Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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DAX futures close to all-time high; did the US economy bounce a bit in October
Peter Garnry
Chief Investment Strategist
Summary: In today's equity update we take a look at DAX future which are closing in on all-time highs with today's IFO survey showing German industry is becoming a bit more optimistic. However, the recent rise in German equities come with rising valuation and based on 12-month trailing numbers European equities actually look a bit expensive against US equities. We also take a look at the US economy and the recent Tesla Cybertruck launch.
Despite negative earnings growth and weak economic fundamentals in Europe, DAX futures are approaching all-time highs and today’s IFO survey (Nov) showed improvement as expected lifting sentiment. STOXX 600 valuation could soon be a stopping point for the momentum rally as the index trades 20.2x on P/E compared to 20.7x for S&P 500 with the latter index clearly showing better numbers and powered by technology monopolies. However, on 12-month forward basis European equities are still trading on a P/E discount but that’s only because consensus EPS growth over the next 12 months is 34% which would require an impressive rebound in Asia growth.
Last week showed that US leading indicators are close to the weakest levels since late 2009 and combined with other indicators we expect the US economy to continue slowing down over the coming months. One of our preferred coincident indicators on the US economy is the Chicago Fed National Activity Index and this broad-based index has shown that the US economic activity is operating well below trend growth and the September reading was weak. Consensus is looking for a rebound in October but still at activity levels below trend. Despite the weak macro backdrop, the equity market is still grinding higher on central bank easing and fiscal stimulus coming from both China and the US. In addition, China’s concession on IP theft indicating willingness to raise the penalty has also seen the market being more buoyant on the trade deal scope widening after the “first phase” deal when it comes.
Tesla’s unveil of its new Cybertruck on Friday to compete against Ford’s F-150 has drawn many headlines as the truck’s bulletproof windows smashed on stage. Whether this was staged PR or not it got the Internet speaking about driving massive attention on the launch. Elon Musk tweeted earlier today that the company has now received 200K orders of Cybertruck paying a small $100 deposit. Tesla shares were down 6% on Friday after the product launch but the pre-order numbers are seeing bids coming in this morning with Tesla shares trading at $345 in pre-market session up from Friday’s close at $333. Regardless of Cybertruck the main risks to Tesla’s shares are the Chinese market share in 2020 as the Shanghai Gigafactory ramps up production in China and the production start and deliveries of the Model Y crossover. Wall Street has lowered their sales growth targets as consensus had FY20 revenue at $35bn in late December 2018 which has now been cut to around $29bn which is still 20% growth y/y. The share price declined throughout the first half of the year in tandem with lower FY20 revenue projections from analysts, but the recent rebound has happened while revenue expectations have continued to come down. This highlight a widening gap between investors and analysts.
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