Three things to watch this week

Let’s make no mistake, this week is merely the appetiser before next week’s main course where we get a Federal Reserve meeting, a Bank of England Monetary Policy report and a US labour market report. However, this week we will still get US GDP, a deluge of earnings reports and likely more volatility in the Turkish lira to contend with. Below we take a look at three things that you should be watching out for this week. 

1. Earnings reports 

It’s a fairly muted start to the week when it comes to economic data releases, however, this will pave the way for a bigger focus on the multitude of earnings releases that we get this week. First up was HSBC, who reported $5.4bn in pre-tax profit for Q3, which was above expectations and more than 75% higher than this time last year. Although HSBC did not announce any dividends for Q3, it did say that it would embark on a $2bn share buyback. The bank also released $700mn of cash that it had put aside as loan-loss reserves, following its US counterparts who have been releasing loan loss reserves this year. This helped to boost earnings; however, the bank delivered an all-round positive message by saying that all regions where the bank operates were profitable. The Asia-focused bank also said that it had no direct exposure to Evergrande, and no exposure to other Chinese real estate companies in Beijing’s “red list” – those most at risk of default, and only limited exposure to those on the orange list. The bank said that it had been conservative in lending to the Chinese real estate sector in recent years and that it is comfortable with its current exposure. However, Reuters is reporting HSBC’s exposure to Chinese real estate firms to be more than $19bn, which sounds like a lot to this analyst. However, the market has cheered HSBC’s results, and the stock is up more than 1.3% at the time of writing. Partly this is on the back of a general uplift for the financial sector, which was also the best performing sector on the S&P 500 last week. 

This week, more than 30% of S&P 500 companies will announce their Q3 results. This will be a key test of stock market resilience. Apple, Amazon, Microsoft, Alphabet, Facebook and Twitter will all release earnings for Q3 this week. So far, earnings have been better than expected and companies have beaten expectations by a wider margin than average, according to FactSet. The bar is high for earnings and any companies that are disappointing the market are seeing their share prices get punished, take Intel and Snap Inc as examples. Snap’s share price tumbled some 25% on Friday after it reported weaker revenues than expected and posted lower revenue guidance for Q4. Boeing, McDonalds and Coca-Cola are also reporting earnings this week. Due to the cross section of sectors that are reporting earnings, and the fact that the S&P 500 reached a fresh all-time high last week on the back of a stronger than expected start for earnings season, there is a risk that market sentiment could run into difficulty if big tech does not deliver the goods on earnings. Right now, the market seems fairly rational. Shares that beat earnings expectations are doing well and helping stock indices reach fresh record highs in some cases, for example, financials, while companies that miss earnings estimates are getting pummelled. Along with Snap, Intel’s sales miss disappointed the market, and its share price fell more than 11% on Friday. 

Right now, the momentum trade is with financials, the best performing sector in the S&P 500 last week, along with other value companies. The momentum trade is not with big tech, as the duration trade sells off, although that has slowed since September. There is still upside momentum to be had in tech, think Tesla, however, tech firms are now more likely to be judged on their individual merits and are unlikely to rise en masse. 

2. Up, up and away for Tesla

As we have mentioned, we think that tech earnings have a high bar to beat this earnings season. However, Tesla is something of an outlier in the tech space. Firstly, it beat earnings estimates earlier this month, then all of its Christmas’ came at once on Monday for the EV maker after it received an investment bank upgrade, and news broke that Hertz, the car rental company, would purchase 100,000 electric vehicles for its fleet. This order is a tenth of what Tesla can make in one year, thus it could make it harder for other rental companies to follow Hertz’ lead and move into the EV space. However, this is certainly the biggest step so far to the electrification of the rental car market. Tesla’s stock price surged more than 6% on Monday and pushed its share price to a record above $972 per share. The next key resistance level is $1,000. At this point, Tesla will be a trillion-dollar company. If people start to get wary of that valuation for Tesla, then we could see some pullback in its share price in the next few days, although there may be another $30 or so on the upside. 

3. US data: Waiting for the Fed 

The Fed meets next Wednesday, and until then members of the Federal Reserve Monetary Policy Committee are in blackout mode and won’t be giving any speeches. This leaves the market to scrutinise the US economic data released this week for clues about what the Fed may do next week. US GDP for Q3 is expected to come in at 5.4%, which is weaker than the 6.2% in Q2. This is expected to weigh on annualised growth, which is expected to come in at 2.5% vs. 6.7% in Q2. The bulk of this slowdown is likely caused by the resurgence of Covid infection rates that took hold in the US in Q3. Although infection rates have since fallen, there have been some mixed reports about the state of the US economy in September/ October, with the ISM manufacturing survey coming in strong for September, yet the Fed’s own Beige Book gave a gloomy outlook for the industrial sector, with supply chain woes and inflation starting to weigh on profits and future orders. 

We will also get the September reading of the Fed’s preferred measure of inflation, the core personal consumption expenditures index for September. This measures how inflation is hitting the consumer, a major pillar of the US economy.  The market is looking for a 0.2% rise in September, which would be lower than the 0.3% increase in August. The annual rate is still uncomfortably high by Fed standards at 4.7% last month vs. 4.3% in August. Thus, we think that the Fed will look through any period of weak GDP data for Q3 due to the Covid impact, and the inflation rate is likely to cause Jerome Powell et al higher blood pressure. Overall, we expect data this week to be supportive of a hawkish message from the Fed when it meets next week, which is supportive of more dollar strength in the near term.