- Weekly global market focus
- Trade focus is on UK post-Brexit and US/EU relations
- China’s coronavirus has a long way to go until containment
- U.S. earnings season heats up
- U.S. new home sales
- T-note auctions
Weekly global market focus — The U.S. markets this week will focus on (1) the extent to which China’s coronavirus continues to spread, (2) the Tue/Wed FOMC meeting, which is unanimously expected to produce an unchanged policy, (3) the second week of President Trump’s Senate impeachment trial, (4) the Treasury’s auction of $133 billion of T-notes on Monday and Tuesday, (5) a heavy Q4 earnings week with reports from 141 of the S&P 500 companies, and (6) a busy U.S. economic calendar headlined by Thursday’s Q4 U.S. GDP report (expected +2.1%).
In Europe, the focus will be the European Parliament’s expected approval of its Brexit withdrawal legislation on Wednesday, which will finalize the UK’s withdrawal from the EU ahead of Friday’s deadline. The market is discounting a 46% chance of a rate cut at the Bank of England’s meeting on Thursday. Italian League party leader Salvini was defeated in Sunday’s election in Emilia-Romagna, giving a boost to the ruling Five Star-Social Democrat coalition government and reducing the chances for a snap election.
The focus in Asia will be on the fall-out from China’s spreading coronavirus. The Chinese government on Sunday said that the current Lunar New Year holiday will be extended until this coming Sunday (Feb 2) from Jan 30. There was no word whether the Chinese stock markets will reopen this Friday as scheduled after this week’s closure on Monday through Thursday for the New Year holiday.
Trade focus is on UK post-Brexit and US/EU relations — On the trade front, the markets today may react with some mild negativity to the news late last Friday that the Trump administration slapped tariffs on more aluminum and steel products. With Brexit being finalized this week, the markets will be watching the UK’s effort to negotiate trade agreements with the EU and around the globe. There was a report last Friday that Prime Minister Johnson plans to threaten the EU with high import tariffs in an effort to bolster his bargaining position.
US/EU trade relations will remain in the news this week after President Trump last week reiterated this threat to impose tariffs on European autos if there is no US/EU trade deal. European Commission President Ursula von der Leyen will be in Washington next week to discuss US/EU trade. US Agriculture Secretary Perdue is scheduled to meet today in Brussels with EU Trade Commissioner Hogan and EU agriculture ministers as the EU searches for ways to give the U.S. some minor concessions on seafood and agriculture trade to keep the US/EU trade truce alive and stave off U.S. tariffs on European autos.
China’s coronavirus has a long way to go until containment — The markets this week will focus mainly on the extent to which China’s coronavirus (2019-nCoV) continues to spread and its impact on global economic growth. The virus in just a week quickly morphed into a major global problem as it spread within China and to 15 other countries, including five cases in the United States. As of Sunday, the virus had infected more than 2,700 persons and caused at least 80 deaths worldwide.
The virus is starting to resemble the fall-out from the SARS pandemic in 2004. The SARS pandemic caused about 8,000 cases and 774 deaths. The SARS epidemic took eight months to be contained (from Nov 2002 to July 2003), according to WHO. Studies showed that the SARS epidemic resulted in a 0.8 percentage point subtraction from China’s GDP and cost about $40 billion of world economic growth. The only good news is that the new coronavirus seems to be less virulent than SARS with milder symptoms and a lower death rate, although the virus can mutate quickly and it could be more contagious.
U.S. earnings season heats up — There are 141 of the S&P 500 companies that report earnings this week. Notable reports include Apple, Ebay, and Starbucks on Tuesday; Microsoft, Facebook, Mastercard, and AT&T on Wednesday; Amazon, UPS, and Visa on Thursday; and Caterpillar and Exxon on Friday.
The consensus is for Q4 SPX earnings growth to fall by -0.8% y/y (+2.4% ex-energy), according to Refinitiv. That would follow the weak 2019 quarterly SPX earnings growth rates of +1.6% in Q1, +3.2% in Q2, and -0.3% in Q3. Looking ahead, the consensus is for SPX earnings growth of +5.5% in Q1-2020, +7.1% in Q2, +10.2% in Q3, and +14.6% in Q4. The consensus is for 2019 calendar-year earnings growth of only +1.1% as earnings growth flattened out after the extraordinary growth rate of +22.7% in 2018 caused mainly by the massive 2018 corporate tax cut. The market consensus is for earnings growth in 2020 to improve to +9.5% y/y, although this early estimate is likely to be revised lower as the year wears on.
Of the 85 S&P 500 companies that have reported thus far, 68.2% have reported above-consensus earnings, which is better than the long-term average of 64.9% but below the 4-quarter average of 73.5%, according to Refinitiv.
U.S. new home sales — The consensus is for today’s Dec new home sales report to show a +1.5% increase to match September’s 12-year high of 730,000, adding to Nov’s +1.3% increase to 719,000. New home sales are in strong shape at only -1.5% below Sep’s 12-year high of 730,000.
T-note auctions — The Treasury today will sell $40 billion of 2-year T-notes and $41 billion of 5-year T-notes. The Treasury will then conclude this week’s $133 billion T-note package before Wednesday’s FOMC results by selling $20 billion of 2-year floating-rate notes and $32 billion of 7-year T-notes on Tuesday. The benchmark 2-year T-note yield last Friday closed at 1.49% and the 5-year T-note yield closed just slightly above that at 1.50%.
