- Weekly global market focus
- Markets remain patient so far on slow-moving US/Chinese trade talks
- Key issue is the length of Brexit deadline extension at Wednesday’s EU summit
- Q1 earnings growth expected -2.2% y/y as earnings season begins
Weekly global market focus — The U.S. markets this week will focus on (1) Fed policy as the March 19-20 FOMC meeting minutes are released this Wednesday and as President Trump last week stepped up his demands for the Fed to cut interest rates and to even restart quantitative easing, (2) any fresh news on the US/Chinese trade talks which now move back into a telephone mode following the face-to-face round of talks in the past two weeks, (3) market perceptions of the strength of the U.S. economy, which improved after last Friday’s stronger-than-expected March payroll report of +196,000, (4) the beginning of Q1 earnings season with banks such as JPMorgan and Wells Fargo reporting on Friday, and (5) May WTI crude oil prices which rallied to a new 5-month high last Friday on tight OPEC+ compliance with its production cuts, reduced production by Iran and Venezuela, and new fighting in Libya.
The European markets this week will focus mainly on Wednesday’s ECB meeting, which may produce some additional details on the ECB’s new round of TLTRO loans to banks. The markets will also be interested to see how concerned ECB President Draghi is about the weak Eurozone economy. The markets are waiting to see if EU ambassadors and trade ministers will approve the mandate that is necessary for EU Trade Commissioner Malmstrom to begin trade talks with the U.S. and prevent President Trump from executing his threat to slap tariffs on imported autos.
Important European economic data this week includes (1) today’s German Fed trade report (Feb exports expected -0.5% m/m after Jan’s +0.1%), (2) Wednesday’s French, Italian and UK industrial production data, and (3) Friday’s Eurozone Fed industrial production (expected -0.6% m/m after Jan’s +1.4%).
In Asia, the focus will be on this week’s raft of Chinese economic data that includes (1) Tuesday night’s March new yuan loans (expected +1.225 trillion yuan), (2) Wednesday night’s March CPI report (expected +2.3% y/y vs Feb’s +1.5%) and PPI report (expected +0.4% y/y vs Feb’s +0.1%), and (3) Thursday night’s trade data (March exports expected +7.7% y/y Feb’s -20.8%).
Markets remain patient so far on slow-moving US/Chinese trade talks — The stock market rallied by +2.06% last week and closed the week on Friday with a +0.46% gain as optimism remains strong that a US/Chinese trade deal will get done. The market didn’t seem to be deterred by President Trump’s comment last Thursday that it might take another four weeks to get a framework deal and another two weeks after that to put the deal on paper.
The White House said after last week’s talks that there is still “significant work” left for the US/Chinese trade talks. However, the White House said that US/Chinese trade officials “will be in continuous contact to resolve outstanding issues.” As long as President Trump remains optimistic about the talks, it appears that the markets will remain optimistic as well.
Key issue is the length of Brexit deadline extension at Wednesday’s EU summit — The EU will hold an emergency summit on Wednesday to deal with Brexit ahead of Friday’s April 12 deadline. If the UK Parliament does not pass the Brexit separation bill by Friday and if the UK does not get a deadline extension, then there will be a chaotic no-deal Brexit on Friday. However, the odds of a no-deal Brexit are near zero and the main question is how long the Brexit deadline extension will be.
Prime Minister May last Friday asked for an extension to June 30, which she said would give her time to have further discussions with the Labour Party and see if there is a Brexit plan that can get through Parliament. However, the Conservative-Labour talks that began last Wednesday ended on Friday with Labour Party saying that Ms. May was not offering any significant compromise. It is not clear whether the talks will resume. Ms. May might be willing to make some new concessions to get the Conservative-Labour talks restarted.
The EU is reportedly leaning towards giving the UK a 1-year “flextension,” which means extending the deadline by a year but saying that the UK can leave the EU sooner if the UK Parliament passes a Brexit separation agreement. The EU seems likely to grant the extension now that Ms. May has said the UK will go ahead with elections for the EU Parliament on May 23-26 if there isn’t a Brexit deal first.
For the markets, a 1-year extension would be good news since that would remove the threat of a no-deal Brexit for at least a year. The House of Lords as early as today may approve the bill approved by Parliament last week that prevents a no-deal Brexit this Friday. However, final approval of that bill would not provide a 100% guarantee against a no-deal Brexit because there is the additional condition that the EU must grant the UK’s request for a deadline extension.
Q1 earnings growth expected -2.2% y/y as earnings season begins — Q1 earnings season begins this week with poor earnings growth expectations of -2.2% y/y, according to Refinitiv. Expectations for an earnings decline are due to the high year-earlier base when earnings spiked upward on the massive 1-Jan-2018 tax cut. The good news, however, is that Q1 revenue growth is expected to be solid at +5.0% y/y. There are six of the S&P 500 companies that report this week with notable reports including Delta Air Lines on Wednesday, and Wells Fargo and JPMorgan Chase on Friday. The consensus is for earnings growth to improve a bit as 2019 wears on with SPX earnings growth of +2.8% in Q2, +2.7% in Q3, and +9.0% in Q4, leading to overall 2019 growth of +3.2% (vs +22.7% in 2018).
