British efforts to reverse the Liz Truss-induced calamity, and better-than-expected earnings in the US give a boost to the global financial markets. But the recession fears, the hawkish Fed expectations and headache around a too-strong US dollar are looming risks to the actual investor optimism.
UK hasn’t convinced investors yet, but is on the right path
Britain’s newest Chancellor of Exchequer Jeremy Hunt scrapping almost all that was promised in the mini budget, pulled British gilt yields lower, and pushed sterling higher.
Cable traded above the 1.14 on Monday, but remains under pressure, as Britain’s political turmoil is not over just yet.
The next natural step for Liz Truss government is to replace Liz Truss by someone with a better financial discipline and market sense.
Unfortunately for Liz Truss, the market’s aggressive negative reaction to her spending plan leaves her with little support today. Those who didn’t like her, like her even less due to the calamity that she caused in just about more than a month. And those who liked her, probably don’t like her anymore as she won’t be delivering what she promised she would in terms of tax cuts and energy spending.
A survey from Bank of America showed that investors cut their exposure to the UK stocks by 9 percentage points since Liz Truss took office in September.
We shall see both the pound, the British sovereigns and the equities on a rocky road until investors are convinced that UK has a solid leadership team, which is not the case right now.
Earnings season kicks off on a positive note
Bank earnings were mixed, but most banks topped market estimates.
JP Morgan reported its highest ever quarterly net interest income due to the rising interest rates in the US. Wells Fargo and Bank of America also topped analyst estimates despite concerns of slowing economy.
US retail sales stalled last month due to worsening inflation, but Bank of America said, their clients’ spending, at least, remains resilient to the unideal macroeconomic environment. BoFa’s net interest income revenue also jumped by 24%!
Goldman Sachs also topped estimates with a trading revenue of above $6 billion in Q3, although the bank is looking for another restructuring to scrap businesses that don’t make money.
But Morgan Stanley’s earnings fell for the 3rd consecutive quarter and Blackrock saw its profits fall 16%.
Overall, the US financials rallied more than 10% since October 13 dip, BUT all major US banks, even those that did well in the Q3, boosted reserves to deal with a potential economic downturn. They all put hundreds of millions of dollars to absorb potential losses on loans. Among them, JP set aside more than $800 million, Wells Fargo $375 million and Citigroup around $370 million, because the rising interest rates are good for the interest revenues, but they are also expected to dampen the consumer demand as they make the mortgage and credit rates more expensive.
Beyond banks, Johnson & Johnson topped estimates, although the shares closed the day slightly down as the company narrowed its outlook due to the strong US dollar, while Netflix jumped up to 15% in the afterhours trading as the company finally came with good news on the subscriber front. Netflix added 2.4 million new subscribers in the latest quarter, versus 1 million they had forecasted. The latter marked the end of slowing growth since the beginning of this year, and the end of an era for Netflix, as the company will be launching the ad supported version by early November, which will cost just $6.99 per month to the subscribers. Those who chose the ad-support version will have to watch 5 minutes of ads every hour, which is clearly not ideal, but they will not find the same price in competitors, like Disney+ or HBO max.
According to forecasts, Netflix’s ad-supported strategy could bring an additional $3 billion in extra revenue to Netflix by 2025.
Netflix shares have a lot to recover, as the share price lost up to 75% of its value since last November and is trading with 65% discount compared to last year peak levels. The next natural bullish target stands at $290, the 23.6% Fibonacci retracement on the past year selloff. But the share price should win over the $368 resistance, the major 38.2% level, for a medium term bullish reversal. And that might be difficult in the actual, difficult market environment.
Bloomberg now says the US will be in recession for sure next year, and we think that the latest rally could again be a flash in the pan before a deeper selloff in equities.
Tesla is the next to announce earnings today, after the bell. The Q3 results will likely be good, but will they leave up to high market expectations, is the million-dollar question.
