Morning Markets Brief 10-13-2020

Summary and Price Action Rundown

Global risk assets are muted and mixed this morning as their recent rally pauses amid the start of key corporate earnings reports. S&P 500 futures indicate a flat open after the index advanced 1.6% yesterday in low-volume holiday trading, upping its year-to-date gain to 9.4%, which is 1.3% below early September’s record high. Equities in the EU and Asia were mixed overnight. The dollar is stabilizing near multi-year lows while longer-dated Treasury yields are edging lower from multi-month highs, with the 10-year yield at 0.76%. Brent crude prices remain choppy above $42 per barrel as demand concerns remain a headwind.

Earnings Reporting Season Begins

TCorporate earnings reporting season kicks off in earnest this week, with muted expectations and relatively low investor attention. Third quarter (Q3) earnings season begins this week with big banks at the outset, where credit adequacy will again be the primary focus. Companies have offered scant insight into earnings expectations thus far, with only 69 of the S&P 500 companies issuing any sort of earnings-per-share (EPS) guidance for the quarter, falling well below the five-year running average of 104 companies reporting per quarter. Of the 69 companies, 46 issued positive earnings expectations while 23 expect negative results. Heading into the first week of reports, analysts have positively adjusted earnings-growth projections by nearly 5% from estimates at the beginning of the quarter. Currently, Q3 earnings are estimated to decline by 20.5%, and if this value should register as the actual decline for the quarter, it will mark the second largest year-over-year decline in earnings reported by the index since Q2 2009, only trailing the previous quarter’s -31.6% figure. The estimated revenue decline also improved during the quarter from -5.4% to -3.5% after net upward revisions to estimates during the quarter. Most notably, the Q3 bottom-up EPS estimate, which aggregates the median EPS estimates for all S&P 500 constituents, increased by 4.1% from June 30th to September 30th.

Stimulus Expectations Center on Post-Election Action

The widening polling lead for Joe Biden in recent weeks is raising investor hopes for a clean and clear election outcome and also focusing attention on the prospects for a $3+ trillion fiscal stimulus package early next year if Democrats sweep the White House, Senate, and House of Representatives. Despite widespread skepticism over the accuracy of polling, particularly in the wake of the high-profile failures to predict the outcomes of the 2016 US election and the Brexit vote, the now roughly double digit national lead for Biden and his narrower but consistent advantage in nearly every consequential swing state are affording investors a moderately greater degree of clarity going into polling. This is being reflected not only in the current US equity rally but diminishing bets on stock market volatility around the election, with level of VIX futures in the coming months moderating significantly over the past week. For context, the primary risk around this election for investors is that of a drawn out and disorderly dispute to declare a winner of the presidential contest and any clear-cut result would likely be met with relief. Meanwhile, President Trump looks unlikely to get a stimulus bill agreed prior to the election despite backpedaling on his pronouncement a week ago that he was unilaterally suspending negotiations with House Democrats over the draft package. The White House has since pivoted to offer a $1.8 trillion deal last Friday, though the reception from both Republican and Democratic leaders on Capitol Hill has been cool.

Additional Themes

German Economic Sentiment Wilts – In September, the ZEW survey of economic sentiment retreated unexpectedly to a five-month low of 56.1, dramatically missing estimates of 72.0 and reversing the optimism of August’s 77.4 reading, which was the highest since May 2000. This comes amid a resurgence of Covid-19 in parts of Germany and elsewhere in the EU. Meanwhile, the Bundesbank’s Financial Stability Review, which was published today, warned that the “effects of the real economic crisis have not yet fully arrived in the German financial system” and that insolvencies would continue to rise amid the persistence of the pandemic.

Mixed Chinese Trade Data – In September, the pace of China’s export growth undershot estimates of 10.5% year-on-year (y/y), printing 8.7%, which is down from 11.6% in August. Meanwhile, imports handily topped expectations, rising 11.6% y/y versus a forecast of 1.0% and -0.5% the prior month. The resulting trade surplus is at its narrowest level since March. Analysts are pondering the outlook for export recovery amid the ongoing impact of the Covid-19 pandemic in the rest of the world, which surging imports reflect China’s domestic rebound.