Global Weekly: Trick or treat in the earnings season

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With a little imagination, the famous Halloween ‘trick or treat’ principle can also be applied to company earnings. When a company shows an outstanding or solid performance, shareholders get a ‘treat’. But if it fails to meet expectations, they get ‘tricked’. This week we saw a lot of companies reporting their quarterly results, which were greeted by a variety of market responses. On average, markets held up quite strongly, with new highs during the week.

In fact, the S&P500 Index touched a new all-time high this week, while the broader European index set a new high for the year. The MSCI World Index also moved up to its highest level for the year and is just a few points off its all-time peak. Solid company results were most probably the main factor here, as well as an accumulation of measures by central banks – and the Fed cut interest rates again on Wednesday.

Of the four companies competing to be the first to reach a trillion-dollar market cap, Microsoft and Amazon had already reported last week. This week it was Alphabet’s and Apple’s turn, with Google parent Alphabet kicking off on Monday. Alphabet‘s third-quarter revenue exceeded consensus estimates, but further investments, especially in cloud services, weighed on earnings. Investors were not really ‘treated’, but Alphabet didn’t get ‘tricked’ either.

On Wednesday, Apple reported strong revenue growth in its Services and Wearables segments, while iPhone revenues dropped. The pace of the decline in iPhones sales has slowed, however, and Apple is positive about the important final quarter of this year. A nice ‘treat’ for investors, then.

Finally, Beyond Meat really got ‘tricked’. The company presented much better than expected results and even raised its full-year revenue outlook. But investors seem to be spooked by the fact that the initial public offering lock-up ended this week, and this sent the share price down significantly.

Overall, markets still seem quite resilient to the deteriorating macroeconomic data and declining earnings growth. Maybe the easing of uncertainties over the US-China trade dispute, Brexit and the continuation of central banks’ supportive policies is what is holding the equity markets up at current levels. What direction the market will take towards the end of the year remains to be seen, though, and for now we remain somewhat cautious on equities.

Bonds – A more stable landscape

More positive news seems set to start emerging on the trade war, which should be favourable for all bonds including the riskiest ones – the global high-yield corporates and emerging market allocations in our portfolio. A more stable trade landscape should provide support to the biggest Asian economy, which in turn should translate to emerging markets and the overall global economy. However, the trade dispute does not look to be solved soon.

In the US, GDP growth in the third quarter exceeded consensus expectations and this led the Fed to end its dovish stance, though we do expect one more cut next year. Growth was driven primarily by consumption, as a strong labour market is continuing to support real incomes. On the political front, talk of impeaching Trump persists, although, if we look back at the history of the country, such cases rarely succeed. It’s interesting to consider how the bond market might react to an impeachment , given that it signals uncertainty – but at the same time, Trump is not loved by the markets.

Corporates globally look healthy, given the low-yield environment and the ongoing process of deleveraging.

Most central banks in emerging markets still have room to cut rates, which justifies our overweight position in this asset class. It’s worth keeping an eye on Latin America, which represents a large part of this universe, as practically all these countries have been experiencing political uprisings. We are not yet that worried, as most demands from these countries’ populations allow for discussion and are easily solved by tax reforms. Last Sunday’s elections in Argentina brought a better outcome than expected, which will limit the power of the Fernandez-Kirchner administration and force it to restructure part of the country’s debt in a way that’s friendly to bondholders.

If the Fed turns more hawkish, we can’t expect a depreciation in the US dollar or any emerging market currencies to strengthen, and we are thus keeping our position exclusively focused on hard currencies.

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