• Harsh Patel, CFA

We Have a Deal ūüá™ūüáļ ūüĆ•


Unfortunately, it's not a Brexit trade deal, with Michel Barnier this week suggesting that it now seems unlikely we'll get one by the end of the year. But that saga will intensify over the next few months, and you'll be hearing from us when the time is right with respect to financial markets.


This week's newsletter title, however, refers to the fiscal spending deal put together by European leaders following a two-day summit that ended up lasting for a marathon five days. European leaders finally emerged at 5.30am on Tuesday morning to announce the agreement had been reached. 


With this deal, the EU will fund economic recovery from the COVID-19 recession, give the ECB some much needed help (regular readers of this newsletter will be familiar with Christine Lagarde's pleas for fiscal help to go along with the ECB's monetary stimulus), and finally, plug any holes in the budget which will arise as a result of the UK leaving, All without adding much debt for Southern European countries to carry individually in the future.


The deal itself consists of two major parts. First,¬†the relatively routine¬†Multiannual Financial Framework, worth nearly ‚ā¨1.1 trillion over the next 7 years. This is essentially the EU's budget, which is agreed upon every few years. What held the discussions up, however, was the second part - a¬†one-off "Next Generation EU" fund of ‚ā¨750 billion being put to work to help Eurozone countries recover from the COVID-19 recession.¬†


What's so special about this Next-Gen EU fund?


For the first time in the EU's history, the European Commission will issue debt jointly over the next six years on behalf of all members at an unprecedented (2020 Word of The Year?) scale. This is significant because it represents a giant leap towards a closer fiscal union - up until now, the EU has essentially been a monetary union (the Euro & ECB) plus a set of policies and principles which all member states agree to abide by. Now, European governments are essentially putting themselves on the hook - financially speaking - for each other.


The ‚ā¨750bn fund will be made up of ‚ā¨390bn in grants, which means highly indebted members of the EU won't be forced to¬†add too much¬†more to their individual debt loads. The remaining ‚ā¨360bn¬†will be distributed by the European Commission¬†in the form of loans to member states.


Icing on the cake


Both parts of the fiscal spending deal - totalling more than ‚ā¨1.8 trillion - will come with green strings attached. EU leaders have agreed to spend 30% of the total, which is north of ‚ā¨500bn, on climate action.¬†


Climate activists have been - and likely will continue to - demand more action than this, and while it's arguably not yet enough to curb emissions as aggressively as needed, it's definitely a commendable step in the right direction.


Market reaction


Stock markets had been expecting this deal to get agreed, which explains the relatively muted reaction from a stock index perspective - there would likely have been a significant stock market sell-off if EU leaders fell short of the above. 


Most of the action on the back of this announcement was instead in the currency space, with the Euro strengthening significantly versus the dollar and other major currencies throughout the week. 


Something to reflect on


All-in-all, this agreement demonstrates the power of democracy, human empathy and teamwork, which is frankly a breath of fresh air at a time when protectionism, authoritarianism and divisive behaviour from leaders in other parts of the world seem to rule the headlines despite being in the midst of a global pandemic.


Now it's on the EU to follow-through with this agreement and execute on a much needed change in trajectory for the Eurozone economy.


We're at the start of a long road here with long term consequences for financial markets - it'll be interesting to follow this story as it unfolds over the next few months and years.


Earnings Season


Elsewhere, Q2 2020 earnings season rumbled on this past week, and we've got a few high level takeaways for you.

  • Tech earnings continued growing, but expectations are sky-high. A¬†case in point was Microsoft, which wrapped up a record fiscal year for revenues and earnings but saw it's share price decline after announcing a small drop in it's¬† overall quarterly¬†earnings. The company's cloud computing business which includes it's Azure platform¬†saw revenue rise by¬†"only" 47% in Q2, missing analyst expectations of a 49% gain with the growth rate being significantly lower than the 59% it recorded in the previous quarter. It's up for debate as to whether this kind of performance warrants any fundamental¬†decline in the company's share price, but the takeaways from it's earnings report were interesting given Amazon and Google - the other 2 cloud computing giants - are reporting earnings next Thursday.

  • Growth in cloud computing and cloud-focussed software businesses seems to have been a broad theme in Q2 2020, with IBM also reporting a 3% rise in sales versus last year, thanks to an almost 30% growth in it's cloud business. Expectations for IBM, however, weren't as elevated as those at Microsoft, which helped the share price rally 6% following the earnings announcement and continue trending higher¬†over the course of the week. Watch this space for more cloud computing winners announcing results in the coming weeks.¬†

  • Twitter saw a surge in monthly active users over the course of Q2 with people locked indoors,¬†but also saw advertising revenue decline. The company reported an increase of¬†20 million active users over the quarter, bringing it's monthly¬†active user¬†base up to 186 million in total. This helped the stock price rally following the announcement despite the company also reporting¬†a decline in advertising revenue over the quarter, which investors seem to have brushed off as a temporary factor. This type of stock market reaction bodes well for Facebook, which announces it's Q2 earnings next Wednesday.

We're in the thick of it now, with around 4,000 companies due to report Q2 2020 earnings next week - we've picked out a shortlist(!) of names you may be interested in following below: 

  • 27 July¬†- Hasbro,¬†LVMH, Michelin, KPN, Moncler,¬†NXP Semiconductors, Ryanair,¬†SAP¬†

  • 28 July¬†- 3M, Altria, AMD, Carrefour,¬†eBay, Endesa, Fresnillo,¬†McDonald's, Kering, Kumba Iron Ore,¬†Peugeot,¬†Pfizer, Reckitt Benckiser,¬†S&P Global,¬†Starbucks,¬†Visa, Yandex

  • 29 July¬†- Barclays,¬†BASF, Bharti Airtel,¬†Boeing, Budweiser, Carlyle,¬†Crown Castle, Deutsche Bank,¬†Deutsche Borse, Engie,¬†Facebook, GE, GM,¬†GSK, Nomura,¬†PayPal, Puma,¬†Qualcomm,¬†Rio Tinto,¬†Sanofi, Schneider Electric, Santander,¬†Shopify, Spotify, Sumitomo Mitsui, T. Rowe Price, Yum China

  • 30 July¬†- AB InBev, Airbus,¬†Alphabet (Google), Altice,¬†Amazon, Anglo American, Apollo,¬†Apple, ArcelorMittal,¬†AstraZeneca, Atlassian, BAE Systems,¬†BBVA,¬†Comcast, Credit Suisse,¬†EDF,¬†Electronic Arts,¬†Danone, EDP Renovaveis, Expedia,¬†Ford, Fresenius Medical Care, Heidelberg Cement,¬†Fujitsu,¬†Gilead, Hitachi,¬†ICE Group, Kellogg,¬†L'Oreal, Lafarge Holcim, LG,¬†Lloyds Banking Group,¬†Mastercard, Mitsubishi,¬†Moody's, Orange,¬†KraftHeinz, PG&E, Poste Italiane,¬†Nestle, Panasonic,¬†P&G, Petrobras, Safran, Saint-Gobain,¬†Samsung, Sberbank, Schroders,¬†Shell, Siemens Gamesa,¬†Telefonica,¬†Total, Vivendi,¬†Volkswagen, YUM! Brands, Zendesk

  • 31 July¬†- AbbVie, AON,¬†BNP Paribas, BT Group,¬†Caterpillar, CBOE Holdings,¬†CBRE Group,¬†Chevron, Colgate-Palmolive, Eni,¬†EssilorLuxottica,¬†ExxonMobil, Fiat Chrysler,¬†Fresenius SE,¬†LSE,¬†MercadoLibre,¬†Merck, Mizuho,¬†Norisk Nickel, Pinterest,¬†RBS,¬†Swiss Re, Tiffany & Co, Umicore,¬†Vinci, Yahoo Japan

  • 1 August¬†- Berkshire Hathaway

Until next time ‚úĆÔłŹ


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