Category: US Markets

A little more than three months ago the citizens of the UK voted to leave the European Union (EU). In the lead-up to the June 24th referendum, many economists predicted an immediate recession and economic chaos on a “Yes” vote.

This sentiment was echoed by then PM David Cameron who said a vote to leave the EU would cause an economic shock that would cost the nation at least 500,000 jobs. This warning, along with UK Treasury predictions of the longer-term damage “Brexit” would cause were the cornerstones to what Brexit supports called “project fear”.

Furthermore, many international institutions — including the Bank of England and the International Monetary Fund — also warned that leaving the EU would have dire economic costs.

However, after yesterday’s stronger-than-expected UK GDP report, project fear now seems like an abjectly partisan political tactic and an economic non-starter.

In fact, the first official growth figures  since the Brexit have not only confounded the governments warnings of a recession, but given validation to the few economic pundits who predicted the UK would be better off outside of the EU.

The numbers weren’t stellar, but, according to the Office for National Statistics, the UK economy grew by 0.5% between July and September. The UK Treasury had predicted it would shrink by 0.1%.

And while it’s clear that the Bank of England won’t be removing stimulus anytime soon, it appears that the fundamentals of the UK economy are strong and the GDP data show that the economy is resilient. The internal data in the report reflected an expansion at a rate broadly similar to that seen since 2015 and there’s really little evidence of a pronounced negative effect in the immediate aftermath of the Brexit decision.

This nascent sense of  stability and cautious optimism is best illustrated in the UK Treasury curve. Since bottoming out at .530% in mid-August, the 10-year Gilt yields have more than doubled and have now traded at a six-month high at 1.285% after the GDP data. In addition, over the same period of time, the FTSE 100 index has climbed over 4% from 6750.00 to close to 7,000.00

The question now is: when will the higher UK rates, firmer stock market and stable economic data translate into a stronger Sterling?

In our view, the answer is very soon.  

Looking at the daily GBP/USD chart, it’s clear that the “flash crash” on October 7th is still the most dominate technical feature. However, with the market positioning leaning very heavy to the short side, and very little swap benefit in holding short Sterling without downside price momentum, it’s reasonable to expect the risk of a short squeeze is increasing.

On Friday, MasterCard beat consensus expectations by announcing a Q3 dividend of $1.08 per share on revenue of $2.88 billion on an 18% increase in consumer spending within their network during the reporting period.

Analysts expected the credit provider to report earnings of 98 cents per share on revenue of $2.75 billion. The net revenue number marked a 14% increase over the same period last year.

Shares of MasterCard posted a 3% gain on the day and reached a new all-time high of $107.70 on an intraday basis. As of September 30th, the company announced a total issuance of 2.3 billion MasterCard and Maestro branded  cards worldwide.

Shares of Alphabet, the parent company of Google, are down over 4% in aftermarket trade even thought the company beat Q3 earnings expectations.

The search engine conglomerate posted Q3 earnings of $9.06 per share, adjusted, on revenue of $22.45 billion. Analysts were expecting the company to report earnings of $8.63 per share on revenue of $22.05 billion.

Today’s results compare to $7.35 per share, with revenue up 20% from last year’s $18.68 billion. The company also announced the approval of a buy-back of over $7 billion of its Class C shares over the next three months.

The share price initially spiked higher, posting a new high for the year at $837.35, before reversing back below $820.00 in after hours trade.

Shares of Coca-Cola dropped slightly to 42.50 on weaker year-on-year profit guidance even though Q3 earnings were slightly higher.

The beverage maker announced a profit of $1.05 billion, or 24 cents per share, down from $1.45 billion, or 33 cents per share in Q3 2015. Excluding one-off tax items, per share earnings were 49 cents per share, while revenue declined 6.9% to $10.63 billion.

Analysts had forecast adjusted earnings of 40 cents on revenue of $10.51 billion. It was the seventh straight quarter that the firm beat expectations; if only slightly. However, when announcing their 2017 guidance, the company warned of a potential 4% to 7% decline in comparable earnings over the medium-term.

This negative guidance gives scope for a pullback in the share price to the $40.00 area last seen in January of this year.

Boeing shares jumped over 4% to post a new high for the year at $148.00 as the company beat expectations for Q3 earnings.

Despite a decline in revenue, the aircraft manufacturer said earnings rose to $2.28 billion, or $3.60 per share, from $1.70 billion, or $2.47 per share during Q3 2015. Core earnings, which exclude some pension and other costs, rose to $3.51 per share from $2.52 a year ago.

Both figures include a special gain of 70 cents per share, reflecting a tax benefit Boeing received by claiming depreciation on plants and equipment.

Positive forward guidance brought in longer term buyers as the company raised its target for jetliner deliveries for the year to 750 from 740 and lifted its year-end revenue estimate to 95.5 billion from 93.5 billion.

Shares of Lockheed Martin closed 5% higher at $243.00 after the defense contractor beat Q3 earnings expectations.

The company reported adjusted earnings of $3.61 per share, well above the consensus of $2.89 per share. It reported sales of $11.55 billion, up from $10.06 billion in the year earlier period and above the consensus of $11.45 billion.

Lockheed said it expects overall 2016 earnings per share of $12.10 and sales of $46.5 billion, as adjusted for divested business. The company expects ongoing operations to lift 2017 net sales by 7%.

The strong price response was welcomed as shares of Lockheed have fallen 9% in the last three months from the August high of $264.00.

The price of Apple shares traded in a wide range after the company reported slightly better earnings but the lower quarterly results marked the third quarter of year-over-year revenue declines.

The iPhone maker reported earnings of $1.67 per share, just above the $1.66 expected consensus. Revenues came in at $46.90 billion, just shy of the 46.94 billion expected. That’s down from the comparable figure of $1.96 per share on sales of $51.5 billion a year ago.

Apple shares rose briefly to $119.00 in after hours trading, but were last seen down more than 2% and dipping below the mid-September support area at $115.00. The company reported that it shipped 44.8 million iPhones, which is down from 48.04 million a year ago.

The USD ended on a firm note last week as foreign exchange traders were focused on the divergence of monetary policy between the Greenback and the other G-7 currencies. Over the last several trading sessions, we learned that European Central bank is still open to more stimulus in December, the Australian economy is not as vibrant as the RBA suggests and that the Reserve Bank of New Zealand is thinking about easing again before the end of the year. We also learned that the U.K. economy is slowing at a time when US growth aggregates have been posting mostly stronger numbers  for employment, housing and retail spending.

The steady flow of generally hawkish comments from FOMC officials stands in contrast to the dovish language coming from other central banks and has helped the USD Index reach an eight-month high just short of 99.00 at Friday’s NY close. It’s our base case that the likelihood for further interest rate normalization will increase over the next few weeks which will support the USD, keep the SP 500 index in a “buy on the dip” pattern and lift 10-year treasury yields back into the 1.95% area

With only a few first-tier fundamental data points scheduled for this week, It’s worth looking at some of the technical price patterns which have emerged over the last several trading sessions. The most prominent technical pattern is the “Golden Cross” in the USD Index. A Golden cross is formed when the 50-day moving average crosses above the 200-day moving average and suggests a continuation to higher levels. We note that the last time this pattern emerged, the USD actually consolidated for a couple of weeks before moving higher. With US Durable Goods orders scheduled for Thursday and GDP to be released on Friday, the consolidation phase could be much shorter this time.

Since the Euro currency makes up close to 58% of the weighting of the USD Index, it’s not surprising that the same moving average time frames have crossed to the downside in the EUR/USD. This pattern is called the “Deadman’s Cross” and suggests last week’s break of the July trend line will see downside range extension this week.