Equities continue to rally with Nikkei futures up in eight straight sessions as macro numbers are stabilizing and no longer surprising to the downside. A weaker USD has also lifted financial conditions, especially in emerging markets, and with it lifted rates globally. The next week is going to be crucial for risk sentiment with ECB meeting today and FOMC next week. Depending on the signals from central banks we could get a hangover period, but if we get the right amount of accommodative policy measures then we could be in for a longer rally in equities.
Trump tweet sparks trade deal hope
In a return of gesture, Trump tweeted that the tariffs increase on Chinese goods set for October 1 would be delayed to October 15, so it does not collide with the 70th anniversary of the Chinese Communist Party. Trump’s tweet has fueled risk sentiment sending the S&P 500 above the 3,000 level and close to all-time highs.
The
momentum crash that we highlighted in yesterday’s
equity update seems to have run out of fuel with quant funds having liquidated
the necessary positions. While momentum stocks were not outperforming in
yesterday’s rally, they did have a positive session. One thing less to worry about
for now.
Nikkei enjoys maximum strength from weaker JPY
and rising rates
Japanese
equities were once again the best performing equity market in Asia as the
country’s equity market benefits the most from weaker JPY, higher rates and
improving macro backdrop. It’s becoming a bit tiring to repeat our stance, but
we still prefer Japanese equities if we have risk-on in equity markets. German
equities are a great alternative for European traders that do not want the JPY
exposure.
ECB and European banks
European
banks are up 12% from the lows in August as investors anticipating a tiering
system on excess reserves that will immediately relieve banks of their deposit
pain. In the three months leading op to Bank of Japan’s QE programme and tiering
system in April 2013 Japanese banks were also repriced by around 50%. However,
the lesson learned from Japan is that it alleviated some short-term pain, but
it did not change the structural issue of weak loan demand and low
profitability.
As a result,
investors must be willing to take profits on those tactical gains from being
long European banks. If Japan is any guidance the rally in European banks could,
given the right stimulus announced today on the ECB meeting, extend for a month
so one has to be opportunistic and analyse today’s ECB decision correctly.
Stocks to watch
Recently
London Stock Exchange (LSE:xlon) made a bold bet to acquire Refinitiv (the
former Thomson Reuters data business) to create a financial data powerhouse to
compete against Bloomberg. This industry transforming deal is now being
supercharged from above with Hong Kong Exchanges
& Clearing (00388:xhkg) making a $36.6bn bid for London Stock Exchange which
shares were up 6% in yesterday’s trading. Investors were not excited about
HKEX’s bid for LSE with its shares down 3.5% and flat this morning. Why should investors
care? Three years ago, Intercontinental Exchange made a bid for LSE but then
walked away. The complete acquisition analysis lies there ready to be pulled
out and we would not be surprised to see a counteroffer from ICE. Also,
according to the Financial Times, LSE is set to reject the HKEX bid. There also
could be a political angle on the acquisition bid from HKEX due to souring
relationship between the US and China.
Oracle released FY20 Q1 earnings yesterday with
revenue and EPS in line with estimates while the Q2 guidance disappointed on
revenue growth and EPS. In addition, Oracle announced that the CEO Mark Hurd will take a leave
of absence due to health-related reasons. Shares were initially down as much as
6.7% but then rebounded during extended trading hours as the conference call
calmed investors enough. The trajectory of its cloud business is a positive for
the company’s outlook as it is the future of the industry.
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