Yield sensitive names remain under pressure as the bond sell-off in the US continues. As bond prices trade lower, the yield is increasing. Higher yields, make interest rate sensitive names like infrastructure and property trusts less appealing.
The sell-off in domestic names such as APA, GMG, GPT, SGP, TLS, TCL, SYD, WFD & SCG has been significant. With many of these names now trading on yields within 4.5 to 6.5% range.
There’s a case to be made for the above stocks to find support as the outlook for interest rates begin to stabilise.
We’ve remained bullish equities and our base case has been that US stocks would hold support following a satisfactory 3Q earnings result. Our resolve was tested in the last 24 hours with US markets down sharply as the election result and Trump Presidency looked possible. However, by the time the Presidential acceptance speech began, the market losses on US indices were cut in half and by the close of US trading markets were up on average by 2%.
We keep our long bias towards equities and turn our focus back to the reality that 3Q S&P500 average earnings per shares growth is tracking at only 3.5% up on the same time last year. Considering the magnitude of share buybacks, we don’t consider the underlying earnings growth to be that encouraging. Chinese export data remains weak, reflecting the slow growth in the global economy and bond yields continue to push higher in the US with the 10year bonds now trading up from 1.3 to 2.05% over the last 3 months.
As stated in the monthly strategy review video, we caution portfolio investors on a blanket buy and hold strategy. We encourage you to establish contact with us, so we can discuss the advantage of adding a call option strategy to your holdings, as well implementing well timed trading ideas around the fringe of your portfolio to help deliver better outright returns.
Alibaba beat expectations in its latest report by posting adjusted earnings of 79 cents per share on $5.12 billion in revenue. Analysts were expecting 69 cents per share and $5.03 billion in revenue. In last year’s September quarter, the online retailer posted $3.28 billion in revenue and adjusted earnings of 53 cents per share.
The company announced core commerce revenue grew 41% to $4.3 billion, while cloud computing revenue increased 130% to $224 million. The adjusted EBITDA margin was 46%, compared to 50% during the same period last year.
Digital media grew by 302% to $541 million. The company also announced they had 450 million active users in September, marking a 23 million increase from June.
Shares of Alibaba rose in early NY trading, climbing as high as 104.75 before drifting back to 98.50 at the close. The share price has almost doubled since the February low of $60.50 and the next key level of support will be found at the August breakout price of $85.00
Shares of Facebook are down close to 8% in after-market trading to $117.00 even though the social media giant reported quarterly earnings that beat analysts expectations.
The company announced adjusted earnings of $1.09 per share on revenue of $7.01 billion, up from the comparable year-ago figures of 57 cents per share, adjusted, on $4.5 billion in revenue. Analysts were expecting 97 cents per share on revenue of $6.92 billion.
Advertising revenue was announced at $6.82 billion, above the $6.71 billion consensus estimate. Monthly active users rose to 1.79 billion and signalled the first time more than 1 billion users were active on their phones in a month.
However, share prices fell sharply after CFO David Wehner said the “ad load”, or number of ads on the website, could come down meaningfully after mid-2017 which could impact revenue growth in Q4 2017.
The next support level in the share price will be found at the double bottom price at 108.50 last traded in April and June.
Over the last six months, an overarching theme driving G-10 financial markets has been the divergence in interest rate policy trajectory between the US Federal Reserve and the rest of the group. From a “cause and effect” point of view, US economic data has been viewed through a prism of how it could influence policy decisions from the FOMC, which has then impacted the way G-10 assets respond relative to US assets.
In short, key fundamental data points which print better than expected have been bullish for the USD and bond yields, and economic reports which reflect weakness in the US have been bearish for the USD and bullish for US stocks. However, last Friday’s trading session illustrated how these correlations will likely be suspended until after the US Presidential election on November 8th.
Friday’s NY trading session began with the release of the highest Advanced GDP report in two years. As expected, the USD Index rallied to a 9-month high just under 99.00 and the EUR/USD slipped to the low end of the range near 1.0850. At around 1:00 PM, NY time, news hit the wire that the FBI said it would reopen its investigation into Hillary Clinton’s private e-mail server after new evidence was discovered on other electronic devices in an unrelated case. The market acted swiftly as the EUR/USD jumped 90 points, bond yields fell and the SP 500 dropped 20 handles from 2140 to 2120 before recovering.
We won’t discuss the validity of the FBI’s decision. However, from a market participants point of view, the important thing to note is that anytime there’s an opening for Don Trump to close the polling gap it means more uncertainty on the horizon and less chance of a rate adjustment this December from the FOMC. As such, we will offer to explain some of the dynamics we could be up against over the next several trading sessions.
It seems the market’s fear of a Trump victory is focused on his proposed tax cuts leading to higher deficits and a steeper yield curve. Some other analysts believe his trade policies could trigger a sell-off in equities and a flight to quality into the long-end of US Treasuries.
Using the “Brexit” vote as a point of reference, a Trump win could trigger a sharp rise in volatility in bonds, FX and equities. And while the spike in asset volatility was short-lived as the VIX moved back to pre-Brexit levels by early July, the impact on the yield curve lasted much longer. The UK referendum was on June 23rd, and it took until mid-September for the UK 10-year Gilt yields to rise above their pre-Brexit levels. There is a similar fear in the US Treasury market if Don trump wins.
In this respect, it’s our view that this week’s fundamental news (which includes 3 Central bank meetings and European PMI’s) will take a back seat to the re-pricing of last week’s forgone conclusion that Hillary Clinton will win the US election.
AMP 3Q16 update produced further losses and write downs in life insurance with significant deterioration in Contemporary Wealth Protection.
Going forward, the market is likely to place a greater focus on AMP’s more important wealth management business. AMP is trading on 13x FY17 earnings and now offers a 6% dividend yield.
FY17 net profit should be around $920m on EPS of $0.34 and DPS of $0.28
We’ve been cautious of AMP despite the bullish analyst forecasts over recent time. In last month’s strategy piece we highlighted the relative underperformance to other financial names. This was enough of a warning sign for us not to allocate funds, however, following the sell-off on Friday, we now think value exists in the range of $4.20 to $4.50.
Due to the elevated volatility, we prefer using a spread option strategy to capture the upside whilst quantifying or protecting our downside risk.
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.
Chart – Coca Cola (US Listing)
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