LCG: US earnings boost risk appetite.

24 oktober 2019

Tesla’s positive revenue announcement was a shocker that no one anticipated. The electric-car maker posted the first positive revenue in more than a year, a quarter earlier than expected and charmed investors.

Elsewhere, Microsoft’s revenues jumped 14% in Q3, beating already-strong analyst estimates, although Azure’s sales fell short of expectations. Ebay and PayPal disappointed.

This far, the US earnings session revealed better-than-anticipated third-quarter results for many companies, giving some relief to investors regarding the negative bearings of a yearlong trade dispute with China.

The S&P500 closed above the 3000 mark. Nasdaq futures edged higher in Asia.

Encouraging company news from the US fueled major Asian stock indices as well. Political headlines related to Trump’s impeachment disputes remained secondary.

Today’s earnings

Twitter will release its third-quarter earnings before the market open. Amazon and Visa are due to reveal theirs after the market close today.

Amazon’s third quarter sales could top estimates amid a record Prime Day performance. The EPS is expected to retreat to $4.585 versus $5.220 printed a quarter earlier, but the fourth quarter guidance, which points at a solid increase in both earnings and sales, is important. Fourth quarter earnings could reach $6.558 per share according to the actual guidance, while sales could jump above the $87-million handle versus $68 million the company penciled in for the third quarter.

Investors are confident that Amazon, who competes with Microsoft and Apple, could win a $10 billion worth of cloud deal with the US Defense Department. But the rising cloud competition should also increase marketing spending.

USD, gold flat. Oil jumps on lower US inventories

US dollar and gold traded flat. The US 10-year yield was unchanged near the 1.76% mark.

Today’s data should confirm a 0.7% monthly decline in US durable goods orders, meanwhile the preliminary PMI data could hint at a slower manufacturing growth in October and back the expectations of a Federal Reserve (Fed) rate cut at next week’s policy meeting.

WTI crude hit $56 a barrel, as US oil inventories unexpectedly declined by 1.7 million barrels last week versus 2.5-million-barrel rise expected by analysts and 9.3-million-barrel surge printed a week earlier. As such, this week’s data broke a five-week rising streak. Combined with expectations that OPEC and its allies could announce further production cuts at their December meeting and encouraging news on US-China trade front, a further recovery could be up for grabs. The net speculative long positions stand at a four-month low in this market.

Draghi to kiss goodbye

The European Central Bank (ECB) meets for the last time under the leadership of Mario Draghi. Despite massive asset purchases and negative interest rates, the ECB couldn’t boost the inflation, nor the inflation expectations under Draghi’s term.

Still, and despite controversies, the ECB lowered its interest rates and announced to resume the Quantitative Easing (QE) at its September meeting. Hence, no further move or announcement is expected today.

Investors will rather turn to Christine Lagarde who will take the helm of the ECB from November 1st. A rapid roundup of market expectations show that another rate cut is not anticipated before June 2020 and the QE should last until the third quarter of 2022. The first interest rate hike is not considered anytime before the fourth quarter of 2022.

The euro trades peacefully above the 1.1100 mark against the US dollar. An increased selling pressure on the greenback ahead of next week’s most-anticipated Fed rate cut could pave the way for a further euro appreciation toward the 1.1200 mark, the 200-day moving average.

That Brexit deadline

The UK has never been this close to leaving the European Union.

The pound consolidates a touch below the $1.30 mark as European leaders discuss whether they should extend the Brexit deadline and by how much. According to the latest news, the UK will be granted additional time to finalize the withdrawal agreement, but some members including the French, are willing to postpone the deadline by two weeks only, instead of three months required by British lawmakers.

Europeans certainly want to make sure that the UK concentrates on the divorce bill, rather than a snap election, which could change the political landscape in Britain and put the signed deal at danger. A verdict on that deadline is expected on Friday.

Meanwhile, stock investors buy British blue-chip stocks before the pound appreciates further. The FTSE 100 gained 3.80% since the beginning of this month despite a stronger pound. The 40-day correlation between the British pound and the FTSE turned slightly positive, versus a solid negative correlation nearing the -50% level at the beginning of September.

The FTSE is expected to open 5 points lower at 7255p.

Turkey to lower rates

Turkish Central Bank is expected to cut its overnight repo rate by another 100 basis points at today’s monetary policy meeting.

To us, the recent dive in inflation below the 10% mark calls for a deeper interest rate cut. A 200-225-basis-point action would not be a shocker.

Gains in lira accelerated as US President Donald Trump announced to lift the US sanctions on Turkey following a temporary ceasefire agreement. If Turks resume their attacks, the sanctions will return.

The lower the rates, the higher the risk of a sharper unwind in Turkish lira. But carry traders seem willing to take this risk in exchange of a still-appetizing rate spread.

Opening calls

FTSE to open 5 points lower at 7255

DAX to open 14 points higher at 12812