Thursday, October 22, 2020

Asia Times: Investors likely showing cautious optimism; Tesla’s gross margins continue to display economies of scale benefits

  • Dollar
  • Gold
  • Euro
  • Pound
  • Stocks
  • Oil
  • US earnings' season


Market Recap: Investors likely showing cautious optimism; Tesla’s gross margins continue to display economies of scale benefits

US equities fluctuated on stimulus headlines on Wednesday and ended the day slightly in the red as hopes for a pre-election fiscal aid package continues to fade yet again. House Speaker Nancy Pelosi had spoken on Wednesday of positive progress in stimulus negotiations with White House officials, but had switched her tone slightly to suggest that it was unlikely for a bill to have enough time to be passed through Congress in time before the election. While Chief of Staff Mark Meadows has remarked that the White House's target to get a deal within the next couple of days, the market seems to be more cautious on such promises, possibly hedging some of their positions with expectations for a post-election stimulus bill rather than one before.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.35% -97.97 28,210.82
S&P500 -0.22% -7.56 3,435.56
Nasdaq -0.28% -31.80 11,484.69
*Source: Bloomberg

That said, stocks were mostly supported by the communications sector, more specifically by tech companies with reliance on digital advertising revenue through their respective social media platforms. The uptick in the industry, which includes stocks such as Twitter (+8.39%), Pinterest (+8.96%) and Facebook (+4.17%) was sparked by better-than-expected earnings results from Snapchat parent company Snap Inc (+28.30%). Snap's shares surged after reporting a 52% spike in third quarter sales and a higher growth in daily active user than analysts had forecast. Analysts covering the company were unanimously optimistic in their post-earnings outlook for the company as a result, causing a spill over in bullish sentiment for other ad-dependent social media companies such as Facebook and Pinterest. The increase in ad revenue was a positive signal for investors, likely driven by the new normal which involves more restrictions to human mobility across the world which probably increased the average screen time of users. This was reflected in Snap's third quarter earnings as well, through its user engagement metric (total daily time spent by Snapchatters watching shows increased by 50% YoY during the reported quarter). The increase in demand for e-commerce (notably using proxies such as the increased spending seen in Amazon Inc or other e-commerce-focused companies) was also a likely driver for increased digital ad revenue, since the imbalance in economic recovery was tilted towards certain sectors, whose customers are more likely to be tech savvy individuals on social media platforms.

In contrast, most S&P500 sectors fell across the board on Wednesday with a skew against more cyclical stocks. Energy shares declined, suffering from both the fluctuations from stimulus headlines and the plunge in oil prices during the day. Smaller-cap indices fell more than major indices, while the Nasdaq 100 only inched 0.11% lower as social media companies helped support the tech heavy index. VIX and VXN both retreated as well.

Tesla's shares surged more than 3% in afterhours trading after beating analysts forecast in each of its metric while reiterating its 500,000 deliveries goal in 2020. Adjusted earnings per share for the quarter came in at US$0.76 per share on an adjusted basis (E: US$0.55/share). More important was its improving margins, which has been relatively lacklustre in our view up to this point. Automotive gross margins for the auto maker rose to 27.7% for the quarter, surpassing that of all others in the previous quarter (exceptions were luxury car makers such as Ferrari) as the company starts to display advantages of its economies of scale via automation (distortions to note is that US$397 million of its US$8.8 billion revenue for the quarter came from regulatory credits, therefore automotive margins excluding regulatory credits would be 23.7%). Also bullish was the reaffirmation of its 500,000 deliveries target, even as other car makers remain relatively more conservative on car sales. Moving forward, the bottom line for the company will likely be the focus, since it still continues to derive some of its revenue from selling of regulatory credits, i.e the sale of credits to other auto makers to meet carbon-emission standards in places such as the EU and several states in the US.


In the foreign exchange market, the dollar extended into a four-day decline, despite the supposed perception of risk-aversion in the equities market. From our perspective, the combined movements across equities, foreign exchange and options markets are more suggestive of cautious optimism for the period ahead as investors have become increasingly certain on what to expect. On the US elections front, the market has priced in a clearer presidential victory by Joe Biden (betting markets spreads remain wider than before October in favour of Biden despite narrowing over the last two weeks, FiveThirtyEight's aggregate of polls still shows Biden win with upwards of 80% in probabilities). Stimulus measures as well, is expected to be passed after the elections even if US lawmakers aren't able to come to an agreement by the end of the week.

Sterling surged more than 1% on Wednesday as EU Chief Negotiator Michel Barnier extended an olive branch to the UK, prompting Britain to return to post-Brexit trade talks with the bloc. Barnier had made remarks on the importance of the UK's sovereignty during a speech to the EU Parliament, an important part of the UK requirements in a post-Brexit trade deal with the EU. Barnier's remarks were welcomed by the UK government, fuelling optimism for a return to progress in trade talks between the two parties.


Safe haven assets closed Wednesday mixed, reinforcing a possible cautious optimistic outlook from the market. Gold gained as did silver. The Japanese yen gained against both the euro and the dollar. US Treasuries were relatively skewed towards the downside as well, with two-year yields remaining mostly flat. Benchmark 10-year yields gained 0.7bps as a result, rising to 0.87%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.91% +17.38 1,924.33
Silver +1.65% +0.41 25.05
USD/JPY -0.86% -0.91 104.59
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.4bps 0.15%
10-Year +3.7bps 0.82%
30-Year +4.4bps 1.64%
*Source: Bloomberg

Oil futures retreated the most in more than two weeks after a weak US crude oil inventories report from the Energy Information Administration (EIA). The EIA's weekly report showed crude oil stockpiles rising 1.9 million barrels last week, the biggest jump since May. Gasoline and distillate implied demand data had also appeared to fall over the week despite the dip in distillate inventories. The EIA's report reinforced the weak energy demand as we continue to move into the end of the year, rattling investors in the space. In addition, the increasing Covid-19-related restrictions in a number of countries in the EU may also be starting to materialise and be reflected into oil prices.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -3.31% -1.43 41.73
WTI -4.00% -1.67 40.03
*Source: Bloomberg

Asian stocks were pointing to a down day in the early hours of trading in Asia as well. The Nikkei, KOSPI and ASX200 were all trading lower in the earlier hours of Thursday. Futures tracking major indices were also skewed towards the downside as of 9.16am (GMT +8), signalling that trading in Asia is likely to be skewed towards the downside for the day in the absence of strong positive data or drivers during the day.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.63% -147.55 23,491.91 9:06:45 AM
KOSPI -0.62% -14.72 2,356.14 9:26:40 AM
ASX200 -0.78% -48.20 6,143.60 9:26:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.49% -138.00 27,996.00 9:16:47 AM
US Futures -0.52% -17.75 3,414.75 9:16:44 AM
Nasdaq 100 Futures -0.49% -57.75 11,634.00 9:16:49 AM
*Source: Bloomberg

Economic releases for the day ahead include (all timings in GMT +8):

  • Germany Nov Consumer Confidence Survey (Gfk) (2pm)
  • US Oct 16th Initial Jobless Claims (8.30pm)
  • US Oct 9th Continuing Jobless Claims (8.30pm)
  • US Oct Kansas Manufacturing Activity (Kansas Fed) (11pm)

Companies reporting earnings next include (all timings in GMT +8):

  • Coca Cola (8.30pm)
  • American Airlines (8.30pm)
  • Southwest Airlines (12.30am +1)
  • Seagate (4.30am +1)
  • Intel Corp (5am +1)