- Weekly global market focus
- Shanghai Composite index on Monday extends 2-week recovery rally
- Expectations for Fed policy remain steady at 1-1/2 rate cuts by year-end
- Q4 earnings season winds down
Weekly global market focus — The U.S. markets this week will focus on (1) the ongoing assessment of the damage being done by the coronavirus to the global economy, (2) Fedspeak with nine speaking events for Fed officials this week and the release of the Jan 28-29 FOMC meeting minutes on Wednesday, (3) the Treasury’s sale of 30-year TIPS on Thursday, (4) the tail end of Q4 earnings season with reports from 54 of the S&P 500 companies, and (5) a relatively light U.S. economic calendar.
The U.S. will also be watching U.S. politics with the Democratic caucus in Nevada this Saturday (Feb 22) and the South Carolina Democratic primary the following Saturday (Feb 29).
G-10 finance ministers and central bankers will hold a 3-day meeting starting this Friday in Riyadh. The main topic on the agenda will be the monetary and fiscal response to the significant global economic damage being down by the coronavirus.
In Europe, the focus will be on the negative impact from the coronavirus and trade tensions. The Trump administration last Friday raised its tariffs on EU aircraft to 15% from 10% as part of the WTO-sanctioned penalty tariffs in the Airbus subsidy case. U.S. and EU trade officials have recently been meeting to try to find a way forward for US/EU trade talks ahead of a visit to Washington in the next few weeks by European Commission President Ursula von der Leyen.
On Thursday, EU leaders will hold an emergency summit to negotiate an EU budget for the next seven years that covers the financial hole caused by the exit of the UK from the EU. The ECB on Thursday will release an account of its January policy meeting, where the ECB left its policy unchanged.
In Asia, the focus will remain on the coronavirus and the extent to which China’s economy starts to get back on its feet. Bloomberg Economics estimates that about 50-60% of the Chinese economy remained shut down last week, improving from the two-thirds shutdown seen in the previous week and the near full shutdown seen in the week before that during the Lunar New Year holiday.
Shanghai Composite index on Monday extends 2-week recovery rally — The Shanghai Composite index extended its sharp 2-week recovery with a +2.28% rally on Monday. The Shanghai index has now retraced 68% of its overall -14.1% (-441.9 point) plunge seen from the mid-January 10-month high to the early-Feb 1-year low.
Chinese stocks on Monday rallied on China’s plan for cuts in corporate taxes and fees. Also, the People’s Bank of China (PBOC) on Monday gave banks $29 billion of 1-year medium-term loans and cut the rate on those loans by -10 bp to 3.15%, the lowest rate since 2017. The market is expecting the PBOC at its monthly review this Thursday to cut the loan prime rate, which is the new benchmark for commercial lending.
Expectations for Fed policy remain steady at 1-1/2 rate cuts by year-end — This will be a busy week for Fedspeak with nine speaking events for Fed officials. In addition, the FOMC on Wednesday will release the minutes of its Jan 28-29 meeting. The FOMC at its Jan 28-29 meeting left its policy unchanged and expressed confidence in the U.S. economy despite the coronavirus. The FOMC affirmed its intention to leave policy unchanged unless there is a material change in the outlook.
However, the market is much more dovish than the Fed and is currently discounting 1-1/2 Fed rate cuts by year-end, which is more than the one rate cut the market was expecting before the coronavirus emerged as a major problem in mid-January. Specifically, the market is expecting 38.5 bp of easing by year-end, according to the December 2020 federal funds futures contract, which is 15 bp more than the 23.5 bp of easing expected as of the end of 2019.
Q4 earnings season winds down — Q4 earnings season is winding down with 54 of the S&P 500 companies reporting earnings this week. Notable reports include Walmart on Tuesday, and Berkshire Hathaway and Deere on Friday.
The consensus is for Q4 SPX earnings growth of +2.6% (5.5% ex-energy), which is substantially better than expectations of -0.3% as of January 1, according to Refinitiv. That would follow the weak 2019 quarterly SPX earnings growth rates of +1.6% in Q1, +3.2% in Q2, and -0.3% in Q3.
Looking ahead, the consensus is for SPX earnings growth of +3.8% in Q1-2020, +6.1% in Q2, +10.0% in Q3, and +11.9% in Q4. The consensus is for 2019 calendar-year earnings growth of only +1.8% as earnings growth flattened out after the extraordinary growth rate of +23% in 2018 caused mainly by the massive 2018 corporate tax cut. The market consensus is for earnings growth in 2020 to improve to +8.1% y/y, although that 2020 earnings estimate has been steadily falling from 9.7% as of January 1.
Of the 387 S&P 500 companies that have reported thus far, 71.6% have reported above-consensus earnings, which is better than the long-term average of 64.9% but below the 4-quarter average of 73.5%, according to Refinitiv. Of the reporting S&P 500 companies, 65.5% have beaten their revenue consensus, which is better than the long-term average of 60.2% and the 4-quarter average of 57.8%, also according to Refinitiv.
