- Weekly global market focus
- U.S. and Chinese officials express optimism about phase one trade agreement
- Markets wait for Monday’s Parliament vote on UK election and Tuesday’s EU deadline extension
- Q3 earnings hit peak week
Weekly global market focus — The U.S. markets this week will focus on (1) whether the FOMC at its meeting on Wednesday complies with market expectations for a -25 bp rate cut to 1.50%/1.75%, (2) the status of US/Chinese trade talks, (3) this week’s expected weak economic data that includes Wednesday’s Q3 GDP report (expected +1.6%) and Friday’s Oct payroll report (expected +90,000), (4) the peak week for Q3 earnings with 158 of the S&P 500 companies reporting, and (5) key inflation news as Thursday’s Sep U.S. core PCE deflator is expected to edge lower to +1.7% y/y from Sep’s +1.8%.
The Bank of Canada at its meeting on Wednesday is expected to leave its key policy variables unchanged with the overnight lending rate unchanged at 1.75%.
In Europe, the focus will mainly be on Brexit where the UK Parliament votes today on whether to hold a Dec 12 general election and where the EU on Tuesday will announce the length of its Brexit deadline extension. Former IMF director Christine Lagarde takes over the helm of the ECB on Friday (Nov 1). Thursday’s Q3 Eurozone GDP report is expected to be weak at +0.1% q/q and +1.1% y/y, down from Q2’s +0.2% q/q and +1.2% y/y.
In Asia, the focus will be on the US/Chinese trade talks in the countdown to the Nov 16-17 APEC Summit, where Presidents Trump and Xi hope to sign a phase one trade agreement. China’s Communist Party leaders will hold their most important meeting of the year from today through Thursday with the full meeting of the Communist Party Central Committee. The Bank of Japan at its policy meeting on Thursday is expected to leave its highly-stimulative monetary policy unchanged.
China’s Oct national PMI reports on Wednesday night are expected to remain soft with the manufacturing PMI falling -0.1 point to 49.7 (after Sep’s +0.3) and the non-manufacturing PMI being unchanged at 53.7 (after Sep’s -0.1). Thursday night’s Caixin Oct Chinese manufacturing PMI is expected to show a -0.4 point decline to 51.0 after Sep’s +1.0.
U.S. and Chinese officials express optimism about phase one trade agreement — The markets were pleased that both the U.S. and Chinese sides expressed optimism after last Friday’s high-level conference call among USTR Lighthizer, Treasury Secretary Mnuchin, and Chinese Vice Premier Liu. President Trump on Friday said, “We’re doing very well with China.” White House trade advisor Navarro said, “We’re on a glide path to Chile and the meeting of the two presidents in mid-November.”
The USTR’s office released a statement Friday saying that “the two sides are close to finalizing some sections of the agreement.” China’s Ministry of Commerce on Saturday released a statement saying that the trade negotiators on Friday “confirmed that the technical consultations on some of the text agreement were completed.” The USTR’s office said that discussions “will go on continuously at the deputy level” with Lighthizer/Mnuchin due to speak again with Chinese Vice Premier Liu “in the near future.”
Markets wait for Monday’s Parliament vote on UK election and Tuesday’s EU deadline extension — The UK Parliament today will vote on Prime Minister Johnson’s call for a general election on December 12. A two-thirds vote in favor is necessary for that measure to pass. Today’s vote is expected to fail because the EU has not yet announced an extension of the Oct 31 Brexit deadline and the Labour Party has said it will vote against a new election as long as there is the threat of a no-deal Brexit, which is technically still the case for Friday’s Oct 31 deadline.
Meanwhile, the EU on Tuesday is expected to announce its decision on the length of the Brexit deadline extension from the current Oct 31 deadline. All the EU members are in favor of a new Jan 31 deadline, except for France, which is calling for a Nov 30 deadline to keep the pressure on the UK Parliament to finalize Brexit.
Once the EU announces what is likely to be the new January 31 deadline, then PM Johnson may press the Labour Party for another vote on a new election since the threat of a no-deal Brexit would then be deferred until January 31.
In the meantime, there is very little chance of a no-deal Brexit on this Thursday’s Oct 31 deadline. The UK Parliament has mandated an extension and the EU has indicated a willingness to grant that extension. The betting odds for a no-deal Brexit for Oct 31 have now fallen to a record low of 6% (16/1), according to oddschecker.com. Meanwhile, sterling remains relatively optimistic about the Brexit situation with GBP/USD consolidating just mildly below last week’s 5-1/2 month high.
Q3 earnings hit peak week — This will be the peak week for Q3 earnings with 158 of the S&P companies reporting. Notable reports this week include Alphabet and AT&T on Monday; GM and Mastercard on Tuesday; Apple and Facebook on Wednesday; Marathon Petroleum on Thursday; and Exxon and Berkshire Hathaway on Friday.
The consensus is for Q3 SPX earnings growth of -2.0% y/y (+0.5% ex-energy), according to Refinitiv. Looking ahead the consensus is for SPX earnings growth of +2.2% in Q4, +7.4% in Q1-2020, +7.7% in Q2-2020, and +12.0% in Q3-2020. On a calendar basis, earnings growth in 2019 is expected to slump to +1.3% from 2018’s stellar pace of +22.7%, but then improve to +10.6% in 2020. Q3 earnings have so far been better than expected. Of the 199 companies in the S&P 500 that have reported, 78.4% have beaten the consensus, which is better than the long-term average of 64.8% and the 4-quarter average of 74.1%, according to Refinitiv.
