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  • Weekly global market focus
  • U.S. government shutdown has little market impact thus far
  • SPX earnings season enters bigger week
  • January’s trend continues with stocks at new record high and 10-year yield at 3-1/4 year high

 

 

Weekly global market focus — The U.S. markets this week will focus on (1) the partial U.S. government shutdown that began last Friday night, (2) whether U.S. interest rates continue to rise as the 10-year T-note yield last Friday rose to a new 3-1/4 year high of 2.66%, (3) anticipation of next week’s FOMC meeting where there is a low probability of a rate hike, (4) Q4 earnings season with 81 SPX earnings reports this week, (5) the Treasury’s sale of $103 billion of T-notes, (6) the U.S. economic calendar that includes several housing reports and Friday’s Q4 GDP report (expected +3.0%), and (7) any news out of this week’s Davos meeting, which President Trump plans to attend.

In Europe, the markets will be relieved today that the German Social Democratic Party (SPD) on Sunday voted to begin formal coalition talks with Chancellor Merkel’s CDU bloc, which eliminated the near-term possibility of a snap German election.  EUR/USD was up +0.3% in early trading on Sunday on the SPD’s vote.  The European markets this week are mainly focused on Thursday’s ECB meeting, where the ECB could shift its guidance about whether QE will end in Sep 2018.  Wednesday’s European PMI reports are expected to show small declines from the recent highs.

In Asia, the focus will mainly be on the Bank of Japan meeting on Mon/Tue.  The market is expecting the BOJ to leave its policy unchanged but will be watching for any hint of a move towards a less accommodative policy.  The 10-year JGB yield in the past month has risen by 4 bp to 0.085%, but it has yet to launch a serious challenge of 0.10%, which is the perceived upper limit of the BOJ’s target.  If the 10-year JGB yield continues to rise and challenge the 0.10% level, the markets will be watching how aggressively the BOJ tries to defend the 0.10% level via a bond buying operation.  The Japanese stock market remains strong with the Nikkei index last Thursday rallying to a new 26-year high.

In China, the focus is on the stock market where the Shanghai Composite index last Friday rallied to a new 2-year high and closed the week with a solid gain of +1.72%. Meanwhile, Chinese interest rates are seeing continued upward pressure.  The Chinese 10-year government bond yield late last week rose to a new 1-1/2 month high of 3.98% where it was just -5.5 bp below the 3-1/4 year high of 4.035% posted in mid-Nov.  The good news is that short-term rates have risen just slightly in the past several weeks.  The 1-year Shibor rate last Friday closed at 4.738%, which was -2.5 bp below the 2-3/4 year high of 4.763% posted in late December.

U.S. government shutdown has little market impact thus far — The U.S. government partially shut down at midnight last Friday after the Senate was unable to pass the short-term continuing resolution passed by the House.  The markets are not likely to be overly concerned about a short shut-down, which will have little macroeconomic impact.  However, the markets are likely to grow increasingly concerned if the shutdown lasts into next week.

Even if a short-term CR is approved through February, Washington will simply be back in the same boat when that CR expires.  The markets must therefore be prepared for a period of uncertainty until Congress can finally agree on a spending bill that lasts for the remainder of the fiscal year (ending Sep 30).  As long as Congress limps from one CR to another, the CR can be used as leverage for DACA, border wall funding, and other issues.

SPX earnings season enters bigger week — There are 81 of the S&P 500 companies that report earnings this week.  Notable reports include Netflix and Halliburton on Monday; Procter and Gamble, Verizon and Capital One on Tuesday; GE, Ford, and Comcast on Wednesday; Intel, Caterpillar, Starbucks, and American Airlines on Thursday; and Honeywell and Colgate-Palmolive on Friday.

The market is expecting a stellar Q4 earnings season with +12.4% earnings growth for the S&P 500 companies, according to Thomson I/B/E/S.  The market is then expecting even stronger growth in the first half of 2018 with +16.0% growth in Q1 and +15.2% growth in Q2. On a calendar year basis, the consensus is for SPX earnings growth to improve to +15.6% in 2018 from +12.1% in 2017.

 

January’s trend continues with stocks at new record high and 10-year yield at 3-1/4 year high — The S&P 500 index last Friday rallied to a new record high and closed the week moderately higher by +0.86%.  The stock market was able to close higher on Friday despite the fact that a U.S. government shutdown appeared likely on Friday night, indicating that the stock market at present is not particularly worried about a government shut down.  The U.S. stock market continues to rally on (1) expectations for very strong earnings growth in 2018, bolstered by corporate tax cuts, and (2) carry-over strength from overseas stock markets, which are also posting new highs.

The stock market has so far been able to shake off negative factors such as rising interest rates and high valuation levels.  The forward P/E last Friday of 18.6 remained well above the 5-year average of 17.1 and the 10-year average of 15.4.

Meanwhile, the 10-year T-note yield last Friday rose to a new 3-1/4 year high of 2.66%, taking out the previous high of 2.64% posted in Dec 2017 after the November election.  

The 10-year yield has risen sharply by more than +25 bp since last autumn mainly because of Congressional passage of the tax-cut bill in late December, which boosted expectations for inflation and Fed tightening.  In addition, inflation expectations have been boosted by the sharp rally in crude oil prices to a new 3-year high early last week

 

Weekly global market focus — The U.S. markets this week will focus on (1) the partial U.S. government shutdown that began last Friday night, (2) whether U.S. interest rates continue to rise as the 10-year T-note yield last Friday rose to a new 3-1/4 year high of 2.66%, (3) anticipation of next week’s FOMC meeting where there is a low probability of a rate hike, (4) Q4 earnings season with 81 SPX earnings reports this week, (5) the Treasury’s sale of $103 billion of T-notes, (6) the U.S. economic calendar that includes several housing reports and Friday’s Q4 GDP report (expected +3.0%), and (7) any news out of this week’s Davos meeting, which President Trump plans to attend.

In Europe, the markets will be relieved today that the German Social Democratic Party (SPD) on Sunday voted to begin formal coalition talks with Chancellor Merkel’s CDU bloc, which eliminated the near-term possibility of a snap German election.  EUR/USD was up +0.3% in early trading on Sunday on the SPD’s vote.  The European markets this week are mainly focused on Thursday’s ECB meeting, where the ECB could shift its guidance about whether QE will end in Sep 2018.  Wednesday’s European PMI reports are expected to show small declines from the recent highs.

In Asia, the focus will mainly be on the Bank of Japan meeting on Mon/Tue.  The market is expecting the BOJ to leave its policy unchanged but will be watching for any hint of a move towards a less accommodative policy.  The 10-year JGB yield in the past month has risen by 4 bp to 0.085%, but it has yet to launch a serious challenge of 0.10%, which is the perceived upper limit of the BOJ’s target.  If the 10-year JGB yield continues to rise and challenge the 0.10% level, the markets will be watching how aggressively the BOJ tries to defend the 0.10% level via a bond buying operation.  The Japanese stock market remains strong with the Nikkei index last Thursday rallying to a new 26-year high.

In China, the focus is on the stock market where the Shanghai Composite index last Friday rallied to a new 2-year high and closed the week with a solid gain of +1.72%. Meanwhile, Chinese interest rates are seeing continued upward pressure.  The Chinese 10-year government bond yield late last week rose to a new 1-1/2 month high of 3.98% where it was just -5.5 bp below the 3-1/4 year high of 4.035% posted in mid-Nov.  The good news is that short-term rates have risen just slightly in the past several weeks.  The 1-year Shibor rate last Friday closed at 4.738%, which was -2.5 bp below the 2-3/4 year high of 4.763% posted in late December.

U.S. government shutdown has little market impact thus far — The U.S. government partially shut down at midnight last Friday after the Senate was unable to pass the short-term continuing resolution passed by the House.  The markets are not likely to be overly concerned about a short shut-down, which will have little macroeconomic impact.  However, the markets are likely to grow increasingly concerned if the shutdown lasts into next week.

Even if a short-term CR is approved through February, Washington will simply be back in the same boat when that CR expires.  The markets must therefore be prepared for a period of uncertainty until Congress can finally agree on a spending bill that lasts for the remainder of the fiscal year (ending Sep 30).  As long as Congress limps from one CR to another, the CR can be used as leverage for DACA, border wall funding, and other issues.

SPX earnings season enters bigger week — There are 81 of the S&P 500 companies that report earnings this week.  Notable reports include Netflix and Halliburton on Monday; Procter and Gamble, Verizon and Capital One on Tuesday; GE, Ford, and Comcast on Wednesday; Intel, Caterpillar, Starbucks, and American Airlines on Thursday; and Honeywell and Colgate-Palmolive on Friday.

The market is expecting a stellar Q4 earnings season with +12.4% earnings growth for the S&P 500 companies, according to Thomson I/B/E/S.  The market is then expecting even stronger growth in the first half of 2018 with +16.0% growth in Q1 and +15.2% growth in Q2. On a calendar year basis, the consensus is for SPX earnings growth to improve to +15.6% in 2018 from +12.1% in 2017.

 

January’s trend continues with stocks at new record high and 10-year yield at 3-1/4 year high — The S&P 500 index last Friday rallied to a new record high and closed the week moderately higher by +0.86%.  The stock market was able to close higher on Friday despite the fact that a U.S. government shutdown appeared likely on Friday night, indicating that the stock market at present is not particularly worried about a government shut down.  The U.S. stock market continues to rally on (1) expectations for very strong earnings growth in 2018, bolstered by corporate tax cuts, and (2) carry-over strength from overseas stock markets, which are also posting new highs.

The stock market has so far been able to shake off negative factors such as rising interest rates and high valuation levels.  The forward P/E last Friday of 18.6 remained well above the 5-year average of 17.1 and the 10-year average of 15.4.

Meanwhile, the 10-year T-note yield last Friday rose to a new 3-1/4 year high of 2.66%, taking out the previous high of 2.64% posted in Dec 2017 after the November election.  

The 10-year yield has risen sharply by more than +25 bp since last autumn mainly because of Congressional passage of the tax-cut bill in late December, which boosted expectations for inflation and Fed tightening.  In addition, inflation expectations have been boosted by the sharp rally in crude oil prices to a new 3-year high early last week

 

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