- Weekly global market focus
- U.S. government shutdown continues with no end in sight
- Market reaction to Tuesday’s Brexit vote depends on size of the defeat
- Q4 earnings expected strong but with potential disappointments
Weekly global market focus — The U.S. markets this week will focus on (1) the partial U.S. government shutdown as the fallout grows, (2) the beginning of Q4 earnings season with 35 of the S&P 500 companies scheduled to report this week, (3) any developments on the US/Chinese trade talks, (4) further assessment of Fed policy with the Beige Book on Wednesday and six speaking engagements by various Fed officials, (5) a moderately busy week for U.S. economic data, (6) whether oil prices can extend the recovery rally seen in the past three weeks, and (7) reports that California-utility PG&E may soon declare bankruptcy, which could disrupt the U.S. corporate bond market.
In Europe, the focus will be on Tuesday’s Brexit vote, which is unanimously expected to fail. The markets will also watch today’s Eurozone Nov industrial production report, which is expected to show a decline of -1.3% m/m and -1.9% y/y. Recent Nov national industrial production reports have been weak and have led to talk that some countries in Europe may be headed towards at least a technical recession with two consecutive quarters of negative economic growth. In Q3, Germany’s GDP growth fell by -0.2% q/q and Italy’s GDP growth fell by -0.1% q/q.
In Asia, the focus will be on whether Chinese stocks can extend the recovery seen in the past week. Chinese investors have become a bit more optimistic about US/Chinese trade talks after US/Chinese mid-level officials at their 3-day meeting last week made progress on China’s promise to buy more U.S. products, although they did not yet tackle the thorniest issues, which will be left to higher level talks. The next step with be a visit by Chinese Vice Premier Liu, President Xi’s top economic advisor, to Washington on Jan 30-31 for talks with USTR Lighthizer and Treasury Secretary Mnuchin, according to a report by the WSJ.
U.S. government shutdown continues with no end in sight — The partial U.S. government shutdown today hits the 24th day and has now become the longest shutdown in U.S. history. The only obvious escape route for the shutdown is for President Trump to declare a national emergency and try to get the military to build his wall. After hinting repeatedly last week that he was about to declare that emergency, Mr. Trump on Friday said that he was not going to declare an emergency “so fast.” The shutdown therefore continues with no serious prospect for a compromise or even negotiations.
White House economist Hassett has said that the shutdown is trimming U.S. GDP by 0.1 point every two weeks while other economists believe the impact is twice that much, plus the additional negative impact from reduced consumer, business, and investor confidence. Fed Chair Powell last week warned that a prolonged shutdown would hurt the U.S. economy.
Mr. Powell also warned that the Fed is now flying partially blind because of postponed economic data by closed government agencies. Reports that are being delayed include retail sales, housing starts, home sales, factory and durable goods orders, personal income/spending, PCE deflator, trade balance, and GDP. The number of postponed U.S. economic reports is piling up, which means the markets are uncertain about the extent to which the U.S. economy may be slowing in response to recent negative events such as slowing economic growth overseas, the U.S. government shut-down, and the stock market correction.
Market reaction to Tuesday’s Brexit vote depends on size of the defeat — The market’s reaction to Tuesday’s vote in Parliament on Prime Minister May’s Brexit separation agreement depends mainly on the size of the defeat, with a loss by a margin of more than about 60 members being considered a major defeat. There is no real question that the Brexit agreement will be defeated considering that the betting odds for a defeat are 98%, according to PredictIt.org.
If the margin of defeat is relatively narrow, then Prime Minister May might still have a chance of getting her plan approved in a repeat vote in Parliament in coming weeks if she can get some additional concessions from the EU and if more members of Parliament view Ms. May’s plan as the only way to avoid a no-deal exit as the March 29 Brexit date approaches.
However, if there is a heavy defeat in the vote, then Ms. May’s plan will be considered dead and then UK politicians will have to move on to other ideas. In that case, there is increased talk that Ms. May might be forced to ask the EU for an extension of the Brexit Article 50 deadline by perhaps three months to give the UK more time to assess its next move. Other more drastic possible outcomes include new elections or a second public referendum.
Q4 earnings expected strong but with potential disappointments — Q4 earnings season begins this week with 35 of the S&P 500 companies scheduled to report. Notable reports this week include Citigroup on Monday, JPMorgan and Wells Fargo on Tuesday; Goldman Sachs, Bank of America, and Blackrock on Wednesday; and Morgan Stanley, Amex, and Netflix on Thursday.
The consensus is for Q4 earnings growth for the S&P 500 companies of +14.5% y/y, according to Thomson Reuters Refinitiv, which is lower than expectations of +20.1% seen as of October 1. This will be the last quarter of stellar earnings growth stemming from the Jan 1, 2018 tax cut. On a calendar year basis, the market is expecting SPX earnings growth to ease to +6.4% in 2019 from +23.5% in 2018.
The markets will be on guard for Q4 earnings disappointments tied to various factors including slower growth in China and Europe, higher corporate costs from steel and other tariffs on U.S. imports, and sales shortfalls caused by retaliatory tariffs on U.S. exports.
