Positive earnings surprise is a given

Abraham George Macro View

As of Friday last week, 22 S&P 500 companies had reported their earnings, and 20 have beaten estimates. So, more than 90% have beaten estimates and the average earnings beat is 25% above estimates. Last week was slightly unusual. Many of the relative under performers of recent years, were the winners of the week. Infrastructure stocks, utilities and small caps.

However, this week has opened with a bang into the major FAANG’s and more. Google at 3.6%, Amazon at 4.8% Facebook over 4% , Twitter at 5% and Apple at 6% up. Today is the launch of the iPhone 12. That should raise a few flutters as unlike previous launches it comes with an industry upgrade to 5G.

So what really caused the markets to rise so sharply? It is not the stimulus as despite a lot of noise over the weekend, nothing will happen before the elections. Could it be China? The Chinese central bank removed a reserve requirement for financial institutions on foreign currency liabilities over the weekend. This clearly is a move to weaken the Yuan which in turn forces the money to leave the country.

Money always left China to be invested in the Treasury markets. With nothing left in the Treasuries to make money, the focus could be on the US Big Techs. They have plenty of liquidity and can be traded easily using many vehicles.

The expectations on earnings also plays a big part. Wall Street has been downplaying the expectations. With an economy that has bounced back to the tune of 35% annualized growth for Q3, we may be in for some very big positive surprises.

Equities

The leading indexes closed up strongly. But a close above 29,714 in the Dow and 3588 in the S&P 500 will change the perspective for the rest of the year. Only a close below the Oct 6 low at 27,728 in the Dow and 3354 in the S&P can signal the rally may be over.

Bonds

There was hardly any movement in the bonds but bonds are poised for further falls. The critical level on the downside is 170^30. A move below that can open the flood gates to the downside.

Euro

The move down in Euro from Sep 01 to Sep 25 has been in three waves which means it is corrective in nature. So higher potential exists for a move above 1.2011.

Gold

Gold formed a low at 1849 on Sep 24 . It again made a higher low at 1873 on Oct 6. The subsequent subdivisions in price actions are pointing towards higher prices. The major resistances to the upside are 1985-2000 and the previous high of 2072. Only a move and break below 1849 will change this outlook.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.