ConocoPhillips Agrees to Acquire Concho Resources for $9.7 Billion

ConocoPhillips, an independent oil and gas exploration company, said it will acquire the U.S. shale oil producer Concho Resources in an all-stock transaction valued at $9.7 billion.

Under the terms of the deal, each share of Concho Resources common stock will be exchanged for a fixed ratio of 1.46 shares of ConocoPhillips common stock, representing a 15% premium to closing share prices on October 13, the company said.

“The 15% premium for the acquiree compares favourably with recent transactions, such as Devon’s merger with WPX, but is modest by historical standards. Until recently, we would have considered a premium of 20%-30% to be the norm for an exploration and production company takeover,” said Dave Meats, director at Morningstar.

“But the environment for E&Ps has deteriorated recently, following the pandemic-related collapse in crude prices. And for Concho specifically, the upcoming presidential election could be more of a threat than it is for most shale companies because Concho has much more exposure to federal land than its peers do,” Meats added.

The transaction is expected to close in the first quarter of 2021.

ConocoPhillips shares ended 3.16% lower at $32.7 on Monday; the stock is down about 50% so far this year. Concho Resources shares closed 2.75% lower at $47.26 on Monday; the stock is down about 46% so far this year

ConocoPhillips stock forecast

Twelve analysts forecast the average price in 12 months at $47.91 with a high forecast of $56.00 and a low forecast of $37.00. The average price target represents a 46.51% increase from the last price of $32.70. From those 12 equity analysts, 11 rated “Buy”, one rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $47 with a high of $69 under a bull scenario and $23 under the worst-case scenario. Citigroup raised their stock price forecast to $39 from $37 and Truist Securities upped their price objective to $55 from $52.

Several other analysts have also recently commented on the stock. ConocoPhillips had its target price decreased by stock analysts at Bank of America to $46 from $50. The brokerage currently has a “neutral” rating on the energy producer’s stock. KeyCorp started coverage on ConocoPhillips, issuing an “overweight” rating and a $46.00 price objective for the company. At last, Raymond James raised their target price to $48 from $46 and gave the company an “outperform” rating.

Concho Resources stock forecast

Twelve analysts forecast the average price in 12 months at $67.73 with a high forecast of $79.00 and a low forecast of $55.00. The average price target represents a 43.31% increase from the last price of $47.26. From those 12 equity analysts, 11 rated “Buy”, one rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $64 with a high of $81 under a bull scenario and $22 under the worst-case scenario. Citigroup lowered their stock price forecast to $67 from $72 and JP Morgan establishes December 2021 price target of $68 vs December 2020 price target of $65.

Several other analysts have also recently commented on the stock. Concho Resources had its target price dropped by Bank of America to $65 from $70. The firm presently has a “buy” rating on the oil and natural gas company’s stock. Mizuho downgraded Concho Resources from a “buy” rating to a “neutral” rating and boosted their price target for the company from $68 to $69.

Analyst Comments

“ConocoPhillips’ (COP) announced the acquisition of Concho Resources (CXO) fortifies the company’s leadership position within US energy. Pro-forma, a diverse portfolio of low-cost resource + ESG focus differentiates COP in lower growth, returns focused shale ‘era.’,” said Devin McDermott, equity and commodities Strategist at Morgan Stanley.

“ConocoPhillips checks all the boxes for sustained outperformance: excellent management, disciplined investment, and consistent return of cash coupled with high quality, low-cost portfolio that can deliver an attractive combination of FCF and growth.”

“Attractive value proposition even in the current commodity price environment with leverage to any rally in oil and with resiliency should price remain low. Strong balance sheet. While management received some investor pushback in 2019 for building an $8 billion strategic cash balance, that disciplined strategy is paying off in 2020 – creating financial and strategic flexibility,” McDermott added.

Upside and Downside Risks to ConocoPhillips

Upside: 1) Higher commodity prices. 2) Upside to Alaska resource discovery. 3) Better well performance in Lower 48 – highlighted by Morgan Stanley.

Downside: 1) Lower commodity prices. 2) Cost inflation. 3) Alaska discovery has less potential resources than expected. 4) Federal acreage exposure in Alaska. 5) Worse than expected well results in the Eagle Ford, Permian, and Bakken.

Upside and Downside Risks to Concho Resources

Upside: 1) Reduced operating and development costs. 2) Consistent execution. 3) Non-core divestitures, with cash returned to shareholders – highlighted by Morgan Stanley.

Downside: 1) Downside to Permian natural gas price differentials. 2) Elevated non-operated spending. 3) Regulation preventing development on Federal acreage.

Check out FX Empire’s earnings calendar

E-mini NASDAQ-100 Index (NQ) Futures Technical Analysis – Strengthens Over 11761.75, Weakens Under 11550.50

December E-mini NASDAQ-100 Index futures are trading sharply lower shortly before the close on Monday as traders express doubts that government policymakers will be able to agree on a new fiscal stimulus package that is needed to help keep the economy on the road to recovery.

At 20:46 GMT, December E-mini NASDAQ-100 Index futures are trading 11685.00, down 113.00 or -0.96%.

In other news, according to Reuters, Netflix Inc will tell investors on Tuesday how the ongoing COVID-19 pandemic affected membership in the third quarter – a period when analysts remain bullish on the company despite the return of live sports and more streaming competition. The video-streaming service was up around 1% ahead of its results on Tuesday.

Daily December E-mini NASDAQ-100 Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, however, momentum is trending lower. A trade through 12249.00 will signal a resumption of the uptrend. The main trend officially turns down on a move through the last swing bottom at 11197.50.

The minor trend is down. This shifted momentum to the downside. The minor trend changed to down when sellers took out 11736.50.

The intermediate range is 12444.75 to 10656.50. Its retracement zone at 11761.75 to 11550.50 is currently being tested. Trader reaction to this zone will likely determine the near-term direction of the index.

The short-term range is 10656.50 to 12249.00. Its retracement zone at 11452.75 to 11264.75 is the next downside target.

Since the main trend is up, all retracement zones are potential support areas until the trend changes to down. The price action also suggests that investors may not be willing to chase the market higher, but instead may be looking for a value area.

Short-Term Outlook

We’re going to be watching trader reaction to 11761.75 early Tuesday since this is likely to set the tone for the session. Over the short-run, however, it’s probably best to watch 11761.75 and 11550.50.

Buyers may try to form a support base inside 11761.75 to 11550.50.

We are also confident that a break down under 11550.50 will not mean a major break is coming. Buyers are still likely to come in at 11452.75 to 11264.75.

We’re also pretty confident that new fiscal stimulus is coming, but we don’t know when, or even the size of the deal. In the meantime, investors may continue to probe the downside, looking for a value area. Basically, I still like the upside potential of this market, except I only want to buy at my price. I think chasing a rally is dangerous at this time and at current price levels.

For a look at all of today’s economic events, check out our economic calendar.

US Stock Market Overview – Stocks Slide Driven Lower by Communications on Stimulus Fears

 

US stocks moved lower on Monday as concerns that a stimulus deal would need to wait until after the November general election weighed on shares. House Speak Nancy Pelosi has given the White House a 48-hour timeline to move forward with a deal. The spread of COVID-19 has accelerated which is reducing the chance of a V-shaped recovery.

Over the past 2-weeks, the stock market has been starting higher and ending lower, which is not a good sign. All sectors in the S&P 500 index were lower, led down by communications and energy, utilities were the best performing sector in a down tape. The VIX volatility index surged higher rising 2-points and recapturing the 29% level. The US home building index released by the FAHB surged to the high level on record but the gain was not strong enough to buoy housing sector stocks on Monday.

Home Building Index Surges

Homebuilders continue to see expanding demand and are struggling to keep up with housing starts. The Homebuilder sentiment set a record high for the second month in a row, jumping to 85 in October on the NAHB/Wells Fargo Housing Market Index. September and October are the first two months the index has ever been above 80. This is a diffusion index with levels above 50 showing an expansion. The index stood at 71 in October 2019. All three components of the index either set records or matched their highest readings.

The current sales conditions rose 2 points to 90. Sales expectations in the next six months increased 3 points to 88, and buyer traffic was unchanged at 74. Builders are struggling to ramp up production, and while housing starts and building permits are rising they are not even close to meeting demand.

Halliburton Posts Fourth Straight Loss in Q3 as Oil Rout Drags Demand

Halliburton Co, one of the world’s largest providers of products and services to the energy industry, reported a loss for the fourth consecutive time in the third quarter as demand slowdown due to the COVID-19 pandemic and lower oil prices have hurt businesses.

The U.S. largest hydraulic fracturing provider reported a net loss of $17 million, or $0.02 per diluted share, for the third quarter of 2020. This compares to a net loss for the second quarter of 2020 of $1.7 billion, or $1.91 per diluted share. Adjusted net income for the third quarter of 2020, excluding severance and other charges, was $100 million, or $0.11 per diluted share.

Halliburton’s total revenue in the third quarter of 2020 was $3.0 billion, a 7% decrease from revenue of $3.2 billion in the second quarter of 2020, the company said.

At the time of writing, Halliburton shares traded 3.55% higher at $12.68 on Monday; however, the stock is down about 50% so far this year.

Its rival, Schlumberger reported a loss for the third consecutive time in the September quarter as a prolonged period of lower crude prices due to COVID-19 disruptions caused clients to suspend drilling activities.

Executive comments

“The pace of activity declines in the international markets is slowing, while the North America industry structure continues to improve, and activity is stabilizing. We have a strong international business, a lean North America operation, and an efficient capital deployment strategy, all enabled by continued adoption of leading digital technologies that benefit our customers and Halliburton,” said Jeff Miller, Chairman, President and CEO.

“We believe executing on our strategic priorities will boost our earnings power reset and free cash flow generation today and as we power into and win the eventual recovery,” concluded Miller.

Halliburton stock forecast

Seventeen analysts forecast the average price in 12 months at $15.28 with a high forecast of $22.50 and a low forecast of $11.50. The average price target represents a 21.80% increase from the last price of $12.55. From those 17 equity analysts, five rated “Buy”, 11 rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $14 with a high of $20 under a bull scenario and $4 under the worst-case scenario. Halliburton’s stock price forecast has been raised by equity research analysts at Cowen and Company to $20 from $19.

Several other analysts have also recently commented on the stock. BMO Capital Markets initiated coverage on Halliburton, issuing a “market perform” rating and a $14 price objective for the company. Goldman Sachs Group raised Halliburton from a “buy” rating to a “conviction buy” rating in August. HSBC increased their stock price forecast to $13.70 from $9.50 and gave the company a “hold” rating in July.

Analyst Comments

“Outsized exposure to deteriorating North America (NAm) markets impacts Halliburton’s results more meaningfully vs. less exposed peers, in our view, and we continue to see greater downside revision risk for those focused on this market. Few bullets left to offset deteriorating fundamentals: Halliburton is winding down a major cost-cutting program in NAm, which suggests to us its ability to further cut overhead as US activity trends lower is limited,” said Connor Lynagh, equity analyst at Morgan Stanley.

“We believe the company’s exposure to areas in high demand (i.e. Ventilators, Patient Monitoring, CT and X-Ray) puts the company in an attractive risk-reward positioning relative to other companies in our sector over the next 12 months.”

Upside and Downside Risks

Upside: 1) Signs of a bottom in NAm pressure pumping activity and pricing. 2) International contract awards. 3) Bolt-on M&A – highlighted by Morgan Stanley.

Downside: 1) Further pricing pressure and activity declines, particularly in Nam. 2) Undisciplined project bidding. 3) Failure to deliver on cost savings goals. 4) Commodity price/cyclical risk.

Check out FX Empire’s earnings calendar

Dollar Comes Back to the Bearish Territory

Nasdaq is still below dynamic and horizontal resistance

SP500 is on a good way to break crucial levels and go higher

DAX sharply bounces from the 12960 points

Dollar Index ignores the inverse head and shoulders and creates a flag. Situation here is bearish

EURUSD are flirting with important dynamic resistance

GBPUSD are one step from breaking 1,3 – the most important level in the past few weeks

AUDUSD with a small bullish correction but the main sentiment is very negative

EURAUD makes another attempt to escape from the long-term rectangle

EURCHF breaks crucial support and later tests it as a resistance. Pretty standard price action move

Gold tries to go higher but the upper line of the pennant looks well defended

Anticipation Builds Ahead Of Microsoft Earnings

Dow component Microsoft Corp. (MSFT) reports fiscal Q1 2021 earnings on Oct. 27, with analysts expecting a profit of $1.36 per-share on $35.8 billion in revenue. The stock sold off more than 6% after the Q4 release in July, despite beating top and bottom line estimates. Market watchers blamed the sell-the-news reaction on overly-high expectations for the cloud and commercial products divisions. The stock recovered those losses into August and posted an all-time high in early September.

Microsoft And TikTok

Buying pressure resumed after Mr. Softee threw its hat into the ring in the TikTok drama, seeking to acquire the company while jumping through political hoops in China and the United States. Oracle Inc. (ORCL) eventually won the coveted prize but continued conflict between nations suggests that Microsoft was lucky to walk away empty-handed and redirect attention to core services and the Nov. 10 release of the next-generation Xbox console.

Morgan Stanley analyst Keith Weiss discussed the revenue boost expected from the Xbox release earlier this month, stating, “The fiscal year 2021 console cycle and the addition of Bethesda highlight incremental growth opportunities for Microsoft’s gaming franchise, w/ a potential ~$80 billion value for the gaming subscription biz alone. Our bottom up work suggests the console cycle should not derail a broader margin expansion story. Overweight.”

Wall Street And Technical Outlook

Wall Street has been bullish on the big tech powerhouse for years, with a current ‘Moderate Buy’ consensus based upon 23 ‘Buy’ and 3 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines at this time. Price targets currently range from a low of $208 to a Street-high $260 while the stock is set to open Monday’s U.S. session about $16 below the median target. There’s plenty of potential upside after a strong strong quarterly report, given this humble placement.

Microsoft broke out above the first quarter high at 190.65 in June and added more than 40 points into the September peak. It then sold off with broad benchmarks, testing the 50-day moving average for more than 5 weeks before surging off a small base earlier this month. Accumulation readings are hovering near new highs, supporting continued upside, but monthly cycles are flashing overbought technical readings. This conflict suggests two-sided action through most or all of the fourth quarter.

For a look at all of today’s economic events, check out our economic calendar.

Doji Clusters Show Clear Support Ranges On The S&P500

Clusters of Doji shaped candles have, for centuries, illustrated very clear levels of support/resistance in price action.  Whenever multiple Doji candles appear in a cluster-like formation, traders should pay attention to these levels as future support/resistance ranges for price action.  In the case of the S&P500 E-Mini Futures Daily Chart, we can clearly see three separate support zones – the highest one being right where price closed on Friday (near 3475).

As the US elections near, we do expect increased volatility to become a factor in the US markets.  Currently, our predictive modeling systems are suggesting a Bullish trend bias is in place in the markets.  Therefore, we expect the bias of the trend to continue to push higher.  Yet, these Doji Cluster support levels become very clear downside targets if increased volatility prompts any broad market rotation over the next few days/weeks. These three levels are :

  • 3445~3495
  • 3330~3390
  • 3185~3225

We are suggesting that IF any deeper market rotation takes place, support near these Doji Cluster levels would likely act as a major price floor – prompting some price support and a potential for a quick upside price reversal near these levels.  If the lowest level, near 3200, is breached by deeper price rotation, then a new price correction phase may setup.

Traders should use these levels to prepare for the expected volatility spike as we near the US elections.  We believe price will become more volatile as traders/investors attempt to reposition assets away from risk before the elections.  We are particularly concerned of a breakdown in the Technology sector related to recent threats to increase liability related to a special clause (230) that protects companies like Facebook and Twitter from the same Publisher Liability as major newspapers.

Given the renewed focus on these social media sites and the content posted/restricted on these sites, it appears they have become the target of investigations and the US Congress.  This could lead to some very big volatility spikes in the NASDAQ and the Technology sector over the next few weeks and months.  This could result in some very good trade setups as price levels may rotate wildly because of the elections and the pending decisions related to these social media firms.

Want to learn how we help traders stay ahead of these bigger trends and setups?  Visit www.TheTechnicalTraders.com to learn more about my swing trade alert and passive long-term signals services. Stay ahead of the market and protect your wealth by signing up today!

For a look at all of today’s economic events, check out our economic calendar.

Chris Vermeulen
Chief Market Strategist
www.TheTechnicalTraders.com

NOTICE AND DISCLAIMER: Our research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.

Netflix Stock Price Forecast Raised to $630 at Morgan Stanley; $840 in Best Case Scenario

Morgan Stanley raised their stock price forecast on Netflix to $630 from $600, assigning an “Overweight” rating to the Internet television network’s stock and foresees short and long-term benefits to Netflix growth and earnings power due to the changes brought on by the COVID-19 pandemic.

The world’s leading streaming entertainment service company is set to report its third-quarter results on October 20. According to Zacks Research, Netflix forecasts Q3 earnings to be $2.09 per share, implying over 40% of year-over-year growth, but the Zacks consensus estimate was pegged at $2.12 per share. The Zacks consensus estimate for September quarter revenues was pegged at $6.38 billion, over 20% higher than a year earlier.

“Price increases as a lagging indicator… Our ‘Overweight’ thesis assumes Netflix has additional pricing power. We believe signals that Netflix looks for before raising prices are engagement growth and falling churn, trends that indicate an increase in “value” delivered to the consumer. Recent price increases in Australia and Canada, 2% and 4% of the estimated paid member base respectively, indicate to us that engagement levels and engagement growth rates are likely high and accelerating in these markets,” said Benjamin Swinburne, equity analyst at Morgan Stanley.

“We realize the 2019 rate adjustments led to slightly more elevated churn levels, particularly in the US, that sustained into subsequent quarters. However, we believe Netflix’s competitive moat is perhaps deeper than ever today. Production delays due to (the) COVID-19 have likely impacted its competitors more significantly than Netflix. Finally, given the size of the base business price increases create substantial long-term value.”

Netflix’s shares closed 2.05% lower at $530.79 on Friday; however, the stock is up over 60% so far this year.

Twenty-six analysts forecast the average price in 12 months at $564.83 with a high forecast of $670.00 and a low forecast of $220.00. The average price target represents a 6.41% increase from the last price of $530.79. From those 26, 19 analysts rated “Buy”, four rated “Hold” and three rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $840 under a bull scenario and $400 under the worst-case scenario. Other equity analysts also recently updated their stock outlook. Netflix had its price objective lifted by KeyCorp to $634 from $590. They currently have an overweight rating on the Internet television network’s stock.

Pivotal Research boosted their stock price forecast on shares of Netflix to $650 from $600 and gave the stock a buy rating. Loop Capital raised their price objective to $600 from $500 and gave the company a buy rating.

“We believe share performance is highly dependent on increasing global membership scale. Proven success in the US and initial international markets provides a roadmap to success in emerging markets, and scale should allow Netflix (NFLX) to leverage content investments and drive margins,” Morgan Stanley’s Swinburne added.

“Higher global broadband penetration should increase the NFLX addressable market, driving member growth and providing further opportunity given NFLX’s global presence. Longer-term, we see the ability to drive ARPU growth, particularly given increased original programming traction.”

The success of programming drives increased subscriber growth and pricing increases lead to revenue upside, driving – were highlighted by Morgan Stanley as two major downside risks.

Pricing increases drive elevated churn, increased competition drives higher pricing for exclusive content lowering margins, challenges in newer markets negatively impacts member growth expectations, were the major downside risks.

Check out FX Empire’s earnings calendar

The Week Ahead – U.S Politics, COVID-19, Brexit, and Private Sector PMIs in Focus

On the Macro

It’s a busy week ahead on the economic calendar, with 57 stats in focus in the week ending 23rd October. In the week prior, 56 stats had been in focus.

For the Dollar:

It’s a relatively quiet week ahead on the economic data front.

On Tuesday, Wednesday, and Thursday, housing sector figures for September are in focus.

With mortgage rates hovering close to historic lows, the numbers are unlikely to have a material impact on the Dollar.

On Thursday, however, U.S jobless claims figures will influence ahead of private sector PMIs on Friday.

October’s prelim services, manufacturing, and composite PMIs are due out at the end of the week.

Expect the Services PMI to be the key driver. The markets will be looking for a pickup in service sector activity…

Away from the economic calendar, we are just over 2-weeks away from the U.S Presidential Election. Wednesday’s final live televised Presidential debate will garner plenty of attention as will chatter from Capitol Hill. We can also expect increased interest in the Senate Election polls.

The Dollar Spot Index ended the week up by 0.67% to 93.682.

For the EUR:

It’s also a relatively busy week ahead on the economic data front.

On Tuesday, German wholesale inflation figures are due out ahead of a busier 2nd half of the week.

On Thursday, Germany is back in focus, with November consumer climate figures due out.

Prelim October private sector PMIs from France, Germany, and the Eurozone will be the key drivers on Friday, however.

We can expect plenty of sensitivity to the numbers. A new spike in new COVID-19 cases in France and other parts of the EU may have impacted activity at the start of the quarter.

Away from the economic calendar, Brexit and COVID-19 will need monitoring throughout the week.

The EUR/USD ended the week down by 0.91% to $1.1718.

For the Pound:

It’s a busy week ahead on the economic calendar.

The markets will have to wait until Wednesday, however, for the first set of numbers.

Inflation figures for September are due out ahead of CBI industrial trend orders on Thursday.

We would expect the Pound to be sensitive to the inflation figures ahead of a busy end to the week.

On Friday, retail sales figures for September and prelim October private sector PMIs will provide direction.

With the BoE open to negative rates, dire numbers will test support for the Pound.

Of greater influence in the week, however, will be Brexit and COVID-19 news.

The GBP/USD ended the week down by 0.93% to $1.2915.

For the Loonie:

It’s a relatively busy week ahead on the economic calendar.

At the start of the week, wholesale sales figures for August are in focus on Monday.

We don’t expect too much influence from the numbers, however.

On Wednesday, September inflation and August retail sales figures will provide direction.

From elsewhere, expect GDP numbers from China and prelim private sector PMIs from the Eurozone and the U.S to also influence.

Away from the economic calendar, risk appetite will likely be dictated by COVID-19 and the U.S Presidential Election polls. There’s also the final presidential debate to consider on Wednesday.

The Loonie ended the week down by 0.52% to C$1.3189 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

It’s a particularly quiet week ahead on the economic calendar.

There are no material stats due out of Australia to provide the Aussie with direction.

The lack of stats will leave the Aussie Dollar firmly in the hands of market risk sentiment in the week.

Expect China’s GDP numbers and prelim PMIs from the Eurozone and the U.S to influence

On the monetary policy front, the RBA meeting minutes at the start of the week will garner interest. There has been the talk of an RBA move next month, the minutes could reveal what is on the cards…

The Aussie Dollar ended the week down by 2.20% to $0.7081.

For the Kiwi Dollar:

It’s also a relatively busy week ahead on the economic calendar.

In the 1st half of the week, 3rd quarter business confidence figures are due out. A pickup in confidence would provide support to the Kiwi ahead of a busy Friday.

Trade data for May and 3rd quarter inflation figures will influence at the end of the week.

While the stats will provide direction, however, economic data from China and COVID-19 will likely be the key drivers.

The Kiwi Dollar ended the week down by 0.96% to $0.6602.

For the Japanese Yen:

It is a relatively quiet week on the economic calendar.

Trade data for September will draw interest at the start of the week ahead of inflation at the end of the week.

We don’t expect the numbers to have too much influence on the Yen, however.

The key driver for the Japanese Yen, however, will be COVID-19 news and U.S politics.

The Japanese Yen ended the week up by 0.21% to ¥105.40 against the U.S Dollar.

Out of China

It’s a busy week ahead on the economic data front.

3rd quarter GDP numbers due out on Monday will be the key driver for the Yuan and market risk sentiment.

September’s industrial production, retail sales, and unemployment figures will also influence.

Barring particularly dire numbers, the fixed asset investment numbers should have a muted impact.

On the monetary policy front, the PBoC is in action on Tuesday. The markets are expecting the PBoC to leave loan prime rates unchanged. Any unexpected rate cut could spook the markets…

The Chinese Yuan ended the week down by 0.04% to CNY6.6976 against the U.S Dollar.

Geo-Politics

UK Politics:

On Friday, Boris Johnson announced that Brexit negotiations were over. Downing Street added the EU chief negotiator Barnier does not need to return to London in the week ahead.

Following the EU’s attempts to leave the ball in Britain’s court, with Fisheries a key issue, it now rests with the EU to compromise. Johnson has been clear that it would not leave fishing access unchanged, despite Macron’s attempts to strong-arm Britain into yielding.

For French fishermen, it would ultimately mean no access to UK fisheries should Britain leave without a deal…

Also at the start of the week, the British Prime Minister is due to announce more containment measures. With the number of new COVID-19 cases continuing to rise, further restrictions would be Pound negative.

U.S Politics

After last week’s individual town hall sessions, the final live televised debate will take place on Wednesday.

It will be a chance for Trump to narrow the gap ahead of the 3rd November Election.

If past performance is any indicator of future performance, however, it could just give Biden a greater edge.

As the markets begin to write-off a Trump victory, the focus will likely shift to the Senate Elections.

A blue wave is expected that would support further stimulus in the New Year.

The Weekly Wrap – Brexit, COVID-19, and U.S Politics Drive the Majors

The Stats

It was a busier week on the economic calendar, in the week ending 16th October.

A total of 56 stats were monitored, following 43 stats from the week prior.

Of the 56 stats, 24 came in ahead of forecasts, with 21 economic indicators came up short of forecasts. 11 stats were in line with forecasts in the week.

Looking at the numbers, 20 of the stats also reflected an upward trend from previous figures. Of the remaining 36 stats, 27 reflected a deterioration from previous.

For the Greenback, it was back into the green after 2 consecutive weeks in the red. The Dollar Spot Index rose by 0.67% to 93.682. In the week ending 9th October, the Dollar Spot Index had fallen by 0.87% to 93.057.

Market risk appetite waned in the week. There were a number of factors driving demand for the Dollar. A lack of progress towards a U.S stimulus bill and a spike in COVID-19 cases were front and center in the week.

Disappointing economic data and Brexit woes also supported the demand for the safety of the Dollar.

Out of the U.S

It was a relatively busy week on the economic data front.

Inflation figures drew interest early in the week. In the 2nd half of the week, however, jobless claims and retail sales figures were the key drivers. Prelim October consumer sentiment figures were also in focus late on Friday.

In the week ending 9th October, initial jobless claims stood at 898k, which was up from 845k from the week prior. The numbers reinforced the view that the labor market recovery had stalled.

A combination of dire labor market conditions, rising new COVID-19 cases, and a lack of further stimulus was a bad combination.

At the end of the week, retail sales impressed, however. In September, retail sales rose by 1.9%, with core retail sales rising by 1.5%. Economists had forecasted increases of 0.5% and 0.7% respectively.

Aligned with the retail sales figures was a further pickup in consumer sentiment. The Michigan Consumer Sentiment Index rose from 80.4 to 81.2 in October, according to prelim figures. The Expectations Index increased from 75.6 to 78.8.

The only negative on the day was an unexpected 0.6% fall in industrial production.

In the equity markets, the NASDAQ rose by 0.79%, with the Dow and S&P500 gaining 0.07% and 0.19% respectively.

Out of the UK

It was a relatively busy week on the economic data front.

Key stats included August unemployment rate and employment change and September claimant count figures.

While claimant counts came in lower than expected, employment fell by more than expected over the 3-months to August.

A 153k fall in employment led to an increase in the unemployment rate from 4.1% to 4.5%.

While the stats provided direction, it was ultimately Brexit and COVID-19 that sank the Pound in the week.

A continued rise in new COVID-19 cases and a new round of containment measures were Pound negative.

More significantly, however, was a lack of progress towards a Brexit agreement, with the EU pushing for more talks next week.

On Friday, Boris Johnson announced that it was time to prepare for a no-trade deal Brexit unless the EU changed its stance. Downing Street also stated that there was no point in EU negotiator Michel Barnier returning to London in the week ahead.

In the week, the Pound fell by 0.93% to $1.2915. In the week prior, the Pound had risen by 0.78% to $1.3036.

The FTSE100 ended the week down by 1.61%, partially reversing a 1.94% gain from the previous week.

Out of the Eurozone

It was a relatively busy week on the economic data front.

Early in the week, key stats included ZEW Economic Sentiment figures for the Eurozone and Germany.

The indicators flashed red for October. Germany’s Economic Sentiment Indicator fell from 77.4 to 56.1, with the Eurozone’s falling from 73.9 to 52.3. A lack of progress on Brexit and jitters over the U.S Presidential Election weighed in October.

Mid-week, industrial production figures for the Eurozone came up short of expectations, rising by just 0.7%. In July, production had jumped by 5.0%.

In the 2nd half of the week, Eurozone trade data and finalized inflation figures for September were in focus.

Inflation figures reaffirmed market concern over deflationary pressures. Trade data also failed to impress, with the Eurozone’s trade surplus narrowing from €27.9bn to €14.7bn in August.

While the stats provided direction, a marked increase in new COVID-19 cases weighed on the EUR in the week. France and other member states were forced to reintroduce containment measures amidst the 2nd wave.

For the week, the EUR fell by 0.91% to $1.1718. In the week prior, the EUR had risen by 0.94% to $1.1826.

For the European major indexes, it was a bearish week. The CAC40 and EuroStoxx600 fell by 0.22% and by 0.77% respectively, with the DAX30 declining by 1.09%.

For the Loonie

It was a quiet week on the economic data front.

Key stats included August’s foreign security purchases and manufacturing sales figures.

Neither set of numbers had an impact, however, as the fresh spike in new COVID-19 cases weighed on market risk sentiment.

The threat of a reintroduction of lockdown measures pegged back crude oil prices in the week.

In the week ending 16th October, the Loonie fell by 0.52% to end the week at C$1.3189. In the week prior, the Loonie had risen by 0.87%.

Elsewhere

It was a bearish week for the Aussie Dollar and the Kiwi Dollar.

In the week ending 16th October, the Aussie Dollar slid by 2.20% to $0.7081. The Kiwi Dollar ended the week down by a more modest 0.96% to $0.6602.

For the Aussie Dollar

It was a relatively quiet week on the economic calendar.

Key stats consumer confidence and employment figures.

It was a mixed bag for the Aussie Dollar. While consumer confidence continued to improve, employment figures were somewhat disappointing.

The unemployment rate rose from 6.8% to 6.9%, driven by a 29.5k fall in employment.

For the Aussie Dollar, it was ultimately market sentiment towards monetary policy and risk aversion that did the damage. There is the talk of an RBA next month…

For the Kiwi Dollar

It was a relatively quiet week on the economic calendar.

Key stats included electronic card retail sales figures and business PMI numbers.

The stats were Kiwi Dollar positive, with retail sales up by 5.4% and the PMI rising from 50.7 to 54.0.

While positive, however, market risk aversion pegged the Kiwi Dollar back in the week.

For the Japanese Yen

It was also a relatively quiet week on the economic calendar.

August’s core machinery orders and finalized industrial production figures were in focus.

The stats were skewed to the negative in the week. Core machinery orders rose by just 0.2%, following a 6.3% jump in July. Industrial production was revised down from 1.7% to 1.0%.

Ultimately, however, it was market risk sentiment that delivered the support for the Yen.

The Japanese Yen rose by 0.21% to ¥105.4 against the U.S Dollar. In the week prior, the Yen had fallen by 0.31%.

Out of China

It was a relatively busy week on the economic data front following last week’s holiday.

Key stats included September’s trade data and inflation figures, which were skewed to the negative.

China’s U.S Dollar trade surplus narrowed from $58.93bn to $37.00bn, driven by a 13.2% jump in imports. Exports rose by a more modest 9.9%.

Inflationary pressures also softened at the end of the quarter. China’s annual rate of inflation softened from 2.4% to 1.7% in September. Wholesale deflationary pressures picked up marginally. The producer price index fell by 2.1%, following a 2.0% decline in August.

In the week ending 16th October, the Chinese Yuan slipped by 0.04% to CNY6.6976. In the week prior, the Yuan had risen by 1.42%.

The CSI300 rose by 2.36%, with the Hang Seng gaining 1.11%.

Schlumberger Posts Third Straight Loss in Q3 as Oil Rout Hurt Demand

Schlumberger, the world’s leading oilfield services provider, reported a loss for the third consecutive time in the September quarter as a prolonged period of lower crude prices due to COVID-19 disruptions caused clients to suspend drilling activities, sending it shares down about 1% on Friday.

Top oilfield services provider posted a net loss of $82 million, or 6 cents per share, in the July-September quarter. Excluding charges and credits, Schlumberger earned 16 cents per share on aggressive cost-cutting.

Schlumberger said its total revenue slumped 38% to $5.26 billion and revenue from North America declined to $1.16 billion, from $2.85 billion a year earlier.

At the time of writing, Schlumberger shares traded over 1% higher at $15.35 on Friday; the stock is down about 60% so far this year.

Executive comments

“International activity is steady following budgets resets completed in the third quarter,” Chief Executive Officer Olivier Le Peuch said in an earnings release.

“In North America, the conditions are set for continued momentum, with improving DUC well completion activity in US land and a modest drilling resumption in the US and Canada. International activity is steady following the budget resets completed in the third quarter and activity will be affected by the seasonal decline in the Northern Hemisphere, partly offset by muted year-end product and multiclient license sales,” Peuch added.

Schlumberger stock forecast

Fifteen analysts forecast the average price in 12 months at $23.33 with a high forecast of $28.00 and a low forecast of $17.50. The average price target represents a 47.85% increase from the last price of $15.78. From those 15 equity analysts, 11 rated “Buy”, four rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $25 with a high of $30 under a bull scenario and $10 under the worst-case scenario. Cowen and Company raised their stock price forecast to $30 from $29; BMO initiated with outperform rating and gave the price target of $21; Susquehanna lowered their price target to $20 from $24.

Several other analysts have also recently commented on the stock. HSBC raises target price to $19.2 from $18.1 in July. Schlumberger had its price objective lowered by analysts at Scotiabank to $21 from $23. The firm presently has a “sector outperform” rating on the oil and gas company’s stock. Citigroup raised Schlumberger from a “neutral” rating to a “buy” rating and increased their price objective to $26 from $20.

Analyst Comments

“Schlumberger’s (SLB) plan to refocus on its best businesses will likely be accelerated by the impending downturn, which can help it emerge in a far better position that it entered in. Strong position in the more-defensive int’l markets: SLB is heavily focused on the int’l markets, which will be more resilient than NAm (where SLB was already retreating) if upstream capex cuts play out as we expect,” said  Connor Lynagh, equity analyst at Morgan Stanley.

“Dividend cut alleviates liquidity concerns: We now think SLB’s balance sheet is on firm footing – FCF covers dividends through our 2022 forecast horizon, and in what we would view as an extreme case where it could not refinance, it could cover 2020-22 debt maturities with current liquidity.”

Check out FX Empire’s earnings calendar

US Stock Indexes Mostly Flat Ahead of Retail Sales Report

The major U.S. stock indexes are treading water in the overnight session on Friday as investors await the latest retail sales data that will give investors clues about the strength of consumer spending.

Early in the session, the blue chip Dow Jones Industrial Average is down about 51 points. The benchmark S&P 500 Index and the tech-weighted NASDAQ 100 futures were both slightly lower.

Retail sales data, due Friday at 12:30 GMT, will offer an update on the recovery in consumer spending. Economists polled by Dow Jones expect retail sales to rise by 0.7% in September, following a 0.6% rebound in August. Excluding autos, sales were expected to rise by 0.4%.

Thursday Recap

On Thursday, U.S. stocks ended lower after a rise in weekly jobless claims compounded worries about a stalling economic recovery and fading hopes for more fiscal aid before the election.

The number of Americans filing new claims for jobless benefits rose to a two-month high last week, stoking fears the COVID-19 pandemic was inflicting lasting damage to the labor market.

Another report showed manufacturing activity in New York State fell more than expected in October.

In the cash market, the S&P 500 Index settled at 3483.34, down 5.33 or -0.16%. The Dow Jones Industrial Average finished at 28494.20, down 19.80 or -0.07% and the NASDAQ Composite closed at 11713.87, down 54.86 or -0.49%.

Fresh Stimulus Proposal

U.S. President Donald Trump said he is willing to raise his offer of $1.8 trillion for a COVID-19 relief deal with Democrats in Congress, but the idea was shot down by his fellow Republican, Senate Majority Leader Mitch McConnell.

The announcement helped the stock indexes recover from earlier steep losses and nearly turned them higher for the session.

Stocks and Sectors

Supporting the Dow Jones Industrial Average, Walgreen’s Boots Alliance Inc surged as the drugstore chain forecast single-digit profit growth in 2021 after reporting a better-than-expected fourth-quarter profit.

Morgan Stanley rose after it beat third-quarter profit estimates, winding up mixed results from major U.S. lenders. Recent bank earnings reports saw those focused on trading clocking big gains, while retail banks took a hit from the COVID-19 pandemic.

Shares of Vertex Pharmaceuticals Inc lost close to a fifth of their value after the drug developer discontinued its trial of a protein deficiency disorder treatment.

The S&P 500 financials index climbed, while communication services were among the worst performers. The S&P 1500 airlines index dipped after United Airlines reported a 78% drop in quarterly revenue.

Earnings Update

Traders will continue to focus on the quarterly results for corporate America, with expectations for third-quarter earnings improving to a 19% drop from 25% tumble forecast on July 1, according to Refinitiv IBES data.

For a look at all of today’s economic events, check out our economic calendar.

Ford Motor Q3 China Sales Rise 25%, Biggest Jump Since 2016; Target Price $10 in Best Case

Ford Motor Co, an American multinational automaker, said its vehicle sales climbed 25% in the third quarter of this year, the biggest year-over-year increase since 2016, as demand gradually recovered from the COVID-19 pandemic slowdown in the world’s second-largest economy.

Ford and its joint ventures, Changan Ford, JMC and Ford Lio-Ho, sold 164,352 vehicles in Greater China in the third quarter. Sales of Ford, Lincoln and JMC brand vehicles achieved year-over-year growth of 12.5%, 64.8% and 38.3%, respectively, the company said.

Ford Motor shares closed 0.66% higher at $7.62 on Thursday; however, the stock is down about 20% so far this year.

Executive comments

“Ford is strengthening its sales momentum in China by building on growing consumer preference for our iconic brand and favourable product mix of luxury and near-premium utility vehicles,” said Anning Chen, president and CEO of Ford China.

“Our localization strategy to produce in China world-class Ford and Lincoln vehicles, including the newly launched Ford Explorer, Lincoln Corsair and Lincoln Aviator, has further enhanced our competitiveness in delivering the best products and services that Chinese consumers are looking for.”

Ford Motor stock forecast

Twelve analysts forecast the average price in 12 months at $8.03 with a high forecast of $10.00 and a low forecast of $4.90. The average price target represents a 5.38% increase from the last price of $7.62. From those 12 equity analysts, four rated “Buy”, seven rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $8 with a high of $12 under a bull scenario and $4 under the worst-case scenario. The investment bank gave the company an “overweight” rating. Deutsche Bank raised their stock price forecast to $9 from $8 and Benchmark introduces a price target of $10.

Several other analysts have also recently commented on the stock. Barclays lifted their price target on Ford Motor to $7 from $4 and gave the stock an “equal weight” rating in July. Nomura reiterated a “sell” rating in August. Citigroup increased their target price on shares of Ford Motor from $5.50 to $7.50 and gave the stock a “neutral” rating. At last, UBS Group increased their price target on Ford Motor to $6.70 from $4.30 and gave the stock a “neutral” rating.

Analyst view

“Auto market recovery in China – which happens to be Ford’s second-largest market- positions the firm well. The company’s efforts to strengthen product line-up, with more customer-centric products and focus on customer experiences are likely to have yielded results. These measures along with improving economic conditions in China are likely to continue the sales growth in the country, going forward,” noted equity analysts at Zacks Research.

“Ford’s focus on SUVs and trucks along with EV launches are likely to boost its long-term prospects. (But) Depressed demand for vehicles amid weak consumer confidence and elevated leverage is likely to dent Ford’s sales and earnings in the near future,” Zacks Research added.

Upside and Downside Risks

Upside: 1) More detail around restructuring actions. 2) Positive share gains in pickups, Ford’s strongest segment 3) Decomplexification actions. 4) Launch execution. 5) Further announcements around EVs or AVs – highlighted Morgan Stanley.

Downside: 1) US SAAR resiliency (2020 base case 14.0MM). 2) Further COVID-19 impacts. 3) The F-150 pickup truck loses market share. 4) Slowdown in key oil-dependent end markets. 5) Launch / Warranty issues continue to remain a problem.

Check out FX Empire’s earnings calendar

PNC Financial Third Quarter Profits Swell as Loan Provisions Shrink; Target Price $138 in Best Case

PNC Financial Services Group Inc, an American bank holding company and financial services corporation, said its profit rose in the third quarter, largely driven by a lower provision for credit losses and higher noninterest income.

The company said its net income from continuing operations was $1.5 billion, an increase of $2.3 billion driven by a lower provision for credit losses and higher noninterest income. Total revenue increased 5% to $4.3 billion, an increase of $205 million.

“Expenses were well-controlled again in 3Q, a story that looks to continue. With its substantial excess capital position, PNC is expected to take advantage of opportunities to add to its franchise, but time will tell what might come available. We raise our ’21 EPS est. to $8.25 (from $7.15) but ’22 moves to $9.75 (from $10.45), mostly on charge-off/provision timing but with higher PPNR,” said Ken Usdin, equity analyst at Jefferies.

The diversified financial services organization reported a net interest income of $2.5 billion decreased $43 million, or 2%, as lower yields on loans and securities and a decline in loan balances more than offset the benefit of lower rates on deposits and borrowings.

PNC Financial reported that its net interest margin decreased 13 basis points to 2.39% reflecting the impact of higher balances held with the Federal Reserve Bank and lower yields on loans and securities partially offset by lower rates on deposits and borrowings.

At the time of writing, PNC Financial shares traded 0.30% higher at $109.01 on Thursday; however, the stock is down about 30% so far this year.

Executive comments

“PNC delivered solid third-quarter results against the backdrop of a continuing uncertain economy. Noninterest income increased, expenses were well managed, and we continued to generate positive operating leverage. Deposits grew while loans declined as a result of lower commercial loan utilization rates, despite growth in loan commitments,” said Bill Demchak, PNC Chairman, President and Chief Executive Officer.

“Our provision for credit losses was significantly less than last quarter, reflecting stable reserve levels. We continue to execute on our strategic priorities, including ongoing investments in our national expansion and digital offerings. We have substantial capital and liquidity flexibility and remain well-positioned to take advantage of potential investment opportunities to enhance shareholder value.”

PNC Financial stock forecast

Twelve analysts forecast the average price in 12 months at $117.64 with a high forecast of $138.00 and a low forecast of $83.00. The average price target represents a 7.95% increase from the last price of $108.98. From those 12 equity analysts, five rated “Buy”, five rated “Hold” and two rated “Sell”, according to Tipranks.

Morgan Stanley target price is $109 with a high of $154 under a bull scenario and $79 under the worst-case scenario. PNC Financial Services Group had its price objective raised by equities researchers at Credit Suisse Group to $117 from $115. The brokerage currently has a “neutral” rating on the financial services provider’s stock.

Several other analysts have also recently commented on the stock. Keefe, Bruyette & Woods cut shares of PNC Financial Services Group to a “market perform” rating from an “outperform” rating and decreased their price target to $127 from $130. Oppenheimer reissued a “hold” rating. JP Morgan Chase & Co. raised their price objective to $120 from $110 and gave the company an “overweight” rating. Zacks Investment Research cut shares from a “hold” rating to a “sell” rating and set a $118 price objective on the stock.

Analyst Comments

“PNC generated $6B in capital from sale of BLK stake. What’s next? Bank M&A is now a key debate for the stock, especially as excess capital and liquidity pressures returns near term. We stay on the sideline as shares already largely reflect the value creation we believe an accretive deal could deliver. PNC going national with multiple initiatives. Middle market C&I expansion well underway, includes 8 new markets in 2017-2019 and 2 additional markets in 2020,” said Betsy Graseck, equity analyst at Morgan Stanley.

“Funded by national retail digital strategy. M&A could accelerate this growth. Excess capital provides valuable hedge, giving PNC optionality regardless of the economic environment,” Graseck added.

Upside and Downside Risks

Upside: 1) Accretive acquisition completed sooner than anticipated. 2) Economic growth rebounds in 2H20. 3) Long end rates rise faster than expected. 4) Lower than expected credit losses – highlighted Morgan Stanley.

Downside: 1) PNC sits on excess capital for longer than expected. 2) Macro environment remains challenging through 2021. 3) Higher than expected credit deterioration. 4) 10-year yield below expectations. 5) Loan growth decelerates.

Check out FX Empire’s earnings calendar

NQ100 Bearish Reversal at Fibonacci Targets

The NASDAQ 100 (NQ) has made a major bearish bounce after reaching strong Fibonacci targets (red circles). How deep will the pullback go before price action finds support within the larger uptrend?

Price Charts and Technical Analysis

NASDAQ 100

The NQ 100 has completed a bullish ABC (orange) pattern within wave B (purple). The strong bearish price action at the Fibs plus the break below the 21 ema zone seems to indicate a pause in the uptrend and a wave C retracement (purple).

The wave C can develop either in an ABC (orange) or a 5 wave pattern. The NQ could be building a larger ABCDE triangle chart pattern in case of an ABC.

The image shows the most likely price movements and expected patterns in my view. The formation is valid if price action does not break the top nor the bottom (red x).

On the 1 hour chart, the bearish reversal is indicated by our Elliott Wave software via the red candles. The bears are now in full control of this time frame, but they will run into a strong and thick layer of support because of the moving averages (blue box).

Price action is expected to run out of steam at the support but it will create two more bottoms. This will complete a 5 wave (green) pattern. At that point, price action could finish the expected wave a (orange) and start an ABC pattern (green) in wave B (orange).

NASDAQ 100 1 hour chart

Good trading,

Chris Svorcik

The analysis has been done with the indicators and template from the SWAT method (simple wave analysis and trading). For more daily technical and wave analysis and updates, sign-up to our newsletter

For a look at all of today’s economic events, check out our economic calendar.

 

 

TSMC Q3 Net Profit Jumps 36% on Strong Demand, Forecasts 2020 Revenue to Climb Over 30%

Taiwan Semiconductor Manufacturing Co Ltd (TSMC), a dedicated integrated circuit foundry company, reported that its third-quarter net profit climbed 36% and revenue increased about 30% on solid demand for high-end chips.

The world’s largest contract chipmaker reported consolidated revenue of TWD 356.43 billion, net income of TWD 137.31 billion, and diluted earnings per share of TWD 5.30 (US$0.90 per ADR unit) for the third quarter ended September 30, 2020.

Year-over-year, third-quarter revenue increased 21.6% while net income and diluted EPS both increased 35.9%. Compared to the second quarter of 2020, third-quarter results represented a 14.7% increase in revenue and a 13.6% increase in net income, the company said.

In USD, third-quarter revenue was $12.14 billion, which increased 29.2% year-over-year and increased 16.9% from the previous quarter. Gross margin for the quarter was 53.4%, operating margin was 42.1%, and net profit margin was 38.5%.

Taiwan-based multinational semiconductor contract manufacturing and design company said it forecast 2020 revenue to jump more than 30%, higher than the previous prediction of more than 20% rise. TSMC forecast fourth-quarter revenue of between $12.4 billion and $12.7 billion, upgraded from $10.4 billion registered a year earlier.

On the NYSE, TSMC shares closed 1.16% lower at $88.60 on Wednesday; however, the stock is up over 50% so far this year.

Executive comments

“Our third-quarter business benefitted from the strong demand for our advanced technologies and speciality technology solutions, driven by 5G smartphones, HPC and IoT-related applications,” said Wendell Huang, VP and Chief Financial Officer of TSMC.

“Moving into the fourth quarter of 2020, we expect our sequential growth to be supported by strong demand for our industry-leading 5-nanometer technology, driven by 5G smartphone launches and HPC-related applications.”

TSMC stock forecast and analyst comments

Morgan Stanley target price is TWD 498 with a high of TWD 541 under a bull scenario and $119 under the worst-case scenario. TSMC’s stock price forecast was raised by Susquehanna to $55 from $40.

For the one listed on the NYSE, five analysts forecast the average price in 12 months at $55.00 with a high forecast of $55.00 and a low forecast of $55.00. The average price target represents a -37.92% decrease from the last price of $88.60. From those five equity analysts, four rated “Buy”, none rated “Hold” and one rated “Sell”, according to Tipranks.

“Revenue shortfall from HiSilicon restriction is likely to be compensated by other customers’ share gains, which reflects TSMC’s technology leadership in the foundry industry. Despite the recent share price rally, we still see risk-reward skewed to the upside thanks to key secular trends in, such as 5G, AI, and high-performance computing benefiting TSMC,” said Charlie Chan, equity analyst at Morgan Stanley.

“CPU outsourcing from x86 vendors presents incremental upside, thanks to TSMC’s cutting edge technology. Amid an uncertain macro environment, TSMC’s cash-flow generating ability should allow it to pay out at least NT$10 DPS annually, which makes it a relatively defensive global tech stock with strong downside support,” Chan added.

Upside and Downside Risks

Upside: 1) Advanced logic demand is faster than expected, given accelerated growth in semi content per box. 2) Macro situation improves, fueling stronger end demand. 3) Samsung and Intel in leading-edge can’t compete with TSMC – highlighted Morgan Stanley.

Downside: 1) Advanced logic demand is slower than expected, given stagnant growth in semi content per box. 2) Macro situation weakens, hurting end demand. 3) Samsung and Intel compete in high-end logic.

Check out FX Empire’s earnings calendar

US Stocks Tumble as Hope Fades for Pre-Election Stimulus Deal

The major U.S. stock indexes finished lower on Wednesday, pressured by steep losses in Amazon and Microsoft, as investors threw in the towel on hopes that a U.S. fiscal stimulus package would be approved before the November 3 presidential election.

In the cash market on Wednesday, the benchmark S&P 500 Index settled at 3488.67, down 23.26 or -0.68%. The blue chip Dow Jones Industrial Average finished at 28514.00, down 165.81 or -0.59% and the tech-driven NASDAQ Composite closed at 11768.73, down 95.17 or -0.85%.

Mnuchin Dims Stimulus Hopes

Downbeat comments from Treasury Secretary Steven Mnuchin that a deal would not likely be made before the vote added to fragile sentiment following a mixed bag of quarterly earnings reports from major Wall Street lenders, Reuters reported.

“At this point getting something done before the election and executing on that would be difficult, just given where we are and the level of detail, but we’re going to try to continue to work through these issues,” Mnuchin said at  conference sponsored by the Milken Institute.

Stocks and Sectors

Amazon dropped 2.3% and Microsoft lost 0.9%, both weighing more than any other stocks on the S&P 500. Microsoft was also a drag on the NASDAQ Composite and the Dow Jones Industrial Average.

Bank of America fell 5.3% and Wells Fargo tumbled 6% after reporting disappointing quarterly results. The news helped drive the S&P 500 bank index lower by 2.4%.

UnitedHealth Group, another Dow component, dropped 2.9%, despite raising its profit forecast, as the U.S. insurer said it was difficult to predict the fallout of the pandemic on earnings.

Early Earnings Results Show Signs of Improvement

Third-quarter earnings season is getting underway, with signs of overall improvement in expectations of how badly U.S. companies have been hurt by the pandemic. Analysts expect earnings to fall 19% from a year earlier, according to Refinitiv IBES data, versus a 25% drop estimate on July 1, Reuters reported.

Markets Leaning Toward Biden Victory

The recent rally reflects growing optimism for a Joe Biden victory on Election Day. While many investors view the Democratic candidate as more likely to raise taxes, they are increasingly pointing to potential benefits of a Biden presidency, such as greater infrastructure spending and less global trade uncertainty.

The Internals

Declining issues outnumbered advancing ones on the NYSE by a 1.51-to-1 ratio; on NASDAQ, a 1.95-to-1 ration favored decliners, according to Reuters.

The S&P 500 posted 23 new 52-week highs and no new lows; the NASDAQ Composite recorded 109 new highs and 14 new lows.

Volume on U.S. exchanges was 8.2 billion shares, compared with the 9.6 billion average over the last 20 trading days.

For a look at all of today’s economic events, check out our economic calendar.

US Stock Market Overview – Stocks Gain Driven by Energy; Banks Continue to Show Strong Financial Results

 

US stocks were mostly higher on Wednesday rebounding from Tuesday decline. Most sectors in the S&P 500 were higher driven by gains in energy and materials, while real estate bucked the trend. US inflation on the wholesale level was hotter than expected in September according to the Labor Department. Goldman Sachs continued a streak of better than expected earnings from the large banks, driven by strong gains in trading.

Goldman Beats on the Top and Bottom Line

Goldman Sachs reported stellar Q3 financial results beat analysts’ profit estimates on stronger-than-expected results in bond trading and asset management. Goldman reported $3.62 billion in profit, or $9.68 a share, exceeding the $5.57 per share estimates. Revenue of $10.78 billion topped the estimate by more than $1 billion, driven by the trading and asset management divisions. The trading division generated $4.55 billion in revenue, a 29% increase from a year earlier. That gain was fueled by bond trading results of $2.5 billion, nearly half a billion dollars more than analysts expected. Equities trading revenue of $2.05 billion essentially matched expectations. The asset management division produced $2.77 billion in revenue, a 71% gain from a year earlier, and nearly $900 million more than the $1.91 billion estimate.

US PPI Rose More than Expected

U.S. wholesale prices increased more than expected in September, leading to the first year-on-year gain since March according to the Labor Department. The PPI index rose 0.4% in September after advancing 0.3% in August. PPI increased 0.4% year over year in September after falling 0.2% in August. Expectations had been for PPI to gain 0.2% in September on both a month over month and year over year basis. Core PPI, which excludes food, energy increased by 0.4% in September. Core PPI had increased by 0.3% for three straight months. Core PPI climbed 0.7% year over year. The core PPI rose 0.3% on a year-on-year basis in August.

Goldman Sachs Q3 Net Revenue Jumps 30% to 10.78 Billion; Target Price $326 in Best Case

Goldman Sachs Group Inc, an American multinational investment bank, reported a better-than-expected profit and revenue in the third quarter as businesses recovered from the COVID-19 pandemic after a sharp decrease in the second quarter, sending its shares up about 3% in pre-market trading on Wednesday.

The Wall Street trading powerhouse reported that its net revenue jumped 30% to $10.78 billion, beating market estimates of $9.5 billion, and net earnings of $3.62 billion for the third quarter which ended on Sept 30. Net revenues were $32.82 billion and net earnings were $5.20 billion for the first nine months of 2020, the company said.

Diluted earnings per common share (EPS) was $9.68 for the third quarter of 2020, doubled than the market consensus of $5.57 per share, compared with $4.79 for the third quarter of 2019 and $0.53 for the second quarter of 2020, and was $13.34 for the first nine months of 2020 compared with $16.32 for the first nine months of 2019.

Goldman Sachs said its annualized return on average common shareholders’ equity (ROE) was 17.5% for the third quarter of 2020 and 8.0% for the first nine months of 2020. Annualized return on average tangible common shareholders’ equity was 18.6% for the third quarter of 2020 and 8.5% for the first nine months of 2020.

At the time of writing, Goldman Sachs’ shares traded 0.79% higher at $212.48 on Wednesday; however, the stock is down about 8% so far this year.

Executive comments

“Our ability to serve clients who are navigating a very uncertain environment drove strong performance across the franchise, building off a strong first half of the year. As our clients begin to emerge from the tough economy brought on by the pandemic, we are well-positioned to help them recover and grow, particularly given market share gains we’ve achieved this year,” said David M. Solomon, Chairman and Chief Executive Officer.

Goldman Sachs stock forecast

Fifteen analysts forecast the average price in 12 months at $250.64 with a high forecast of $326.00 and a low forecast of $200.00. The average price target represents an 18.01% increase from the last price of $212.38. From those 15 equity analysts, ten rated “Buy”, five rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley target price is $208 with a high of $295 under a bull scenario and $119 under the worst-case scenario. Goldman Sachs stock prices were raised by JMP Securities to $280 from $275 and BofA Global Research upped their price objective to $246 from $240.

Other equity analysts also recently updated their stock outlook. Deutsche Bank raised the price target to $230 from $227 and UBS increased their stock rating to buy from neutral, raising the target price to $245 from $220.

Analyst Comments

“We expect a strong finish to 2020, with 2H20 revenues up 9% y/y as stronger capital markets drive an earnings beat in 3Q, and the uncertainty/volatility around the election drive a strong backdrop for 4Q. That said, we remain Equal-Weight GS with a one-year time horizon as market volatility and the urgency around capital raising activity (both equity and debt) subside in 2021. We expect total revenues decline 9% y/y in 2021, driven by weaker trading revenues,” said Betsy Graseck, equity analyst at Morgan Stanley.

“Stock is trading at 0.8x 2021 BVPS, reflecting the 9-10% ROE we expect in 2021/2022. Over time, we expect GS can drive some multiple expansion as management executes on its multi-year strategic shift towards higher recurring revenues,” Graseck added.

Upside and Downside Risks

Upside: 1) Quick and sustained economic / capital markets rebound. 2) Strong trading environment and market share gains. 3) Strategic changes drive revenue/EPS growth sooner than expected. 4) Faster expense reduction. 5) 1MDB issue resolved quickly – highlighted Morgan Stanley.

Downside: 1) Markets decline sharply and IBD activity stalls through 2021. 2) Higher loan losses in consumer loan books. Energy prices decline further. 3) Strategic changes take longer to execute.

Check out FX Empire’s earnings calendar

E-mini NASDAQ-100 Index (NQ) Futures Technical Analysis – Reaction to 12134.00 Sets the Tone

December E-mini NASDAQ-100 Index futures are trading slightly better on Wednesday as we approach the cash market opening. During the pre-market session, most of the chatter was about the coronavirus pandemic and the lack of progress toward a fiscal stimulus package.

Traders aren’t too worried about the stimulus because some feel that it’s just a matter of time when the financial aid will be approved. But the rising infections in the United States is raising come concerns. Furthermore, the news that Eli Lilly and Johnson & Johnson have hit the pause button on their respective studies on antibodies and a vaccine, is forcing investors to sit up and face the possibility that we may not have a working vaccine until spring 2021.

At 12:50 GMT, December E-mini NASDAQ-100 Index futures are trading 12107.75, up 13.75 or +0.11%.

Daily December E-mini NASDAQ-100 Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, but momentum may be getting ready to shift to the downside following the formation of a closing price reversal top on Tuesday.

A trade through 12019 will confirm the potentially bearish chart pattern. This could lead to the start of a 2 to 3 day correction. A move through 12249.00 will negate the chart pattern and signal a resumption of the uptrend.

The minor range is 12249.00 to 12019. Its 50% level or pivot comes in at 12134.00. Traders are currently straddling this level.

The first major downside target is the long-term Fibonacci level at 1.1761.50. Since the main trend is up, buyers are likely to come in on a test of this level.

Daily Swing Chart Technical Forecast

The direction of the December E-mini NASDAQ-100 Index on Wednesday is likely to be determined by trader reaction to the pivot at 12134.00.

Bullish Scenario

A sustained move over 12134.00 will indicate the presence of buyers. The first upside target is 12249.00. Overcoming this level could trigger an acceleration into the next main top at 12444.75.

Bearish Scenario

A sustained move under 12134.00 will signal the presence of sellers. This could trigger a break into 12019.

Taking out 12019 will confirm the closing price reversal top. This could trigger the start of a 2 to 3 day break with 11761.50 the minimum downside target.

For a look at all of today’s economic events, check out our economic calendar.