Shaky Sentiment On Disappointing Earnings

WHERE WE STAND – Sentiment shakier this morning as fallout from rather disappointing Microsoft and Meta earnings continues, with weakness in futures unsurprisingly led by the Nasdaq 100, though the front S&P future also trades around 0.5% softer.

While both delivered top- and bottom-line beats compared to consensus expectations, Microsoft’s guidance was lacking, with cloud revenue growth set to slow, and margins likely to shrink, in the coming quarters. Once again, we see the ‘massage and beat’ theory in action, where corporates beat earnings expectations which have been massaged lower throughout the prior quarter, leaving guidance as the key factor to unlock post-earnings market moves.

Meanwhile, Meta’s increasing capex on AI technology exerted pressure, as risks around the theme continue to become more two-sided, particularly after relatively poor earnings from AMD on Tuesday. This, of course, tees things up in somewhat precarious fashion for Nvidia earnings, due towards the back end of next month.

Elsewhere, yesterday’s UK Budget brought a return to ‘tax and spend’, as well as ‘borrow and spend’. Even though the latter spend will be badged up as investment, this is likely to matter little in the market’s mind, and it was unsurprising to see gilts trade softer in reaction, with the 2-year at one stage having risen more than 10bp on the day.

It’s also worth nothing that the supposed ‘Budget for growth’ fails to deliver GDP growth north of 2% in any year of the OBR’s forecast horizon – Labour had been targeting 2.5%, of course. Something of a misnomer in my view! Full Budget thoughts can be found here.

Speaking of growth, yesterday delivered that rarest of surprises – better than expected eurozone data. Pigs will be flying next! The initial estimate of Q3 GDP pointed to expansion of 0.4% on a QoQ basis, though downside risks clearly remain, and such a figure is unlikely to deter the ECB from another 25bp cut at the December meeting.

Furthermore, yesterday’s US GDP data once more evidenced the continued ‘US exceptionalism’ theme which still underpins much of the USD’s recent strength, with the economy having grown by an annualised 2.8% QoQ in the three months to September, the eighth quarter in the last nine where growth has been north of 2%. I still find it tough to bet against the greenback in such an environment, and would be buying any pre-election USD dips.

Overnight, Chinese data surprised to the upside, with the official (aka manipulated) manufacturing PMI rising north of the 50 mark, snapping a five month run of contraction. Still, a PMI at 50.1 is hardly worth popping the champagne corks for, and risks remain here as well, considering that the recent round of fiscal stimulus was geared primarily towards ensuring financial market stability, as opposed to propping up the ‘real’ economy.

In terms of other market moves – gold trades to fresh record highs, as momentum remains firmly with the bulls. This still isn’t a move I’d be particularly keen to stand in the way of, as calls for $2,800/oz grow. Fading gold here, particularly before any signs of consolidation emerge, is akin to picking up pennies in front of a steamroller.

Elsewhere, crude firmed a touch, though the move smacks of a ‘dead cat bounce’ as opposed to anything else, after Monday’s slump on receding geopolitical risk. Perhaps participants went a little too far in pricing out the associated risk premium, though with WTI still trading under $70bbl, the rally isn’t anything to get excited about just yet.

LOOK AHEAD – A busy day awaits, with plenty of events having the potential to spook markets on Halloween.

Already, the BoJ kept all policy settings on hold, as had been widely expected, though an upward revision to GDP growth forecasts leaves further policy tightening on the cards, so long as Japan can sort out the present political shambles, and form some sort of governing coalition. The JPY trades marginally firmer post-BoJ, pending Governor Ueda’s presser.

Turning to the day ahead, where eurozone inflation figures highlight the docket. Headline CPI is seen having risen 1.9% YoY in October, though risks to this consensus are tilted to the upside after hotter than expected regional inflation prints yesterday. Still, with core inflation seen falling 0.1pp to 2.6%, and growth risks tilted firmly to the downside, there’s likely to be little in the figures to deter the ECB from another 25bp cut, even if 50bp now seems firmly off the table.

Stateside, the US releases the weekly jobless claims data, though neither the initial nor the continuing claims print pertains to the October NFP survey week, with that data of course due tomorrow lunchtime. The latest Chicago PMI figures, and Canadian GDP report, might also be worth a cursory glance.

On the earnings slate, it’s another busy one. Uber and Peloton highlight the pre-market slate, while after the close ‘magnificent seven’ earnings continue with Amazon and Apple set to report.