Week Ahead: Brexit crunch time, US earnings season kicks off

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Week Ahead

Welcome to your guide to the week ahead in the markets.

European Council Summit 

It’s make or break time for Brexit. EU heads of state hold their next summit this week, starting on Thursday. The meeting also marks UK Prime Minister Boris Johnson’s last chance to agree a Brexit deal, but the UK’s latest proposals have not met a warm reception. If nothing is forthcoming, the recently passed Benn Act obligates the PM to request an extension by Saturday at the latest. Boris seems to have some plan to circumnavigate the legislation, although Downing Street is unsurprisingly quiet on the details. 

Earnings Season 

The third quarter earnings season on Wall Street gets underway this week, with S&P 500 companies seen posting a year-on-year earnings per share decline for the third straight quarter. 

As usual banks get the season off to a start. Financials posted decent gains in Q3, boosted by a strong +4.5% gain in September.  

JP Morgan (Tuesday) is expected to deliver EPS of $2.45. In Q2 the company reported net income up 16% to $9.65 billion from last year’s $8.32 billion. EPS beat the $2.50 expected at $2.82, rising from $2.29 in the same quarter a year before. Net interest income is the concern in early September at the Barclays conference boss Jamie Dimon said he sees full-year 2019 net interest income down $500M from the last guidance.  

Citigroup (Tuesdayposted good numbers in Q2 as well with EPS of $1.95 topping the $1.80 expected, although trading revenues were down. For Q3 the Street expects EPS growth of c13% at $1.97 a share. Revenues are expected to rise a little less than 1% to $18.54bn. 

Wells Fargo (Tuesday) beat in Q2 but lower net interest income and comments about higher expenses acted as a drag. EPS for Q3 is seen as at $1.20, up 5.3% year-on-year, on revenues seen –5% at $20.85bn. In September the bank’s CFO lowered the net interest income for the third time in five months, with the company now seeing this key profit metric down 6% this year compared with 2018. Bulls will be clinging to anything positive on net interest income. 

Netflix (Wednesday) has had a tough comedown and Wall Street has turned cold on the stock as the risk of a competitive spiral from the rise of rival streaming services threatens to derail the company’s remarkable growth. Investors have shown concern about subscriber growth rates that have started to falter. In Q2 global net adds of 2.7m massively missed expectations for 5m.  

Eco data 

On the high frequency economic data front we are looking at the RBA meeting minutes and Chinese inflation figures early on Tuesday, with the German ZEW economic sentiment survey likely to be key for the European session. 

Wednesday sees the CPI inflation numbers for the UK and Canada, with US retail sales also in focus. 

Thursday, we have the Australian unemployment data, which is a key factor in the RBA’s thinking on monetary policy, before the Phill Fed manufacturing index ahead of the US session. 

On Friday the focus will be the data out of China, with GDP, industrial production and fixed asset investment figures due. 

Tentatively scheduled for Friday is the US Treasury Currency Report, which outlines countries that the US deems currency manipulators.

Corporate Diary

Earnings season is upon us again, here are the notable releases this week.

October 15thJPMorgan Chase & Co
October 15thJohnson & Johnson
October 15thWells Fargo & Co
October 15thCitigroup
October 16thIBM
October 16thNetflix
October 17thMorgan Stanley
October 17thPhilip Morgan
October 18thAmerican Express

 Coming Up in XRay

There are plenty of great sessions coming up on XRay this year. Watch them live on XRay or catch up in a time to suit you.

Don’t forget to ask your questions in advance to xray@markets.com

07.15 GMTOct 14thEuropean Morning Call
10.00 GMTOct 14thLIVE Earnings Season Preview
15.45 GMTOct 15thAsset of the Day: Oil Outlook
19.00 GMTOct 15th LIVE Trader Training
18.00 GMTOct 17thThe Stop Hunter’s Guide to Technical Analysis (Part 7)

Key Economic Events

There are lots of releases this week that are likely to impact the markets. Also remember that trade tensions and Brexit rumble on which make also cause volatility.

09.30 GMTOct 15thRBA Monetary Policy Meeting Minutes
09.00 GMTOct 15thGerman ZEW Economic Sentiment
08.30 GMTOct 16thUK CPI
12.30 GMTOct 16thUS Retail Sales
14.30 GMTOct 16thEIA Crude Oil Inventories
00.30 GMTOct 17thAustralia Employment Change, Unemployment Rate
08.30 GMTOct 17thUK Retail Sales
12.30 GMTOct 17thPhilly Fed Manufacturing
02.00 GMTOct 18thChina GDP, Industrial Production

Preview: Apple Q3 Earnings

Earnings season is in full swing and there’s a big name on the calendar this week.

Apple will announce its Q3 earnings after the market close on Tuesday, and it looks like it could be a mixed bag.

The tech giant saw revenue fall in the first two quarters of this fiscal year and a profits warning from Tim Cook at the start of the year. While guidance suggests that things are improving, this report could throw a few surprises our way.

“What we know: It’s tough in China, iPhone sales are not what they were, Services growth is strong,” said Neil Wilson, Chief Markets Analyst at MARKETS.COM.

“What we don’t know: if things have improved in China as was hinted at in the Q2 release and what the outlook for the rest of the year looks like. Q3 is always a bit dull, so as is often the case, the guidance for the rest of the year is key.”

The year so far

The Q2 report three months ago had its ups and downs, however Apple did report in-line earnings and upbeat guidance for the next quarter.

Guidance for the fiscal third quarter of $52.5bn-$54.5bn was particularly impressive, and well ahead of forecasts.

While Apple’s Q2 results overall were a boost to the tech sector, iPhone revenue came under pressure as it dropped 17% to $31.1 billion. Greater China sales were down 22% from the year previous, but the report hinted that things were improving, with sales picking up as the quarter progressed.

Overall revenues were down 5%, in line with consensus. EPS came in at $2.46.

Services revenues climbed to an all-time high of $11.45bn, up 16% from the year ago period, as the tech giant switches much of its attention (and investment) away from products towards services and software.

“Of course, this is very strong,” Wilson said. “But we did note at the time some mild concern that the growth rate is slowing from the fiery levels we saw last year when we got +30% prints.”

What to expect

This report will include earnings for Q3, but also the outlook for the upcoming two quarters. These will be interesting given the worries about the iPhone. Following the Q2 report, Tim Cook admitted that consumers were slower to upgrade to a new handset. This is likely to be further impacted by the guidance for the 5G refresh.

Apple’s recent acquisition of Intel’s smartphone modem business for $1bn suggests they are committed to making improvements that consumers want. However, 5G is not expected until 2020, so the iPhone 11 refresh due this autumn will likely only have small tweaks – something consumers are increasingly unwilling to give up their existing handset for.

It’s quite likely, therefore, that consumers will wait for the release of the 5G models next year, putting further pressure on iPhone sales.

In terms of what to expect about services, Wilson said: “Not only are we looking at the absolute growth rate here, but also the impact on margins for the company as a whole and the shift in the balance. Apple Services margins came in at 63.8% in Q2. For the group, management guided gross margin to be between 37% and 38%.

“However, Services makes up about 20% of Apple’s revenue, up from 16% a year before – at what point can Apple start to guide its margins higher? This could be an area for an upside surprise, if not now then perhaps heading into the year-end. A slowing in the Services growth rate from the 16% in Q2 would be a concern.”

We’ll also be on the lookout for data about the new services launched in March – News Plus, Apple Arcade, and Apple TV Plus. At the time, Cook was keen to stress that these new ventures are not hobbies and the tech firm had serious ambitions to succeed in these new markets. The Q3 report should provide some early indicators.

Finally, we’ll also be looking for any insight into how Apple thinks the ongoing trade war with China will pan out. Cook had been more positive in Q2, but the White House has insisted that there will be no tariff relief for Apple products made in China. And, the third quarter report could include scope for further acquisitions, if the recent Intel deal is anything to go by.

In terms of estimates, Wilson said: “Consensus estimates forecast revenues to remain flat year-on-year in Q3 at $53.4bn, with EPS seen at $2.10 against $2.34 a year before.”

A closer look at share price

The profits warning at the start of the year saw Apple shares take a hammering, but shares have rallied close to 50% since then.

“Breakout to $211 and beyond? Bulls looking for a break north of $211 but this could offer resistance. Sustained rally beyond $211 starts to bring all-time highs in view again. If there’s disappointment, the support trend line comes in around $185.”

Key financials

On our platform, you can see the key financials for Apple ahead of the earnings report.

Netflix tumbles on subscriber woes

The latest earnings report from Netflix rattled investors and sent the stock tumbling in afterhours trading and languishing during yesterday’s session.

Netflix was off 17% on Wednesday evening and, despite paring gains during trading yesterday, closed 11% lower.

According to the new numbers, Netflix lost 130,000 customers in the US during the second-quarter. It’s the first time the streaming service has reported dwindling subscriber numbers in eight years. Analysts had expected US subscriber numbers to grow 352,000 across the period.

Netflix is well established in the US, and overseas is where the true growth potential lies. But the numbers here are disappointing as well, with Netflix managing to add just under half (2.83 million) paid subscribers in international territories of the 4.8 million forecast by analysts.

Netflix stumbles as competitors line up

It’s a worrying sign of weakness at a time when competition in the video on demand space is heating up. Apple, Disney, AT&T and Comcast all have streaming services in the works. The launch of these will see popular content disappear from Netflix.

For instance, Disney’s streaming service will be the exclusive home of Marvel and Star Wars movie. The two most-streamed shows on Netflix – The Office and Friends – will soon been removed as they head to Comcast’s streaming platform and HBO Max, run by AT&T, respectively.

Netflix said in a letter to shareholders that it believed the second-quarter “content slate” was less appealing than it had anticipated, driving fewer signups. The company also noted that subscription rates had slowed slightly more in regions where prices have recently increased than in those where the cost has remained unchanged.

Can Netflix afford not to raise prices?

This could reveal that Netflix is in a tricky position. With so many competitors, Netflix may find itself unable to raise prices as users can easily switch to an alternative video on demand service. But in order to stay attractive Netflix needs to continue investing heavily in content – and this does not come cheap.

Netflix has enjoyed a long run as the King of streaming. But it’s an expensive crown to keep, and the coming few quarters will see many new challengers to the throne step forward.

Eurozone bank shares slip further on weak yields, eyes on Fed speeches

Eurozone bank shares are amongst the worst performing today. The sector has fallen 1% overall, greatly outpacing the wider market dip.

The biggest movers include Sabadell, with losses in the region of 1.1%, Credit Agricole, off 1.5%, UBI Banca, down 1.7%, and ABN Amro, also down 1.7%.

The sector has been hit by weak Eurozone government bond yields, which are currently hovering just above record lows. The German 10-year bund currently yields -0.311%. That’s just above the -0.329% record low seen last Tuesday.

All eyes are back on the Federal Reserve ahead of a set of speeches, including one from chair Jerome Powell during the US session.

Federal Open Market Committee members signalled after last week’s policy meeting that a rate cut was on the way. This wasn’t enough for President Donald Trump, who responded that the Fed “blew it”. The President called a few months ago for 100 basis points of cuts and the reintroduction of quantitative easing.

Markets are waiting to see whether the Fed will bow to pressure and crank up the dovish rhetoric. President Jerome Powell has so far had little time for the President’s attempts to intervene. But with market expectations racing way ahead of what the data and policymakers themselves would suggest is necessary and a President intent on getting a weaker dollar to help him in his trade battle with China, can the Fed afford to go at its own pace?

Elsewhere stocks were holding near opening levels, with losses capped by the merger of two of the biggest business consultancies in Europe. The deal sees Capgemini purchasing Altran for €3.6 billion. Shares of Capgemini are up 7% to trade at a 2-month high, while Altran shares, reflecting the selling price, have shot up 21%.

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