Catalan tail risk receding as HSBC share price ignores good results

The big news this morning is Spain. After an escalation of the Catalan crisis on Friday, Spanish markets are in recovery mode at the start of this week. Although this is a fluid situation there are a few things that are keeping the markets calm, which is why EUR/USD is back above 1.16 and the Ibex is the best performer in European equity markets, it is up some 1.5% today. This is largely in response to the peaceful transferral of power to Madrid from the Catalan authorities over the weekend. So far, the streets also seem to be free of violent protest, suggesting that the prospect of an election in December has eased investors’ and secessionists’ minds for the time being.

Markets are in favour of a united Spain

Interestingly, the Ibex started to recover late on Friday, once Madrid had taken control of the Catalan parliament. Unsurprisingly, change-phobic markets are happy that Catalonia, for now, will remain part of Spain. The economic consequences so far have also been mild, which is another reason why the Ibex has managed to claw its way back above its 200-day moving average at 10,320, suggesting that investors are not willing to ditch Spanish assets en masse at this stage.

We believe that in the short-term the Ibex and euro sell off from last week was over played and both are due some respite from here. We continue to see euro upside hobbled by the ECB for now, while the Ibex could recover but remains at risk from wobbly risk sentiment, particularly as we lead up to December’s election. For now, political concerns are not impacting market sentiment, since this crisis does not threaten the Spanish state.

HSBC stock price bucks good news results

The other key story of the morning was HSBC’s stellar results. I was talking about this on the Today Programme and Wake up to Money this morning, and the general consensus was the five-fold earnings pick up compared to last year was impressive, but was partly down to a very weak third quarter in 2016, when profits were in the mere hundreds of millions as opposed to the near $4bn today. This seems to have weighed on the share price this morning, with investors selling the “good” news. This is partly a natural reaction to results when the market expects to hear good news so it is already baked into the price. Also, when you get a strong set of results and the share price has already risen some 20% this year, it’s as good a time as any to sell.

The share price decline masks the genuine progress made by HSBC in cutting costs and buying back shares, along side the pick-up in Asian economic growth. The key driver of the earnings was bread and butter banking: interest income earned from lending and insurance businesses. This may not be a sexy business model, but it sure is profitable, especially if, like HSBC, you have wide access to the burgeoning Asian middle classes. If a strong set of bank results is a reflection of a strong economy, then HSBC’s results suggest that the outlook for Asia’s regional economy looks good.

Unlike some of its rivals like Barclays who are refocusing on trading and investment banking, HSBC is a well-diversified bank with strong networks in the major economies. With synchronised strong global growth, this is good news for HSBC and other truly global companies. Thus, we expect the share price to bounce back after today’s decline.

Trump teases markets with new Fed chair announcement

Elsewhere, markets are eagerly awaiting the announcement of the new Fed chair later this week. President Trump seems to relish the drama of his pick and the “winner” will be announced probably towards the end of this week after the latest FOMC meeting and Congress’s tax bill are both released on Wednesday. The markets believe that Jerome Powell will be chosen. He is a centrist and a supporter of taking the rate hiking cycle slow, so no wonder markets favour him as the next Fed governor. John Taylor, the other candidate in the running, is far too hawkish for markets at these lofty levels. But, if Powell is not chosen by Trump then expect an adverse market reaction.

US stocks take a breather after Friday’s surge

Looking ahead to today, US PCE and Eurozone sentiment surveys are worth watching. The dollar is retreating after last week’s surge higher. Interestingly, euro and GBP longs have been declining in recent weeks, according to the latest CFTC data, so a sustained dollar recovery is still on the cards. After a fantastic run last week, the main US indices are expecting a slight decline at the open, while the Nasdaq is still in the green, potentially due to expectation of strong Facebook and Apple earnings, which are released later this week.