in Asia markets.
The miss from Alphabet was less of a surprise given the slowdown seen in Snap’s numbers last week, with misses across all of its core businesses.
Q3 ad revenue came in at $54.48bn, below expectations of $56.98bn, although at least the numbers were higher than the same quarter a year ago. The same can’t be said for YouTube which saw revenues decline to just over $7bn, down from $7.2bn a year ago. The only silver lining was its cloud business which saw revenues rise to $6.87bn from $4.99bn. Operating margins also declined to 25% from 32%.
On the plus side Microsoft saw Q1 revenues beat estimates, coming in at $50.12bn, while profits came in at $2.35c a share. While Microsoft managed to beat on both revenues and profits, the initial market reaction was mixed, with the shares slipping after hours. As suspected Windows OEM revenue as well as Xbox content and services revenue were the main drag. Windows OEM revenue fell 15% dragged down by lower PC sales, while Xbox revenue fell 3%. Consequently, personal computing revenue fell slightly from a year ago to $13.33bn.
On the cloud side of the business, Microsoft’s Intelligent Cloud business saw revenue rise to $20.3bn a rise of 20%, however it would appear that markets were expecting slightly better numbers here.
On guidance Microsoft was more pessimistic predicting that weaker PC demand could see a high 30% decline in Windows revenue in Q2.
Both companies pointed to the strength of the US dollar as a factor in the underperformance through the quarter.
European markets look set to open slightly lower on the back of last night’s disappointing after-hours reaction to the start of the big tech earnings numbers.
Aside from earnings the Bank of Canada kicks off a week of several key central bank decisions later today, with the ECB tomorrow and the Bank of Japan on Friday.
Are we near to peak rate hikes for the Bank of Canada?
It seems unlikely given the direction of travel from the Federal Reserve.
We saw the Bank of Canada raise rates by another 75bps, following on from the 100bps seen in July. There is already increasing evidence that wages are starting to rise in response to this recent inflation surge, however headline CPI does appear to be showing signs of slowing, with headline CPI falling to 7% in August, from the June peaks of 8.1%.
While markets are pricing another 75bps today the pricing isn’t a done deal, with sharp declines in business sentiment likely to factor into today’s final calculation. This suggests we might see the central bank err on the cautious side with a 50bps move and a hawkish outlook, at today’s meeting, although the consensus is for a rather more customary bumper hike of 75bps, which is what we’ve become used to over the past few months.
While the increased focus on core prices appears to be driving the dynamics in the US could the Bank of Canada adopt a more cautious approach and slow the pace. Core prices in Canada are lower than in the US but like the US they are also stickier at around 5.7%.
EUR/USD – has broken through the 50-day SMA at 0.9900, as well as trend line resistance from the highs earlier this year but needs to take out the highs this month. which currently come in just below parity. A move above 1.0000 could well trigger further gains towards 1.0200.
GBP/USD – pushed above the 1.1440 area, falling shy of the 1.1500 area but still posting a 6-week high. A sustained break above 1.1500 could signal a rapid move towards 1.1800.
EUR/GBP – after failing at the 0.8760 earlier this week the euro has slipped back and could well be set for a retest of the 0.8600 level and 100-day SMA. A break of 0.8650 and the 50-day SMA, could well signal further declines towards 0.8490 and the 200-day SMA.
USD/JPY – the slide in yields and the weakness in the US dollar has seen the Japanese yen continue to recover. Could slip back towards the lows this week while US dollar weakness prevails, with the 150.00 level likely to act as resistance.