Apple merger madness and UK downgrade fears set the tone

Politics may take a backseat this week while fundamentals steal the limelight. We have a plethora of tech stocks reporting their earnings figures for Q3, and some top tier economic data, including the first post-Brexit GDP report. If fundamentals come back into focus then the current FX themes could persist, including a resurgence in the US dollar and further weakness in the GBP and EUR. GBP fell below 1.21 earlier as concerns mount that rating agency could downgrade the UK.

Why banks may take their time quitting the UK

Equity futures markets are currently pricing a small gain for the FTSE 100 at the open, suggesting that stock markets are brushing off weekend reports that large and small banks based in the UK are making plans to move out of London, with some looking to make the move as early as next year. We do not think that this is an excuse to sell British banks this week, for a few reasons. Firstly, relocation is a costly business, so banks will want to know more detail on the Brexit plans before upping sticks. Secondly, this could be a political move by the bankers’ lobby group to sway Theresa May into taking more notice of the City during Brexit negotiations. Theresa May has not shown the financial sector much love since she took office, so we shall have to see if this lady is for turning based on bankers’ threats to leave the UK for good. Any sign that Theresa May’s feelings towards the City are warming could be met with a general uptick in UK based assets.

Has Apple past its peak?

Apple is likely to hog all of the headlines when it reports earnings on Tuesday after the market close, but for all the wrong reasons. Analysts are expecting a decline in profits, and the first decline in iPhone sales since its debut in 2007. Analysts polled by Bloomberg are looking for earnings per share of $1.64 and sales of $46.9bn, this time last year Apple was generating sales of $53bn. While analysts expect a pick up in EPS and revenues compared with the prior quarter, it still suggests that Apple’s glory days could be behind us. With little progress on Apple’s driverless cars project, and iPhone sales slowing, a weak earnings report along with uninspired forward guidance for 2017, could take a bite out of Apple’s share price, which is close to its highest level of this year at $116.60.

What Apple earnings could mean for the broader market

Investors may ask themselves a couple of questions on the back of Apple’s earnings that could have broader significance for overall risk sentiment this week. Firstly, if demand for iPhones slows significantly, it may suggest that fears of a rising dollar could be hitting demand. Of course, iPhones are not actually made in the US, however, the recent price increase in the latest iPhone 7 could make it less attractive to a broad range of buyers, particularly in countries where currencies are weak compared to the dollar. In the past, one would expect demand for Apple’s goods to be sticky, if a decline in sales suggests that demand is not that sticky after all, even though some of Apple’s rivals are struggling, then bigger questions may be asked of the overall direction of the company. Due to Apple’s extremely large size and importance in corporate America, any sign that Apple has reached peak innovation may trigger a wave of risk aversion across the tech sector and more broadly in US equity markets.

Monday M&A madness

M&A activity in the US is hotting up. Telecoms giant AT&T is expected to make an $85bn offer for Time Warner on Monday, which equates to $107 a share. This is a huge premium on Time Warner’s share price, which traded around $80 last week, before rumours of the takeover pushed up the price to just below $89.50. We would expect to see Time Warner’s shares rise even further once the merger is formally announced and the price AT&T is willing to pay is finalised, while we would expect investors to punish AT&T for paying such a high premium.

Why a weak pound may not put off UK firms for looking for takeover targets

Across the pond, an interesting merger was reported in the weekend papers, British American Tobacco is making a move on its US partner Reynolds. BAT makes the majority of its profits in dollars, so when it translates that to pounds the decline in sterling is having a favourable impact on earnings. The same story may benefit other sectors that earn in dollars, such as energy and mining, and could protect them from the more negative impact of Brexit that may be coming down the line.

Saudi and Russia suggest confidence in oil price is increasing

Another interesting development worth noting is Saudi Arabia’s credit default risk. It reached a 10-month low last week, even though it sold its first international bonds. This also coincided with Russia’s stock market volatility reaching a record low. Since both countries’ economies are heavily reliant on oil revenues, it suggests to us that some in the market have confidence in a rising oil price, especially since recent estimates suggest that Saudi needs oil to trade around $80 per barrel to meet its spending needs, currently the Brent crude oil price is $51.78.

UK economy’s sanguine reaction to Brexit a mirage 

Economics will also be in focus as the UK releases in first GDP report encompassing the period after the Brexit vote this week. GDP is expected to come in at 0.4%, not bad considering the doom and gloom about the UK economy, some may say. However, there are a few signs that Brexit is starting to weigh on the UK economy. Business investment is expected to be weak, and we expect another quarter of growth heavily reliant on the consumer. Going forward, we see consumer confidence flagging once Article 50 is triggered at some point early in Q1 next year. As the reality of Brexit hits home, and some multinationals consider whether or not they want to stay in London, this may be the time that consumers pull in the purse strings and 2017 could be tricky for the UK economy.

Overall, it could be a busy week for equity markets. US stocks have been trading in a tight range as we lead up to the US election in 2 weeks’ time, however tech earnings and the AT&T and Time Warner merger could deliver some much-needed direction to the S&P at the start of this week.