Friday, October 30, 2020

Asia Times: ECB sets clear path for easing in December; Apple shares dive afterhours despite strong earnings

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Stocks
  • Oil
  • US earnings' season
  • European Central Bank

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Market Recap: ECB sets clear path for easing in December; Apple shares dive afterhours despite strong earnings

US equities rebounded on Thursday, as markets normalised the sharp decline in stock prices on Wednesday. A better-than-expected Q3 GDP reading in the US may also have had a positive impact on stocks. The US economy grew 33.1% during the last quarter, beating expectations for a 32% QoQ growth. But it is important to view this figure in context with the 31.4% slide in Q2 GDP, as the US's economic output is still 3.5% below its pre-pandemic highs. That being said, it appears that the large jump in GDP along with a dip in initial jobless claims and mostly positive earnings reports was enough to quell some of the Covid-19 fears seen earlier this week.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.52% +139.16 26,659.11
S&P500 +1.19% +39.08 3,310.11
Nasdaq +1.64% +180.72 11,185.59
*Source: Bloomberg

S&P500 sectors rose across the board with the exception of health care stocks on Thursday. The S&P500 energy sector gained the most after multiple companies in the index beat earnings estimates. Gains in oil may also have been fuelled by sentiment that the worse of the pandemic in relation to economic activity may be over, after the US Energy Information Administration's (EIA) weekly crude oil supplies report showed distillate demand continuing to recover last week. Other than mega-cap tech companies, other firms that reported better-than-expected earnings included Starbucks, Activision Blizzard, Spotify, Kellogg, Shopify and Royal Dutch Shell.

Apple's shares dipped 4% despite reporting better-than-expected sales and earnings for the quarter as investors focused on the sharp dip in iPhone sales in China. The tech giant reported revenue of US$64.7 billion (E: US$63.5 billion) and earnings per share of US$0.73 (E: US$0.70/share). Overall iPhone sales had dipped by 21%, with that in China declining 29%. But this dip was likely in anticipation of Apple's newest product offering that includes 5G enabled iPhones. Sales still grew double digits in China for its other products as well. The lack of guidance for the current quarter may have also added downward pressure to the company's share price as well. Breaking down revenue from its physical products, sales from its iPad, Mac and Wearables and Other Products segments had beat estimates, while iPhone revenue missed. Services managed to beat expectations as well, driven by increased demand for music streaming, cloud storage, AppleCare and its App Store products. Important to note is that the pandemic had some impacts on seasonal revenue as the new iPhone had been delayed by a month from September to October. This likely had resulted in missed expectations for the previous quarter which will materialise in the current quarter. The release of its Apple One subscription bundles are also likely to strengthen the current quarter’s earnings as well.

Overall earnings reactions appear to be skewed towards the downside despite tech companies reporting better-than-expected revenue, likely due to ultra-high expectations and fair valuations for tech-type companies. Ad-related companies as expected reported stronger-than-expected earnings. Google parent Alphabet's revenue beat estimates with ad revenue from Google surging 9.4% YoY. Facebook saw a 22% increase in sales and a jump in monthly active users to 2.74 billion. But the soft spot in the social media giant's earnings report was a decline in users in the US and Canada, possibly due to the ongoing criticism the company has recently been facing in regards to hate speech and misinformation. However, thanks to a somewhat gloomy outlook due to increased regulations in the EU and increased privacy rules in Apple's new iOS 14 that will limit unique device data collections, the company's shares fell 2.72% in afterhours trading. Twitter's shares slump in afterhours trading after only adding a million new daily users in the third quarter, well below analyst expectations. Despite that, the company still managed to report a surge in revenue to US$936 million, beating estimates for a 5% decline to US$780.5 million. Twitter’s shares plunged 17.53% in afterhours trading.

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In the foreign exchange market, the dollar gained for the second day in a row, closing just shy of 94.00 as risk aversion was likely still present among investors. The oil-sensitive Norwegian krone continued to tumble on declining oil prices, while there was some reversion in G10 currency performance with other commodity-related currencies outperforming havens such as the yen and Swiss franc.

The euro fell mostly in line with our expectations as the European Central Bank (ECB) explicitly signalled that there will likely be an agreement on more stimulus measure in the upcoming meeting in December. ECB President Christine Lagarde's remarks at her post-meeting conference featured a sharp reversal in her tone from the last meeting, with clear statements that the EU's “economic recovery is losing momentum more rapidly than expected” and that policy makers "agreed that it was necessary to take action and therefore recalibrate our instruments at our next Governing Council meeting". EUR/USD plunged following the announcement, as traders immediately priced in an easing cycle - likely in the form of an expansion to its Pandemic Emergency Purchase Programme (PEPP) during the ECB’s meeting in December.

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Safe haven assets appeared to be mostly tilted towards the downside on Thursday, but risk aversion in our view appears to be here to stay in the short-term. Gold and silver inched only a tuch lower. The yen fell against the greenback, but gained against the euro. Its middle-of-the-pack performance with the Swiss franc in the G10 currency basket was indicative of lingering risk aversion. US Treasuries mostly dipped, with benchmark 10-year yields rising 5.2bps to 0.82%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.51% -9.60 1,867.59
Silver -0.54% -0.13 23.26
USD/JPY +0.28% +0.29 104.61
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year 0.0bps 0.15%
10-Year +5.2bps 0.82%
30-Year +4.8bps 1.60%
*Source: Bloomberg

Oil futures fell on Thursday, likely as energy demand concerns continued to impact investor sentiment. While markets have likely priced in EU member countries returning to lockdown measures, there may be traders starting to price in the likelihood of the US following that path as well as Covid-19 cases continue to surge in parts of the US. Additionally, supply-side concern has returned to the market and will probably continue to put downward pressure on crude oil prices as Libya increases oil production closer towards one million barrels per day in the coming weeks. Additionally, WTI crude futures fell to its lowest since June, after breaking a support level it appeared to have form in early September. Downside risk will probably continue to plague crude oil prices, due to the lack of stimulus in the US, increasing risk of additional lockdown restriction in the EU and US as well as peaking economic activity. Our longer-term expectations for crude oil prices still remain the same, i.e. a slow and gradual recovery. We expect upside catalysts for crude oil prices to be in the form of a successful vaccine over the coming weeks or months, as well as a possible postponement of January's production hikes by OPEC+ in December.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -3.76% -1.47 37.65
WTI -3.26% -1.22 36.17
*Source: Bloomberg

In Asia, stocks were trading lower as investors in the region may be holding on to additional cash ahead of the US presidential elections next week. With volatility expected to heighten next week, there may be some outflows in the region to hedge against uncertainty over the weekend. Some traders may have also focused on the dip in share prices of Big Tech after better-than-expected earnings were not enough to satisfy expectations for companies in the sector. The Nikkei, KOSPI and ASX200 were all trading lower in the earlier hours of Friday's trading session. Futures tracking major indices in the US were strongly skewed towards the downside as of 9.19am (GMT +8), likely due to the heavy weightage of Apple and Facebook on the S&P500 and Nasdaq 100 indices.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.56% -129.08 23,202.86 9:09:20 AM
KOSPI -0.91% -20.89 2,305.78 9:29:20 AM
ASX200 -0.33% -19.74 5,940.60 9:29:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.65% -171.00 26,386.00 9:19:18 AM
US Futures -0.87% -28.50 3,273.75 9:19:13 AM
Nasdaq 100 Futures -1.41% -157.25 11,185.50 9:19:18 AM
*Source: Bloomberg

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

  • Germany Q3 GDP (P) (3pm)
  • Eurozone Oct Inflation Rate (CPI) (P)
  • Eurozone Q3 GDP (P) (6pm)
  • Eurozone Sep Unemployment Rate (6pm)
  • US Sep Inflation Rate (PCE) (8.30pm)
  • US Sep Personal Income/Spending (8.30pm)
  • US Oct Consumer Sentiment Index (U. of Mich) (F) (10pm)

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

  • Exxon Mobil (9.30pm)
  • Chevron (11pm)