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Markets jump on stimulus chatter but real earnings test begins this week

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Last week was a strong one for US shares, as investors eyed potential routes to a new round of fiscal stimulus. The Nasdaq Composite gained almost 5%, while the S&P 500 closed the week 3.8% higher – its best week in three months.

Multiple changes of direction by the White House and ongoing negotiations with Senate Republicans and House Democrats dominated headlines, but hopes of a decisive election outcome emerged as a positive force for stocks. A Democrat in the White House could ease the passage of a more substantial stimulus package, and a clear cut outcome would avoid a likely volatile market reaction to a contested result. Hopes of a package being passed before the election diminished over the weekend, however, as a near $1.9trn offer drew criticism from both parties.

Along with stimulus negotiations and election polls, investors will be watching third-quarter corporate earnings, which kick off in the US this week. According to data from Factset, analysts are expecting aggregate S&P 500 earnings to come in 20.5% below Q3 2020, a prediction that has improved in recent months.

Nonetheless, markets in Asia set a positive tone on Monday, as China’s CSI 300 index of blue-chip stocks gained 2.7% after comments emerged around the next five-year plan for the country. Hong Kong’s benchmark Hang Seng index also added 2.2%.

Meanwhile gold held steady above the $1,900 mark, trading at $1,926 this morning, although with little momentum to propel it higher, while crude oil – which has been in the eye of the storm of coronavirus – was flat at just over $40 a barrel after last week’s strong rally when it gained around 10%.

Small-cap stocks outpace large-cap

The Nasdaq Composite led the three major US stock indices last week, but it was small-cap stocks that drove it overall. For the second week in a row, small-cap shares beat their large-cap siblings, with the Russell 2000 index climbing 6%. During the week, US crude oil prices gained around 10%, although still haven’t broken free of the narrow price range they have been stuck in for months. A statement from OPEC Secretary-General Mohammad Barkindo on Thursday saying the worst is over for the oil market was one factor buoying prices.

On Friday, the news that chipmaker AMD plans to buy rival Xilinx sent the latter’s share price soaring by 14.1%, although there is no guarantee a deal will come to fruition. The WSJ highlighted that a near doubling in the value of AMD’s shares this year could embolden it to go after acquisitions, using its stock as currency.

Ahead of the coming week, US stock futures were close to flat yesterday night, as investors wait for what is certain to be a tumultuous five days of headlines. In a Friday note, analysts at financial advice firm Edward Jones noted that the passage of a new relief package “does not represent a do-or-die scenario for the broader recovery,” but said they do believe it will be necessary to stave off a partial relapse.

S&P 500: +0.9% Friday, +7.6% YTD (+3.8% last week)

Dow Jones Industrial Average: +0.6% Friday, +0.2% YTD (+3.3% last week)

Nasdaq Composite: +1.4% Friday, +29.1% YTD (+4.6% last week)

Rolls Royce stock almost doubles in a week

London-listed shares enjoyed a positive last week; similar to their US counterparts, small-cap names raced ahead of large caps. The FTSE 250 closed the week 3.9% higher, versus the 1.9% gain posted by the FTSE 100, meaning the former is now around three percentage points ahead year-to-date.

Rolls-Royce was the big success story of the week, with its share price almost doubling from what was a 17-year low. Broad hopes that the airline industry may be through the worst of the pandemic appeared to be the catalyst, along with news that the firm secured funding through a new bond offering. The firm’s share price remains close to 70% down year-to-date, however.

At the bottom of the FTSE 100 pile last week was online grocery firm Ocado Group, which sunk double digits following a mammoth year-to-date rally. The firm is currently facing down technology patent lawsuits in both the US and UK from automated storage firm AutoStore.

FTSE 100: +0.7% Friday, -20.2% YTD (+1.9% last week)

FTSE 250: +0.7% Friday, -17.4% YTD (+3.9% last week)

What to watch

US corporate earnings season: Third-quarter earnings season kicks off in the US tomorrow, starting as usual with most of the major banks. JPMorgan and Citigroup are among the first to deliver their quarterly reports on Tuesday, along with BlackRock, Delta Air Lines and Johnson & Johnson. Throughout the week, Bank of America, Wells Fargo, Goldman Sachs, United Airlines, Morgan Stanley, Walgreens Boots and more will all report their own updates. According to FactSet data, more than a quarter of S&P 500 firms are still not providing earnings guidance, after swathes of firms threw out their forecasts when the pandemic hit.

Apple’s iPhone event: Consumer tech giant Apple will announce its latest round of iPhone models tomorrow, with investors anticipating the launch of 5G-ready smartphones by the company. Apple has been beaten to the punch on 5G by Samsung, LG and more, but some analysts anticipate a generational step forward in wireless technology will prompt masses of iPhone users to upgrade their devices. According to CNN, 5G phones have yet to achieve mass adoption, and Apple will be hoping to be the firm to achieve it. Another point to note will be the price point Apple sets for its latest set of devices.

Amazon ‘Prime Day’: This week will also see Amazon hold its annual ‘Prime Day’ sale on Tuesday and Wednesday, which is typically a huge sales event for the online marketplace. Last year Prime Day sales exceeded those of Black Friday and Cyber Monday combined, and a successful sale period could be a boost for Amazon stock. Amazon’s sales are already running at an elevated level during the pandemic, whether the firm’s logistics network can handle the volume of orders will be key.

Crypto corner: Payments platform Square buys bitcoin

Square, the payments platform set up by Twitter CEO Jack Dorsey, has purchased $50 million worth of bitcoin.

Square said late last week it had bought a total of 4,709 bitcoins, which the company says represents about 1% of its total assets as of the end of the second quarter, according to reports.

Square said it was making the purchase because it believes “bitcoin has the potential to be a more ubiquitous currency in the future,” calling cryptocurrency “an instrument of economic empowerment” that “provides a way for the world to participate in a global monetary system.” Square has accepted bitcoin as a form of payment since 2014.

Square added bitcoin trading to its Cash app in 2018, and last year, it formed Square Crypto, an independent team that contributes to bitcoin open-source work. Last month, it also launched the Cryptocurrency Open Patent Alliance, a non-profit aimed at keeping the open-source nature of cryptocurrency alive by pooling patents in a shared library to “defend against patent aggressors.”

Jack Dorsey, CEO of Twitter and Square, has long been a proponent of bitcoin, saying in 2018 that he believes it will eventually become the world’s single currency within the next decade. “Bitcoin, for us, is not stopping at buying and selling. We do believe that this is a transformational technology for our industry and we want to learn as quickly as possible,” he said.

All data, figures & charts are valid as of 12/10/2020. All trading carries risk. Only risk capital you can afford to lose. 

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