- Weekly global market focus
- Trade tensions will remain in the news this week
- Markets wait for Russia’s answer on OPEC+ production cut
- Q4 earnings start to wind down
Weekly global market focus — The U.S. markets this week will focus on (1) whether there is any progress on containing China’s coronavirus and slowing the global economic damage, (2) Fed Chair Powell’s semi-annual testimony to Congressional committees on Tuesday and Wednesday, (3) oil prices as OPEC+ struggles to reach a new production cut agreement to address the plunge in Chinese oil demand caused by the coronavirus, (4) the dwindling Q4 earnings season with 66 of the S&P 500 companies scheduled to report, and (5) the Treasury’s $84 billion quarterly refunding operation on Tuesday through Thursday.
Fed policy will be front and center this week as Fed Chair Powell delivers his semi-annual testimony on Tuesday and Wednesday. The Fed last Friday in its semi-annual report to Congress on monetary policy said, “The effects of the coronavirus in China have presented a new risk to the outlook.” The Fed said, “Because of the size of the Chinese economy, significant distress in China could spill over to the U.S. and global markets through a retrenchment of risk appetite, U.S. dollar appreciation, and declines in trade and commodity prices.”
Before the coronavirus emerged as a major problem in mid-January, the Fed said that its policy would remain firmly on hold unless there was a material change in the outlook. The market so far does not consider the U.S. impact from the coronavirus to be serious enough to justify a near-term Fed rate cut. The market is discounting only a 10% chance of a Fed rate cut at its next meeting on March 17-18 and a 28% chance at the following meeting on April 28-29. However, the market is fully discounting that rate cut by September.
In Europe, the focus this week will be on virus fallout and economic data. Tuesday’s UK Q4 GDP report is expected to show that the UK economy stalled with unchanged growth quarter-on-quarter. Friday’s German Q4 GDP is also expected to be weak at +0.1% q/q. Wednesday’s Dec Eurozone industrial production report is expected to fall sharply by -1.7% m/m and -1.9% y/y, reinforcing the recession in the Eurozone manufacturing sector.
The Asian markets will focus mainly on whether the spread of the coronavirus starts to slow, allowing the Chinese economy to start getting back on its feet. Some Chinese companies this week will restart their operations after the Lunar New Year holiday was extended into last week. The Chinese government continues to impose quarantines in the areas of China hardest hit by the virus but there was potentially positive news over the weekend when WHO said that the pace of new infections in the hard-hit Hubei area may be stabilizing.
Trade tensions will remain in the news this week — The US/China phase-one trade deal goes into effect this Friday (Feb 14), which is 30 days after the agreement was signed. On Friday, the U.S. will cut tariffs in half to 7.5% on $120 billion of Chinese products and China will reduce tariffs in half on $75 billion of U.S. goods. Penalty tariffs will remain in place on about $370 billion of Chinese goods and $110 billion of U.S. goods except for exemptions to allow China to meet its requirements for purchasing U.S. goods.
The main issue is whether President Trump will allow China to delay its requirements for purchasing an extra $200 billion of U.S. goods in 2020-21. Presidents Trump and Xi had a phone call late last week where they reaffirmed their commitment to the phase-one trade deal. White House advisor Kudlow said President Xi told Mr. Trump the Chinese purchases might be slower than originally planned but that purchases would still get done by the end of this year and next year.
On the EU front, the markets are waiting to see whether the Trump administration by mid-February follows through with its threat to slap more penalty tariffs on European products in the Airbus subsidy case. Also, the markets are waiting for news on when European Commission President Ursula von der Leyen might soon visit Washington to restart US/EU trade talks. EU Trade Commissioner Hogan was in Washington last week trying to get a sense of what concessions on agriculture might be necessary to get a US/EU trade deal and get Mr. Trump to back off his threat to slap tariffs on European autos.
Markets wait for Russia’s answer on OPEC+ production cut — Russia last Thursday said it would respond in “days” to the OPEC+ Joint Technical Committee’s recommendation for a new 600,000 bpd production cut and an extension of the Q1 production cut of 1.7 million bpd through year-end. Russia has been holding out against the obvious need to cut production in response to the plunge in Chinese crude oil demand of some 20%. The need for a production cut will become even more severe if there is a Libyan peace deal that allows Libya to resume its oil production.
Q4 earnings start to wind down — The Q4 earnings season is starting to wind down with 66 of the S&P 500 companies reporting this week. Of the 322 SPX companies that have reported thus far, 70.5% have been above expectations, which is better than the long-term average of 64.9% but below the 4-quarter average of 73.5%, according to Refinitiv.
The consensus is for Q4 earnings growth of +2.3% y/y (+5.1% ex-energy), according to Refinitiv, following the weak 2019 quarterly 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 +4.0% in Q1-2020, +6.0% in Q2, +9.9% in Q3, and +12.2% in Q4. The consensus is for earnings growth in calendar 2020 to improve to +8.2% after growth rates of +1.7% in 2019 and +23% in 2018.
