Global Economy & Markets, Weekly Roundup 26/10/21

26/10/2021 - Reports

Global Economy and Markets

​US equities ended at fresh highs on Monday due to strong corporate earnings results
Key Takeaways
In the US, the earnings season is well underway with S&P500 companies beating EPS estimates by a significant margin. Overall, out of the 136 companies that have reported results, so far, circa 82% have exceeded analyst estimates (5-year average: 76%) and circa 75% have reported a positive revenue surprise.

In aggregate, companies are reporting EPS that are circa 13% above estimates or $50 vs quarterly EPS expectations of $44. All told, EPS growth rate for the third quarter is expected at 33% year-over-year. For 2021, EPS growth is expected at +44% ($201).

Strong corporate earnings supported equities’ rally in the past week, with the S&P500 recording a new all-time high (4566). Cyclicals sectors overperformed, with Consumer Discretionary rising by 1.5% wow led by Automobiles (+6.3% wow) due to Tesla.

At the same time, government bond yields edged higher as expectations for the first interest hikes by major Central Banks have been brought forward, while increased inflation expectations drove the US 10-year breakeven rate to 2.66%, its highest level since 2006. The 10-Year UST yield has increased by 13 bps MtD to 1.65% (5-month high) and the 10-Year Bund yield has increased by 9 MtD to -0.09% (c. 2.5-year high).

US real GDP in Q3:2021, due on October 28th, is expected to confirm a partial easing of post-pandemic economic momentum due to (i) decelerating private consumption amid Covid-related health concerns; (ii) supply chain disruptions hurting production and (iii) some retreat for residential investment. According to the Atlanta Fed’s GDPNowcast model, real GDP growth is expected at +0.5% qoq saar (consensus estimates: +3.5% qoq saar), from +6.7% qoq saar (12.2% yoy) in Q2:2021.  

On the other side of the Atlantic, euro area real GDP growth, due on October 29th, is expected to have held up better in Q3:2021 in view of a strong performance of the tourism sector during the summer. In addition, economic activity had made up, so far, a lesser part compared with the US, of pandemic losses. Indeed, euro area real GDP in Q2:2021 was 2.7% below Q4:2019 levels, versus +0.9% in the US. All in all, consensus estimates suggest growth of +8.2% qoq saar, from +8.7% qoq saar (+14.2% yoy) in Q2:2021.

On monetary policy, the European Central Bank, due on October 28th, is expected to stand pat. However, the press conference will be monitored for potential indications regarding the decisions on asset purchases, which are set to come in December. Recall that the Pandemic Emergency Purchase Programme with a total envelope of €1.85 tn (holdings of €1.44 tn as of October 15th) is likely to run its course in March 2022.

The European Commission relaunched the public debate on the review of the EU economic governance framework, following the changed circumstances due to the COVID-19 crisis. In the event, European Stability Mechanism (ESM) has presented a detailed two-pillar proposal that utilizes a 3% fiscal deficit ceiling while raising the debt limit (Debt-to-GDP ratio) from 60% to 100%.