French and German lockdowns hammer stocks - DAY AHEAD

French and German stock markets led the global selloff on Wednesday with both counties introducing what comes very close to stay-home orders.



There has been no let-up in the selling. On Wednesday the DAX dived 4.17% and CAC fell 3.37% while the price of oil slumped 5%. Interestingly, bonds fell alongside stocks. It goes to show rising yields are pricing in more issuance after stimulus, not an economic rebound. 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 across Europe to introduce stricter lockdowns - notably in the major economies 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 ‘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 four of the biggest tech companies on the planet.

Bank of Japan rate decision
The expectation is that the BOJ will hold 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 will probably hint at more measures in December including corporate bond purchases and lending measures for small businesses. Governor Kuroda 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.

Apple 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, Alphabet, Facebook earnings. Also - Samsung, Spotify, Twitter, Starbucks, Royal Dutch Shell, Volkswagen, Credit Suisse.


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