The Top three for the week ahead

It’s a huge week for financial markets as well as societies at large around the world. The UK has followed the lead of many European countries and entered into a second lockdown, potentially for a month, but one has to assume that if Covid cases do not fall then the lockdown could be longer for the UK and elsewhere. There is a US Presidential election, the usual start of the month economic data and multiple central bank meetings. In fact, there is a US election and a Fed meeting in the same week for the first time since 1984. These are historic times, it is no wonder that there were large gyrations in risky assets last week and the Vix index, Wall Street’s fear gauge, was at its highest level since June. The question now is, will the sell-off continue or will the market calm down? We focus on three key areas to watch in the coming days. 

1, Earnings news

It’s a big week for some UK and European listed companies as they report key results and update about future prospects. Ryanair is first up. The key number to watch out for is capacity for the November – March winter flying season. While the June- September period may have provided some much-needed relief to Ryanair in what has a been an historically bad year for the airline sector, the spate of recent lockdowns across Europe, including the UK, France, Spain and Germany, has dimmed the prospect of winter travel. There is a risk that Ryanair could cut capacity further, it announced that it was cutting flights to just 40% of capacity for October, we expect this to be trimmed further for the rest of the year. Capacity cuts are not good for stock prices, although Ryanair’s share price has fared well considering everything that has been thrown at the aviation industry this year, we doubt that its share price will swerve a sell off if further capacity cuts are announced. The last time it announced capacity cuts its share price fell 5%, we would expect something similar to happen this time. Ryanair sold off sharply last week, along with most global indices, however, it managed to claw back some losses on Friday, closing up more than 2%, BA owner IAG was up more than 5%, but this recovery may not last. It is also worth watching out for any comments from Michael O’Leary, who is likely to be vocal in this contempt of further lockdowns and how governments around the world have woefully neglected airlines. We would expect him to make a forceful call to governments to bail out the sector. Unfortunately for Ryanair’s share price, until any potential bailout is announced it’s hard to muster enthusiasm to buy airline stocks. 

J Sainsbury and M&S also report results this week. We expect Sainsbury’s to report a decent set of results, and potentially to announce the sale of its banking arm. The bank has already scrapped mortgage loans to focus on credit cards, however, with negative interest rates looming and the threat this poses to banks’ profitability, we expect the newish CEO to concentrate on retail. Expect the future guidance to be focussed on the digital strategy of the firm. Analysts will also want to know how Sainsburys will keep their new-found online customers in the crucial Christmas period. If discounting is key to keeping customers, this could erode profitability and limit any upside in Sainsbury’s share price even if it manages to deliver a decent set of Q3 results. M&S could be a different story. Profits are likely to be hamstrung by heavy discounting in its clothing and homeware business. However, analysts may focus on the success of its online tie up with Ocado, which is 50% owned by M&S. So far, this is likely to have bagged M&S £40mn, if the future looks good, then traders could forgive M&S its clothing disaster and focus on its future in online food sales. Of course, if the Ocado tie up fails to live up to expectations then we may see M&S’s share price decline on Wednesday. 

2, Central banks 

Two of the biggest to watch out for are the Bank of England and the Federal Reserve meetings, which both take place on Thursday. The BOE will release their latest Monetary Policy Report at this meeting, and they will give their latest forecasts for the economy. The forecasts are likely to be slashed, and the Bank may say that the threat of a double dip recession for the UK is very real, although we expect them to cut Q4 growth estimates to 0% rather than into negative territory. While more asset purchases are likely, the market expects £50-£150bn of new purchases to be announced, we don’t think that negative interest rates are on the cards for this meeting. Firstly, the BOE may want to keep negative rates as a reserve support measure in case things get worse next month or early next year. Secondly, the BOE may want to wait to see if the UK and the EU can agree a trade deal before employing something as drastic as negative interest rates. A trade deal could be announced as early as next week at the EU summit, so the BOE are unlikely to move too early. Overall, the BOE meeting may have a slight negative effect on the pound in the short term, as the extra asset purchases increase GBP supply. However, the outcome of the US election is likely to have a bigger impact on GBP, especially if it causes a large move in the dollar. 

The Fed meets on Thursday this week due to the election. We doubt that the Fed will announce any new policy support as it is increasingly likely that whoever wins the White House will push through more fiscal support for the US economy in the coming weeks. This is something that the Fed has been asking for, thus we don’t expect them to add more monetary support when more fiscal support could be around the corner. 

3, The US election 

We saved the most eagerly anticipated event until last to keep you all on your toes! Last week’s big market sell-off was largely down to the prospect of another economic lockdown in Europe and the impact that this could have on global economic growth. While there may have been some election risk in their too, we believe that global stock markets will start the week on a calmer note. It is hard to judge how the markets will react to this election because, firstly, the quality of debates has been poor, which means that the policies of either candidate have not been debated in detail. Secondly, it is likely that both sides will sanction big increases in fiscal spending over the coming months. The markets would probably prefer a clear outcome on Tuesday night, but we doubt that will be the case. With more than 60% of votes already cast, Tuesday night could be a damp squib. What would be more interesting for markets would be no outcome on election night, or potentially a contested outcome, particularly if it looks like Donald Trump is set to lose and not concede defeat to Joe Biden. This is the result that would trigger the most volatility for risky assets and could send the dollar and other safe havens like gold soaring. It is worth noting that neither of the candidates are feared by the markets; Trump is the continuity candidate and he would mean more of the same, Biden means more fiscal stimulus, both of which are traditionally good for stock price performance. However, derivatives traders expect the markets to calm down after the US election, which suggests that the markets are not properly priced for a contested election or no clear outcome. It is worth noting that the volatility and uncertainty created by the Gore/ Bush election in 2000, which was eventually settled by the Supreme Court, coincided with a 12% decline for the S&P 500. Thus, if there is no clear outcome on Tuesday night, we could be in for a wild ride in the coming weeks.