- Weekly global market focus
- Markets are encouraged by US/Chinese trade truce but a solid deal remains far away
- Brexit negotiations will continue as EU says Johnson’s proposal isn’t yet good enough
- Q3 earnings season begins with poor expectations
Weekly global market focus — The U.S. markets this week will focus on (1) any further details on last Friday’s US/China trade truce which averted the tariff hike to 30% from 25% that was otherwise due to go into effect tomorrow (Oct 15), (2) money market rates after the Fed last Friday announced the sustained purchase of T-bills to boost the availability of reserves, (3) the beginning of Q3 earnings season, (4) a heavy schedule of Fed speakers with the market discounting a 70% probability of a rate cut at the next FOMC meeting in two weeks (Oct 29-30), (5) Middle East turmoil as Turkish troops battle their way into Syria and as the U.S. withdraws troops, and (6) this week’s World Bank/IMF meetings in Washington and expectations for the IMF on Tuesday to downgrade its global GDP forecast another notch. Trading today is likely to be light since the cash Treasury and forex markets are closed for the Columbus Day holiday.
In Washington, Congress returns on Tuesday from its recess with a key order of business being to pass spending bills ahead of the expiration of the continuing resolution on Nov 21. Washington will continue to be roiled by political uncertainty as the House Intelligence Committee continues to depose officials involved in the Ukraine matter as part of its impeachment investigation.
In Europe, the focus will mainly be on Brexit negotiations ahead of the EU Summit on Thursday/Friday. Also, the EU this week may announce retaliation if the U.S. goes ahead with its plan to impose tariffs effective this Friday on $7.5 billion of EU goods due to what the WTO determined were improper government subsidies to Airbus.
In Asia, the focus will be on China’s economic data on Thursday night. China’s Q3 GDP is expected to ease to +6.1% from Q2’s +6.2%, Sep industrial production is expected to improve to +5.0% y/y from Aug’s +4.4%, and Sep retail sales are expected to improve to +7.8% y/y from Aug’s +7.5%. Tonight’s China Sep CPI report is expected to edge higher to +2.9% y/y from Aug’s +2.8%.
Markets are encouraged by US/Chinese trade truce but a solid deal remains far away — The markets were encouraged by President Trump’s announcement Friday afternoon that the U.S. and China reached “phase one” of a trade agreement. Mr. Trump canceled Tuesday’s (Oct 15) scheduled hike in the tariff to 30% from 25% on the original $250 billion worth of Chinese goods, but left in play the threat of the 15% tariff on Dec 15 on $160 billion of Chinese goods.
The U.S. and China need to put Friday’s agreement into writing, which means there is plenty of room for the deal to fall apart. However, Mr. Trump was optimistic about the agreement and said he and Chinese President Xi could possibly sign the agreement in November at the APEC Summit in Santiago, Chile. Mr. Trump did not say whether he would drop his threat of the tariffs on Dec 15 if Friday’s agreement is successfully signed and sealed. CNN reported that China has invited USTR Lighthizer and Treasury Secretary Mnuchin to China for further talks ahead of November’s APEC summit.
Friday’s trade deal involved the U.S. delaying only Tuesday’s tariff hike in return for Chinese ag purchases and unspecified concessions related to IP, financial services, and currency. The agreement did not include Huawei, which remains on a separate track. There was no mention about the Trump administration’s recent discussion of limiting U.S. capital flows into Chinese securities.
The fact that Mr. Trump backed off on this week’s tariff hike was good news for the markets. However, the fact remains that all the existing tariffs remain in the place and the threat continues for the new U.S. 15% tariff on Dec 15. The U.S. has not made much progress on moving China on the big issues related to industrial policy and state subsidies, meaning a full US/Chinese trade deal is still far away.
Brexit negotiations will continue as EU says Johnson’s proposal isn’t yet good enough — The markets were encouraged when Prime Minister Johnson and Irish premier Varadkar last Thursday after their meeting claimed that they “could see a pathway to a possible deal.” Sterling soared by a total of +3.7% last Thursday and Friday to post a new 3-1/2 month high on optimism about the “pathway” comment.
However, EU officials over the weekend said they were not yet satisfied with the plan and there wasn’t enough of an agreement to move into the “tunnel” stage where secret negotiations begin on the legal text of an agreement. The UK and EU over the next few days will hold intensive discussions to see if there is an agreement to present to the EU members at their summit this Thursday and Friday (Oct 17-18).
If there is no Brexit agreement by this Saturday (Oct 19), then the UK Parliament’s Benn act requires PM Johnson to request an extension of the current Oct 31 Brexit deadline. The markets are expecting either an agreement or a deadline extension since betting odds for a no-deal Brexit in 2019 remain very low at 15% (11/2) at oddschecker.com.
Q3 earnings season begins with poor expectations — Q3 earnings season begins this week with 55 of the S&P 500 companies reporting. Notable reports include Goldman Sachs, BlackRock, JPMorgan Chase, and Citigroup on Tuesday; Bank of America, and Netflix on Wednesday; Morgan Stanley on Thursday, and American Express on Friday. The market consensus is for Q3 SPX earnings growth of -3.2% and for calendar-year-2019 growth of only +1.5%, according to analyst surveys by Refinitiv. Earnings growth was weak in the past two quarters at +1.6% in Q1 and +3.2% in Q2.
