- Weekly global market focus
- This week’s US/Chinese trade talks could be do-or-die after new Trump threat
- Q1 SPX earnings are better than expected as season winds down
Weekly global market focus — The U.S. markets this week will focus on (1) this week’s US/Chinese trade talks, which may have become do-or-die after President Trump on Sunday issued a new tariff threat if there isn’t an agreement by this Friday and China responded by saying it is considering canceling this week’s talks, (2) increased geopolitical risks after North Korea on Saturday conducted what appeared to be its first ballistic missile launch since 2017, (3) the upgrade in the U.S. economic assessment after last Friday’s stronger-than-expected April payroll report of +263,000, (4) a busy week for Fedspeak with nine appearances by various Fed officials, (5) the U.S. inflation outlook with Friday’s April CPI report (expected higher at +2.1% y/y for both the headline and core indexes after March’s +1.9% headline and +2.0% core), (6) the Treasury’s $84 billion refunding operation of 3-year, 10-year, and 30-year securities, and (7) the tail end of Q1 earnings season with 61 of the S&P 500 companies scheduled to report.
In Europe, the focus this week will be on whether the German manufacturing sector can recover with Tuesday’s German March factory orders report (expected +1.5% m/m after Feb’s -4.2%) and Wednesday’s March industrial production report (expected -0.5 m/m after Feb’s +0.7%). The European Commission on Tuesday will release new macroeconomic forecasts. Friday’s German March trade report is expected to show a -0.4% m/m decline, adding to Feb’s decline of -1.2%. Friday’s UK Q1 GDP report is expected to improve to +0.5% q/q and +1.8% y/y from Q4’s +0.2% q/q and +1.4% y/y.
Brexit will be in the news this week as cross-party talks resume on Tuesday ahead of Prime Minister May’s self-imposed deadline of Friday for an agreement. Prime Minister May is trying to get Labour’s help for Parliamentary approval of a Brexit withdrawal agreement before the May 23 elections to the EU Parliament. Pressure for a deal increased after both the Conservative and Labour Parties fared poorly in last week’s local elections, with the beneficiaries being independents and the pro-EU Liberal Democrats. The good news for the markets is that there is no risk of a no-deal Brexit until the new Brexit deadline of October 31.
In Asia, the Chinese markets reopen today after having been closed last Wednesday through Friday. The Japanese markets remain closed today but will finally reopen on Tuesday after having been closed all last week. Chinese economic reports this week include Tuesday night’s (ET) April trade report (April exports expected +3.0% y/y after March’s +14.2% y/y), Wednesday night’s April CPI (expected +2.5% y/y vs March’s +2.3%), and Thursday night’s April new yuan loans (expected +1.2 trillion yuan after March’s +1.7 trillion yuan). The Australian central bank on Tuesday is expected to leave its policy unchanged with its cash rate target at 1.50%.
This week’s US/Chinese trade talks could be do-or-die after new Trump threat — This week’s US/Chinese trade talks may now be do-or-die after President Trump on Sunday threatened to raise tariffs to 25% from 10% on $200 billion of Chinese goods effective this Friday if this week’s talks do not produce an agreement. Mr. Trump said that he would also slap a 25% tariff on the remaining $325 billion of Chinese goods “shortly” if there isn’t an agreement. The Wall Street Journal later Sunday night then reported that China is considering the cancellation of this week’s talks since China refuses to negotiate under such a threat.
With his two tweets on Sunday, Mr. Trump was clearly trying to light a fire under this week’s talks and force last-minute concessions by China on difficult issues. Chinese Vice Premier Liu is due to arrive in Washington with some 100 Chinese officials for talks that are scheduled to begin on Wednesday.
The U.S. stock market has already mostly factored in a successful US/Chinese trade agreement, which has been a key bullish factor behind the sharp rally in stocks seen so far this year. If the talks collapse with new tariffs this Friday, the U.S. stock market would undoubtedly show a steep decline. If Mr. Trump imposes a new round of tariffs, China might walk away from the talks for a number of months, raising questions about whether a final US/Chinese trade agreement could be reached before the presidential campaign season swings into full gear next year. On that basis, the US/Chinese trade war could become much worse and last at least until the end of President Trump’s first term.
While Mr. Trump’s tweets on Sunday may have simply been a last-minute negotiating tactic, the U.S. threat could also anger China and lead to a complete breakdown in the talks.
Q1 SPX earnings are better than expected as season winds down — There are 61 of the S&P 500 companies that report earnings this week as the Q2 earnings season starts to wind down. The latest consensus Q1 earnings expectation of +0.9% y/y (+2.3% ex-energy) is better than expectations of -2.0% seen as of April 1, according to Refinitiv. Of the 388 SPX companies that have reported, 76.5% reported above-consensus earnings, better than the long-term average of 65% and the 4-quarter average of 76%, according to Refinitiv.
Looking ahead, the consensus is for SPX earnings to improve to +1.6% in Q2, +1.9% y/y in Q3, and +3.5% in Q4. On a calendar year basis, the consensus is for earnings growth to improve from +3.5% in 2019 to +12.0% in 2020.
The forward P/E ratio on the S&P 500 index is currently at 17.7, which is slightly above 5-year average of 17.6 and well above the 10-year average of 15.9.
