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  • Weekly global market focus
  • Sterling posts 3-1/2 month high as expectations grow for postponed Brexit deadline
  • This week’s Liu-Lighthizer meeting will be “determinative”
  • Q4 earnings expected strong but with potential disappointments
 

Weekly global market focus — This will be a huge week for news with (1) the high-level US/Chinese trade talks on Wed/Thu, (2) the Brexit vote in the UK Parliament on Tuesday, (3) the Tue/Wed FOMC meeting and Fed Chair Powell’s news conference on Wednesday, (4) Friday’s U.S. Jan unemployment report (payrolls expected +165,000), (5) a key Q4 earnings week with 125 of the S&P 500 companies reporting and with reports from Amazon, Apple, Microsoft and Facebook, and (6) the Treasury’s sale of $133 billion worth of T-notes on Monday and Tuesday.

The U.S. government will reopen today after the 35-day shutdown ended last Friday.  Washington passed a 5-week continuing resolution (CR) that will keep the government open through February 15.  There is a big backlog of postponed U.S. economic reports that will be trickling out over the next couple of weeks as the various agencies complete their reports and schedule them for release.  There is the possibility of another partial government shutdown when the CR expires on February 15, although the first shutdown did not produce President Trump’s desired result and he might instead simply move forward with an emergency declaration if he is not successful in getting any wall funding in negotiations with Congress over the next few weeks.

In Europe, the markets will be watching Thursday’s Eurozone Q4 GDP report, which is expected to be weak at +0.2% q/q and +1.2% y/y.  Italy on Thursday is expected to announce its Q4 GDP report at -0.1% q/q, which would represent a technical recession following the Q3 report of -0.1% q/q.

In Asia, the markets will be watching China’s PMI reports.  The consensus is for Wednesday night’s Chinese Jan manufacturing PMI to show a -0.1 point decline to 49.3, adding to Dec’s -0.6 point decline to 49.4.  The Jan non-manufacturing PMI is expected to show a small +0.1 point increase to 53.9, adding to Dec’s +0.4 point gain to 53.8.  Thursday night’s Caixin China Jan manufacturing PMI is expected to be unchanged at 49.7 after Dec’s -0.5 point decline to 49.7.

 

 

Sterling posts 3-1/2 month high as expectations grow for postponed Brexit deadline — Sterling was slightly higher in early trade on Sunday night on a report by the Sun newspaper that UK Prime Minister May has privately told cabinet ministers that she will not allow a no-deal Brexit and will not take the UK out of the EU without a separation agreement.

Sterling has rallied sharply in the past several weeks and posted a 3-1/2 month high last Friday on market expectations that Prime Minister May will be forced to ask for an extension of the March 29 Brexit deadline.  The betting odds for a no-deal Brexit on March 29 are low at 25%, illustrating expectations for either last-minute UK Parliamentary approval of a Brexit separation agreement, or more likely, a postponed deadline.  Parliament on Tuesday will vote on Ms. May’s Brexit B plan along with various amendments.

This week’s Liu-Lighthizer meeting will be “determinative” — White House economic advisor Kudlow last Thursday said that this week’s talks on Wed/Thu between Chinese Vice Premier Liu He (Chinese President Xi’s top economic advisor) and USTR Lighthizer talks will be “determinative.” By nearly all accounts, the two sides are close to an agreement for China to boost its buying of U.S. goods to reduce the US/Chinese trade deficit but are stuck on the difficult structural issues such as IP protection, forced technology transfers, more opening of markets, and state subsidies.

The US/Chinese trade talks will actually begin on Monday with another round of mid-level talks.  Bloomberg reported last Friday that Vice Commerce Minister Wang Shouwen and Vice Finance Minister Liao Min will arrive in the U.S. on Monday for preparatory talks ahead of the Liu/Lighthizer talks on Wednesday and Thursday.  Bloomberg reported that China’s central bank governor Yi Gang will also join the mid-level talks on Monday/Tuesday.

The markets are hoping for news on Thursday of a preliminary agreement or at least reports of good progress after the Liu-Lighthizer meeting.  The March 1 deadline is less than five weeks away and there is not much time left for another round of high-level talks.  The markets are hoping that if there isn’t a comprehensive US/Chinese trade agreement before March 1, that there will at least be enough progress that President Trump will agree to postpone the March 1 deadline for a hike in the tariff to 25% from 10% on $200 billion of Chinese goods.

Q4 earnings expected strong but with potential disappointments — Q4 earnings season kicks into high gear this week with 125 of the S&P 500 companies scheduled to report.  Notable reports this week include Caterpillar on Monday; Apple on Tuesday; Microsoft, Facebook, AT&T and Visa on Wednesday; Amazon, UPS and Mastercard on Thursday; and Exxon on Friday.

The consensus is for Q4 earnings growth from the S&P 500 companies of +14.3% y/y, according to Thomson Reuters Refinitiv.  This will be the last quarter of stellar earnings growth stemming from the Jan 1, 2018 tax cut.  On a calendar year basis, the market is expecting SPX earnings growth to ease to +5.7% in 2019 from +23.5% in 2018.

Q4 earnings have so far been favorable with 72.3% of the 112 reporting SPX companies having beaten earnings expectations, above the long-term average of 64% but below the 4-quarter average of 78%.  The markets are on guard for Q4 earnings disappointments tied to various factors including slower growth in China and Europe, higher corporate costs from steel and other tariffs on U.S. imports, and sales shortfalls caused by retaliatory tariffs on U.S. exports.

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