- Last Sunday, the Chinese Central Bank (PBOC) cut the reserve requirement ratio for most banks by 100 basis points. The central bank said the move will free up nearly US$175B. However, just over US$65B of that will be for banks to repay short-term debt (MLF) that comes due this month. The reduction failed to provide any support for China stocks, which sold off more than 3.5% on Monday and experienced ongoing weakness during the week.
- Global equity markets were weak across the board. So, what is driving recent market weakness? Several factors such as the speed of recent rate rises has pressured growth/momentum plays and technical selling from algorithmic and risk parity funds on technical factors and volatility spikes. Some concerns regarding “peak margin” for equities stemming from higher labour, raw material/commodity and freight costs. Upcoming earnings reports will either confirm or not.
- Reality Check: Since 1928 the S&P 500 has seen 325 days with losses of 3% or more. That means it happens roughly 3.5x a year on average. Pullbacks are normal. The long- term average return for stocks is a 7–8% gain each year, BUT they also tend to have three to four pullbacks each year of some 5–10% and at least one 10–20% correction. We had a 10% correction in February and now seem to on our way to another one but no need to panic.
- Positives still underpin the market over the medium term. The U.S. economy is in good shape. Consumer spending is growing, consumer and business confidence is high, the U.S. job market is strong, manufacturing surveys are near record levels, and by historical standards, interest rates are still low. 3.2% for a 10-year U.S. treasury bond can’t compete with equities nor does it create an onerous financing scenario for corporates.
- Corporate profitability should remain strong. The FactSet consensus expects a 21% increase in S&P 500 earnings per share in Q3, underpinned by a strong U.S. economy and tax cuts. Over the past month, forward earnings estimates for the S&P 500 have risen by about 1%, according to FactSet.
5 day returns to 12 October 2018
|Local currency||AUD currency|
|WTI Oil||US 71.34 (-4.00%)||N/A|
|Treasury (10 year)||3.16% (3.23%)||N/A|
Notable U.S. economic stats this week
The U.S. Consumer Price Index increased only 0.1 percent last month after rising 0.2 percent in August, the Labor Department said. In the 12 months through September, the CPI increased 2.3 percent, slowing from August’s 2.7 percent advance. Excluding the volatile food and energy components, the CPI edged up 0.1 percent for the second straight month.
The so-called core index had increased 0.2 percent in May, June and July. In the 12 months through September, the core CPI increased 2.2 percent. Economists polled by Reuters had forecast both overall and core CPI climbing 0.2 percent in September. Inflation remains benign.
Tesla (NASDAQ: TSLA)
In the third quarter of this year, Tesla sold 69,925 vehicles in the US. That was well ahead of luxury car manufacturer Mercedes-Benz with 66,542 vehicles sold. And according to Atherton Research, Tesla was just 1,754 vehicles shy of knocking over the other German automaker, BMW.
Tesla is held in Macrovue’s “Car of the Future” Vue.
Daimler (ETR: DAI)
Daimler has announced it intends to invest more than €1 bn in a ramp-up of its battery production network with eight factories on three continents. Recent groundbreaking near Tuscaloosa, Alabama marks the start of construction work for its first Mercedes Benz battery factory in the US underlying the company’s commitment to the electrification of its fleet.
Daimler is held in Macrovue’s “Car of the Future” Vue.
Bunge (NYSE: BG)
Activist investor D.E. Shaw & Co. has boosted its stake in global agribusiness giant Bunge Ltd. and is pushing the grain trader to make operational improvements and add board members. The hedge fund is working with Continental Grain Co., an agricultural-investment firm. Negotiations with Bunge’s management will probably involve how to make the grain trader’s operations more efficient, improve margins, and replace current board members.
Bunge is in Macrovue’s “Feed the World” Vue.
LVMH (EPA: MC)
LVMH reported very strong Q3 18 Sales on 9 October 2018 post market close. Sales were up 10% at the Group level and +14% at the Fashion & Leather Goods (F&LG) division - its largest and most profitable. The performance of F&LG at +14% was way ahead of consensus. See earnings slides for a comprehensive analysis of LVMH’s global business.
LVMH is held in our “Luxury Goods” Vue.
Citigroup (NYSE: C)
Citigroup’s Q3 GAAP EPS of $1.73 (+21.8% Y/Y) beat estimates by $0.05 on revenue of $18.39B (-0.2% Y/Y). Net income rose to $4.62B from $4.49B in Q2 and $4.13B a year ago. Drivers were Global Consumer Banking ($1.57B, up 23% Q/Q, and up 34% Y/Y) and fixed income revenue of $3.20B, which was up 4% Q/Q and 9% Y/Y. Reiterated 4Q guidance, cost reduction program on track. Overall a solid result. Stock traded up 2.14% on the day.
Citibank is held in Macrovue’s “Bank On It” Vue.
Charts of the week
U.S. midterm elections
Worried about the U.S. midterm elections? Don’t be. The S&P 500 has been up 14.5% on average a year after all midterm elections going back to 1946. In addition, all 18 midterms saw higher returns 12 months later.
Japan a cheap market?
The week aheadVue Companies Reporting:
- Bank of America
- Johnson and Johnson
Economic CalendarWhile corporate earnings will be center stage this week with some 73 companies reporting, economic reports to watch include retail sales, industrial production, housing metrics, FOMC minutes, and leading indicators.
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