Equity Strategy Week Ahead

Weeks like next week don’t come up often. There is a lot – a lot - of risk, particularly in the US with the Fed, ISM manufacturing, nonfarm payrolls, PCE and the first print of Q3 GDP. We’ve also got key EZ inflation and GDP numbers, plus China manufacturing PMIs. And it’s month end. And we were supposed to have Brexit – or are we still? Hold on tight. At least it seems fairly quiet and rosier on the trade front – just don’t let Mike Pence in on the talks.

In many ways the narrow range for the S&P 500 over the last 4 sessions (and Friday’s presumably, unless we get a breakout to the all-time high today, which futures don’t really indicate at present) has been down to a wait-and-see mood in the market ahead of this big week of risk events. Earnings have been broadly solid versus expectations though still on course to record a third quarter on the bounce of declines in EPS.

Macro highlights

US Q3 GDP, Wednesday
First up we need to see just how much the US economy has slowed in the third quarter. The Atlanta Fed estimates growth hit 1.8% and has been steady around that marker all October. The New York Fed’s Nowcast model suggests 1.9%. A sub-2% print is on the cards. Weakness in manufacturing and a slowdown in the global economy are starting to weigh on the American economy, but we think the consumer remains more resilient.

FOMC, Wednesday
The Federal Reserve meeting is pretty much a done deal with markets almost fully priced for a 25bps cut to 1.5-1.75% target Federal funds rate target. The Fed is not about to pull the rug out.
The key question that we think will need to be answered is whether the Fed thinks there may be another in December. Markets currently only give this a 1 in 4 chance, however given the uncertainties over trade it seems likely the Fed and Jay Powell will leave the door open for another cut this year after this week’s expected cut.

Since the last meeting the near-term risks of a blow out from the trade war have subsided with the ‘phase one’ deal, whilst no-deal Brexit risks are also greatly reduced. This offers the Fed time to pause its cutting cycle should it choose to – therefore it’s possible it will just drop a few hints that there will no Dec cut. The yield curve is also looking a lot healthier. Broadly, the economy appears still in decent shape, albeit there are heightened fears that manufacturing is slumping. Inflation is not running too hot by any means.

Nonfarm payrolls, Friday
Coming immediately after the Fed decision and just before the ISM manufacturing print there Friday NFP report will be an interesting marker for investors. However it’s likely to a tough one to read as striking GM workers will affect the number (RBC notes 50k needs to be added to the headline number as a result).

The last reading showed total nonfarm payrolls rose 136k in September, leaving the 2019 average at 161k versus 223k last year. July and August was revised up by 45k. Unemployment is at a 50-year low – the 3.5% unemployment rate highlights just how tight this jobs market is. Private sector employment is weaker (at just +114k) than these numbers suggest, although census hiring was minimal in September. Those census hiring figures will skew the numbers going forward. Wages were flat, with 2.9% growth yoy, which is a disappointment and hints at weaker inflation pass through.

ISM manufacturing PMI, Friday
The previous month’s headline manufacturing PMI plunged to a 10-year low, coming in at 47.8 against the 50.1 expected. New orders came in at 47.2. Construction spending was also weaker at +0.1% against the 0.5% expected. The blowout in the PMI reading spooked markets and preceded a drop of as much as 140pts on the S&P 500 as it fell to the weakest level since August at the start of October. With fears about Chinese slowing, global trade heading lower and American businesses delaying investment, the broader market remains sensitive to this number again.

PCE, Thursday
In the 12 months through August, the PCE price index increased 1.4%. But the core PCE price index rose to 1.8% in August, the fastest pace since January. The data comes out after the Fed meeting and before the ISM and may not have an especially large bearing on the economic outlook or markets, especially as there is very limited scope for a surprise.

EZ inflation and GDP, Thursday
Growth is seen slowing to 0.1% by the ECB, although it might be a little stronger. Inflation is yet to show any signs of life and will likely sit around the 0.9-1% level. The ECB and the market has already revised down its estimates, as has the market.

Earnings highlights

It’s going to be a very busy week for corporate earnings. Whilst there has so far been a pretty good percentage of beats among S&P 500 companies, certain bellwether stocks have disappointed. In the UK it’s a big week for the FTSE with index heavy weights Shell, BP, and HSBC among the movers and shakers.

Apple, Q4, after market close, Oct 30th

There have been a number of price target increases from Wall Street analysts, but in many ways they’ve simply been playing catch up as the stock has rallied through the $240 mark to break new all-time highs. The stock has rallied about 8% since it released its new iPhone range – this may be an indicator the market is expecting upgraded guidance off the back of higher-than-expected iPhone sales. What may be fair to say is that any beat to the Q4 analyst expectations is already priced, as argued by Deutsche Bank in a recent note. Indeed, we may add that earnings multiples appear stretched. The trailling 12-month PE ratio has risen above 20 versus an average of 15 over the last 5 years. Whilst there may be encouragement that this is about a re-rating of the stock as it pivots away from being a hardware business to a services business, it makes it ripe for sellers on any miss.

The Street expects EPS of $2.80, short of the $2.91 in the same quarter a year ago, on revenues of $62.9bn, flat on last year. In the last update, investors were particularly impressed by robust Q4 guidance which was ahead of the Street’s expectations. Apple guided revenue to between $61bn and $64bn versus expectations of $60.9bn prior to the Q3 report. The Q3 numbers broadly showed that consumers are still extending the upgrade cycle and holding on to iPhones longer but stickiness in the Apple ecosystem remains strong. The 13% growth in Services was a disappointment and represented another quarter of deceleration. However, excluding a couple of one-off items, the growth was more like 18%, according to Tim Cook. Given the backdrop of slowing growth in China, Hong Kong protests and the Sino-US trade war, investors will be watching for the Greater China sale with interest.

Facebook, Q3, after market close, Oct 30th

Q2 results were even better than expected, showing that it continues to drive user growth and ad revenue growth. Facebook is still loved by advertisers. Remember it’s not just Facebook but the entire ecosystem that matters. And the data – the data it has to offer on users to advertisers is vital. DAUs rose 8% as expected to 1.59bn, with MAUs also up 8%. Ad revenues rose more than expected, up 28% to $16.9bn versus the $16.5bn expected. EPS came in at $1.99 against the $1.88 expected. Mobile advertising revenue represents approximately 94% of advertising revenue for the second quarter of 2019.

Revenue growth was a surprise but watch for a slowing. CFO Dave Wehner reiterated during the earnings call that Facebook continues to expect that constant-currency revenue growth rates to decelerate sequentially going forward. Also keep an eye out for operating margin. This slumped to 27% from 44% in the same quarter a year ago. However, this would have been closer to 39% had it not been for the $2bn FTC settlement. So, to Q3, and the Street thinks The Facebook (as we still like to call it sometimes) will deliver EPS of $1.91 on revenue growth of 26% at $17.4bn.

HSBC, Q3, Monday (4am GMT)

Four words: Hong Kong + Trade War. This will be when we really start to see if the unrest in Hong Kong – where some 50% or so of HSBC’s earnings come from – has impacted the bank. Meanwhile we will also be watching for the impact of the trade war and a broader slowdown in China’s economic growth.

Another two words: Noel Quinn. How is the interim CEO seeking to impress? Chiefly it seems by cutting costs. We will find out more about the rumoured axing of 10,000 jobs. HSBC has a relatively high cost base with a large geographical footprint. Slimming that down when interest rates seem to show no signs of life makes sense.

H1 numbers were positive as the bank reported profit after tax up 18.1% to $9.9bn, while profit before tax was up 15.8% to $12.4bn. But whilst it welcomed continued revenue growth in Asia (+7%), management warned on the uncertain outlook.

H1 Highlights: Reported profit after tax up 18.1% to $9.9bn. • Reported profit before tax up 15.8% to $12.4bn. Adjusted profit before tax up 6.8% to $12.5bn. • Reported revenue up 7.6%. Adjusted revenue up 8.0. Adjusted revenue down 3% in GB&M, which suffered from lower market activity due to ongoing economic uncertainty and spread compression. • Reported operating expenses down 2.3%. Adjusted operating expenses up 3.5%. Positive adjusted jaws of 4.5%. • Earnings per share of $0.42. Return on average tangible equity (annualised) up 150 basis points to 11.2% • Common equity tier 1 ratio up 30bps from 31 December 2018 to 14.3%.

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Fondée en 2015, Chaineum est un cabinet de conseil en opérations de haut de bilan offrant une expertise de premier plan en matière d’ICO et STO, avec une vision stratégique orientée tant vers le métier de ses clients que sur la technologie blockchain. A ce titre, Chaineum a participé à la mise en œuvre de bonnes pratiques dans le secteur (ICO Charter, Security Token Network).
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About Chaineum:
Founded in 2015, Chaineum is a leading corporate finance advisory firm with a strong expertise in ICO and STO, and a strategic focus on both its clients' business and blockchain technology. As such, Chaineum paved the way in the implementation of certain best practices in this sector (ICO Charter, Security Token Network).
Chaineum's blockchain services division, is developing Chaineum Segment technology, an object-oriented private blockchain.

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