- Weekly global market focus
- Markets look ahead to this week’s critical US/Chinese trade talks
- Q3 earnings season begins next week with expectations for negative growth
Weekly global market focus — The U.S. markets this week will focus on (1) whether there is any progress at the high-level US/Chinese trade talks that begin this Thursday, (2) Washington political uncertainty and any further developments on the Ukraine and impeachment inquiry, (3) global economic data as market concerns grow about the slowing global economy, (4) whether there are any cracks in the Fed’s consensus view that no further rate cuts are necessary, (5) the Treasury’s sale of 3-year, 10-year and 30-year securities this week, and (6) a light earnings week in the runup to next week’s start of Q3 earnings season.
This week’s U.S. economic calendar is mildly busy. Key reports this week include Tuesday’s Sep PPI report, Wednesday’s FOMC minutes, Thursday’s CPI report, and Friday’s preliminary-Oct U.S. consumer sentiment index.
In Europe, the markets will focus on Brexit and any fresh weakness in the European economic data. The markets will also watch for any additional comments from ECB members opposing the ECB’s restart of its QE program on Nov 1.
UK Prime Minister Johnson is desperately trying to find a Brexit compromise with the EU by next week. UK law requires that Mr. Johnson request a Brexit deadline extension beyond the current deadline of October 31 if he cannot get a Brexit agreement before Oct 19, which is just after the EU Summit on Oct 17-18.
The markets currently believe that the most likely outcome is a deadline extension and a general election in late 2019. However, PM Johnson continues to insist that the UK will exit from the EU “do-or-die” by October 31, which means there is still at least a small risk for a no-deal Brexit on October 31.
In Asia, the Chinese markets will finally reopen tomorrow (Tuesday) after having been closed since last Tuesday for the National Day holidays. During that market closure, there has been a spate of weak global economic data as well as new protest violence in Hong Kong. The Chinese markets are mainly focused on the US/Chinese trade talks later this week.
Markets look ahead to this week’s critical US/Chinese trade talks — The markets are hoping for some progress at the high-level US/Chinese trade talks that begin this Thursday (Oct 10). Chinese Vice Premier Liu and his team will travel to Washington to meet with USTR Lighthizer and U.S. Treasury Secretary Mnuchin.
The markets are hoping that there might be enough progress to convince President Trump to at least delay his upcoming tariffs. Mr. Trump has already announced a tariff hike to 30% from 25% effective Oct 15 on the original $250 billion of Chinese goods, and also a 15% tariff on the remaining $160 billion of Chinese goods effective Dec 15. The Trump administration on Sep 1 just implemented a 15% tariff on $110 billion of Chinese goods.
China has been trying to show some goodwill ahead of this week’s talks by purchasing some U.S. pork and soybeans. However, the two sides are far apart on a final trade deal. The most the markets are hoping for this week is for an “interim” deal or a truce whereby Mr. Trump holds off on upcoming tariffs and perhaps rolls back the Sep 1 tariff in return for Chinese ag purchases and IP commitments.
If this week’s US/Chinese trade talks go badly, there is the chance that Mr. Trump might announce new tariffs or even expand the trade war by announcing restrictions on U.S. investment in Chinese stocks.
Q3 earnings season begins next week with expectations for negative growth — There are only two of the S&P 500 companies that report earnings this week with Delta Airlines on Thursday and Fastenal on Friday. However, Q3 earnings season then kicks into gear next week (Oct 14-18) with reports from 55 of the S&P 500 companies.
Notable reports next week include Goldman Sachs, BlackRock, JPMorgan Chase, and Citigroup on Tuesday; Bank of America, Morgan Stanley, and Netflix on Wednesday; and American Express on Friday.
The market consensus is for S&P 500 earnings growth in Q3 of -2.2%, according to analyst surveys by Refinitiv. That would follow the weak growth rates seen in the past two quarters of -2.2% in Q1 and +4.1% in Q2.
U.S. earnings growth is struggling in 2019 due in part to the weaker global economy. However, the main reason for weak earnings growth is simply the tough year-earlier comparison since earnings growth in 2018 soared by +23% due to the massive corporate tax cut that took effect on January 1, 2018. The cut in the minimum corporate tax rate to 21% from 35% meant that the U.S. government took a much lower chunk of gross corporate profits, thus boosting the after-tax earnings available to stock investors. The higher level of earnings gave a direct boost to stock prices.
Looking ahead, the consensus is for SPX earnings growth to improve slightly to +4.1% in Q4, leading to SPX earnings growth of +1.8% for the calendar year of 2018. However, there is the possibility of an earnings recession if SPX earnings in fact show the expected -2.2% decline in Q3 and then earnings growth in Q4 under-performs expectations and shows another decline, leading to two consecutive quarters of negative growth. Still, the markets may not become too concerned about weak earnings in the second half of 2019 since hopes are high for 2020 with current expectations for earnings growth of +11.2%.