French And German Lockdowns Hammer Stocks

MARKETS

A more modest sell-off in Asia on Thursday helped by the region's better outlook for the pandemic is allowing for some let-up in the selling that took hold Wednesday. European stocks look set for a mostly positive open and US futures points significantly higher.

On Wednesday the DAX dived 4.17% and CAC fell 3.37% while the price of oil slumped 5%. The Dow crashed over 900 points but interestingly, bonds fell alongside stocks. It goes to show rising yields are pricing in more issuance after stimulus but not necessarily an economic rebound. The worry from a US standpoint is that there will be a repeat for the sequencing from the first wave, first Europe sees rising cases and locks down and the US follows. This is especially true after a Biden election victory.

The dollar was the clear beneficiary - forcing losses in gold and major FX. EUR/USD dropped though 1.18 and GBP/USD closed below 1.30. Even Bitcoin caught some flak, pulling back from an 18-month high.

Without a clear public health plan like a vaccine or cure to the coronavirus, governments are falling back on lockdowns as the primary way to deal with rising infections. The decisions in the major economies of Europe to introduce stricter lockdowns are rendering this earnings season obsolete.

Expectations were so low going into Q3 results season that companies have beaten estimates by the widest margin in history. But those record beats can just be thrown in the rubbish if new lockdown restrictions mean the results cannot be extrapolated into Q4 and 2021. Companies had only just begun to offer guidance again and that small offering to investors of a little more certainty is of no use because of these measures.

As far as an approach to markets, it feels like there isn’t really a place to hide. The big tech results after the close will play an important role in where investors buy into this dip. The ‘stay home’ stocks have already been bid up into bubble-like valuations and will probably be some of the first places investors look for funds to cover margin calls if the sell-off deepens. The call for a ‘rotation into value’ is too soon because we can’t know how far governments will take these new restrictions. That means markets may not have fully baked in worst case scenarios - namely insolvency.

DAY AHEAD

The day ahead will see a rate decision in Japan, the first reading of US Q3 GDP and earnings from five of the biggest tech companies on the planet after the close.

Bank of Japan rate decision

The BOJ has held pat by leaving YCC targets at -0.1% for short term rates and 0% for longer term. Given the rise in cases and likely need for ongoing economic support, the BOJ hinted at more measures in December including corporate bond purchases and lending measures for small businesses. Governor Kuroda in his press conference will likely need to reassure markets that the March 2021 deadline for the measures is extendable.

US Q3 GDP data

The rather extraordinary consensus figure is 31% annualised growth in Q3, up from the -31.4% in Q2. The Atlanta Fed GDPNow estimate is 37.0%, its highest for Q3. A rapid turnaround in retail sales from the plunge in April has driven the sharp recovery with government support offsetting some of the still very high unemployment.

Apple (NASDAQ:AAPL) earnings

The new product launches in September and the October launch of the new iPhone 12 – Apple’s first 5G iPhone won’t affect the third quarter results but will play a big part in the forward guidance. The biggest growth driver for Apple now is its services and accessories businesses. For Q3, revenues are expected at $64.16 billion with an EPS of 71 cents.

Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Facebook (NASDAQ:FB) earnings. Also, Samsung (LON:0593xq), Spotify (NYSE:SPOT), Twitter (NYSE:TWTR), Starbucks (NASDAQ:SBUX), Royal Dutch Shell (LON:RDSa), Volkswagen (DE:VOWG_p), Credit Suisse (SIX:CSGN).

OPENING CALLS

FTSE 100 = 5581 (-1pt).

DAX = 11,603 (+43pts).

Dow Jones = 26,805 (+286pts).

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